10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to             

Commission file number:  0-22229

Vital Images, Inc.

(Exact name of registrant as specified in its charter)

Minnesota	42-1321776
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
5850 Opus Parkway, Suite 300
Minnetonka, MN 55343-4414	55343-4414
(Address of principal executive offices)	(Zip Code)

(952) 487-9500

(Registrant’s telephone number, including area code)

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $.01 par value	NASDAQ Global Select Market

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

Not applicable.

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o          No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes o          No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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

As of June 30, 2008, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $213,381,914. The common stock is the registrant’s only class of voting stock.

The number of shares outstanding of the issuer’s class of common stock as of March 9, 2009 was 14,552,991 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant’s definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held May 14, 2009 (“2009 Proxy Statement”) are incorporated by reference into Part III of this Form 10-K, as indicated in Items 10 through 14 of Part III.

Vital Images, Inc.

Form 10-K

Table of Contents

Part I
Item 1.	Business	2
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	36
Item 9A.	Controls and Procedures	36
Item 9B.	Other Information	37
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	38
Item 11.	Executive Compensation	38
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	38
Item 13.	Certain Relationships and Related Transactions, and Director Independence	38
Item 14.	Principal Accountant Fees and Services	38
Part IV
Item 15.	Exhibits and Financial Statement Schedules	39
Signatures		40

Part I

Cautionary Statement Regarding Forward-Looking Information

Vital Images desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) and is filing this cautionary statement in connection with the Reform Act. This Annual Report on Form 10-K and any other written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and future financial performance. Certain statements in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of Section 27(a) of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by our use of the words “believes,” “anticipates,” “forecasts,” “projects,” “could,” “plans,” “expects,” “may,” “will,” “would,” “intends,” “estimates” and similar expressions, whether in the negative or affirmative. We wish to caution you that any forward-looking statements made by us or on our behalf are subject to uncertainties and other factors that could cause such statements to be wrong. We cannot guarantee that we actually will achieve these plans, intentions or expectations. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make.These statements are only predictions and speak only of our views as of the date the statements were made. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, and/or performance of achievements. We do not assume any obligation to update or revise any forward-looking statements that we make, whether as a result of new information, future events or otherwise.

Factors that may impact forward-looking statements include, among others, our abilities to maintain the technological competitiveness of our current products, develop new products, successfully market our products, respond to competitive developments, develop and maintain partnerships with providers of complementary technologies, manage our costs and the challenges that may come with growth of our business, and attract and retain qualified sales, technical and management employees. We are also affected by the growth and regulation of the medical technology industry, including the acceptance of advanced visualization by hospitals, clinics, and universities, product clearances and approvals by the United States Food and Drug Administration and similar regulatory bodies outside the United States, and reimbursement and regulatory practices by Medicare, Medicaid, and private third-party payer organizations. We are also affected by other factors identified in our filings with the Securities and Exchange Commission, some of which are set forth in the section entitled “Item 1A. Risk Factors” in this Annual Report on Form 10-K (and many of which we have discussed in prior filings). Although we have attempted to list comprehensively these important factors, we also wish to caution investors that other factors may prove to be important in the future in affecting our operating results. New factors emerge from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor or combination of factors may have on our business.

Item 1. Business

Our Business

Vital Images, Inc. (“Vital Images,” “we,” “us,” or “our”) is a leading provider of advanced visualization and image analysis solutions for use by medical professionals in clinical analysis and therapy planning for medical conditions. We provide software, customer education, software maintenance and support, professional services and, on occasion, third-party hardware to our customers. Our technology rapidly transforms complex data generated by diagnostic imaging equipment into functional digital images that can be manipulated and analyzed using our specialized applications to better understand internal anatomy and pathology. Our solutions are designed to improve physician workflow and productivity, enhance the ability to make clinical decisions, facilitate less invasive patient care, and complement often significant capital investments in diagnostic imaging equipment made by our customers. Our software is compatible with equipment from all major manufacturers of diagnostic imaging equipment, such as computed tomography (“CT”) scanners, and can be integrated into picture archive and communication systems (“PACS”). Many hospitals use PACS to acquire, distribute and archive medical images and diagnostic reports, reducing the need for film and increasing reliance on advanced visualization solutions such as ours. We also offer a Web-based solution that provides physicians with anywhere, anytime access to medical images and visualization tools through any Internet-enabled computer.

We were founded and incorporated in Iowa in September 1988, and we re-incorporated in Minnesota in March 1997. Our principal executive offices are located at 5850 Opus Parkway, Suite 300, Minnetonka, MN 55343 (telephone (952) 487-9500, facsimile (952) 487-9510, e-mail – info@vitalimages.com ). From May 24, 1994

2

through May 11, 1997, we were a wholly-owned subsidiary of Bio-Vascular, Inc., which is now known as Synovis Life Technologies, Inc.

Our corporate website address is www.vitalimages.com. To access our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, other reports and documents filed with or furnished to the United States Securities and Exchange Commission (the “SEC”) and amendments to these reports free of charge, go to the “Investors” section of our website, then to the “Financial Info & Filings” category, and then to the “SEC Filings” subcategory, where we make such filings available as soon as reasonably practicable after they are filed with or furnished to the SEC. The “Corporate Governance” category of the Investors section of our website also contains free copies of the Charters for the Audit Committee, Compensation Committee, and Governance Committee of our Board of Directors, as well as our Code of Business Conduct and Ethics, which is our written code of ethics under Section 406 of the Sarbanes-Oxley Act of 2002. Each of the above referenced documents can also be obtained free of charge (other than a reasonable charge for copying exhibits to our reports on Forms 10-K, 10-Q or 8-K) in print by any shareowner who requests them from our investor relations department. The investor relations department’s email address is investorrelations@vitalimages.com and its mail address is: Investor Relations, Vital Images, Inc., 5850 Opus Parkway, Suite 300, Minnetonka, MN 55343. Information available on our website is not incorporated by reference into this Annual Report on Form 10-K.

You may also obtain copies of our SEC filings on the SEC’s website at www.sec.gov or at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

ViTAL Enterprise, introduced in May 2008, enables unlimited enterprise access to the complete ViTAL solution offering, including Vitrea, Vitrea Web, ViTALConnect and our specialized clinical options. ViTAL Enterprise provides customers with full access to our best-in-class clinical solutions and comprehensive services, including education, consulting and maintenance. ViTAL Enterprise has the flexibility to scale to the size of the customer’s enterprise by providing access to the complete ViTAL solution based on unlimited users or concurrent users. Additionally, ViTAL Enterprise offers customers the ability to license the solution through capital or subscription pricing, and it is available to our worldwide installed base of existing customers. Going forward, we anticipate an increasing percentage of license fee revenue will be from sales of ViTAL Enterprise.

Vitrea® software, our flagship software product, is an easy-to-use, intuitive, high-speed volume rendering technology that creates interactive two-dimensional, or 2D, three-dimensional, or 3D, and four-dimensional, or 4D, images from information generated by standard CT scanners. Vitrea is commonly deployed on standalone workstations, as well as on PACS, using standard computer hardware, and provides advanced visualization for radiological, cardiac, oncological and surgical applications. Vitrea renders vibrant, clear, color images at high speeds and enables users to interactively navigate within these images to visualize, measure and understand internal structures and disease conditions. We believe our user interfaces are intuitive, and they are specifically configured to assist physicians in optimizing their clinical workflow.

Vitrea Web provides users with everywhere access to Vital Images’ powerful advanced clinical applications via the Web. With Vitrea Web, customers have the same capabilities of a standalone workstation to review, analyze, and communicate findings, all from any PC. Vitrea Web enables advanced best of breed clinical applications access throughout the healthcare enterprise.

ViTALConnect® software allows multiple physicians to collaboratively use advanced visualization in their medical practices. It provides radiologists and referring physicians anywhere, anytime access to interactive 2D, 3D and 4D medical images and the ability to measure, rotate, analyze and segment those images. Our latest release includes features previously available only on multimodality workstations, such as a variety of multi-planar reformat, or MPR, modes, thick slab rendering in MPR, 3D volumetric visualization with simple point of interest navigation, 4D dataset visualization, CT/positron emission tomography, or PET, fusion and advanced analysis tools.

3

Advanced visualization options expand the relevance of our products beyond the radiology department to referring physicians and surgical specialists, particularly in the areas of cardiology, cardiovascular, oncology, neurology and gastroenterology. Our advanced visualization options allow physicians to customize their software according to their unique requirements. Most options are proprietary; however, ViTAL Enterprise and Vitrea also serve as an integration platform for applications offered by our visualization technology partners. Our options include:

Vitrea Option	Clinical Use
·Vscore	—Quantifies calcium in the four major coronary arteries
·CT Brain Perfusion	—Analyzes the blood flow of stroke victims
·Innerview GI (virtual colonoscopy)	—Locates and analyzes polyps in the colon
·Automated Vessel Measurements	—Characterizes the course and dimensions of diseased blood vessels
·CT Cardiac	—Determines the extent of obstructive coronary artery disease
·SUREPlaque™	—Aids in evaluating, characterizing and quantifying plaque inside the coronary     arteries
·Vessel Probe	—Defines vascular anatomy and the extent of obstruction in vessels other than the     coronary arteries
·CT Lung and Lung Tools	—Visualizes and measures nodules in the lungs
·ImageChecker® CT	—Detects pulmonary nodules in the chest
·Fusion7D™	—Visualizes images and fuse studies from multiple modalities, such as magnetic     resonance, or MR, and PET
·CADstream™	—Analyzes MR breast exams
·QMass™ MR	—Analyzes MR cardiac images
·EP Planning	—3D advanced visualization and modeling tool for the electrophysiology lab
·Collaboration	—Enables two users to collaborate while viewing the same study at the same time
·PET/CT Overlay	—Provides the ability to overlay PET and CT images with Standardized Uptake     Value (SUV) calculations

Our software solutions are used with medical diagnostic equipment, primarily in clinical analysis and therapy planning. Our software applies proprietary technologies to a variety of data supplied by CT scanners to allow medical clinicians to create 2D, 3D and 4D views of human anatomy and to non-invasively navigate within these images to better visualize and understand internal structures and pathologies. Our main customers are hospitals and clinics, university medical schools and diagnostic imaging centers. We market our products and services to these customers both directly through our own sales force and indirectly through digital imaging equipment manufacturers and PACS companies, who sell our products with other products they either manufacture or acquire from third parties.

Our products work with equipment from all major manufacturers of diagnostic imaging systems, including Toshiba Medical Systems Corporation (“Toshiba”), GE Healthcare (“GE”), Siemens Medical Systems, Inc. (“Siemens”) and Philips Medical Systems (“Philips”). Our products may also be integrated into PACS, such as those marketed by McKesson Corporation (“McKesson”) and Sectra AB (“Sectra”), and run on off-the-shelf third-party computer hardware.

Maintenance and Services

In addition to software products, we provide maintenance and support services, as well as certain other services, such as installation and customer education. We offer maintenance and support services for our software solutions pursuant to which we provide error correction, software enhancements, updates and upgrades, telephone support and other general support services.

Market Opportunity

We believe the number and complexity of advanced medical imaging examinations creates a substantial opportunity for us in the medical imaging market. Diagnostic CT scanning equipment today is capable of quickly generating thousands of discrete images in a single imaging exam, which is many times more than were generally attained in such exams as few as five years ago. This substantial data output cannot be analyzed in a timely or cost-effective manner without the use of digital solutions capable of handling these large data sets efficiently and accurately. Physicians require advanced visualization solutions that can quickly render 2D, 3D and 4D images to improve their

4

clinical efficiency and efficacy as healthcare organizations search for ways to increase throughput and gain operational efficiencies in their day-to-day practices.

While advanced visualization applications are commonly used by radiologists, usage is becoming more widespread among non-radiology specialties. In general, we expect to benefit as advanced visualization software is used increasingly throughout the healthcare enterprise by non-radiology clinicians and physicians. Non-radiology clinical specialties are using advanced visualization and analysis tools to improve productivity and facilitate less invasive patient care.  Expanding usage of our products in other clinical specialties, including cardiology, neurology, women’s health, respiratory pulmonary medicine, gastroenterology and surgery, will serve to expand our user base across the healthcare enterprise. In addition, images are now being used by referring physicians to educate patients, plan treatment and monitor patient progress.

This shift has created demand for advanced visualization solutions that can be accessed throughout the enterprise. We facilitate enterprise-wide advanced visualization by distributing images and certain analysis tools directly using VitreaWeb and ViTALConnect which allow remote access to Vitrea’s toolset, as well as through our ability to integrate with PACS and other healthcare information technology systems.

In general, we believe that several macro market trends will drive long-term demand for our products:

·increasing number of imaging exams performed due to the expanded use of CT imaging procedures by physicians and an aging U.S. population;

·technological advancements enabling CT scanners to generate thousands of images per exam;

·demand from radiologists, non-radiologists and other referring physicians for advanced visualization solutions that can improve productivity, optimize clinical workflow and enhance treatment planning;

·international markets are still in the early phases of adopting advanced healthcare technology and will continue to purchase increasingly more advanced healthcare technology as healthcare infrastructure and demand for advanced services increase;

·increasing use of imaging technology throughout the healthcare enterprise, in part due to the integration of advanced visualization with healthcare information technology systems; and

·growing importance of integrating advanced visualization and analysis tools into the clinical enterprise to facilitate collaboration among clinicians and physicians, increase access to information and improve workflow productivity.

In 2008, as was the case in 2007, market demand for advanced visualization solutions decreased. We believe the decrease in market demand in 2008 was caused primarily by the following factors:

·a general slowdown in hospital purchasing as a result of the global credit crisis and other macroeconomic factors;

·a reduction in purchases of CT scanners and other imaging related healthcare information technology, as a result of the broader economic slowdown and its related effect on imaging spending;

·decreases in reimbursement for imaging procedures, typified by the reductions of reimbursement to imaging centers resulting from the Deficit Reduction Act of 2005;

·reductions in purchases by medical imaging facilities due to reduced profitability for that industry resulting from increased regulatory requirements and reductions in reimbursement; and

·a maturing of the PACS market, as most large hospitals have previously installed PACS, resulting in the PACS market being a replacement market instead of a new installation market.

We expect many of the factors affecting the market in 2008 to continue into 2009. Based on current and anticipated 2009 hospital spending patterns and the condition of the overall economy in the U.S., we expect a decrease in the imaging equipment market and advanced visualization market in 2009. These factors will affect not only our core customer base of radiologists but all potential users of advanced visualization. At this time, it is difficult to predict market growth rates beyond 2009. However, until there are improvements in the credit markets and general availability of debt instruments to help hospitals fund healthcare technology purchases, we expect that the environment will remain challenging.

Strengths

One of our key competitive differentiators from other advanced visualization providers is our focus on, and investment in, developing intuitive, user-friendly software. Our software is designed to automate common elements

5

of physician visualization workflow, which makes our software simple to use and facilitates user adoption across a broad range of constituents in the healthcare enterprise. We believe that workflow automation and general ease-of-use are important factors that customers consider when choosing our solutions. In addition, we believe that the following additional competitive strengths also contribute to our success:

·our compatibility with all major diagnostic imaging scanners and with many different healthcare information technologies, including PACS and Electronic Medical Records (EMRs);

·our ability to render integrated 2D, 3D and 4D images at high speeds and with interactive navigation capabilities using a relatively low-cost standard computer;

·our large installed base of customers and our related commitment to service excellence, which contributes to our strong recurring revenue stream in the form of ongoing maintenance and support revenue;

·our relationship with Toshiba, through which our products are distributed globally;

·our modular products for digital equipment manufacturers, PACS vendors and end-user customers that can easily be segmented or integrated into the healthcare information technology environment; and

·our ability to distribute our applications throughout a healthcare enterprise through our Web-based solutions and extensible infrastructure platform.

Strategy

Our goal is to be a leading provider of advanced visualization and image analysis solutions that we believe can improve clinical outcomes and reduce the overall cost of healthcare for our customers by improving both physician productivity and patient outcomes. To achieve this goal, we intend to continue advancing via the following key strategies:

·develop and maintain leading-edge, advanced visualization technology;

·increase penetration of our existing customer base and provide excellent customer service;

·expand our software functionality to appeal to a broader base of users;

·expand our presence in the advanced visualization market by continuing to make our products easy to integrate with other healthcare information technologies;

·build on and grow our relationship with Toshiba and McKesson;

·grow our business internationally;

·grow our collaborative partnerships with leading medical technology companies; and

·selectively pursue strategic acquisitions.

Marketing and Distribution

We market our products both as standalone software packages and as part of integrated software and hardware systems to radiologists, surgeons, primary care physicians and medical researchers. We market our products directly to end-user customers and through business partners, including diagnostic imaging equipment manufacturers, PACS companies, and software developers, all of whom sell our products with products they either manufacture or acquire from third parties.

Our marketing partners include Toshiba, which markets our software to its customers through its subsidiaries and distributors in more than 50 countries throughout the world. Our agreement with Toshiba commenced in 2001, and it has been extended four times, most recently through December 31, 2013. Sales through Toshiba are a material portion of our revenues, comprising approximately 52% of our 2008 revenues, 47% of our 2007 revenues, and 41% of our 2006 revenues. See “Item 1A. Risk Factors - - Dependence on Major Customers.”

6

We also have marketing and reseller agreements with several other companies, such as McKesson, Sectra and Cerner Corp., under which these companies may resell our products to their customers as add-on components to their products.

As of December 31, 2008, we had 24 salespeople in the U.S., four salespeople in Europe, one salesperson supporting national accounts, and two salespeople supporting our international resellers outside of Europe.

Collaborative Relationships

From time to time, we work with leading physicians in our industry to develop advanced clinical applications.  These physicians, as well as information technology professionals who work for our customers, also give us advice and guidance about how we can develop our products to most effectively operate with other technologies within their enterprises.  Further, we typically obtain significant input from our leading customers about the clinical value of our clinical solutions for given applications.

Competition

The advanced visualization market is highly competitive, subject to rapid change and is significantly affected by new product introductions and other market activities of industry participants. Our products compete based on a multitude of factors, including quality, performance, functionality, clinical features, quality of support and service, reputation, brand and price. Our primary competitors are diagnostic imaging system suppliers, which are typically large, multinational companies with far greater financial and technical resources. They also have well-established sales and distribution networks for their products. These companies, including GE, Siemens, and Philips, develop and market medical imaging systems, such as CT and MR equipment, which may be purchased with integrated medical imaging capabilities. Our software works on the products offered by each of these companies. To win business against equipment manufacturers, we must convince customers to buy our solution separately from their purchase of imaging equipment instead of buying integrated systems from our competitors. We believe that we have the largest organization in the world dedicated to developing advanced visualization solutions, as the groups working on competitive technologies at the equipment manufacturers mentioned above are smaller in relation to our company’s operations.

We also face competition from PACS vendors and other suppliers of medical imaging systems and software. PACS companies sometimes provide medical imaging capability in addition to their image archiving and networking products. Some of the diagnostic equipment manufacturers, including GE and Philips, also offer PACS. Vendors of hospital, clinical and radiology information systems have also diversified into the PACS and medical imaging product lines, either through internal development or business development and partnership channels. These companies, which may be large or small, attempt to offer an integrated system covering a full range of administrative, clinical and radiology information management capabilities to healthcare providers. Other suppliers of medical imaging systems and software, such as TeraRecon, Inc., compete on the basis of volume rendering or other visualization technologies, specific applications or market niches. We are seeing additional competitors enter our market, but have yet to see these competitors attain a meaningful share of the market.

Our competitive strength is based on several factors, including our ability to do the following:

·provide differentiated solutions that operate in multi-vendor network and image source environments;

·provide clinical quality, integrated 2D, 3D and 4D images at a high speed with interactive navigation;

·provide solutions that run on commercial, off-the-shelf computer hardware;

·build user interfaces that are easy for physicians and clinicians to use so that they can easily derive value from our products;

·integrate clinical knowledge from our collaborative clinical partners into our products;

·leverage our visualization and analysis technology across multiple clinical disciplines;

·serve original equipment manufacturers (OEMs), PACS vendors and end-user customers through the development of a modular end-user product that can easily be segmented for OEM customers or integrated into various healthcare information technology environments; and

·offer our market-leading clinical applications into the broadening clinical enterprise through a Web-based architecture.

We believe that product quality, performance, functionality and features, quality of support and service, reputation, brand and price are also important competitive factors. We believe that customers will prefer our solutions because they are the best-in-class productivity tools for doctors. Although price has been less significant than other factors, increasing competition in the market may result in price reductions and reduced gross margins. In particular, if one or more of the diagnostic imaging system suppliers or PACS vendors, many of which have greater scale and

7

resources than we do, provides or distributes more competitive medical imaging products than ours, our business, financial condition and results of operations could be materially adversely affected.

Customers and Customer Support

Through December 31, 2008, we had a customer install base of approximately 3,600, principally consisting of hospitals and teaching hospitals, clinics and imaging centers in major cities and smaller population areas.

We are committed to rapid response to customer service requests. Customer support representatives are available during business hours and on an on-call basis to answer questions about the operation, maintenance and repair of our products.

Intellectual Property

We rely primarily on a combination of trade secret and copyright law, employee and third-party nondisclosure agreements and other protective measures to protect intellectual property rights pertaining to our products and technologies. Because of the rapid pace of technological change in the medical software industry, we believe that the knowledge, ability and experience of our personnel; new product developments and enhancements; and ongoing, reliable product maintenance and support will enhance our competitive position.

We do not own all of the software and other technologies used in our products, but we believe we have the necessary licenses from third parties to use that technology in our current products. It may be necessary to renegotiate with such third parties for any new versions of current products or any new products. Such third-party licenses may not be available on reasonable terms, or at all.

Manufacturing and Service

Our manufacturing efforts are limited to the production, quality assurance and distribution of our software, which is distributed on CD-ROM and through password-protected downloads. After we send software to our customers, it is loaded into hardware, either by our personnel, personnel from one of our authorized resellers, or our customers’ personnel. If our personnel load the software, it is as part of our installation services. In addition to loading software into the hardware, our installation services generally include implementation of our software into customers’ computer networks, configuring the network requirements and verifying software operability on site.

We provide customer education services for our customers, both in connection with their acquisition of our software and as independent purchases. We conduct customer education programs for our software at our headquarters in Minnetonka, Minnesota, at customers’ locations and at various designated locations through the United States.

We rely primarily on our own software development as our core competence. We obtain certain application and utility software from third parties (see “Intellectual Property” above) and use a third-party operating system for integrated computer workstations. In addition, we obtain systems components, computers and computer peripherals from third-party suppliers.

We have also signed reseller distribution agreements that allow us to distribute products from certain third parties. These third-party products include MeVis Medical Solutions Inc.’s ImageChecker® CT software applications for the detection of lung nodules; Mirada Solutions Ltd.’s Fusion 7D™ software application for the anatomical alignment of two different image data sets from two different types of diagnostic equipment, such as combining images from CT and PET scanners; Confirma Inc.’s CADstream™ breast MRI software; and Medis Inc.’s QMass® MR software.

Governmental Regulation

As medical devices, our software solutions are subject to extensive and rigorous regulation by numerous governmental authorities, principally the U.S. Food and Drug Administration (“FDA”) and corresponding foreign agencies. In the United States, the FDA administers the Federal Food, Drug, and Cosmetic Act, its amendments (the “FD&C Act”) and its related regulations. The FD&C Act and these regulations classify medical devices as Class I, II or III devices, which are subject to general controls, special controls or pre-market approval requirements, respectively. Most Class I and II devices, as well as some Class III devices, can be cleared for marketing pursuant to a 510(k) pre-market notification. The process of obtaining a 510(k) clearance typically can take several months to a year or longer.

Class III devices generally require more stringent clinical investigation and pre-market clearance requirements. In such cases, the FDA will require that the manufacturer submit a pre-market approval (“PMA”) application that must

8

be reviewed and approved by the FDA prior to the sale and marketing of the device in the United States. The process of obtaining a PMA can be expensive, uncertain and lengthy, frequently requiring anywhere from one to several years from the date of FDA submission, if approval is obtained at all. Moreover, a PMA, if granted, may include significant limitations on the indicated uses for which a product may be marketed.

Our software is classified as a Class II medical device and has received marketing clearances from the FDA as the result of 510(k) pre-market notifications. Specifically, our software in general release has been cleared to be marketed for use with CT, MR and PET scanners. Future products, add-on options to existing software, and expanded claims of efficacy will likely require additional 510(k) pre-market notifications.

There can be no assurance that future FDA review processes will not involve delays or that clearances will be granted on a timely basis. In recent years, the FDA has increased its level of scrutiny of medical devices involving software, which requires us to produce additional documentation about the safety and effectiveness of our devices in order to obtain regulatory clearance, and which can lengthen the time required to obtain such clearance.  Further, if any of our current or future products become classified as Class III devices, they could be subject to an even more expensive, uncertain and lengthy approval process, and approval, if granted, could include significant limitations on the indicated uses for which a product may be marketed.

We are also subject to regulation in foreign countries in which we sell our products. Many of the regulations applicable to our products in such countries are similar to those of the FDA, but the regulations in several countries, particularly in Asia, may be more particular than those of the FDA, and significantly greater time and resources may be required to obtain approval in those countries. Our ability to successfully market and sell our products in foreign markets depends in large part on our ability to comply with such foreign regulatory requirements. Our products have been Conformitee Europeene (“CE”) marked, indicating conformance with applicable sections of the Medical Device Directive 93/42/EEC, which allows the products to be marketed in the member countries of the European Communities.

We are also subject to periodic inspections by the FDA and similar foreign regulatory agencies, whose primary purpose is to audit our compliance with quality system regulations established by the FDA and other applicable government standards. Regulatory action may be initiated in response to audit deficiencies or product performance problems. We believe that our manufacturing and quality control procedures comply with all applicable requirements of the FDA and foreign regulatory agencies in countries in which we sell our products. We have received and maintain ISO 13485: 2007 Certification.

Medicare and Medicaid laws and regulations may impact the financial arrangements through which we market, sell and distribute our products and services to patients who are Medicare or Medicaid beneficiaries. Violations of these laws and regulations may result in civil and criminal penalties, including substantial fines and imprisonment. In a number of states, the scope of these laws and regulations has been extended to include the provision of services or products to all patients, regardless of the source of payment, although there is variation from state to state as to the exact provisions of such laws or regulations. In other states, and on a national level, several health care reform initiatives have been proposed which would have a similar impact. We believe that our operations and our marketing, sales and distribution practices currently comply with all current applicable fraud and abuse and physician anti-referral laws and regulations.

Third-Party Reimbursement and Cost Containment

Our products are purchased primarily by hospitals, clinics, imaging centers and other users that bill various third-party payers for the services provided to the patients. These payers, which include Medicare, Medicaid, private insurance companies and managed care organizations, reimburse part or all of the costs and fees associated with the diagnostic procedures utilizing our products. The medical imaging services performed using our software, except for disease screening procedures, are covered by current CPT codes (Current Procedural Terminology, as defined by the Centers for Medicare & Medicaid Services). As such, hospitals providing services using our advanced visualization solutions can seek reimbursement for such services by using existing approved CPT codes. Medicare and Medicaid reimbursement for hospitals is based on a fixed amount for treating a patient with a specific diagnosis. Because of this fixed reimbursement method, hospitals have incentives to use less costly methods in treating Medicare and Medicaid patients, and they will frequently make capital expenditures to take advantage of less costly treatment technologies. Often, reimbursement is reduced to reflect the availability of a new procedure or technique and, as a result, hospitals are generally willing to implement new cost-saving technologies before these downward adjustments take effect. Likewise, because the rate of reimbursement for certain physicians who perform certain procedures has been, and may in the future be, reduced in the event of changes in the resource-based relative value scale method of payment calculation, physicians may seek greater cost efficiency in treatment to minimize any

9

negative impact of reduced reimbursement. Any amendments to existing reimbursement rules and regulations that restrict or terminate the reimbursement eligibility (or the extent or amount of coverage) of medical procedures using our products or the eligibility (or the extent or amount of coverage) of our products could have a material adverse impact on our business.

In response to the focus of national attention on rising health care costs, a number of changes to reduce costs have been proposed or have begun to emerge. There have been, and may continue to be, proposals by legislators and regulators and third-party payers to reduce these costs. There has also been a significant increase in the number of Americans enrolling in some form of managed care plan and, in addition, many hospitals participate in or have agreements with HMOs (health maintenance organizations). It has become a typical practice for hospitals to affiliate themselves with as many managed care plans as possible. Higher managed care penetration typically drives down the prices of healthcare procedures, which in turn places pressure on medical supply prices. This causes hospitals to implement tighter vendor selection and certification processes by reducing the number of vendors used, purchasing more products from fewer vendors and trading discounts on price for guaranteed higher volumes to vendors. Hospitals have also sought to control and reduce costs over the last decade by joining group purchasing organizations or purchasing alliances. We cannot predict what continuing or future impact these practices, the existing or proposed legislation, or such third-party payer measures may have on our future business.

Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)

The HIPAA regulations require our customers to observe several requirements for the privacy and security of the protected health information (PHI) of their patients.  Although the products and services we provide may technically not be covered under the HIPAA regulations, we may have access to PHI while working with our customers and they therefore routinely request that we sign “business associate” agreements with them. A “business associate” is a person or entity that performs certain functions or activities that involve the use or disclosure of protected health information on behalf of, or provides services to, a covered entity. By law, the HIPAA Privacy Rule applies only to covered entities — health plans, health care clearinghouses, and certain health care providers. However, most health care providers do not carry out all of their health care activities and functions by themselves. Instead, they often use the services of a variety of other persons or businesses. The Privacy Rule allows covered providers and health plans to disclose protected health information to these “business associates” if the providers or plans obtain satisfactory assurances that the business associate will use the information only for the purposes for which it was engaged by the covered entity, will safeguard the information from misuse, and will help the covered entity comply with some of the covered entity’s duties under the Privacy Rule. Covered entities may disclose protected health information to an entity in its role as a business associate only to help the covered entity carry out its health care functions — not for the business associate’s independent use or purposes, except as needed for the proper management and administration of the business associate.

Employees

As of December 31, 2008, we had 280 full-time employees, with 102 involved in research and development, 78 in sales and marketing, 53 in technical support functions and 47 in administrative functions. We believe our relationship with our employees is good.

Item 1A.Risk Factors

The discussion of our business and operations included in this annual report on Form 10-K should be read together with the risk factors set forth below. They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties, together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect financial performance. Each of the risks described below could adversely impact the value of our securities. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.

We offer only one line of products, which is advanced visualization software, related services and hardware, and if our products do not continue to gain market acceptance, our financial results would be adversely affected.

Our success depends on our ability to successfully market advanced visualization software for clinical use, and on the ability and willingness of physicians to use enterprise-wide advanced visualization medical imaging software in clinical analysis and therapy planning. Our enterprise-wide advanced visualization software products are alternatives to the conventional methods traditionally used for viewing medical images in the clinical setting. Often, a purchase

10

by a customer of our products means that it has chosen not to utilize software that was provided in connection with the customer’s purchase of a scanner, which means that the customer may pay additional amounts to obtain our products.  The acceptance of our products by physicians and other clinicians will depend on our ability to educate those users as to the speed, ease-of-use and other benefits offered by our products and systems, as well as our timely introduction of new features and functions. There can be no assurance that users will prefer advanced visualization and analysis software solutions over less expensive 2D medical imaging software or that we will succeed in our efforts to further develop, commercialize and achieve market acceptance for our products or for any other product in the clinical setting. Further, most of our business in markets outside the United States is provided through third parties with whom we have marketing agreements. There can be no assurance that these third parties will wish to continue our relationships on an indefinite basis or under the same terms as the business is currently conducted. Further, although we have undertaken efforts to develop direct relationships with customers in markets outside the United States, we may not be successful in doing so at a sufficient level. The loss of or adverse changes in our relationships with our third-party business partners, and our failure to establish sufficient direct relationships with customers outside the United States, would have a material adverse impact on our business, financial condition and results of operations.

A substantial portion of our revenue is derived from sales of our software in connection with customer purchases of CT scanners, and any decline in the purchase of CT scanners or any difficulty we have in growing sales separately from sales of CT scanners could have a material adverse effect on our results of operations and financial condition.

Our business historically was tied to sales of our Vitrea advanced visualization software and related software options (which includes software, hardware and maintenance and services), which were typically purchased concurrently with a customer’s purchase of CT imaging equipment. Forecasts for 2009 suggest that the market for CT imaging equipment will be down significantly.  In order to improve the marketability of our products separately from sales of CT imaging equipment, during 2008, we evolved our business model into sales throughout a customer’s enterprise when we launched ViTAL Enterprise in May. ViTAL Enterprise includes Vitrea and ViTALConnect software, as well as all options that we manufacture for such products.  ViTAL Enterprise makes all of our clinical functionality available throughout a hospital enterprise to better enable specialists to take advantage of our tools. We intend for ViTAL Enterprise to be sold both with purchases of CT equipment as well as in the absence of such purchases. There can be no assurance that ViTAL Enterprise will meet with acceptance by a wide range of hospitals or that specialists throughout hospitals will wish to use our tools. If ViTAL Enterprise does not meet with market acceptance, it would have a material adverse impact on our business, financial condition and results of operations.

We presently depend on Toshiba for a significant portion of our total revenues. A reduction in the business from Toshiba could adversely affect our revenues and could seriously harm our business.

A limited number of large customers may continue to account for a significant portion of our revenue during any given period for the foreseeable future. One of our principal distribution channels is to sell our medical imaging software in connection with medical imaging equipment sold by Toshiba. Sales to Toshiba accounted for 52% of our total revenue for the year ended December 31, 2008, 47% of our total revenue for the year ended December 31, 2007 and 41% of our total revenue for the year ended December 31, 2006. Toshiba’s accounts receivable represented 42% of our accounts receivable at December 31, 2008 and 34% at December 31, 2007. Except for our agreement with Toshiba, we have no significant purchase commitments from any of our customers or business partners, and we generally make sales pursuant to individual transactions. Our joint distribution agreement with Toshiba commenced in 2001 and has been extended five times, most recently through December 31, 2013. A reduction, delay, or cancellation of orders from Toshiba, or our inability to collect accounts receivable from Toshiba, likely would have a material adverse effect on our financial condition and operating results.

In February 2009, Toshiba announced that via its wholly-owned subsidiary, Toshiba Medical Visualization Systems Europe, Ltd., it had completed its acquisition of the Advanced Visualization Imaging System Division (AVIS) of Barco nv, Edinburgh, Scotland. This acquisition enables Toshiba to conduct in-house development of 3D volume rendering and advanced visualization capabilities for all Toshiba modalities. For the past 10 years, Toshiba has used Voxar 3D visualization core software, a product of AVIS, in its medical imaging products and PACS. AVIS, as part of Barco, provided advanced visualization solutions for the medical imaging and PACS markets.

We believe that due to Toshiba’s renewal in November 2008 of its agreement with us to resell our products and its execution in January 2009 of an agreement to fund our development of advanced visualization software, the acquisition of AVIS by Toshiba will not have a material negative impact on our sales to Toshiba.  However, there can be no assurance that Toshiba will not use AVIS to develop technologies that are competitive to our products, particularly to work with lower-end CT imaging equipment.  If Toshiba does develop technologies that are

11

competitive to our products, it could choose to sell its own products in place of ours, which likely would have a material adverse effect on our business, financial condition and results of operations.

We operate in a single industry and are therefore dependent upon growth in the advanced visualization market. If that market does not grow as we expect, our business, results of operations and financial condition will be adversely affected.

The advanced visualization industry in which we market our products is currently faced with regulatory, technical and market challenges. State and federal governmental agencies and private payors are putting pressure on reimbursement rates for advanced visualization examinations, which can negatively affect demand for our products. Many of the major hospitals and medical research centers within the United States have already purchased scanners, PACS and advanced visualization technologies, causing future sales to be upgrades or replacements instead of new installations, potentially lengthening the sales cycles as customers feel less urgency to purchase and implement new systems. We believe that the market for advanced visualization technologies is still developing, with growth opportunities outside the United States and among specialists beyond radiology.

However, given the uncertainties associated with the developing stage of many of these markets, there can be no assurance that they will develop in the manner we anticipate or that they will not require a level of investment greater than we expect. Additionally, some of our customers finance their acquisitions through third-party lenders.  With the recent tightening in the lending market, some customers who would otherwise purchase our products may not be able to obtain sufficient financing and therefore will not complete their purchases. Accordingly, there can be no assurance that the advanced visualization industry will provide growth opportunities for us and our software products or that our business strategies will be successful as the industry continues to evolve. Ultimately, if the advanced visualization industry fails to develop as we expect, our business, results of operations and financial condition will be materially and adversely affected.

We participate in a highly competitive industry. If we fail to compete effectively, our results of operations and financial condition would be adversely affected.

We face intense competition in the advanced visualization industry. We expect technology to continue to develop rapidly, and our success will depend to a large extent on our ability to maintain a competitive position with our products. Our competitors in the advanced visualization industry include large, established manufacturers of CT and MR imaging equipment. Companies such as GE, Siemens and Philips typically offer their own advanced visualization software and workstations as part of their integrated imaging and scanner systems. Our software works on the products offered by each of these companies. To win business against equipment manufacturers, we must convince customers to buy our software solutions separately from their purchase of imaging equipment instead of buying integrated systems from our competitors.

In addition to having a competitive advantage in marketing advanced visualization tools as an integrated part of their imaging products, our competitors have significantly greater capital and staffing resources for research and development that are critical to success in the dynamic advanced visualization industry, more recognizable brand names, and more well-established marketing and distribution networks. Although price has been less significant than other factors, increasing competition may result in price reductions and reduced gross margins. Additionally, we face competition from other entities, such as PACS vendors and developers of competitive or ancillary software packages. We may not be able to compete effectively with such manufacturers or competing entities on each or any particular factor, including price, features and service.

Our products may become obsolete or non-competitive, or we may develop non-competitive products, which would result in reduced revenue and profit margins.

The advanced visualization market is characterized by rapid innovation and technological change. For example, as scanners become faster and generate increasingly more slices, our software must maintain its capability to handle the increased data volumes generated by the more powerful scanners. We may devote time and resources to develop products that do not obtain market acceptance or for which the market is much smaller than we expected when we planned the products, and we may be otherwise unable to compete effectively in the marketplace. Products developed by our competitors may render our products obsolete or non-competitive. Similarly, our competitors may succeed in developing or marketing products that are viewed as providing superior clinical performance or are less expensive than our current or future products.

12

As our products are accessed by additional medical professionals throughout an enterprise, the satisfaction of our customers may decrease.

Historically, our products were used by radiologists who received education on the use of imaging products in medical school and continuing education programs and to whom we provided training in connection with their purchases. Further, use of medical imaging products is a relatively routine activity for radiologists. As our products are used by additional medical professionals throughout an enterprise, however, they will be used by persons with less training and familiarity with imaging technologies.  Occasional and less-trained users of imaging technology may find use of our products to be more difficult than do radiologists, which could increase our time and expenses supporting these users, thus negatively affecting our gross margins for support services. Further, these users may realize less satisfaction than do our historical customers, negatively affecting the adoption of our products elsewhere in the enterprise. Finally, occasional and less-trained users are more likely to use our products incorrectly. Although our products are intended to be secondary analytical devices, their incorrect use could result in errors by medical professionals in their treatment of patients, lowering their satisfaction with our products and potentially exposing us to legal and regulatory liability, which could affect our results of operations and ability to market our products.

We may make future acquisitions, which may be difficult to integrate, divert management resources, result in unanticipated costs or dilute our shareholders.

Part of our continuing business strategy is to make acquisitions of, or investments in, companies, products or technologies that complement our current products, enhance our market coverage or technical capabilities, or offer growth opportunities. Future acquisitions could pose numerous risks to our operations, including:

·we may have difficulty integrating the purchased operations, technologies or products;

·we may incur substantial unanticipated integration costs;

·assimilating the acquired businesses may divert significant management attention and financial resources from our other operations and could disrupt our ongoing business;

·acquisitions could result in the loss of key employees, particularly those of the acquired operations;

·we may have difficulty retaining or developing the acquired businesses’ customers;

·acquisitions could adversely affect our existing business relationships with suppliers and customers;

·we may fail to realize the potential cost savings or other financial benefits and/or the strategic benefits of the acquisitions; and

·we may incur liabilities from the acquired businesses for infringement of intellectual property rights or other claims, and we may not be successful in seeking indemnification for such liabilities or claims.

Further, we may not receive the returns from an acquisition that were expected at the time of acquisition. In connection with any acquisition or investment, we could incur debt, be required to amortize expenses related to intangible assets, incur large and immediate write-offs, experience volatility in future earnings resulting from contingent consideration, assume liabilities, or issue stock that would dilute our current shareholders’ percentage of ownership. We may not be able to complete acquisitions or integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on our business, financial condition and results of operations.

We sell our products internationally and are subject to various risks relating to such international activities, which could harm our international sales and profitability.

During the years ended December 31, 2008, 2007 and 2006, 29%, 19% and 15% of our total revenues, respectively, were attributable to international sales. Toshiba has been the primary source of our international sales. We are also developing direct international sales and marketing efforts. By doing business in international markets, we are exposed to risks separate and distinct from those we face in our domestic operations. Our international business may be adversely affected by changing economic conditions in foreign countries. Because most of our sales are currently denominated in U.S. dollars, if the value of the U.S. dollar increases relative to foreign currencies, our products could become more costly to the international consumer and therefore less competitive in international markets, which could adversely affect our profitability. Furthermore, the percentage of sales denominated in non-U.S. currencies may increase in the future, in which case fluctuations in exchange rates could affect demand for our products. Engaging in international business inherently involves a number of other difficulties and risks, including:

·export restrictions and controls relating to technology;

13

·the availability and level of reimbursement within prevailing foreign healthcare payment systems;

·pricing pressure that we may experience internationally;

·required compliance with existing and new foreign regulatory requirements and laws;

·business customs in other countries that violate U.S. laws, such as the Foreign Corrupt Practices Act;

·laws and business practices favoring local companies;

·longer payment cycles;

·difficulties in enforcing agreements and collecting receivables through foreign legal systems;

·political and economic instability;

·potentially adverse tax consequences, tariffs and other trade barriers;

·international terrorism and anti-American sentiment;

·difficulties and costs of staffing and managing foreign operations;

·changes in currency exchange rates; and

·difficulties in enforcing intellectual property rights.

Our exposure to each of these risks may increase our costs, lengthen our sales cycle and require significant management attention. We cannot assure you that one or more of these factors will not harm our business.

If our internal control over financial reporting is found to be inadequate, our financial results may not be accurate, raising concerns for investors and potentially adversely affecting our stock price.

Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to evaluate and determine the effectiveness of our internal controls over financial reporting. We have dedicated a significant amount of time and resources to ensure compliance with this legislation for the years ended December 31, 2008, 2007 and 2006 and will continue to do so for future periods. We may encounter problems or delays in completing the review and evaluation, the implementation of improvements, and the receipt of a positive attestation, or any attestation at all, from our independent registered public accounting firm. In addition, our assessment of our internal controls may identify deficiencies that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors and therefore adversely affect our stock price.

We may experience fluctuations in operating results, which may result in volatility in the price of our common stock.

We have in the past experienced, and may in the future experience, significant fluctuations in annual and quarterly operating results. If these fluctuations occur, they may result in volatility in the price of our common stock. Quarterly revenue and operating results may fluctuate as a result of a variety of factors that are outside of our control including, but not limited to, the timing of significant orders, the timing of product enhancements and new product introductions by us or our competitors, the pricing of our products, changes in customers’ budgets and competitive conditions. Our quarterly license and services revenue may fluctuate and may be difficult to forecast for a variety of reasons, including the following:

·a significant number of our existing and prospective clients’ decisions regarding whether to enter into license agreements with us are made within the last few weeks or days of each quarter;

·the size and number of license transactions can vary significantly;

·our dependence on Toshiba or any other major customer for a significant portion of our revenues;

·a decrease in license fee revenue which may likely result in a decrease in services revenue in the same or subsequent quarters;

·clients unexpectedly postponing or cancelling projects due to changes in their strategic priorities, project objectives, budget or personnel;

·the uncertainty caused by potential business combinations in the software industry, causing clients and prospective clients to cancel, postpone or reduce capital spending projects on software;

·client evaluations and purchasing processes that vary significantly from company to company, and a client’s internal approval and expenditure authorization process that is difficult and time consuming to complete, even after selection of a vendor;

·the number, timing and significance of software product enhancements and new software product announcements by us or our competitors;

·existing clients declining to renew support for our products, and market pressures that limit our ability to increase support fees or require clients to upgrade from older versions of our products; or

·prospective clients declining or deferring the purchase of new products or releases if we do not have sufficient client references for those products.

14

If we do not achieve a substantial improvement in pretax results in 2009 over 2008, we may need to establish a valuation allowance for some or all of our deferred tax assets, which could materially impact our income tax provision, results of operations and financial condition.

As of December 31, 2008, we had $14.6 million of deferred tax assets. Considerations for determining the realizability of our deferred tax assets primarily involve cumulative pre-tax income for financial reporting purposes, cumulative taxable income for the past three years, estimated future pre-tax income for financial reporting purposes and estimated future taxable income from our core business. We also consider the expiration dates and amounts of net operating loss carryforwards and other tax credits, and estimate the impact of future tax deductions from the exercise of stock options. If we do not achieve a substantial improvement in pretax results in 2009 over 2008, it is reasonably possible that we may need to establish additional valuation allowances for some or all of our deferred tax assets, which could materially impact our income tax provision, financial position and results of operations.

We are subject to government regulation, which can result in additional costs or restrict our ability to market our products.

Our products are subject to regulation by the FDA and by comparable agencies in foreign countries. In the United States, the FDA regulates the development, introduction, manufacturing, labeling and record keeping procedures for medical devices, including 3D medical imaging software and systems. Our medical devices require clearance or approval by the FDA before they can be commercially distributed in the United States. Modifications and enhancements to a medical device also require a new FDA clearance or approval if they could significantly affect its safety or effectiveness or would constitute a major change in its intended use, design or manufacture. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision and may require a new clearance or approval for the modification if it disagrees with the manufacturer’s decision. If the FDA requires us to seek clearance or approval for the modification of a previously cleared product for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties, which could have a material adverse effect on our financial results and competitive position. The process of obtaining marketing clearance from the FDA for new products and new applications for existing products can be time-consuming and expensive. All of our current products are marketed pursuant to 510(k) pre-market clearance from the FDA. Our products have been cleared to be marketed for use with CT, MR and PET scanners. The FDA may not grant clearance with respect to our future products or enhancements, or future FDA review may involve delays that could adversely affect our ability to market such future products or enhancements. In addition, our future products or enhancements may be subject to a more lengthy and expensive pre-market approval process with the FDA.

Even if we obtain regulatory clearances and approvals to market a product from the FDA, these approvals may entail limitations on the indicated uses of the product. Product clearances and approvals by the FDA can also be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. The FDA could also limit or prevent the distribution of our products and has the power to require the recall of such products. FDA regulations depend heavily on administrative interpretation, and future interpretations made by the FDA or other regulatory bodies may adversely affect us. The FDA may inspect our facilities and operations to determine whether we are in compliance with various regulations relating to specification, development, documentation, validation, testing, quality control and product labeling. If the FDA determines that we are in violation of such regulations, it could impose civil penalties, including fines, recall or seize products and, in extreme cases, impose criminal sanctions.

We market our products both domestically and internationally. International regulatory bodies have established varying regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Our inability or failure to comply with the varying regulations, or the imposition of new regulations, could restrict our ability to sell our products internationally and could adversely affect our business.

The imposition of requirements under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, could adversely affect our business.

The HIPAA regulations require our customers to observe several requirements for the privacy and security of the protected health information (PHI) of their patients. Although the products and services we provide may technically not be covered under the HIPAA regulations, we may have access to PHI while working with our customers and they therefore routinely request that we sign “business associate” agreements with them. A “business associate” is a person or entity that performs certain functions or activities that involve the use or disclosure of protected health

15

information on behalf of, or that provides services to, a covered entity. By law, the HIPAA Privacy Rule applies only to covered entities—health plans, healthcare clearinghouses, and certain healthcare providers. However, most healthcare providers do not carry out all of their healthcare activities and functions by themselves. Instead, they often use the services of a variety of other persons or businesses. The Privacy Rule allows covered providers and health plans to disclose protected health information to these “business associates” if the providers or plans obtain satisfactory assurances that the business associate will use the information only for the purposes for which it was engaged by the covered entity, will safeguard the information from misuse, and will help the covered entity comply with some of the covered entity’s duties under the Privacy Rule. Covered entities may disclose protected health information to an entity in its role as a business associate only to help the covered entity carry out its healthcare functions—not for the business associate’s independent use or purposes, except as needed for the proper management and administration of the business associate. These agreements are necessary for us in the normal course of servicing and supporting our products and may require us to incur liabilities if we disclose protected health information in a manner not allowed under any respective agreement. Our potential liabilities may include indemnifying our customer against any damages resulting from the disclosure. If we are not willing to or are unable to enter into a business associate agreement with current and potential customers, such customers may not purchase our products or services, which would have a material adverse effect on our business, financial condition, or results of operations.

We are subject to various federal and state “fraud and abuse” laws, and if we are unable to fully comply with such laws, we could face substantial penalties, which may adversely affect our business.

We are subject to various federal and state laws pertaining to health care fraud and abuse, including the following:

·the federal Anti-Kickback Statute, which prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual, or furnishing or arranging for a good or service, for which payment may be made under federal health care programs (such as Medicare and Medicaid);

·the federal False Claims Act, which prohibits anyone from knowingly presenting or causing to be presented a false or fraudulent claim for payment to the federal government;

·HIPAA, which prohibits executing a scheme to defraud any health care benefit program;

·the federal False Statements Statute, which prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for health care benefits, items or services; and

·state law equivalents to these federal laws, which may not be limited to government reimbursed items, and may not contain identical exceptions.

If our past or present operations are found to be in violation of any of the laws described above or the other similar governmental regulations to which we are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from federal health care programs and/or the curtailment or restructuring of our operations. Similarly, if the physicians or other providers or entities with which we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on us. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that their provisions are open to a variety of interpretations and are subject to further legal or regulatory change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, fines and other penalties, divert our management’s attention from the operation of our business and damage our reputation.

The protection of our intellectual property may be uncertain, and we may face possible claims of others.

Although we have received patents and have filed patent applications with respect to certain aspects of our technology, we generally do not rely principally on patent protection with respect to our products and technologies. Instead, we rely primarily on a combination of trade secret and copyright law, employee and third-party nondisclosure agreements and other protective measures to protect intellectual property rights pertaining to our products and technologies. Such measures may not provide meaningful protection of our trade secrets, know-how or other intellectual property in the event of any unauthorized use, misappropriation or disclosure. Others may independently develop similar technologies or duplicate our technologies. In addition, to the extent that we apply for any patents, such applications may not result in issued patents or, if issued, such patents may not be valid or of value. Third parties could, in the future, assert infringement or misappropriation claims against us with respect to our current or future products and technologies, or we may need to assert claims of infringement against third

16

parties. Any infringement or misappropriation claim by us or against us could place significant strain on our financial resources, divert management’s attention from our business and harm our reputation. The costs of prosecuting or defending an intellectual property claim could be substantial and could adversely affect our business, even if we are ultimately successful in prosecuting or defending any such claims. If our products or technologies are found to infringe the rights of a third party, we could be required to pay significant damages or license fees or cease production, any of which could have a material adverse effect on our business.

We face the risk of product liability claims, and our product liability and errors and omissions insurance coverage may not be adequate to pay products liability claims, which could have a material adverse effect on our financial condition.

Our business exposes us to the risk of product liability claims that is inherent in the manufacturing and marketing of medical devices, including those which may arise from the misuse or malfunction of, or design flaws in, our products. We may be subject to product liability claims if our products cause, or merely appear to have caused, an injury. Claims may be made by patients, healthcare providers or others selling our products. Although we have product liability and errors and omissions insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, the coverages may not be adequate to protect us against any future product liability claims. Further, if additional products are approved for marketing, we may seek additional insurance coverage. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.

If we fail to attract and retain qualified personnel, our business would be harmed.

Recruiting and retaining talented personnel in the future will be critical to our success. There is intense competition from other companies, research and academic institutions, government entities and other organizations for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our marketing and development activities.

If we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations and, as a result, our business might not succeed.

Our ability to grow successfully requires an effective planning and management process. The expansion and growth of our business could place a significant strain on our management systems, infrastructure and other resources. To manage our growth successfully, we must continue to improve and expand our systems and infrastructure in a timely and efficient manner. Our controls, systems, procedures and resources may not be adequate to support a changing and growing company. If our management fails to respond effectively to changes and growth in our business, including acquisitions, such failure could have a material adverse effect on our business.

We depend on third-party reimbursement. A reduction or other change in reimbursement from third parties could negatively affect our business.

Our products are purchased by hospitals, clinics, imaging centers and other users, which bill various third-party payers, such as government health programs, private health insurance plans, managed care organizations and other similar programs, for the healthcare goods and services provided to their patients. There are currently Current Procedural Terminology, or CPT, reimbursement codes that describe most of the diagnostic procedures that use our products. However, the amount of reimbursement from third-party payers varies by site of service and geographic location and is subject to change. Payers may deny reimbursement if they determine that a product used in a procedure was not used in accordance with established payer protocol regarding cost-effective treatment methods or was used for an unapproved indication. Third-party payers are increasingly challenging the prices charged for medical services and, in some instances, have put pressure on service providers to lower their prices or reduce their services. We are unable to predict what changes will be made in the reimbursement methods used by third-party healthcare payers. Third-party payers may not consider as cost effective the procedures in which our products are used. Reimbursement for such procedures may not be available or, if available, payers’ low reimbursement levels may adversely affect our ability to sell our products on a profitable basis. In addition, there have been and may continue to be changes and proposals by legislators, regulators and third-party payers to curb further these costs in the future. For example, the Deficit Reduction Act of 2005, or the DRA, which was signed into law on February 8, 2006, imposes caps on Medicare payment rates for certain imaging services, including MR and PET, furnished in

17

physicians’ offices and other non-hospital based settings. Under the caps, payments for specified imaging services cannot exceed the hospital outpatient payment rates for these services. This change applies to services furnished on or after January 1, 2007. The DRA also codifies a reduction in Medicare payments for certain multiple images performed on contiguous body parts, which was previously established in the 2006 Physician Fee Schedule final rule. A failure by hospitals and other users of our products to obtain reimbursement from third-party payers, changes in third-party payers’ policies toward reimbursement for procedures using our products, or legislative action could have a material adverse effect on our business, financial condition and results of operations.

Healthcare reform may negatively impact our business.

The levels of revenue and profitability of medical technology companies may be affected by the efforts of government and third-party payers to contain or reduce the costs of healthcare through various means. In the United States, there has been, and we expect that there will continue to be, a number of federal, state and private proposals to control healthcare costs. These proposals include legislative, regulatory and other initiatives and may contain measures intended to control public and private spending on healthcare as well as to provide universal public access to the healthcare system. If enacted, these proposals may result in a substantial restructuring of the healthcare delivery system. For example, the Congressional Budget Office has issued a report suggesting that radiology benefit managers could require pre-authorization, which could decrease the demand for imaging services. Significant changes in the nation’s healthcare system could have a substantial impact on the manner in which we conduct business and could have a material adverse effect on our business, financial condition and results of operations.

Consolidation in the healthcare industry could lead to demands for price concessions or limit or eliminate our ability to sell to certain of our significant market segments.

The cost of healthcare has risen significantly over the past decade, and numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the medical device industry as well as among our customers, including healthcare providers. This in turn has resulted in greater pricing pressures and limitations on our ability to sell to important market segments, as group purchasing organizations, independent delivery networks and large single accounts, such as the Veterans Administration in the United States, continue to consolidate purchasing decisions for some of our healthcare provider customers. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances which may exert further downward pressure on the prices of our products and adversely impact our business, financial condition and results of operations.

We may incur goodwill impairment charges that adversely affect our operating results.

We review goodwill for impairment annually and more frequently if events and circumstances indicate that the asset may be impaired and that the carrying value may not be recoverable. We operate as one reporting unit and therefore compare our book value to our market value (consisting of market capitalization plus a control premium of 25%). If the market value exceeds the book value, goodwill is generally considered not to be impaired. After December 31, 2008, declines in our stock price have resulted in our book value at times exceeding our market value. If such a condition continues for a sustained period, our goodwill may be impaired. The balance of goodwill was $9.1 million as of December 31, 2008, which if impaired would have an adverse affect on our financial position and operating results.

If we do not reach certain milestones in the implementation of our enterprise resource planning (“ERP”) system, we may incur impairment charges for all or a portion of the amounts we have capitalized, which could adversely affect our operating results.

In 2007, we began the implementation of an ERP system. The ERP system is intended to replace numerous disconnected business management software applications and link the data contained within these disconnected systems to enable better management of our business and derive more useful data for various business functions, such as sales, marketing, finance and customer support.

Phase 1 of the implementation, which related to the replacement of our general ledger, was completed in 2007. The related capitalized costs are being depreciated over seven years and, as of December 31, 2008, the net book value of Phase 1 was $1.0 million. Phase 2 of the implementation, which consists of replacing our various customer relationship management and order processing systems, has yet to be completed or placed in service. As of December 31, 2008, Phase 2 capitalized costs were $2.9 million.  We will continue implementation of the ERP during 2009, and upon

18

completion of the implementation, the cost will be depreciated over seven years. If we do not reach certain milestones in the implementation schedule, we may be required to write-off all or a portion of the amounts capitalized, which could negatively affect our operating results.

The disruption in the global financial markets and the economic downturn may adversely impact customer purchasing and payment patterns.

During 2008, we were affected by the general decline in the U.S. economy, which resulted in contracted capital spending by U.S. hospitals and lower interest rates on our cash and investments. Disruptions in the financial markets and the related economic downturn could also negatively impact customer purchasing and payment patterns and have a material adverse effect on our financial condition and results of operations. There can be no assurances as to the length or severity of this period of disruption and the related economic downturn.

We may issue shares of preferred stock without the consent of our holders of common stock, which could adversely affect the rights of the holders of our common stock.

Our Articles of Incorporation authorize our Board of Directors, without any action by the holders of our common stock, to establish the rights and preferences of up to 5,000,000 shares of currently undesignated preferred stock. These shares of preferred stock could possess voting and conversion rights that could adversely affect the voting power of the holders of the common stock or dilute their ownership rights, and it may have the effect of delaying, deferring or preventing a change in control of Vital Images. No shares of preferred stock or other senior equity securities are currently designated, and currently we have no plan to designate or issue any such securities.

We are subject to certain laws and plans which may discourage takeover attempts that could be beneficial for shareholders.

We are subject to anti-takeover provisions of the Minnesota Business Corporation Act. These provisions may deter or discourage takeover attempts and other changes in control that are not approved by our Board of Directors, and they may have a depressive effect on any market for our stock. As a result, our shareholders may lose opportunities to dispose of their shares at the higher prices typically available in takeover attempts or that may be available under a merger proposal. In addition, these provisions may have the effect of permitting our current directors to retain their positions and place them in a better position to resist changes that our shareholders may wish to make if they are dissatisfied with the conduct of our business.

We have never paid any cash dividends and, therefore, our shareholders’ only opportunity to achieve a return on their investment in our common stock is if the price of our common stock appreciates.

We have not paid cash dividends on our common stock in the past, and we do not intend to do so in the foreseeable future. Consequently, our shareholders’ only opportunity to achieve a return on their investment in our common stock will be if the market price of our common stock appreciates and they sell their shares at a profit.

Our directors may not be held personally liable for certain actions, which could discourage shareholder suits against them.

As permitted by Minnesota law, our Articles of Incorporation provide that members of our Board of Directors shall not be personally liable to our company or our shareholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions. These provisions may discourage shareholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by shareholders on behalf of our company against a director. In addition, our Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Minnesota law.

Item 1B. Unresolved Staff Comments

None.

Item 2.  Properties

Our principal office is located in an office building in Minnetonka, Minnesota, where we currently occupy approximately 72,000 square feet under a lease that expires January 31, 2012. We also lease small offices in Den Haag, the Netherlands, and Beijing, China, for our operations in those countries. We consider our current facilities adequate for our current needs.

19

Item 3.  Legal Proceedings

We are involved in various claims and legal actions in the normal course of business. We are of the opinion that the outcome of such legal actions will not have a significant adverse effect on our financial position, results of operations or cash flows. Notwithstanding our belief, an unfavorable resolution of some or all of these matters could materially affect our future results of operations or cash flows.

Item 4.  Submission of Matters to a Vote of Security Holders

There was no matter submitted to the vote of security holders during the fourth quarter of the fiscal year ended December 31, 2008.

20

Part II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Vital Images, Inc.’s common stock is quoted on The NASDAQ Global Select Market under the symbol “VTAL.” The table below reflects the high and low per share closing sale prices of our common stock as reported by The NASDAQ Global Select Market for each of the periods indicated. Such prices reflect inter-dealer prices, do not include adjustments for retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.

	High		Low
2008
Fourth Quarter	$	15.02	$	10.60
Third Quarter	$	16.33	$	12.19
Second Quarter	$	16.36	$	12.44
First Quarter	$	18.00	$	14.46
2007
Fourth Quarter	$	23.05	$	16.18
Third Quarter	$	27.74	$	17.30
Second Quarter	$	33.51	$	25.44
First Quarter	$	36.48	$	30.16

We have never paid or declared any cash dividends on our common stock and do not intend to pay dividends on our common stock in the foreseeable future. We expect to retain our future anticipated earnings to finance development and expansion of our business. As of March 9, 2009, there were approximately 6,400 beneficial owners and approximately 600 registered holders of record of our common stock.

On May 8, 2008, we announced a share repurchase program of up to $25.0 million of our common stock. On August 7, 2008, we announced additional repurchases of up to $15.0 million of our common stock, allowing for total repurchases of up to $40.0 million of our common stock under the share repurchase program. We completed this share repurchase program on February 6, 2009 through only open market transactions. Between the inception of this share repurchase program and December 31, 2008, we repurchased 2.8 million shares of our common stock for $38.2 million. On March 4, 2009, we announced a new share repurchase program, under which we will repurchase up to 1.0 million shares of our common stock. The new share repurchase program expires on February 28, 2010.

The following table presents information with respect to purchases of our common stock made during the quarter ended December 31, 2008 by us or our “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)
October 1-31, 2008	353,549	$	13.02	4,601,722	$	10.0
November 1-30, 2008	363,425	$	12.75	4,632,602	$	5.4
December 1-31, 2008	295,712	$	12.06	3,566,782	$	1.8
	1,012,686	$	12.64	12,801,106	$	1.8

Performance Graph

Since April 24, 2007, our common stock has been quoted on The NASDAQ Global Select Market. From June 9, 2003 through April 23, 2007, our stock was quoted on The NASDAQ Global Market. From September 29, 2000 through June 6, 2003, our common stock was quoted on The NASDAQ SmallCap Market (now known as The NASDAQ Capital Market). The following graph shows changes during the period from December 31, 2003 to

21

December 31, 2008 in the value of $100 invested in: (1) Vital Images, Inc.’s common stock; (2) the CRSP Total Return Index for The NASDAQ Composite; and (3) NASDAQ Non-Financial Stocks. The values of each investment as of the dates indicated are based on share prices plus any dividends paid in cash, with the dividends reinvested on the date they were paid. The calculations exclude trading commissions and taxes.

Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future filings by reference, including this Annual Report on Form 10-K, in whole or in part, the following performance graph shall not be deemed to be incorporated by reference into any such filings and shall not otherwise be deemed filed under such acts.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Vital Images, Inc., The NASDAQ Composite Index

And The NASDAQ Non-Financial Index

*$100 invested on 12/31/03 in stock & index-including investment of dividends. Fiscal year ending December 31.

	12/31/03		12/31/04		12/31/05		12/31/06		12/31/07		12/31/08
Vital Images, Inc.	$	100.00	$	93.78	$	146.42	$	194.85	$	101.18	$	77.88
NASDAQ Composite	$	100.00	$	110.08	$	112.88	$	126.51	$	138.13	$	80.47
NASDAQ Non-Financial	$	100.00	$	108.59	$	109.34	$	120.07	$	132.52	$	77.34

22

Item 6.Selected Financial Data (in thousands, except per share data)

Years ended December 31:	2008(1)			2007(1)			2006(1)		2005(1)			2004(1)
Revenue	$	68,141		$	70,176		$	70,512	$	51,717		$	36,122
Gross profit	52,268			54,587			56,302		40,157			25,675
Operating expenses	62,093		(2)	61,755		(3)	49,371		32,592		(4)	25,161		(5)
Operating (loss) income	(9,825		)	(7,168		)	6,931		7,565			514
Net (loss) income	$	(2,800	)	$	1,367		$	6,583	$	5,801		$	296
Net (loss) income per share-basic	$	(0.17	)	$	0.08		$	0.49	$	0.47		$	0.03
Weighted average common shares	16,155			16,972			13,463		12,379			11,632
Net income per share-diluted	$	(0.17	)	$	0.08		$	0.46	$	0.44		$	0.02
Weighted average common shares	16,155			17,457			14,259		13,283			12,536
At December 31:
Working capital	$	135,417		$	173,905		$	162,202	$	45,604		$	30,996
Total assets	$	198,193		$	230,996		$	219,730	$	91,151		$	69,284
Long-term debt	$	—		$	—		$	—	$	—		$	—
Total stockholders’ equity	$	168,691		$	202,216		$	190,902	$	68,789		$	54,554

(1)	Includes equity-based compensation of $5,007, $5,987, $5,063, $335 and $12 for the fiscal years 2008, 2007, 2006, 2005 and 2004, respectively.
(2)	Includes a $660 restructuring charge related to a reduction in workforce of approximately 11% in November 2008.
(3)	Includes an $885 charge related to the separation of Jay D. Miller, our former Chief Executive Officer, in the fourth quarter of 2007.
(4)	Includes a loss on operating lease of $493 related to the relocation of our corporate headquarters in the first quarter of 2005.
(5)	Includes $1,000 of acquired in-process research and development charge relating to the acquisition of HInnovation, Inc. in February 2004.

23

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive summary

Since the second quarter of 2007, financial results for Vital Images, Inc. (also referred to as “we”, “us” and “our”) have been significantly affected by weakness in the computed tomography, or CT, and picture archiving and communication systems, or PACS, markets and by the broad impact of the Deficit Reduction Act.

Vital Images, Inc. summary 2008 results were as follows:

·Total revenue of $68.1 million, compared to $70.2 million for 2007.

·Gross margin of 77%, compared to 78% for 2007.

·Operating expenses of $62.1 million, compared to $61.8 million for 2007.

·Net loss of $(2.8) million, or $(0.17) loss per diluted share, compared to 2007 net income of $1.4 million, or $0.08 per diluted share.

Total cash, cash equivalents and marketable securities were $147.0 million as of December 31, 2008, compared to $178.4 million as of December 31, 2007. Working capital (defined as current assets less current liabilities) was $135.4 million as of December 31, 2008, compared to $173.9 million as of December 31, 2007. The decrease in cash and working capital during 2008 was primarily the result of repurchases of our common stock totaling $38.2 million under a share repurchase program authorized by our Board of Directors in 2008.

During 2008, we continued to experience the effects of the industry-wide slowdown in the high-end CT market and the Deficit Reduction Act that significantly impacted our 2007 results. Additionally, in 2008 we were impacted by the general decline in the U.S. economy, which resulted in contracted capital spending by U.S. hospitals and lower interest rates on our cash and investments. We generated $4.6 million of interest income in 2008, compared to $8.9 million in 2007. A decline in interest rates resulted in a 2.9% return on investments in 2008 compared to a 5.1% return on investments in 2007.

We partially mitigated these negative factors by making progress on our transition to an enterprise company, as demonstrated by our introduction of ViTAL Enterprise in the 2008 second quarter, and by implementing significant cost-control measures, including an 11% workforce reduction in the 2008 fourth quarter. We also responded by implementing a $40.0 million share repurchase program, resulting in the repurchase of 2.8 million shares of our common stock for $38.2 million during 2008.

We further strengthened our strategic relationship with Toshiba in 2008, renewing our global distribution agreement through December 31, 2013 and, in January 2009, entering into an agreement under which we will jointly develop applications. Our revenue from international sales grew 45% in 2008, and Toshiba has been the primary source of our international growth.

Although we expect the negative market factors that affected our 2007 and 2008 results to continue into 2009 and beyond, we remain committed to developing the best software solutions for the enterprise and taking exceptional care of our customers.

Overview

We are a leading provider of advanced visualization and analysis solutions for use by medical professionals in clinical analysis and therapy planning. We provide software, customer education, software maintenance and support, professional services and, on occasion, third-party hardware to our customers. Our technology rapidly transforms complex data generated by diagnostic imaging equipment into functional digital images that can be manipulated and analyzed using our specialized applications to better understand internal anatomy and pathology. Our solutions are designed to improve physician workflow and productivity, enhance the ability to make clinical decisions, facilitate less invasive patient care, and complement often significant capital investments in diagnostic imaging equipment made by our customers. Our software is compatible with equipment from all major manufacturers of diagnostic imaging equipment, such as CT scanners, and can be integrated into PACS. Many hospitals use PACS to acquire, distribute and archive medical images and diagnostic reports, reducing the need for film and increasing reliance on advanced visualization solutions such as ours. We also offer a Web-based solution that provides physicians with anywhere, anytime access to medical images and visualization tools through any Internet-enabled computer.

24

We operate and manage our business as a single business segment – the development and marketing of software and related services for advanced visualization and analysis solutions for use by medical professionals in clinical analysis and therapy planning. We market our products and services through a direct sales force, resellers and independent distributors in the United States and in international markets. Our common stock is currently traded on The NASDAQ Global Select Market under the symbol “VTAL.”

Critical accounting policies and estimates

Our discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The notes to the Consolidated Financial Statements contained in this Annual Report describe our significant accounting policies used in the preparation of the Consolidated Financial Statements. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates.

We believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation of our Consolidated Financial Statements.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts in an amount estimated to be sufficient to provide adequate protection against losses resulting from extending credit to our customers. In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors, including historical bad debt experience, the general economic environment, the need for specific client reserves and the aging of our outstanding receivables. A portion of this provision is included in operating expenses as a general and administrative expense and a portion of this provision is included as a reduction of license revenue. A considerable amount of judgment is required in assessing these factors. If the factors utilized in determining the allowance do not reflect future performance, then a change in the allowance for doubtful accounts would be necessary in the period such determination has been made, which would impact future results of operations. As of December 31, 2008, the allowance for doubtful accounts was $638,000 for gross accounts receivable of $13.7 million.

Deferred taxes

Significant judgment is required in determining the realizability of our deferred tax assets. We must assess the likelihood that our net deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent that we establish a valuation allowance, we must include an expense within the tax provision in the statement of operations. As of December 31, 2008, the consolidated balance sheet included net deferred tax assets of $14.6 million.

Considerations for determining the realizability of our deferred tax assets primarily involve cumulative pre-tax income for financial reporting purposes, cumulative taxable income for the past three years, estimated future pre-tax income for financial reporting purposes and estimated future taxable income from our core business. We also consider the expiration dates and amounts of net operating loss carryforwards and other tax credits, and estimate the impact of future tax deductions from the exercise of stock options. These estimates are projected through the life of the related deferred tax assets based on assumptions which we believe to be reasonable and consistent with current operating results.

As of December 31, 2008, the significant components of our deferred tax assets were as follows: 

·Deferred tax assets for net operating loss carryforwards and other tax credits of $8.7 million, which is net of a valuation allowance of $221,000 relating to tax credits and certain state net operating loss carryforwards that expire prior to 2013.  We will require approximately $18.0 million in cumulative future taxable income to be generated at various times over the next 18 years to realize the related deferred tax assets prior to expiration.

·Deferred tax asset related to equity based compensation of $3.7 million. Many of the stock options related to this deferred tax asset are currently significantly out-of-the money and may expire unutilized during the next six years.  Our projections of future taxable income have taken into consideration our expectations that a portion of these out-of-the money options will not result in future tax deductions and will not reduce future taxable income.

After giving consideration to the above factors, we concluded that the net deferred tax assets of $14.6 million as of December 31, 2008 do not require any additional valuation allowance. However, if we do not achieve a substantial improvement in pretax results in 2009 over 2008, it is reasonably possible that we may need to establish additional valuation allowances for some or all of our deferred tax assets, which could materially impact our income tax provision, financial position and results of operations.

25

Long-lived assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable, in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant decrease in the market value of the business or asset acquired, a significant adverse change in the extent or manner in which the business or asset acquired is used, or a significant adverse change in the business climate. If such events or changes in circumstances are present, the undiscounted cash flows method is used to determine whether the asset is impaired. Cash flows would include the estimated terminal value of the asset and exclude any interest charges. To the extent the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset or asset groups, the impairment is measured as the difference between the carrying value of the asset and its fair value, determined using the discounted cash flows. The discount rate utilized would be based on our best estimate of the related risks and return at the time the impairment assessment is made.

Our long-lived assets consist of property and equipment of $11.5 million and other intangible assets subject to amortization of $808,000 as of December 31, 2008. A patent acquired in the HInnovation, Inc. acquisition having a $594,000 net book value as of December 31, 2008 is currently under review by the United States Patent and Trademark Office (“USPTO”).

Goodwill

We account for goodwill in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets with indefinite lives are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. We operate as one reporting unit and therefore compare the book value to the market value (consisting of market capitalization plus a control premium of 25%). As of December 31, 2008, we had 14.7 million shares outstanding, a closing stock price of $13.91 per share, a market value of $255.1 million, and a book value of $168.7 million, which would indicate that our goodwill was not impaired. Furthermore, based on December 31, 2008 data including 14.7 million shares outstanding, our book value of $168.7 million, and a control premium of 25%, our stock price would need to trade below $9.20 per share for a sustained period of time to indicate that our goodwill may be impaired. If the market value exceeds the book value, goodwill is considered not impaired, and thus the second step of the impairment test is not necessary. If our book value exceeds the market value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the goodwill with the book value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss would be recognized in an amount equal to the excess. We completed the annual goodwill impairment assessment as of December 31, 2008, in which no impairment was identified. Goodwill was $9.1 million as of December 31, 2008. If market conditions continue to fluctuate, we may incur goodwill impairment charges that adversely affect our financial position and operating results.

Revenue Recognition

We follow specific and detailed guidelines in determining the proper amount of revenue to be recorded; however, certain judgments affect the application of our revenue recognition policy.

We recognize revenue in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the AICPA, and SEC Staff Accounting Bulletin (“SAB”)

26

No. 104. We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when we have persuasive evidence of an arrangement, the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable, and collectability is probable.

Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from period to period. The significant judgments for revenue recognition typically involve whether collectability can be considered probable and whether fees are fixed or determinable. Significant judgment is also required when evaluating and assessing revenue recognition relating to our distribution agreements with original equipment manufacturers, value-added resellers and independent distributors (collectively, “Resellers”). In addition, our transactions often consist of multiple element arrangements, which must be analyzed to determine the fair value of each element, the amount of revenue to be recognized upon shipment, if any, and the period and conditions under which deferred revenue should be recognized. As a result, if facts and circumstances change that affect our current judgments, our revenue could be materially different in the future.

Equity-based compensation

We recognize equity-based compensation expense under the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment.” We recognize equity-based compensation net of an estimated forfeiture rate and recognize compensation cost only for those shares expected to vest over the requisite service period of the award.

The fair value of each option award is estimated as of the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected stock volatility, the risk-free interest rate, the option’s expected life and the dividend yield on the underlying stock. Expected volatility is calculated based on the historical volatility of our common stock over the expected option life and other appropriate factors. Risk-free interest rates are calculated based on continuously compounded U.S. Treasury risk-free rates for the appropriate term. Prior to March 9, 2006, the expected life of stock options was calculated by performing a detailed analysis of all historical stock option information available. On March 9, 2006, we began to grant options with a five-year legal life instead of the eight-year legal life that had historically been used. As a result, we elected to use the “simplified” method, as described in SAB No. 107, to estimate the expected life of options granted on and after March 9, 2006. We will utilize the simplified method until sufficient historical information becomes available on the five-year legal life options. The dividend yield is assumed to be zero, as we have never paid or declared any cash dividends on our common stock and do not intend to pay dividends on our common stock in the foreseeable future. The expected forfeiture rate is estimated based on historical experience.

Determining the appropriate fair value model and calculating the fair value of equity-based payment awards require the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity-based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our equity-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the equity-based compensation expense could be significantly different from what we have recorded in the current period. See Note 2 to the Consolidated Financial Statements for a further discussion of equity-based compensation.

27

Results of Operations

The following table sets forth information from our Statements of Operations, expressed as a percentage of total revenue.

	For the Year Ended December 31,
	2008		2007		2006
Revenue:
License fees	50.3	%	56.5	%	65.7	%
Maintenance and services	47.6		42.0		32.1
Hardware	2.1		1.5		2.2
Total revenue	100.0		100.0		100.0
Cost of revenue:
License fees	7.2		6.7		7.1
Maintenance and services	14.8		14.2		11.4
Hardware	1.3		1.0		1.7
Impairment of patent	—		0.3		—
Total cost of revenue	23.3		22.2		20.2
Gross profit	76.7		77.8		79.8
Operating expenses:
Sales and marketing	44.4		45.6		36.0
Research and development	25.1		21.7		18.6
General and administrative	20.6		20.7		15.4
Restructuring charge	1.0		—		—
Total operating expenses	91.1		88.0		70.0
Operating (loss) income	(14.4	)	(10.2	)	9.8
Interest income	6.8		12.6		4.7
(Loss) income before income taxes	(7.6	)	2.4		14.5
(Benefit) provision for income taxes	(3.5	)	0.5		5.2
Net (loss) income	(4.1	)%	1.9	%	9.3	%

Revenue (dollars in thousands)

	For the Year Ended December 31,						Increase (Decrease)						Percent Increase (Decrease)
	2008		2007		2006		2007 to 2008			2006 to 2007			2007 to 2008		2006 to 2007
Revenues:
License fees	$	34,290	$	39,673	$	46,332	$	(5,383	)	$	(6,659	)	(14	)%	(14	)%
Maintenance and services	32,436		29,487		22,615		2,949			6,872			10	%	30	%
Hardware	1,415		1,016		1,565		399			(549		)	39	%	(35	)%
Total revenue	$	68,141	$	70,176	$	70,512	$	(2,035	)	$	(336	)	(3	)%	(0	)%

For 2009, we expect revenue of $61.0 million to $66.0 million, or a 3% to 10% decrease from 2008 revenue.

28

License fee revenue (dollars in thousands)

	For the Year Ended December 31,						Increase (Decrease)						Percent Increase (Decrease)
	2008		2007		2006		2007 to 2008			2006 to 2007			2007 to 2008		2006 to 2007
License fee revenue:
Vitrea licenses	$	9,242	$	12,853	$	18,585	$	(3,611	)	$	(5,732	)	(28	)%	(31	)%
Vitrea options and third party software	20,559		24,967		26,486		(4,408		)	(1,519		)	(18	)%	(6	)%
ViTAL Enterprise	3,303		—		—		3,303			—			100	%	—	%
Other	1,186		1,853		1,261		(667		)	592			(36	)%	47	%
Total license fee revenue	$	34,290	$	39,673	$	46,332	$	(5,383	)	$	(6,659	)	(14	)%	(14	)%

ViTAL Enterprise, introduced in May 2008, enables unlimited enterprise access to the complete ViTAL solution offering, including Vitrea, Vitrea Web, ViTALConnect and our specialized clinical features. We expect that revenue from Vitrea licenses, Vitrea options and third party software will continue to decrease in significance as compared to overall license fee revenue as sales of ViTAL Enterprise increase. The decrease in license fee revenue during 2008, as compared to 2007, was driven primarily by a decrease in the number of Vitrea licenses sold by our direct sales force, offset in part by new sales of ViTAL Enterprise, and by a greater percentage of license fee revenue from Toshiba, which has lower revenue per license. Sales of ViTAL Enterprise also impact overall revenue mix, as a larger percentage of each ViTAL Enterprise sale is allocated to maintenance and services revenue than has historically been allocated for sales of Vitrea. The decrease in 2007 license fee revenue resulted from a 16% decrease in the number of Vitrea licenses sold in 2007 compared to 2006.

The following table sets forth information on license fee revenue by source:

	For the Year Ended December 31,
	2008			2007			2006
License fee revenue:
Direct	$	9,750		$	14,202		$	20,273
Toshiba	23,276			22,141			20,414
McKesson	1,264			3,330			5,645
Total license fees	$	34,290		$	39,673		$	46,332
Percent of license fee revenue:
Direct	28		%	36		%	44		%
Toshiba	68			56			44
McKesson	4			8			12
Total license fee revenue	100		%	100		%	100		%

Maintenance and services revenue (dollars in thousands)

	For the Year Ended December 31,						Increase (Decrease)					Percent Increase (Decrease)
	2008		2007		2006		2007 to 2008			2006 to 2007		2007 to 2008		2006 to 2007
Maintenance and services revenue:
Maintenance and support	$	26,656	$	22,811	$	16,379	$	3,845		$	6,432	17	%	39	%
Customer education	4,478		5,590		5,178		(1,112		)	412		(20	)%	8	%
Professional services	1,302		1,086		1,058		216			28		20	%	3	%
Total maintenance and services	$	32,436	$	29,487	$	22,615	$	2,949		$	6,872	10	%	30	%

In 2008, maintenance and services revenue was positively impacted by sales of ViTAL Enterprise, as a larger percentage of each ViTAL Enterprise sale is allocated to maintenance and services revenue than has historically been allocated for sales of Vitrea. As in 2008, we expect that in future periods, although sales of ViTAL Enterprise will result in proportionately lower license revenue upon sale, we will benefit from a recurring revenue stream from maintenance and services contracts.

29

The increase in maintenance and support revenue in 2008 was primarily driven by an increase in the number of customers on maintenance contracts, resulting from both new license sales and improvement in the percentage of our existing customers who went on maintenance contracts. The increase in maintenance and support revenue in 2007 was primarily driven by an increase in the number of customers on maintenance contracts, as well as by increased pricing on maintenance and support.

Decreased license sales in 2008, compared to 2007, and a general deferral of education sessions contributed to lower customer education revenue in 2008. Professional services revenue, which includes installation and other implementation-related services, increased due to an increase in services related to sales of ViTAL Enterprise. The increase in customer education revenue and professional services revenue in 2007 was due in part to customer education revenue recognized in 2007 related to strong Vitrea license sales near the end of 2006.

Hardware revenue

Hardware revenue increased 39% to $1.4 million, compared to $1.0 million in 2007, which was a 35% decrease from $1.6 million in 2006. We sell hardware as a convenience to our customers, and fluctuations are driven by individual customer purchasing preferences. Sales of hardware systems are not core to our strategy and will fluctuate from period to period depending upon the needs of our customers.

Cost of revenue and gross profit

Gross profit decreased 4% to $52.3 million in 2008, compared to $54.6 million in 2007, which was a 3% decrease from $56.3 million in 2006. Gross margin percentage decreased slightly to 77% in 2008 from 78% in 2007. Gross margin was 80% in 2006.

A comparison of gross profit and gross margin by revenue category is as follows (dollars in thousands):

	For the Year Ended December 31,
	2008			2007			2006
Gross profit:
License fees	$	29,368		$	34,948		$	41,341
Maintenance and services	22,347			19,559			14,592
Hardware	553			322			369
Impairment of patent	—			(242		)	—
Total gross profit	$	52,268		$	54,587		$	56,302
Gross margin:
License fees	86		%	88		%	89		%
Maintenance and services	69		%	66		%	65		%
Hardware	39		%	32		%	24		%
Total gross margin	77		%	78		%	80		%

Fluctuations in license fee gross margin are generally a result of average sales prices, changes in the product mix, and the mix between direct sales and sales to distribution partners, which tend to carry lower margins.

Maintenance and services gross margin increased during 2008, compared to 2007, as a larger percentage of each ViTAL Enterprise sale being allocated to maintenance and services revenue than has historically been allocated for sales of Vitrea, without a corresponding increase in costs.  In addition, in the fourth quarter of 2008, we recognized a $391,000 benefit to maintenance and support revenue arising from Toshiba billing adjustments relating to historic periods. We will continue to invest in our customer education, installation, professional services and customer support areas in the future to adequately support our growing installed base of customers. Gross margin for 2007 was relatively consistent with 2006.

Gross margin for hardware increased in 2008, compared to 2007 and increased in 2007, compared to 2006. Variances in gross margin for hardware are expected, as hardware sales are not a substantial part of the sales strategy. Low volume can affect margins substantially.

During the third quarter 2007, we recognized a $242,000 patent impairment charge related to a patent application acquired in the HInnovation, Inc. acquisition in February 2004. This patent application was rejected by the USPTO

30

on August 23, 2007, and we decided not to pursue this application further. The impairment was recorded as a separate item in cost of revenue, and it is included in the total gross margin percentage above.

For 2009, we expect total gross margin to be approximately 76% to 77%.

Operating expenses

The following is a comparison of operating expenses as a percent of revenue as well as the percent increase or decrease in the total expense:

	Percent of Revenue for the Year Ended December 31,						Percent Increase (Decrease)
	2008		2007		2006		2007 to 2008		2006 to 2007
Operating expenses:
Sales and marketing	44.4	%	45.6	%	36.0	%	(5	)%	26	%
Research and development	25.1		21.7		18.6		13	%	16	%
General and administrative	20.6		20.7		15.4		(4	)%	34	%
Restructuring charge	1.0		—		—		100	%	—	%
Total operating expenses	91.1	%	88.0	%	70.0	%	(1	)%	25	%

Sales and marketing

Sales and marketing expenses decreased $1.7 million, or 5%, to $30.3 million in 2008, compared to $32.0 million in 2007, which was a $6.6 million, or 26%, increase from $25.4 million in 2006. The change in sales and marketing expense is as follows (dollars in thousands):

	For the Year Ended December 31,						Increase (Decrease)						Percent Increase (Decrease)
	2008		2007		2006		2007 to 2008			2006 to 2007			2007 to 2008		2006 to 2007
Salaries, benefits and bonus	$	12,173	$	11,652	$	8,588	$	521		$	3,064		4	%	36	%
Overhead and other expenses	4,532		4,634		3,349		(102		)	1,285			(2	)%	38	%
Commissions	3,592		4,634		5,266		(1,042		)	(632		)	(22	)%	(12	)%
Travel, meals and entertainment	3,467		3,676		2,521		(209		)	1,155			(6	)%	46	%
Trade shows and advertising	3,454		3,623		2,849		(169		)	774			(5	)%	27	%
Depreciation	1,668		1,380		806		288			574			21	%	71	%
Equity-based compensation	1,408		2,392		1,995		(984		)	397			(41	)%	20	%
Total	$	30,294	$	31,991	$	25,374	$	(1,697	)	$	6,617		(5	)%	26	%

The decrease in expenses in 2008 was due primarily to a decrease in commission expense related to the decrease in revenue and a decrease in equity-based compensation resulting from issuing equity awards at a lower exercise price, as well as significant cancellations of equity awards resulting from organizational changes. The increase in expenses during 2007 was due to an increase in compensation costs as a result of additional personnel, higher travel and entertainment costs, and higher costs for attending U.S. and European industry tradeshows. Commission expense for both 2008 and 2007 decreased due to lower direct revenue compared to the respective prior year expense. We had 78, 103 and 75 sales and marketing personnel as of December 31, 2008, 2007 and 2006, respectively. The decrease in headcount as of December 31, 2008 was due primarily to the reduction in force described in “Restructuring charge.”

We expect sales and marketing expenses to be between 43% and 44% of total revenue for the year ending December 31, 2009.

31

Research and development

Research and development expenses increased $1.9 million, or 13%, to $17.1 million in 2008, compared to $15.2 million in 2007, which was an increase of $2.1 million, or 16%, from $13.1 million in 2006. The change in research and development expense is as follows (dollars in thousands):

	For the Year Ended December 31,						Increase (Decrease)						Percent Increase (Decrease)
	2008		2007		2006		2007 to 2008			2006 to 2007			2007 to 2008		2006 to 2007
Salaries, benefits and bonus	$	10,924	$	10,310	$	8,294	$	614		$	2,016		6	%	24	%
Overhead and other expenses	2,860		2,680		2,423		180			257			7	%	11	%
Consulting	1,394		481		804		913			(323		)	190	%	(40	)%
Equity-based compensation	1,017		729		840		288			(111		)	40	%	(13	)%
Depreciation	936		1,004		731		(68		)	273			(7	)%	37	%
Total	$	17,131	$	15,204	$	13,092	$	1,927		$	2,112		13	%	16	%

The major driver of higher research and development expenses in 2008 was new product initiatives, resulting in increased consulting expense and increased compensation expense due to higher average headcount in 2008 compared to 2007. The increase in expenses for 2007 was due primarily to increases in compensation costs as a result of additional personnel focused on product innovation and development. We had 102, 118 and 100 research and development personnel as of December 31, 2008, 2007 and 2006, respectively. The decrease in headcount as of December 31, 2008 was due primarily to the reduction in force described in “Restructuring charge.”

During 2006, we required a significant amount of temporary consulting services to complete certain research and development activities, specifically in the area of software testing and validation. We reduced these external expenses during 2007 by hiring additional research and development personnel.

In January 2009, we entered into a co-development and collaboration agreement with Toshiba, in which we will enter into a mutual license of intellectual property and will jointly invest to develop and deliver innovative technology advancements for Toshiba’s modalities and Vital Images’ advanced visualization software solutions. We do not expect the agreement will have a material impact on our 2009 research and development expense.

We expect research and development expenses to be between 23% and 25% of total revenue for the year ending December 31, 2009.

General and administrative

General and administrative expenses decreased $552,000, or 4%, to $14.0 million in 2008, compared to $14.6 million in 2007, which was a 34% increase from $10.9 million in 2006. The change in general and administrative expense is as follows (dollars in thousands):

	For the Year Ended December 31,						Increase (Decrease)					Percent Increase (Decrease)
	2008		2007		2006		2007 to 2008			2006 to 2007		2007 to 2008		2006 to 2007
Salaries, benefits and bonus	$	5,101	$	5,716	$	4,869	$	(615	)	$	847	(11	)%	17	%
Overhead and other expenses	3,516		3,170		2,429		346			741		11	%	31	%
Professional and consulting services	3,142		3,197		1,751		(55		)	1,446		(2	)%	83	%
Equity-based compensation	2,249		2,477		1,856		(228		)	621		(9	)%	33	%
Total	$	14,008	$	14,560	$	10,905	$	(552	)	$	3,655	(4	)%	34	%

Salaries, benefits and bonus and equity-based compensation decreased for 2008, compared to 2007, as 2007 included an $885,000 pre-tax charge related to the separation of our former Chief Executive Officer. Of this charge, $580,000 is included in salaries, benefits and bonus and $305,000 is included in equity-based compensation for 2007. Professional and consulting services for 2007 increased due to international expansion and higher accounting, audit and legal expenses. Overhead expenses increased both years due to the increase in infrastructure. We had 47, 52 and 50 general and administrative personnel as of December 31, 2008, 2007 and 2006, respectively. The decrease in headcount as of December 31, 2008 was due primarily to the reduction in force described in “Restructuring charge.”

32

We expect general and administrative expenses to be approximately 18% to 19% of total revenue for the year ending December 31, 2009.

Restructuring charge

During 2008, we continued to experience the effects of the industry-wide slowdown in the high-end CT market and the Deficit Reduction Act that significantly impacted our 2007 results. Additionally, in 2008, we were impacted by the general decline in the U.S. economy, which resulted in contracted capital spending by U.S. hospitals and lower interest rates on our cash and investments. We reduced our workforce by approximately 11% under a plan announced in November 2008 in order to align our operations with the current market conditions and improve profitability in 2009 and beyond. We expect that the effect of the restructuring activities will reduce employee costs by approximately $4.0 million to $5.0 million in 2009, compared to 2008.

In connection with the reduction in workforce, we incurred certain charges in 2008 totaling $660,000, which were primarily comprised of employee severance and other termination costs. The following table summarizes 2008 restructuring transactions and related liability balances (in thousands):

	Severance and Other Termination Costs
Balance at January 1, 2008	$	—
Restructuring charges	660
Payments	(519		)
Balance at December 31, 2008	$	141

Actions with respect to the above activities were completed in the fourth quarter of 2008, and we do not anticipate any additional charges related to the restructuring plan announced in November 2008.

Interest income

We generated $4.6 million of interest income in 2008, compared to $8.9 million in 2007 and $3.3 million in 2006. A decline in interest rates resulted in a 2.9% return on investments in 2008 compared to a 5.1% and 4.5% return on investments in 2007 and 2006, respectively. During the fourth quarter of 2006, we completed a public offering of 3.4 million shares of common stock, resulting in net proceeds of $97.7 million, which contributed to increased interest income beginning in the first quarter of 2007.

Interest income is significantly impacted by changes in interest rates. We anticipate significantly lower interest rates in 2009 compared to 2008 due to general market conditions; interest rate changes would have a significant impact on results.

Income taxes

Our effective income tax rates were 46%, 20% and 36% in 2008, 2007 and 2006, respectively. The fluctuations in our effective tax rates for 2008, 2007 and 2006 were due primarily to the relative impact of research and development credits on lower pretax income in 2007.

Our effective income tax rate may fluctuate significantly from quarter to quarter due to the relative proximity to breakeven of our results before taxes. For 2009, we expect an effective tax rate of approximately 40% to 60%. Due to the utilization of deferred tax assets relating to net operating losses and tax deductions from the exercise of stock options, we do not anticipate paying any significant cash for federal income taxes for the next three to four years. Actual results could accelerate or defer the utilization of our deferred tax assets. Additional information regarding income taxes and deferred tax assets is included in “Deferred taxes” of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical accounting policies and estimates.”

33

Liquidity and capital resources

The following table sets forth certain relevant measures of our liquidity and capital resources (in thousands):

	As of December 31,
	2008		2007
Cash and cash equivalents	$	109,706	$	146,685
Marketable securities	37,287			31,709
Cash, cash equivalents and marketable securities	$	146,993	$	178,394
Working capital	$	135,417	$	173,905
Debt	$	—	$	—

The decrease in our net cash position as of December 31, 2008, compared to December 31, 2007, is primarily due to $38.2 million of share repurchases in 2008 under our $40.0 million share repurchase program implemented in 2008 and completed in February 2009. On March 3, 2009, we announced an additional share repurchase program, authorizing up to an additional 1.0 million shares to be repurchased on the open market.

We believe our existing cash and investments will satisfy our foreseeable working capital requirements for at least the next 12 months. Additionally, we believe our liquidity and strong balance sheet enable us to execute our repurchases of common stock while still investing in our enterprise solution and marketing strategy and remaining well positioned to pursue strategic acquisitions if and when they emerge.

We have investments in marketable securities that are classified and accounted for as available-for-sale. Market conditions during 2008 and 2009 indicate significant uncertainty on the part of investors on the economic outlook for the U.S. and for financial institutions that have potential exposure to the sub-prime housing market. Our corporate debt included $257,000 and $3.0 million of asset-backed securities as of December 31, 2008 and 2007, respectively. The net unrealized gains (losses) on asset-backed securities were $(7,000) and $(19,000) as of December 31, 2008 and 2007, respectively. Our asset-backed securities are rated AAA and are current on scheduled pay downs, with expected full maturity within the next 12 months. For further information about the risks associated with our investments, see the “Market Risk” section and the section entitled “Risk Factors.”

Summary of Cash Flows

A summary of cash flows is as follows (in thousands):

	For the Year Ended December 31,
	2008			2007			2006
Cash provided by (used in)
Operating activities	$	8,581		$	13,902		$	14,771
Investing activities	(10,246		)	(15,870		)	1,382
Financing activities	(35,314		)	4,271			107,384
Net change in cash and cash equivalents	$	(36,979	)	$	2,303		$	123,537

Operating activities

Net cash provided by operating activities decreased $5.3 million in 2008, compared to 2007, due to a $4.2 million decrease in net income and a $1.9 million decrease in non-cash operating items, offset by a $791,000 increase due  to the timing of other receipts and payments in the ordinary course of business.

Net cash provided by operating activities decreased $869,000 in 2007, compared to 2006, primarily due to a $5.2 million decrease in net income, offset by a $1.4 million increase in non-cash operating items and a $2.9 million increase due to the timing of other receipts and payments in the ordinary course of business.

Investing activities

We used $10.2 million for cash and investing activities in 2008. Net cash used by investing activities was $15.9 million in 2007. Net cash provided by investing activities was $1.4 million in 2006.

34

We used $5.4 million, $6.6 million and $6.4 million for purchases of property and equipment in 2008, 2007 and 2006, respectively. The purchases for all periods were principally to expand our facilities and upgrade computer equipment and to purchase computer equipment for new personnel. Additionally, in 2007, we began the implementation of an enterprise resource planning (“ERP”) system. We continued implementation of the ERP during 2008 and expect to continue to incur costs in future periods as we complete subsequent phases of the implementation. We anticipate that we will continue to purchase property and equipment in the normal course of business. The amount and timing of these purchases and the related cash outflows in future periods are difficult to predict and depend on a number of factors, including the hiring of employees and the rate of change of computer hardware.

We used $76.3 million, $60.0 million and $29.5 million to purchase investments in marketable securities during 2008, 2007 and 2006, respectively. We realized $71.6 million, $50.7 million and $37.4 million of proceeds from maturities and sales of marketable securities during 2008, 2007 and 2006, respectively. The marketable securities consist of U.S. government obligations, U.S. government agency obligations, corporate commercial obligations and certificates of deposits.

Financing activities

Cash used by financing activities totaled $35.3 million for 2008, compared to cash provided by financing activities of $4.3 million and $107.4 million for 2007 and 2006, respectively. The primary use of cash in 2008 was for the repurchase of $38.2 million of our common stock under our $40.0 million share repurchase program initiated in 2008. The cash provided by financing activities in 2007 resulted primarily from the exercise of stock options granted under our stock plans and upon the exercise of warrants. The cash provided by financing activities in 2006 related primarily to the $97.7 million in net proceeds from our public offering of 3.4 million shares of common stock.

We have never paid or declared any dividends and do not intend to pay dividends in the near future.

The following summarizes our contractual obligations at December 31, 2008 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands).

	Total		1 Year or Less		1 to 3 Years		3 to 5 Years		More than 5 Years
Operating leases	$	3,067	$	1,154	$	1,837	$	76	$	—

Off-balance-sheet arrangements

We did not have any off-balance sheet arrangements as of December 31, 2008 or 2007.

Purchase commitments

We had no significant outstanding purchase orders as of December 31, 2008. We have entered into a number of technology licensing agreements that provide for the payment of royalties when we sell Vitrea, ViTALConnect and ViTAL Enterprise; we are not obligated for any minimum payments under such agreements.

Foreign currency transactions

Our export sales are primarily negotiated, invoiced and paid in U.S. dollars, with a portion of sales transactions denominated in foreign currencies. As we expand our direct business internationally, we expect to enter into a higher percentage of sales transactions in foreign currencies and could be subject to greater gains or losses based on exchange rate fluctuations.

Inflation

We believe inflation has not had a material effect on our operations or financial condition.

Recent accounting pronouncement

Information regarding new accounting pronouncements is included in Note 2 to the Consolidated Financial Statements.

35

Item 7A.Quantitative and Qualitative Disclosures about Market Risk

Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors such as liquidity will result in losses for a certain financial instrument or group of financial instruments. We do not hold or issue financial instruments for trading purposes, and we do not enter into forward financial instruments to manage and reduce the impact of changes in foreign currency rates because, as disclosed above, our export sales are primarily negotiated, invoiced and paid in U.S. dollars, with a small percentage of sales transactions denominated in foreign currencies. Based on the controls in place and the relative size of the financial instruments entered into, we believe the risks associated with not using these instruments would not have a material adverse effect on our consolidated financial position or results of operations.

In addition, we do not engage in speculative transactions and do not use derivative instruments or engage in hedging activities. See the Notes to the Consolidated Financial Statements for a description of our accounting policies and other information related to these financial instruments.

In the normal course of business, we are exposed to market risks, including changes in interest rates and price changes, which could affect our operating results.

Interest rate risk

We place our cash, cash equivalents and marketable securities, which generally have a term of less than one year, with a high-quality financial institution and have investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. As of December 31, 2008, we had cash, cash equivalents and marketable securities totaling $147.0 million. If, during 2008, average short-term interest rates decreased by 1.0% from 2008 average rates, based on our quarterly average balance of cash, cash equivalents and marketable securities, our projected interest income from short-term investments would have decreased by approximately $1.6 million.

Foreign currency risk

Our export sales are primarily negotiated, invoiced and paid in U.S. dollars, with a portion of sales transactions denominated in foreign currencies. Therefore, fluctuations in the value of the dollar as compared to other foreign currencies have not had a significant effect on our results of operations or financial condition. As we expand our direct business internationally, we expect to enter into a higher percentage of sales transactions in foreign currencies and could be subject to greater gains or losses based on exchange rate fluctuations.

Item 8.Financial Statements and Supplementary Data

Our financial statements and Report of Independent Registered Public Accounting Firm thereon, all of which are included in this Annual Report on Form 10-K, are listed in Item 15(a)(1) of this Form 10-K.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.Controls and Procedures

Evaluation of disclosure controls and procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

Our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

36

Management’s report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with established policies or procedures may deteriorate.

Our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of this evaluation, we concluded that our internal control over financial reporting was effective as of the end of the period covered by this report.

The effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in Item 15(a)(1) of this Annual Report on Form 10-K.

Changes in internal control over financial reporting

There were no changes in internal control over financial reporting during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.Other Information

None.

37

Part III

Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file a definitive Proxy Statement relating to our 2009 Annual Meeting of Stockholders pursuant to Schedule 14A (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information included therein is incorporated herein by reference as indicated below.

Item 10.Directors and Executive Officers of Registrant

The information required by this Item 10 will be included under the captions “Election of Directors” and “Information Concerning Directors, Nominees and Executive Officers” in our Proxy Statement for our 2009 annual meeting of shareholders. Information concerning the compliance of our officers, directors and 10% shareholders with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information to be contained in the 2009 proxy statement under the caption “Information Concerning Directors Nominees and Executive Officers — Section 16(a) Beneficial Ownership Reporting Compliance.” The information regarding Audit Committee members and “Audit Committee Financial Experts” is incorporated by reference to the information to be contained in the 2009 proxy statement under the caption “Information Concerning Directors Nominees and Executive Officers — Board Committees.” The information regarding our Code of Business Ethics is incorporated by reference to the information to be contained in the 2009 proxy statement under the heading “Information Concerning Directors Nominees and Executive Officers — Code of Business Conduct and Ethics.”

Item 11.Executive Compensation

The information under the captions “Information Concerning Directors Nominees and Executive Officers — Executive Compensation” and “Information Concerning Directors Nominees and Executive Officers — Director Compensation” to be contained in the 2009 proxy statement is incorporated herein by reference.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information under the captions “Beneficial Ownership of Common Stock” and “Information Concerning Directors, Nominees and Executive Officers — Securities Authorized for Issuers Under Equity Compensation Plans” to be contained in the 2009 proxy statement is incorporated herein by reference.

Item 13.Certain Relationships and Related Transactions, and Director Independence

The information under the caption “Information Concerning Directors, Nominees and Executive Officers” to be contained in the 2009 proxy statement is incorporated herein by reference.

Item 14.Principal Accountant Fees and Services

The information under the caption “Ratification of Appointment of PricewaterhouseCoopers LLP as Independent Registered Public Accounting Firm” to be contained in the 2009 proxy statement is incorporated herein by reference.

38

Part IV

Item 15.Exhibits and Financial Statement Schedules

(a)	The following Consolidated Financial Statements of Vital Images, Inc. and Report of Independent Registered Public Accounting Firm thereon are included herein:
	(1)	Financial Statements
		Report of Independent Registered Public Accounting Firm	41
		Consolidated Balance Sheets as of December 31, 2008 and 2007	42
		Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006	43
		Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2008, 2007 and 2006	44
		Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006	45
		Notes to Consolidated Financial Statements	46
	(2)	All other schedules to the Consolidated Financial Statements required by Article 12 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.
	(3)	Listing of Exhibits
		The Exhibits required to be a part of this Report are listed in the Index to Exhibits.
(b)	Exhibits

Included in Item 15(a)(3) above.

39

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Minneapolis, Minnesota, on the 16th day of March, 2009.

	Vital Images, Inc.
By:	/s/Peter J. Goepfrich
	Peter J. Goepfrich
	Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Michael H. Carrel	President, Chief Executive Officer and Director	March 16, 2009
Michael H. Carrel	(Principal Executive Officer)
/s/Peter J. Goepfrich	Chief Financial Officer and Treasurer	March 16, 2009
Peter J. Goepfrich	(Principal Financial Officer and Principal Accounting Officer)
/s/James B. Hickey, Jr.	Chairman of the Board and Director	March 16, 2009
James B. Hickey, Jr.
/s/Douglas M. Pihl	Director	March 16, 2009
Douglas M. Pihl
/s/Richard W. Perkins	Director	March 16, 2009
Richard W. Perkins
/s/Michael W. Vannier	Director	March 16, 2009
Michael W. Vannier
/s/Sven A. Wehrwein	Director	March 16, 2009
Sven A. Wehrwein
	Director
Gregory J. Peet

40

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Vital Images, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and comprehensive income (loss) and of cash flows present fairly, in all material respects, the financial position of Vital Images, Inc. and its subsidiaries at December 31, 2008 and December 31, 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Minneapolis, Minnesota

March 16, 2009

41

Vital Images, Inc.
Consolidated Balance Sheets

(In thousands, except per share amounts)

	December 31,
	2008			2007
Assets
Current assets:
Cash and cash equivalents	$	109,706		$	146,685
Marketable securities	37,287			31,709
Accounts receivable, net	13,047			15,962
Deferred income taxes	654			3,472
Prepaid expenses and other current assets	2,179			2,441
Total current assets	162,873			200,269
Property and equipment, net	11,519			11,165
Deferred income taxes	13,904			8,621
Other intangible assets, net	808			1,852
Goodwill	9,089			9,089
Total assets	$	198,193		$	230,996
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,792		$	3,330
Accrued compensation	2,936			3,092
Accrued royalties	1,057			1,113
Other current liabilities	1,947			2,282
Deferred revenue	17,724			16,547
Total current liabilities	27,456			26,364
Deferred revenue	1,164			1,140
Deferred rent	882			1,276
Total liabilities	29,502			28,780
Commitments and contingencies (Note 4)
Stockholders’ equity:
Preferred stock: $0.01 par value; 5,000 shares authorized; none issued or outstanding	—			—
Common stock: $0.01 par value; 40,000 shares authorized; 14,673 issued and outstanding as of December 31, 2008; and 17,153 shares issued and outstanding as of December 31, 2007	147			172
Additional paid-in capital	168,738			199,625
(Accumulated deficit) retained earnings	(380		)	2,420
Accumulated other comprehensive income (loss)	186			(1		)
Total stockholders’ equity	168,691			202,216
Total liabilities and stockholders’ equity	$	198,193		$	230,996

The accompanying notes are an integral part of the Consolidated Financial Statements.

42

Vital Images, Inc.

Consolidated Statements of Operations

(In thousands, except for per share amounts)

	For the Year Ended December 31,
	2008			2007			2006
Revenue:
License fees	$	34,290		$	39,673		$	46,332
Maintenance and services	32,436			29,487			22,615
Hardware	1,415			1,016			1,565
Total revenue	68,141			70,176			70,512
Cost of revenue:
License fees	4,922			4,725			4,991
Maintenance and services	10,089			9,928			8,023
Hardware	862			694			1,196
Impairment of patent	—			242			—
Total cost of revenue	15,873			15,589			14,210
Gross profit	52,268			54,587			56,302
Operating expenses:
Sales and marketing	30,294			31,991			25,374
Research and development	17,131			15,204			13,092
General and administrative	14,008			14,560			10,905
Restructuring charge	660			—			—
Total operating expenses	62,093			61,755			49,371
Operating (loss) income	(9,825		)	(7,168		)	6,931
Interest income	4,643			8,886			3,342
(Loss) income before income taxes	(5,182		)	1,718			10,273
(Benefit) provision for income taxes	(2,382		)	351			3,690
Net (loss) income	$	(2,800	)	$	1,367		$	6,583
Net (loss) income per share – basic	$	(0.17	)	$	0.08		$	0.49
Net (loss) income per share – diluted	$	(0.17	)	$	0.08		$	0.46
Weighted average common shares outstanding - basic	16,155			16,972			13,463
Weighted average common shares outstanding - diluted	16,155			17,457			14,259

The accompanying notes are an integral part of the Consolidated Financial Statements.

43

Vital Images, Inc.

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

(In thousands)

												Retained			Accumulated
						Additional						Earnings /			Other			Total
	Common Stock					Paid-In			Deferred			(Accumulated			Comprehensive			Stockholders’			Comprehensive
	Shares		Amount			Capital			Compensation			Deficit)			Income / (Loss)			Equity			Income (Loss)
Balances as of December 31, 2005	12,848		128			75,918			(1,707		)	(5,530		)	(20		)	68,789
Issuance of common stock upon exercise of stock options	564		6			5,168												5,174
Tax benefit related to exercise of stock options and release of restricted stock						4,403												4,403
Issuance of common stock under employee stock purchase plan	16		—			364												364
Grant of restricted stock to employees	34		—			—												—
Forfeiture or cancellation of restricted stock	(4	)	—			—												—
Common stock surrendered for payment of payroll tax liability resulting from the vesting of restricted stock	(10	)	—			(292		)										(292		)
Issuance of common stock as contingent consideration related to the acquisition of Hinnovation (See note 3)	106		1			3,083												3,084
Issuance of common stock in connection with public offering, net of offering costs of $6,271	3,354		34			97,669												97,703
Stock-based compensation						5,063												5,063
Reclassification of deferred compensation pursuant to FAS123R						(1,707		)	1,707									—
Change in unrealized gain or loss on investments, net of tax															27			27			$	27
Cumulative translation adjustment															4			4			4
Net income												6,583						6,583			6,583
Balances as of December 31, 2006	16,908		169			189,669			—			1,053			11			190,902			$	6,614
Issuance of common stock upon exercise of stock options	221		3			2,352												2,355
Tax benefit related to exercise of stock options and release of restricted stock						1,443												1,443
Issuance of common stock under employee stock purchase plan	27		—			521												521
Grant of restricted stock to employees	14		—			—												—
Forfeiture or cancellation of restricted stock	(5	)	—			—												—
Common stock surrendered for payment of payroll tax liability resulting from the vesting of restricted stock	(12	)	—			(347		)										(347		)
Stock-based compensation						5,987												5,987
Change in unrealized gain or loss on investments, net of tax															(8		)	(8		)	$	(8	)
Cumulative translation adjustment															(4		)	(4		)	(4		)
Net income												1,367						1,367			1,367
Balances as of December 31, 2007	17,153		172			199,625			—			2,420			(1		)	202,216			$	1,355
Issuance of common stock upon exercise of stock options	243		2			1,927												1,929
Tax benefit related to exercise of stock options and release of restricted stock						50												50
Issuance of common stock under employee stock purchase plan	43		—			490												490
Grant of restricted stock to employees	30		—			—												—
Forfeiture or cancellation of restricted stock	(27	)	—			—												—
Common stock surrendered for payment of payroll tax liability resulting from the vesting of restricted stock	(12	)	—			(174		)										(174		)
Stock-based compensation						5,007												5,007
Repurchases of common stock	(2,757	)	(27		)	(38,187		)										(38,214		)
Change in unrealized gain or loss on investments, net of tax															187			187			$	187
Net loss												(2,800		)				(2,800		)	(2,800		)
Balances as of December 31, 2008	14,673		$	147		$	168,738		$	—		$	(380	)	$	186		$	168,691		$	(2,613	)

The accompanying notes are an integral part of the Consolidated Financial Statements.

44

Vital Images, Inc.

Consolidated Statements of Cash Flows

(In thousands)

	For the Year Ended December 31,
	2008			2007			2006
Cash flows from operating activities:
Net (loss) income	$	(2,800	)	$	1,367		$	6,583
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment	4,919			4,517			2,910
Amortization of identified intangible assets	1,044			1,205			1,404
Impairment of patent	—			242			—
Provision for doubtful accounts	519			239			25
Deferred income taxes	(2,521		)	(16		)	3,472
Excess tax benefit from stock transactions	(481		)	(1,395		)	(4,143		)
Amortization of discount and accretion of premium on marketable securities	(473		)	(857		)	(382		)
Employee stock-based compensation	5,007			5,987			5,045
Non-employee stock-based compensation	—			—			18
Amortization of deferred rent	(375		)	(338		)	(195		)
Changes in operating assets and liabilities:
Accounts receivable	2,396			3,388			(5,284		)
Prepaid expenses and other assets	262			(513		)	(701		)
Accounts payable	623			(363		)	836
Accrued expenses and other liabilities	(740		)	(1,142		)	193
Deferred revenue	1,201			1,382			4,429
Deferred rent	—			199			561
Net cash provided by operating activities	8,581			13,902			14,771
Cash flows from investing activities:
Purchases of property and equipment	(5,434		)	(6,577		)	(6,436		)
Purchases of marketable securities	(76,395		)	(59,974		)	(29,545		)
Proceeds from maturities of marketable securities	70,002			49,931			35,987
Proceeds from sales of marketable securities	1,581			750			1,376
Net cash (used in) provided by investing activities	(10,246		)	(15,870		)	1,382
Cash flows from financing activities:
Repurchases of common stock	(38,214		)	—			—
Proceeds from sale of common stock under stock plans	2,419			2,876			5,538
Proceeds from sale of common stock, net of offering costs	—			—			97,703
Excess tax benefit from stock transactions	481			1,395			4,143
Net cash (used in) provided by financing activities	(35,314		)	4,271			107,384
Net (decrease) increase in cash and cash equivalents	(36,979		)	2,303			123,537
Cash and cash equivalents, beginning of year	146,685			144,382			20,845
Cash and cash equivalents, end of year	$	109,706		$	146,685		$	144,382
Supplemental cash flow information:
Purchases of property and equipment with accounts payable	$	366		$	525		$	662
Non-cash investing and financing activities:
Common stock issued relating to acquisition of HInnovation, Inc. (see Note 3)	$	—		$	—		$	3,084

The accompanying notes are an integral part of the Consolidated Financial Statements.

45

Vital Images, Inc.

Notes to Consolidated Financial Statements

1.Business description

Vital Images, Inc. (the “Company”) is a leading provider of advanced visualization and image analysis solutions for use by medical professionals in clinical analysis and therapy planning for medical conditions. The Company provides software, customer education, software maintenance and support, professional services and, on occasion, third-party hardware to its customers. The Company’s technology rapidly transforms complex data generated by diagnostic imaging equipment into functional digital images that can be manipulated and analyzed using its specialized applications to better understand internal anatomy and pathology. The Company’s solutions are designed to improve physician workflow and productivity, enhance the ability to make clinical decisions, facilitate less invasive patient care, and complement often significant capital investments in diagnostic imaging equipment made by its customers. The Company’s software is compatible with equipment from all major manufacturers of diagnostic imaging equipment, such as computed tomography, or CT, scanners, and can be integrated into picture archiving and communication systems, or PACS. Many hospitals use PACS to acquire, distribute and archive medical images and diagnostic reports, reducing the need for film and increasing reliance on advanced visualization solutions such as the Company’s. The Company also offers a Web-based solution that provides physicians with anywhere, anytime access to medical images and visualization tools through any Internet-enabled computer.

The Company views its operations and manages its business as one reportable segment — the development and marketing of software and related services for advanced visualization and analysis solutions for use by medical professionals in clinical analysis and therapy planning. Factors used to identify the Company’s single operating segment include the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance. The Company markets its products and services through a direct sales force and independent distributors in the United States and international markets.

2.Summary of significant accounting policies

Basis of presentation

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Use of estimates

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

Fair value of financial instruments

The Company’s financial instruments consist primarily of cash, cash equivalents, and marketable securities, for which the current carrying amounts approximate fair market values.

Cash and cash equivalents

Cash and cash equivalents consist of cash and temporary investments with maturities of 90 days or less when purchased. The carrying amount of cash equivalents approximates fair value due to the short maturity of these instruments.

Marketable securities

Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. Currently, all marketable securities held by the Company are classified as available-for-sale. Available-for-sale securities are carried at fair value as determined by quoted market prices or, in the case of the Company’s corporate debt, using matrix pricing techniques, with unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. If an unrealized loss for any investment is considered to be other-than-temporary, the loss will be recognized in the consolidated income statement in the period the determination is made. The cost basis of securities sold is determined using the specific

46

identification method. The cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income. Interest and dividends on securities classified as available-for-sale are included in interest income. As of December 31, 2008, all investments mature within one year.

As of December 31, 2008 and 2007, the Company’s marketable securities were as follows (in thousands):

	December 31, 2008						December 31, 2007
	Adjusted Cost Basis		Aggregate Fair Value		Net Unrealized Gains / (Losses)		Adjusted Cost Basis		Aggregate Fair Value		Net Unrealized Gains / (Losses)
Corporate debt	$	2,253	$	2,255	$	2	$	9,993	$	9,975	$	(18	)
Government debt	34,742		35,032		290		21,717		21,734		17
	$	36,995	$	37,287	$	292	$	31,710	$	31,709	$	(1	)

As of December 31, 2008 and 2007, the Company’s gross unrealized gains and losses were as follows (in thousands):

	December 31, 2008							December 31, 2007
	Gross Unrealized Gains		Gross Unrealized (Losses)			Net Unrealized Gains / (Losses)		Gross Unrealized Gains		Gross Unrealized (Losses)			Net Unrealized Gains / (Losses)
Corporate debt	$	9	$	(7	)	$	2	$	2	$	(20	)	$	(18	)
Government debt	290		—			290		17		—			17
	$	299	$	(7	)	$	292	$	19	$	(20	)	$	(1	)

The carrying values of available-for-sale securities are at fair value. There were no material realized gains or losses on any investments for the years ended December 31, 2008, 2007 or 2006.

Corporate debt included $257,000 and $3.0 million of asset-backed securities as of December 31, 2008 and 2007, respectively. The net unrealized losses on asset-backed securities were $(7,000) and $(19,000) as of December 31, 2008 and 2007, respectively. The Company’s asset-backed securities are rated AAA and are current on scheduled pay downs, with expected full maturity within the next 12 months. Given the current conditions of the credit markets, there is some risk the unrealized losses as of December 31, 2008 could increase if the credit markets continue to deteriorate.

The Company analyzes its investments for impairment on an ongoing basis. Factors considered in determining whether an unrealized loss is a temporary loss or an other-than-temporary loss include the length of time and extent to which the securities have been in an unrealized loss position and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated market recovery. The Company has the ability and intent to hold these investments until anticipated recovery of fair value, which may be maturity, and therefore the Company does not consider these investments to be impaired as of December 31, 2008.

Accounts receivable and allowance for doubtful accounts

Accounts receivable are initially recorded at a selling price, which approximates fair value upon the sale of goods or services to customers. The Company maintains an allowance for doubtful accounts to reflect accounts receivable at net realizable value. In judging the adequacy of the allowance for doubtful accounts, the Company considers multiple factors, including historical bad debt experience, the general economic environment, the need for specific client reserves and the aging of the Company’s receivables. A portion of this provision is included in operating expenses as a general and administrative expense and a portion of this provision is included as a reduction of license revenue. A considerable amount of judgment is required in assessing these factors. If the factors utilized in determining the allowance do not reflect future performance, then a change in the allowance for doubtful accounts would be necessary in the period such determination has been made, which would impact future results of operations.

47

Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. Deposits with the Company’s bank may exceed the amount of insurance provided on such deposits. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and marketable securities. Marketable securities consist of corporate debt and government debt. The Company’s investment policy, approved by its Investment Committee, limits the amount the Company may invest in any one type of investment, thereby reducing credit risk concentrations. A significant portion of the Company’s accounts receivable relates to Toshiba Medical Systems Corporation and McKesson Corporation, totaling 42% and 7% of accounts receivable, respectively. The Company reviews the creditworthiness of its customers prior to product shipment and generally does not require collateral.

Property and equipment

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the related asset’s estimated useful life, generally three to seven years. Equipment is generally depreciated over three to seven years, furniture and fixtures are generally depreciated over seven years, computer software is generally depreciated over three to seven years, and leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining terms of the related leases. The asset cost and related accumulated depreciation or amortization are adjusted for asset retirement or disposal, with the resulting gain or loss, if any, credited or charged to results of operations.

Long-lived assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant decrease in the market value of the business or asset acquired, a significant adverse change in the extent or manner in which the business or asset acquired is used, or a significant adverse change in the business climate. If such events or changes in circumstances are present, the undiscounted cash flows method is used to determine whether the asset is impaired. Cash flows would include the estimated terminal value of the asset and exclude any interest charges. To the extent the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset, the impairment is measured using the discounted cash flows. The discount rate utilized would be based on management’s best estimate of the related risks and return at the time the impairment assessment is made.

Goodwill

The Company accounts for goodwill in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets with indefinite lives are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The Company operates as one reporting unit and therefore compares the book value to the market value (market capitalization plus a control premium). If the market value exceeds the book value, goodwill is considered not impaired, and thus the second step of the impairment test is not necessary. If the Company’s book value exceeds the market value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the goodwill with the book value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss would be recognized in an amount equal to the excess. Any loss recognized cannot exceed the carrying amount of goodwill. The Company completed the annual goodwill impairment assessment as of December 31, 2008, in which no impairment was recorded. If market conditions continue to fluctuate, the Company may incur goodwill impairment charges that adversely affect its financial position and operating results.

Revenue recognition

The Company recognizes revenue in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the AICPA and SEC Staff Accounting

48

Bulletin (“SAB”) No. 104. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable, and collectability is probable.

License fee revenue is derived from the licensing of computer software. Hardware revenue is derived from the sale of system hardware, including peripheral equipment. Maintenance and service revenue is derived from software maintenance and from telephone support, installation, customer education and consulting services. The Company’s software licenses are generally sold as part of an arrangement that includes maintenance and support and often installation and customer education services.

The Company licenses software and sells products and services to end users and also indirectly through original equipment manufacturers, value-added resellers and independent distributors (collectively, “Resellers”). Terms offered by the Company do not generally differ between end users and Resellers. The Company generally offers terms that require payment within 30 to 90 days after product delivery. In rare situations where the Company offers terms that require payment beyond 90 days after product delivery, revenue is deferred until the payment becomes due. The Company does not generally offer rights of return or acceptance clauses to its customers. In rare situations where the Company provides rights of return or acceptance clauses, revenue is deferred until the clause expires. The Company evaluates the credit worthiness of all customers. In circumstances in which the Company does not have experience selling to a customer and lacks adequate credit information to conclude that collection is probable, revenue is deferred until collection is reasonably assured and all other revenue recognition criteria in the arrangement have been met. If all other revenue recognition criteria are met, license revenue from Resellers is recognized on a sell-in or sell-through basis depending on the arrangement with the Reseller. The Company recognizes revenue from Resellers on a sell-in basis if the Reseller i) assumes all risk of the purchase, ii) has the ability and obligation to pay regardless of receiving payment from the end user, and iii) all other revenue recognition criteria are met. The majority of revenue generated through Resellers has been on a sell-in basis. The following are other revenue recognition criteria applied by the Company:

·Software and Hardware – Revenue from license fees and hardware is recognized when shipment of the product has occurred, no significant Company obligations with regard to implementation remain and the Company’s services are not considered essential to the functionality of other elements of the arrangement.

·Services – Revenue from maintenance and support arrangements is deferred and recognized ratably over the term of the maintenance and support arrangements. Revenue from customer education, installation and consulting services is recognized as the services are provided to customers or upon contractual expiration of such services.

·Multiple-Element Arrangements – The Company enters into arrangements with customers that include a combination of software products, system hardware, maintenance and support (which includes unspecified upgrades), or installation and customer education services. For such arrangements, the Company recognizes revenue using the residual method. The Company allocates the total arrangement fee among the various elements of the arrangement based on the fair value of each of the undelivered elements determined by vendor-specific objective evidence. The fair value of installation and customer education services and maintenance and support services is established based upon sold separately pricing for the services or stated renewal rate. In software arrangements for which the Company does not have vendor-specific objective evidence of fair value for all elements, revenue is deferred until the earlier of when vendor-specific objective evidence is determined for the undelivered elements (residual method) or when all elements for which the Company does not have vendor-specific objective evidence of fair value have been delivered.

Equity-based compensation

The Company accounts for equity-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which requires the measurement and recognition of compensation expense for all equity-based payment awards made to employees and directors, including employee stock options, restricted stock and employee stock purchases related to the Employee Stock Purchase Plan, based on estimated fair values.

Equity-based compensation expense recognized under SFAS No. 123(R) for the years ended December 31, 2008, 2007 and 2006 was $5.0 million, $6.0 million and $5.1 million, respectively.

SFAS No. 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model, which requires the input

49

of assumptions, including an estimate of the average period of time employees will retain vested stock options before exercising them, the estimated volatility of the Company’s common stock price over the expected term, and the number of options that will ultimately be forfeited before completing vesting requirements. Changes in the assumptions can materially affect the estimate of fair value of equity-based compensation and, consequently, the related expense recognized. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite vesting period.

Equity-based compensation expense recognized for the years ended December 31, 2008, 2007 and 2006 included compensation expense for equity-based payment awards granted on or prior to December 31, 2005 but not yet vested as of that date. Because equity-based compensation expense recognized for the years ended December 31, 2008, 2007 and 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The following table illustrates how equity-based compensation was allocated to the income statement as well as the effect on net income of all equity-based compensation recognized under SFAS No. 123(R) (in thousands, except per share data):

	For the Year Ended December 31,
	2008			2007			2006
Cost of revenue	$	333		$	389		$	372
Sales and marketing	1,408			2,392			1,995
Research and development	1,017			729			840
General and administrative	2,249			2,477			1,856
Equity-based compensation before income taxes	5,007			5,987			5,063
Income tax benefit	(1,771		)	(1,964		)	(1,488		)
Total equity-based compensation after income taxes	$	3,236		$	4,023		$	3,575

For purposes of calculating the fair value of options under SFAS No. 123(R), the weighted average fair value of options granted during 2008, 2007 and 2006 were $5.50, $13.47 and $13.58, respectively. The weighted-average fair values for the options were based on the fair values on the dates of grant. The fair values for the options were calculated using the Black-Scholes option-pricing model, with the following weighted-average assumptions and expense adjusted using the following expected forfeiture rate assumptions:

	For the Year Ended December 31,
	2008		2007		2006
Expected option life	3.75 years		3.75 years		3.78 years
Expected volatility factor	46	%	52	%	52	%
Expected dividend yield	0	%	0	%	0	%
Risk-free interest rate	2.33	%	4.46	%	4.65	%
Expected forfeiture rate	1	%	1	%	1	%

Prior to March 9, 2006, the expected life of stock options was calculated by performing a detailed analysis of all historical stock option information available. On March 9, 2006, the Company began to grant options with a five-year legal life instead of the eight-year legal life that it had previously used. As a result, the Company has elected to use the “simplified” method as described in SAB No. 107 to estimate the expected life of options granted on and after March 9, 2006. The Company will utilize the simplified method until sufficient historical information becomes available on the five-year legal life options. The expected volatility is calculated based on the historical volatility of the Company’s common stock over the expected option life and other appropriate factors. The expected dividend yield is based on the Company’s intent not to issue dividends for the foreseeable future. Risk-free interest rates are calculated based on continuously compounded U.S. Treasury risk-free rates for the appropriate term. The expected forfeiture rate is estimated based on historical experience.

50

As of December 31, 2008, there was $7.0 million of unrecognized compensation expense related to stock options that is expected to be recognized over a weighted-average period of 3.0 years.

The Company has granted nonvested shares of common stock (“restricted stock”) to certain employees under its 1997 Stock Option and Incentive Plan and 2006 Long-Term Incentive Plan. With the exception of shares of restricted stock subject to performance vesting, as noted below, restricted stock generally vests 25% annually beginning one year after the grant date. The Company records equity-based compensation expense equal to the fair market value of the common stock on the date of grant ratably over the vesting period. Equity-based compensation expense related to restricted stock was $491,000, $741,000 and $728,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

In the first quarter of 2007, the Company granted shares of restricted stock with performance-based vesting to certain employees. The Company granted a total of 13,500 restricted shares with a total grant-date fair value of $464,000. As of December 31, 2008, after forfeitures, 6,700 restricted shares with a total grant-date fair value of $230,000 remained outstanding. The awards vest upon achievement of certain Company performance metrics for fiscal years 2007 through 2009. One-third of each award will vest on each of the Company’s Form 10-K filing dates for the years ending December 31, 2007, 2008 and 2009 if the performance metrics are met for the respective fiscal year. If the performance metrics are not met for a given year, the unvested portion will carry forward to the next fiscal year and may vest if that year’s metric is met. As of the Company’s Form 10-K filing date for the year ending December 31, 2009, any unvested portion of the award will be forfeited. The performance metrics were not achieved for the years ended December 31, 2008 and 2007. Therefore, no equity-based compensation expense for the awards was recognized for the years ended December 31, 2008 and 2007. The amount of the expense related to the awards not recognized as of December 31, 2008 but which may be recognized in future periods if performance metrics are met was $139,000. The first quarter of 2007 was the only period in which the Company granted restricted stock awards with performance-based vesting.

As of December 31, 2008, there was $612,000 of unrecognized compensation expense related to restricted stock awards that is expected to be recognized over a weighted-average period of 2.3 years. The aggregate fair value of restricted stock that vested was $488,000 and $1.0 million for the years ended December 31, 2008 and 2007, respectively.

Employee Stock Purchase Plan (“ESPP”) compensation expense was $154,000 and $161,000 for the years ended December 31, 2008 and 2007, respectively.

The fair value of stock compensation expense associated with the Company’s ESPP was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

	For the Year Ended December 31,
	2008		2007		2006
Expected life of ESPP options	3 months		3 months		3 months
Expected volatility factor	46	%	51	%	50	%
Expected dividend yield	0	%	0	%	0	%
Risk-free interest rate	1.81	%	4.59	%	4.64	%

Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits resulting from the exercise of stock options and settlement of restricted stock awards as operating cash inflows in the consolidated statements of cash flows in accordance with the provisions of the Emerging Issues Task Force (“EITF”) Issue No 00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option.” SFAS No. 123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for those options and stock awards to be classified as financing cash inflows rather than operating cash inflows on a prospective basis. This amount is shown as “Excess tax benefit from stock transactions” on the Consolidated Statement of Cash Flows.

The Company’s adoption of SFAS No. 123(R) using the modified prospective application required the Company to determine the amount of eligible windfall tax benefits (the pool of windfall tax benefits) that are available on the adoption date to offset future shortfalls. The Company has elected to calculate its historical pool of windfall tax benefits (that is, the amount that would have accumulated as of the adoption date of SFAS No. 123(R)) using the alternative (“short-cut”) method, as provided in FSP No. FAS 123(R)-3, and the “tax law ordering approach” to

51

determine when the historic tax benefits are realized (tax benefits realized based on provisions in the tax law that identify the sequence in which stock option deductions are utilized for tax purposes). The Company will continue to track the balance of the pool of windfall tax benefits based on windfalls or shortfalls incurred after the adoption date.

Research and development costs

Costs related to research, design and development of products are charged to research and development expense as incurred. Software development costs are capitalized beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. The Company uses the working model approach to determine technological feasibility. Generally, the Company’s products are released soon after technological feasibility has been established. As a result, the Company has not capitalized any software development costs because such costs have not been significant.

Income taxes

The Company provides for income taxes using the liability method under SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this statement, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some component or all of the deferred tax assets will not be realized. Tax rate changes are reflected in income during the period such changes are enacted.

Computation of net income per share

Basic earnings per share is computed using net income and the weighted average number of common shares outstanding. Diluted earnings per share reflect the weighted average number of common shares outstanding plus any potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of shares issuable upon the exercise of stock options and warrants, as well as unvested restricted stock.

The computations for basic and diluted net income per share are as follows (in thousands, except per share amounts):

	For the Year Ended December 31,
	2008			2007		2006
Numerator:
Net (loss) income	$	(2,800	)	$	1,367	$	6,583
Denominator:
Denominator for weighted average common shares outstanding – basic	16,155			16,972		13,463
Dilution associated with the company’s stock based compensation plans	—			485		779
Dilution associated with contingent stock consideration relating to acquisition of HInnovation, Inc. (see note 3)	—			—		17
Denominator:
Denominator for weighted average common shares outstanding – diluted	16,155			17,457		14,259
Net (loss) income per share – basic	$	(0.17	)	$	0.08	$	0.49
Net (loss) income per share – diluted	$	(0.17	)	$	0.08	$	0.46
Antidilutive stock options and restricted stock awards excluded from above calculation	2,515			809		379

52

Comprehensive income (loss)

Comprehensive income (loss) as defined by SFAS No. 130, “Reporting Comprehensive Income,” includes net income and items defined as other comprehensive income. SFAS No. 130 requires that items defined as other comprehensive income, such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities, be separately classified in the financial statements. Such items are reported in the consolidated statements of stockholders’ equity as comprehensive income (loss).

New accounting pronouncements

FASB Staff Position (“FSP”) FAS No. 157-2, “Effective Date of FASB Statement No. 157,” delayed the effective date of the application of SFAS No. 157, “Fair Value Measurements,” to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. Nonrecurring nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of SFAS No. 157 include those measured at fair value during impairment testing for goodwill and other long-lived assets and those initially measured at fair value in a business combination. The Company does not believe SFAS No. 157 will have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which changes accounting for business acquisitions. SFAS No. 141(R) will require the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establish the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets and tax benefits. SFAS No. 141(R) will be effective for the Company for business combinations occurring after December 31, 2008. The impact on the Company’s consolidated financial statements of adopting SFAS 141(R) will depend on the nature, terms and size of business combinations completed after December 31, 2008.

In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 is effective for the Company in the first quarter of 2009. The Company does not expect that the adoption of FSP EITF 03-6-1 will have a material impact on the Company’s consolidated financial statements.

3.Financial statement components

Allowance for doubtful accounts

The allowance for doubtful accounts activity was as follows (in thousands):

	For the Year Ended December 31,
	2008			2007		2006
Beginning balance	$	505		$	266	$	320
Provision	519			239		25
Write-offs	(386		)	—		(87		)
Recoveries	—			—		8
Ending balance	$	638		$	505	$	266

53

Property and equipment, net

The components of property and equipment were as follows (in thousands):

	December 31,
	2008			2007
Equipment	$	13,551		$	13,776
Furniture and fixtures	3,993			3,813
Computer software	7,572			4,543
Leasehold improvements	2,521			2,780
Total property and equipment	27,637			24,912
Less accumulated depreciation and amortization	(16,118		)	(13,747		)
Property and equipment, net	$	11,519		$	11,165

Depreciation and amortization expense was $4.9 million, $4.5 million and $2.9 million for the years ended December 31, 2008, 2007 and 2006, respectively.

In 2007, the Company began the implementation of an enterprise resource planning (“ERP”) system. Phase 1 of the implementation, which related to the replacement of the Company’s general ledger, was completed in 2007. The related capitalized costs are being depreciated over seven years and, as of December 31, 2008, the net book value of Phase 1 was $1.0 million. Phase 2 of the implementation, which consists of replacing the Company’s various customer relationship management and order processing systems, has yet to be completed or placed in service. As of December 31, 2008, Phase 2 capitalized costs were $2.9 million.  The Company will continue implementation of the ERP during 2009, and upon completion of the implementation, the cost will be depreciated over seven years. If the Company does not reach certain milestones in the implementation schedule, it may be required to write-off all or a portion of the amounts capitalized, which could negatively affect its financial position and results of operations.

Other intangible assets, net

Acquired intangible assets subject to amortization were as follows (in thousands):

	December 31, 2008							December 31, 2007
	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Software technology	$	3,400	$	(3,334	)	$	66	$	3,400	$	(2,650	)	$	750
Patents and patent applications	2,500		(1,758		)	742		2,500		(1,398		)	1,102
Total intangible assets subject to amortization	$	5,900	$	(5,092	)	$	808	$	5,900	$	(4,048	)	$	1,852

During the third quarter 2007, the Company recognized a $242,000 patent impairment charge related to a patent application acquired in the HInnovation, Inc. acquisition in February 2004. This patent application was rejected by the United States Patent and Trademark Office (“USPTO”) on August 23, 2007, and the Company decided not to pursue this application further.

Intangible assets subject to amortization are amortized on a straight-line basis over the estimated period of benefit. Amortization expense was $1.0 million, $1.2 million and $1.3 million for the years ended December 31, 2008, 2007 and 2006, respectively. The estimated future annual amortization expense for identified intangible assets is as follows (in thousands):

2009	$	426
2010	360
2011	22
	$	808

54

The preceding expected amortization expense is an estimate. Actual amortization expense may differ from estimates due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets, and other events. A patent acquired in the HInnovation, Inc. acquisition having a $594,000 net book value as of December 31, 2008 is currently under review by the USPTO.

Goodwill

There were no changes to the carrying value of goodwill for the years ended December 31, 2008 and 2007. Goodwill increased during 2006 due to contingent consideration paid through the issuance of 106,000 shares of common stock valued at $3.1 million in connection with the acquisition of HInnovation, Inc. on February 18, 2004.

Deferred revenue

The components of deferred revenue were as follows (in thousands):

	December 31,
	2008			2007
Maintenance and support	$	13,912		$	12,376
Customer education	3,034			3,311
Professional services	788			762
Software	616			755
Hardware and other	538			483
Total deferred revenue	18,888			17,687
Less current portion	(17,724		)	(16,547		)
Long-term portion of deferred revenue	$	1,164		$	1,140

4.Commitments and contingencies

Operating lease commitments

The Company rents office space and certain office equipment under operating leases. In addition to minimum lease payments, the office leases require payment of a proportionate share of real estate taxes and building operating expenses. Total rent expense, including an allocation of the lessor’s operating costs, was $1.8 million, $1.7 million and $1.2 million for the years ended December 31, 2008, 2007 and 2006, respectively.

In March 2004, the Company signed a non-cancelable operating lease for a new office facility in Minnetonka, Minnesota. The new lease term started in February 2005 and expires in January 2012. The Company moved into the Minnetonka location and moved out of its Plymouth, Minnesota location in February 2005.

The Company recorded deferred rent of $1.6 million in the first quarter of 2005 relating to estimated payments by the Minnetonka lessor for the benefit of the Company. Such payments are considered lease incentives under FASB Technical Bulletin (“FTB”) 88-1, “Issues Relating to Accounting for Leases,” and are amortized as a reduction of rent expense over the term of the Minnetonka lease.

During the years ended December 31, 2007 and 2006, the Company expanded its Minnetonka headquarters and received leasehold improvements paid for by the Minnetonka lessor of $199,000 and $561,000, respectively. Such leasehold improvements were recorded as an asset by the Company and amortized over the shorter of their estimated useful lives or the remaining terms of the related leases, with a corresponding amount recorded as deferred rent and amortized as a reduction of rent expense over the term of the Minnetonka lease.

The deferred rent balance was $1.3 million ($394,000 was classified as current) and $1.7 million ($375,000 was classified as current) as of December 31, 2008 and 2007, respectively.

55

The minimum lease payments, excluding estimated taxes and operating cost rent obligations, are approximately (in thousands):

2009	$	1,154
2010	930
2011	907
2012	76
Total	$	3,067

Other items

Under general contract terms, the Company sometimes includes an indemnification clause in its software licensing agreement providing that the Company will indemnify the licensee against liability and damages arising from any claims of patent, copyright, trademark or trade secret infringement by the Company’s software. The Company has incurred insignificant costs as a result of this type of indemnification clause, and the Company does not maintain a product warranty liability related to such indemnification clauses.

The Company has entered into various employment agreements with certain executives of the Company, which include provisions for severance payments subject to certain conditions and events.

The Company recorded an $885,000 charge in the fourth quarter of 2007 related to the resignation of Jay D. Miller, the company’s former president and chief executive officer, of which $580,000 related to 2008 cash payments and $305,000 related to equity-based compensation.

The Company is involved in various claims and legal actions in the normal course of business. Management is of the opinion that the outcome of such legal actions will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows. Notwithstanding management’s belief, an unfavorable resolution of some or all of these matters could materially affect the Company’s future results of operations or cash flows.

5.Stockholders’ equity

Background

On October 28, 1996, the Board of Directors of Bio-Vascular, Inc. (“Bio-Vascular”), now known as Synovis Life Technologies, Inc., the former parent of the Company, approved a plan to spin off and establish the Company as an independent, publicly-owned company. On May 12, 1997 (the “Distribution Date”), Bio-Vascular distributed all of the shares of the Company to the shareholders of Bio-Vascular (the “Distribution”), and on that date the Company began operating as an independent public company. All Bio-Vascular shareholders of record as of May 5, 1997 received one share of the Company’s common stock for each two shares of Bio-Vascular stock held on that date and cash in lieu of fractional shares.

Share Repurchase Program

During 2008, the Company’s Board of Directors approved a share repurchase program, which authorized open market transactions of up to $40.0 million, including fees and expenses, of the Company’s common stock. The program authorizes management to repurchase shares from time to time, depending on market conditions. During 2008, the Company completed stock repurchases of 2.8 million shares for $38.2 million, inclusive of fees and expenses. At time of repurchase, shares are returned to the status of authorized and unissued shares. The Company has accounted for the repurchases as constructively retired and recorded such repurchases as a reduction of common stock and additional paid-in capital.

The Company completed the $40.0 million share repurchase program on February 6, 2009. Between January 1, 2009 and February 6, 2009, the Company purchased 149,000 shares under the program for $1.8 million, inclusive of fees and expenses, bringing the total aggregate shares repurchased to 2.9 million shares. On March 3, 2009, the Company announced an additional share repurchase program, authorizing up to an additional 1.0 million shares to be repurchased on the open market.

Public offering of common stock

During the fourth quarter of 2006, the Company completed a public offering of 3.4 million shares of common stock at $31.00 per share for total gross proceeds of $104.0 million. After deducting offering costs of $6.3 million, the Company received net proceeds of $97.7 million.

56

Stock option plans

In May 1997, Bio-Vascular, Inc., which is now known as Synovis Life Technologies, Inc., as the sole shareholder of the Company, approved and adopted the Vital Images, Inc. 1997 Stock Option and Incentive Plan (the “1997 Plan”), which became effective on the Distribution Date. Under the terms of the 1997 Plan, the Board of Directors or a committee of the Board may grant options and other equity-based awards to key employees to purchase shares of the Company’s common stock at an option exercise price equal to or greater than 85% of the fair market value on the date of grant. The options are exercisable at such times, in installments or otherwise, as the Board of Directors or a committee of the Board may determine. Generally, these options have a term of five or eight years and are exercisable as to 28% of the total grant one year after the date of grant and 2% per month thereafter. The total number of shares of common stock that may be issued or awarded under the 1997 Plan was 4,100,000 shares. The 1997 Plan expired on March 19, 2007, and no more rights to purchase shares will be granted from it.

Also in May 1997, Bio-Vascular, as the sole shareholder of the Company, approved and adopted the Vital Images, Inc. 1997 Director Stock Option Plan (the “Director Plan”), which became effective on the Distribution Date. The Director Plan provides non-employee directors with automatic grants of stock options and allows the Board of Directors to make additional discretionary option grants to any or all directors. Options that are granted under the Director Plan are granted with an option price equal to the fair market value on the date of grant, have a term of five or eight years, are non-qualified options, and become exercisable in three equal annual installments beginning on the first occurring December 31 after the date of grant. The total number of shares of common stock that may be issued or awarded under the Director Plan was 500,000 shares. The Director Plan expired on March 19, 2007, and no more rights to purchase shares will be granted from it.

On May 4, 2006, the shareholders of the Company approved the Vital Images, Inc. 2006 Long-Term Incentive Plan (the “2006 Plan”). The 2006 Plan provides that the total number of shares of the Company’s common stock that may be subject to options, restricted stock awards and other equity awards granted under the 2006 Plan shall not exceed 900,000 shares. On June 3, 2008, the shareholders of the Company approved an amendment to the 2006 Plan to increase the shares reserved under the plan by 1.6 million shares, resulting in total shares reserved for issuance under the 2006 Plan of 2.5 million shares. The 2006 Plan provides the Board of Directors or a committee of the Board the authority to grant incentive stock options qualified as such under Section 422 of the Internal Revenue Code of 1986 and nonqualified stock options, awards of restricted stock, stock appreciation rights, other equity-based awards, cash-based awards or any combination of such awards subject to the terms of the 2006 Plan. As of December 31, 2008, 1,435,208 shares remained available for the grant of awards under the 2006 Plan.

57

The following table summarizes stock option activity for 2008, 2007 and 2006:

	Shares Underlying Options		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Total outstanding as of December 31, 2005	1,997,275		$	11.45
Options granted	383,300		$	31.15
Options exercised	(564,286	)	$	9.17
Options cancelled	(19,110	)	$	23.33
Total outstanding as of December 31, 2006	1,797,179		$	16.24
Options granted	469,595		$	30.99
Options exercised	(220,604	)	$	10.68
Options cancelled	(64,766	)	$	26.66
Total outstanding as of December 31, 2007	1,981,404		$	20.03
Options granted	1,081,070		$	14.77
Options exercised	(242,525	)	$	7.95
Options cancelled	(367,090	)	$	23.93
Total outstanding as of December 31, 2008	2,452,859		$	18.32	3.25	$	2,278
Options exercisable as of:
December 31, 2006	1,064,923		$	11.39
December 31, 2007	1,206,104		$	14.71
December 31, 2008	1,259,018		$	18.98	2.43	$	2,016

Various price ranges and weighted average information for options outstanding and exercisable as of December 31, 2008 are as follows:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$   5.19  -  $ 12.23	472,057	2.62	$	9.42	318,057	$	8.07
$ 12.44  -  $ 15.11	488,817	3.81	$	14.47	121,537	$	12.62
$ 15.17  -  $ 15.40	444,502	4.19	$	15.27	50,280	$	15.40
$ 15.50  -  $ 19.64	442,001	3.09	$	17.55	366,282	$	17.82
$ 19.80  -  $ 32.14	461,020	2.65	$	30.49	308,473	$	30.28
$ 32.16  -  $ 35.70	144,462	2.98	$	33.34	94,389	$	33.47
	2,452,859	3.25	$	18.32	1,259,018	$	18.98

The aggregate intrinsic value of options (that is, the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the option) exercised during the years ended December 31, 2008, 2007 and 2006 was $1.5 million, $4.4 million and $12.8 million, respectively. Cash received from the exercise of stock options for the years ended December 31, 2008, 2007 and 2006 was $1.9 million, $2.4 million and $5.2 million, respectively. The total tax benefit realized for the tax deductions from options exercised for the years ended December 31, 2008, 2007 and 2006 was $490,000, $1.5 million and $4.4 million, respectively.

58

Restricted stock

The Company grants nonvested shares of common stock (“restricted stock”) to certain employees under the 1997 Plan and the 2006 Plan. The restricted stock generally vests 25% annually beginning one year after the grant date. The following table summarizes the restricted stock activity for the year ended December 31, 2008 and 2007:

	Restricted Shares		Weighted-Average Grant Date Fair Value Per Share
Total outstanding as of December 31, 2005	114,770		$	17.61
Shares granted	33,910		$	31.76
Shares vested	(29,226	)	$	17.51
Shares forfeited/cancelled	(3,777	)	$	21.44
Total outstanding as of December 31, 2006	115,677		$	21.65
Shares granted	14,250		$	34.21
Shares vested	(35,677	)	$	20.88
Shares forfeited/cancelled	(4,647	)	$	24.53
Total outstanding as of December 31, 2007	89,603		$	23.81
Shares granted	30,000		$	13.74
Shares vested	(29,816	)	$	20.98
Shares forfeited/cancelled	(27,210	)	$	25.42
Total outstanding as of December 31, 2008	62,577		$	19.63

The total tax benefit realized for the tax deductions from restricted stock vested during the years ended December 31, 2008, 2007 and 2006 was $183,000, $368,000 and $315,000, respectively.

Employee stock purchase plan

The ESPP was approved and adopted by Bio-Vascular, as the sole shareholder of the Company, in May 1997. The ESPP, which became effective on July 1, 1997, enables eligible employees to purchase the Company’s common stock at a price equal to 85% of the fair market value of the stock on the date an offering period commences or on the date an offering period terminates, whichever is lower. Shares of common stock are offered under the ESPP during a series of offering periods, with each offering period running for a calendar quarter. On June 3, 2008, the shareholders of the Company approved an amendment to the ESPP to increase, from 250,000 shares of common stock to 400,000 shares of common stock, the number of aggregate shares of common stock that can be issued and sold to participating employees of the Company under the ESPP. The ESPP covers substantially all employees, subject to certain limitations. Each employee may elect to have up to 10% of his or her base pay withheld and applied toward the purchase of shares in each such offering period. As of December 31, 2008, 132,955 shares of common stock remained reserved for future purchases under the ESPP.

6.Income taxes

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 did not have a material impact on the Company’s Consolidated Financial Statements. Additionally, the adoption of FIN 48 had no impact on retained earnings or the gross liability for uncertain tax positions. The Company had no uncertain tax positions as of December 31, 2008 and 2007.

The Company did not have any material unrecognized tax benefits as of December 31, 2008 and 2007. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. The Company recorded no interest and penalties during the year ended December 31, 2008 and had no accrued interest and penalties as of December 31, 2008. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2005. The Company is open to state tax audits until the applicable statute of limitations expires.

59

The components of income before income taxes were as follows (in thousands):

	For the Year Ended December 31,
	2008			2007		2006
Income before income taxes:
U.S.	$	(5,710	)	$	1,313	$	9,951
International	528			405		322
	(5,182		)	1,718		10,273

The income tax provision included the following components (in thousands):

	For the Year Ended December 31,
	2008			2007			2006
Current income taxes:
Federal	$	—		$	112		$	91
State	—			140			48
Foreign	139			115			79
	139			367			218
Deferred income taxes:
Federal	(2,296		)	93			3,181
State	(225		)	(109		)	218
Foreign	—			—			73
	(2,521		)	(16		)	3,472
Provision for income taxes	$	(2,382	)	$	351		$	3,690

A reconciliation of the Company’s income tax provision computed using the federal statutory rate to the tax provision reported in the Company’s statements of operations is as follows (in thousands):

	For the Year Ended December 31,
	2008			2007			2006
Tax provision computed at the federal statutory rate	$	(1,762	)	$	584		$	3,493
State taxes, net of federal benefit	(132		)	96			378
Increase (decrease) in tax from:
Stock-based compensation	52			244			334
Research and development tax credits	(725		)	(682		)	(562		)
Business meals and entertainment	119			119			75
Extraterritorial income exclusion	—			—			(38		)
Foreign tax rate differential	(39		)	(23		)	(5		)
Change in valuation allowance	108			(4		)	(25		)
Other, net	(3		)	17			40
Provision for income taxes	$	(2,382	)	$	351		$	3,690

60

The significant components of the Company’s tax-effected net deferred tax assets were as follows (in thousands):

	December 31,
	2008			2007
Current:
Accrued expenses and allowances	$	760		$	829
Equity-based compensation	—			2,643
Unrealized gain on investments	(106		)	—
Total current deferred tax asset	654			3,472
Noncurrent:
Equity-based compensation	3,736			—
Net operating loss carryforwards	4,418			4,221
Research and development tax credit carryforwards	4,285			3,579
Depreciation and amortization	1,286			952
Deferred revenue	425			416
Identifed intangible assets	(295		)	(677		)
Other	270			269
Total noncurrent deferred tax asset before valuation allowance	14,125			8,760
Total deferred tax asset before valuation allowance	14,779			12,232
Less valuation allowance	(221		)	(139		)
Total net deferred tax asset	$	14,558		$	12,093

Deferred tax assets related to equity-based compensation as of December 31, 2008 were reclassified to noncurrent, as the Company does not anticipate tax deductions from the related stock options during 2009. This is due to the fact that the majority of the stock options have exercise prices that are significantly higher than the market price per share as of December 31, 2008.

Net operating loss carryforwards and other tax credit carryforwards

The Company had federal tax loss carryforwards of approximately $12.6 million, representing a $4.3 million deferred tax asset as of December 31, 2008. The federal tax loss carryforwards will expire in 2019 through 2028 if not utilized. The Company estimates that it is more likely than not that this deferred tax asset will be realized prior to expiration.

The Company had state tax loss carryforwards of approximately $2.2 million, representing a $125,000 deferred tax asset as of December 31, 2008. The state tax loss carryforwards will expire at various dates through 2024 if not utilized. The Company had an $18,000 valuation allowance related to this deferred tax asset as of December 31, 2008 due to the uncertainty in realization prior to expiration.

The Company had other federal and state tax credits and carryforwards of approximately $4.6 million, representing a $4.6 million deferred tax asset as of December 31, 2008. The federal and state credits and carryforwards will expire in 2009 through 2028 if not utilized. The Company had a $203,000 valuation allowance related to this deferred tax asset as of December 31, 2008 due to the uncertainty in realization prior to expiration for credits expiring 2012 and earlier. During the year ended December 31, 2008, the Company wrote off $26,000 to the valuation allowance related to research and development tax credits that had expired prior to realization.

61

During the year ended December 31, 2007, the Company reversed $4,000 of the valuation allowance relating to state tax loss carryforwards as it was more likely than not that the deferred tax asset would be realized prior to expiration. During the year ended December 31, 2007, the Company wrote off $42,000 to the valuation allowance related to research and development tax credits that had expired prior to realization.

During the year ended December 31, 2006, the Company reversed $25,000 of the valuation allowance relating to state tax loss carryforwards, as it was more likely than not that the deferred tax asset would be realized prior to expiration. During the year ended December 31, 2006, the Company wrote-off $79,000 to the valuation allowance related to research and development tax credits that had expired prior to realization.

Realizability of Deferred Tax Assets

Significant judgment is required in determining the realizability of the Company’s deferred tax assets. The Company must assess the likelihood that the net deferred tax assets will be recovered from future taxable income, and to the extent that the Company believes that recovery is not likely, the Company must establish a valuation allowance. To the extent that the Company establishes a valuation allowance, the Company must include an expense within the tax provision in the statement of operations. As of December 31, 2008, the consolidated balance sheet included net deferred tax assets of $14.6 million.

Considerations for determining the realizability of the Company’s deferred tax assets primarily involve cumulative pre-tax income for financial reporting purposes, cumulative taxable income for the past three years, estimated future pre-tax income for financial reporting purposes and estimated future taxable income from the Company’s core business. The Company also considers the expiration dates and amounts of net operating loss carryforwards and other tax credits, and estimates the impact of future tax deductions from the exercise of stock options. These estimates are projected through the life of the related deferred tax assets based on assumptions which the Company believes to be reasonable and consistent with current operating results.

As of December 31, 2008, the significant components of the Company’s deferred tax assets were as follows: 

·Deferred tax assets for net operating loss carryforwards and other tax credits of $8.7 million, which is net of a valuation allowance of $221,000 relating to tax credits and certain state net operating loss carryforwards that expire prior to 2013.  The Company requires approximately $18.0 million in cumulative future taxable income to be generated at various times over the next 18 years to realize the related deferred tax assets prior to expiration.

·Deferred tax asset related to equity based compensation of $3.7 million. Many of the stock options related to this deferred tax asset are currently significantly out-of-the money and may expire unutilized during the next six years.  The Company’s projections of future taxable income have taken into consideration the Company’s expectations that a portion of these out-of-the money options will not result in future tax deductions and will not reduce future taxable income.

After giving consideration to the above factors, the Company concluded that the net deferred tax assets of $14.6 million as of December 31, 2008 do not require any additional valuation allowance. However, if the Company does not achieve a substantial improvement in pretax results in 2009 over 2008, it is reasonably possible that the Company may need to establish additional valuation allowances for some or all of the Company’s deferred tax assets, which could materially impact the Company’s income tax provision, financial position and results of operations.

Net operating loss carryforward limitations

Under Section 382 of the Internal Revenue Code of 1986, certain stock transactions which significantly change ownership, including the sale of stock and the granting of options to purchase stock, could limit the amount of net operating loss carryforwards that may be utilized on an annual basis to offset taxable income in future periods. Management believes that any past changes in ownership, as defined by Section 382, would not materially impact the Company’s ability to utilize loss carryforwards.

7.Employee benefit plan

The Company maintains the Vital Images, Inc. Salary Savings Plan (the “Plan”), which is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended. The Plan covers substantially all employees. Each employee may elect to contribute to the Plan through payroll deductions up to 100% of his or her salary, subject to certain limitations. At the discretion of the Board of Directors, the Company may make matching contributions equal to a percentage of the salary reduction contributions or other discretionary amounts. The Company paid matching contributions of $412,000, $410,000 and $214,000 in 2008, 2007 and 2006, respectively.

8.Restructuring charge

The Company reduced its workforce by approximately 11% under a plan announced in November 2008 in order to align the Company’s operations with the

62

current market conditions and improve profitability in 2009 and beyond. In connection with the reduction in workforce, the Company incurred certain charges in 2008 totaling $660,000, which were primarily comprised of employee severance and other termination costs. The following table summarizes 2008 restructuring transactions and related liability balances (in thousands):

	Severance and Other Termination Costs
Balance at January 1, 2008	$	—
Restructuring charges	660
Payments	(519		)
Balance at December 31, 2008	$	141

Actions with respect to the above activities were completed in the fourth quarter of 2008.

9.Fair Value Measurements

The Company adopted SFAS No. 157, “Fair Value Measurements,” as of January 1, 2008, with the exception of the application of SFAS No. 157 to nonrecurring nonfinancial assets and nonfinancial liabilities. Nonrecurring nonfinancial assets and nonfinancial liabilities to which we have not applied the provisions of SFAS No. 157 include those measured at fair value during impairment testing for goodwill and other long-lived assets and those initially measured at fair value in a business combination.

SFAS No. 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2008 (in thousands):

			Fair Value Measurements at December 31, 2008 Using
	Total Carrying Value at December 31, 2008		Quoted price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash equivalents:
Money market	$	102,877	$	102,877	$	—	$	—
Marketable securities:
Corporate debt	2,255		1,998		257		—
Government debt	35,032		35,032		—		—
Total marketable securities	37,287		37,030		257		—
Total cash equivalents and marketable securities	$	140,164	$	139,907	$	257	$	—

Cash equivalents and marketable securities measured at fair value using quoted market prices are classified within Level 1 of the valuation hierarchy. Marketable securities classified within Level 2 of the valuation hierarchy consist

63

of asset-backed securities for which significant observable market data exists but the Company’s nonstandard lot sizes prevent measurement using quoted market prices. The valuation of asset-backed securities is determined by reviewing quoted market prices for traded lots of the same or similar securities. All asset-backed securities held by the Company are rated AAA and are current on scheduled pay downs with expected full maturity within the next 12 months. Given the current conditions of the credit markets, there is some risk the unrealized losses as of December 31, 2008 could increase if the credit markets continue to deteriorate.

The Company analyzes its investments for impairment on an ongoing basis. Factors considered in determining whether an unrealized loss is a temporary loss or an other-than-temporary loss include the length of time and extent to which the securities have been in an unrealized loss position and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated market recovery. The Company has the ability and intent to hold these investments until anticipated recovery of fair value, which may be maturity, and therefore the Company did not consider these investments to be other than temporarily impaired as of December 31, 2008.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company adopted SFAS No. 159 on January 1, 2008 and has elected not to measure any additional financial instruments and other items at fair value.

10.Major customers and geographic data

Customers accounting for more than 10% of the Company’s total revenue are as follows (in thousands):

	For the Year Ended December 31,
	2008			2007			2006
Toshiba Medical Systems Corporation	$	35,275		$	32,710		$	28,879
Percentage of total revenue	52		%	47		%	41		%
McKesson Corporation	$	4,516		$	6,061		$	7,314
Percentage of total revenue	7		%	9		%	10		%

As of December 31, 2008 and 2007, Toshiba Medical Systems Corporation accounted for 42% and 34% of accounts receivable, respectively.

The majority of the Company’s long-lived assets are located in the United States.

Export revenue accounted for 29%, 19% and 15% of total revenue for the years ended December 31, 2008, 2007 and 2006, respectively. The Company’s export sales are primarily negotiated, invoiced and paid in U.S. dollars, with a portion of sales transactions denominated in foreign currencies.

Sales to customers located in the following geographic areas are summarized as follows (in thousands):

	For the Year Ended December 31,
	2008		2007		2006
United States	$	48,473	$	56,630	$	59,640
Europe	11,316		8,378		5,713
Asia and Pacific Region	3,643		2,380		2,520
Canada	1,401		349		441
Other foreign countries	3,308		2,439		2,198
	$	68,141	$	70,176	$	70,512

64

11. Selected quarterly financial data (unaudited)

The following summarized unaudited quarterly financial data has been prepared using the financial statements of the Company (in thousands, except per share data):

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
2008
Total revenue	$	17,317		$	15,707		$	17,679		$	17,438
Gross profit	$	13,397		$	12,106		$	13,619		$	13,146
Net loss	$	(594	)	$	(1,577	)	$	(243	)	$	(386	)
Loss per share – basic (1)	$	(0.03	)	$	(0.09	)	$	(0.02	)	$	(0.03	)
Loss per share – diluted (1)	$	(0.03	)	$	(0.09	)	$	(0.02	)	$	(0.03	)
2007
Total revenue	$	20,825		$	15,534		$	17,115		$	16,702
Gross profit	$	16,480		$	11,842		$	13,329		$	12,936
Net income (loss)	$	2,372		$	(379	)	$	927		$	(1,553	)
Earnings (loss) per share – basic (1)	$	0.14		$	(0.02	)	$	0.05		$	(0.09	)
Earnings (loss) per share – diluted (1)	$	0.14		$	(0.02	)	$	0.05		$	(0.09	)

(1)The sum of the quarterly earnings (loss) per share may not equal the annual earnings per share due to changes in average shares outstanding.

65

Vital Images, Inc.
Form 10-K

Index to Exhibits

Item No.	Description
3.1	Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 10 dated March 13, 1997 (“Form 10”).
3.2	By-laws of the Company, incorporated by reference to Exhibit 3.2 to the Form 10.
4.1	Form of common stock certificate of the Company, incorporated by reference to Exhibit 4.3 to the Form 10.
10.1	Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.10 to the Form 10.*
10.2	1997 Stock Option and Incentive Plan, as amended, incorporated by reference to Exhibit 10.11 to the Form 10 and Exhibit 99.9 to the Company’s Registration Statement on Form S-8 dated May 23, 2005.*
10.3	1997 Director Stock Option Plan, as amended, incorporated by reference to Exhibit 10.12 to the Form 10 and Exhibit 99.14 to the Company’s Registration Statement on Form S-8 dated May 23, 2005.*
10.4	Form of Change in Control Agreement between Vital Images, Inc. and Steven P. Canakes, incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.*
10.5	Employment Agreement dated September 8, 2005 by and between Vital Images, Inc. and Dr. Susan A. Wood, incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K dated September 12, 2005.*
10.6	Change in Control Agreement dated September 8, 2005 by and between Vital Images, Inc. and Dr. Susan A. Wood, incorporated by reference to Exhibit 99.5 to the Company’s Current Report on Form 8-K dated September 12, 2005.*
10.7	Employment Agreement dated September 8, 2005 by and between Vital Images, Inc. and Philip I. Smith, incorporated by reference to Exhibit 99.6 to the Company’s Current Report on Form 8-K dated September 12, 2005.*
10.8	Employment Agreement dated September 8, 2005 by and between Vital Images, Inc. and Steven P. Canakes, incorporated by reference to Exhibit 99.7 to the Company’s Current Report on Form 8-K dated September 12, 2005.*
10.9	Change in Control Agreement dated May 16, 2005, by and between Vital Images, Inc. and Michael H. Carrel, incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K dated May 19, 2005.*
10.10	Form of Change in Control Agreement between Vital Images, Inc. and Philip I. Smith, incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
10.11	2006 Long Term Incentive Plan, as amended, incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and Exhibit 99.1to the Company’s Registration Statement on Form S-8 dated September 08, 2006.*
10.12	Employment Agreement dated January 12, 2008 by and between Vital Images, Inc. and Michael H. Carrel, incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.*

66

Item No.	Description
10.13	Employment Agreement dated January 12, 2008 by and between Vital Images, Inc. and Peter J. Goepfrich, incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.*
10.14	Separation and Non-Compete Agreement dated January 16, 2008 by and between Vital Images, Inc. and Jay D. Miller, incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.*
10.15	Separation and Non-Compete Agreement dated June 30, 2008 by and between Vital Images, Inc. and Philip I. Smith, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.*
10.16	Separation and Non-Compete Agreement dated September 11, 2008 by and between Vital Images, Inc. and Susan A. Wood, Ph. D., incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.*
10.17	Offer letter dated August 5, 2008 by and between Vital Images, Inc. and Vikram Simha, filed herewith.* b
10.18	Employment Agreement dated August 6, 2008 by and between Vital Images, Inc. and Vikram Simha, filed herewith.*
10.19	Change in Control Agreement dated August 6, 2008, by and between Vital Images, Inc. and Vikram Simha, filed herewith.*
10.20	Offer letter dated December 10, 2008 by and between Vital Images, Inc. and Reza A. Ghanbari, filed herewith.*
10.21	Employment Agreement dated December 10, 2008 by and between Vital Images, Inc. and Reza A. Ghanbari, filed herewith.*
10.22	Change in Control Agreement dated December 10, 2008, by and between Vital Images, Inc. and Reza A. Ghanbari, filed herewith.*
10.23	Marketing and Distribution Agreement between Vital Images, Inc. and Toshiba Medical Systems Corporation dated November 21, 2008, filed herewith. b
10.24	Development Agreement between Vital Images, Inc. and Toshiba Medical Systems Corporation dated January 8, 2009, filed herewith. b
21.1	Subsidiaries of Registrant, filed herewith.
23.1	Consent of PricewaterhouseCoopers LLP, filed herewith.
31.1	Certification of Chief Executive Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2	Certification of Chief Financial Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

*Indicates a management contract or compensatory plan or arrangement.

bPortions of such exhibit are treated as confidential pursuant to a request for that confidential treatment filed with the Commission by Vital Images.

67

EX-10.17

Exhibit 10.17

August 5, 2008

Vikram Simha

49 Trefry Lane

Stow, MA 01775

Dear Vikram,

On behalf of Vital Images, Inc., I am pleased to offer you the full-time position of Chief Technology Officer and Executive Vice President of Engineering reporting directly to me.  Your base salary will be $10,000.00 semi-monthly, which annualizes to $240,000.  Your start date will be August 6th, 2008.  This offer letter will expire on August 6th, 2008.

In addition to your base salary, you will be eligible for the management bonus program.  Your management bonus incentive target for calendar year 2008 will be 35% of base pay.  Awards under the management bonus incentive plan will be based on achievement of a combination of both company and personal performance goals. Moreover, there is an opportunity for the bonus payout to be more than your incentive target, based on overachievement of Company goals. Payouts under the management incentive bonus plan are expected to be made to qualifying employees on a lump sum basis on or before March 15, 2009.  Please be advised that Vital Images reserves the right, without prior notice, to make any changes to the manager bonus program at its discretion, of which you will be notified.

Additionally, the Company will pay you a signing bonus of $35,000.  Appropriate taxes will be withheld on this bonus.  Should you leave the Company voluntarily within one year after your start date; the sign-on bonus must be repaid to the Company.

In addition to your salary, management will recommend that you receive non-qualified options to purchase 150,000 shares of Vital Images Common Stock and 15,000 shares of restricted stock. The grants will be priced as of your start date with Vital Images (or the first preceding trading date, if the markets are closed on your start date) and will be under our standard terms and conditions for such grants.

We have agreed that you will relocate to the Minneapolis, MN area no later than May 2010.  To assist you in your relocation we will pay for temporary housing in the Minneapolis area for the next 18 months.  We will also pay for the move of your household goods and two house hunting trips for you and your spouse for four days duration each and reimburse you for any travel expenses associated with traveling to and from our headquarters prior to your relocation.  Please see “Exhibit A” for more details surrounding the relocation assistance.

*  *  *

You represent and warrant that as of the date that you sign this letter agreement, you have not, personally or through your agent, * * * .  If you voluntarily terminate your employment with the Company or are terminated for Cause, as such is defined in your employment agreement, within six (6) months of your start date, you also agree to reimburse the Company for any amounts paid under this provision, and if you voluntarily terminate your employment with the Company or are terminated for Cause within the following twelve (12) months, you agree to reimburse the Company a prorated portion of these amounts, amortized on a straight-line basis commencing with your seventh (7th) month of employment.  You represent and warrant that you have provided the Company with * * *.  You further represent, warrant and covenant that you have not misappropriated any confidential, proprietary or trade secret information of your former employer, will not do so, and that you will not disclose to the Company any of such information.  The Company’s obligation under this clause will not apply to any claim or lawsuit brought by the Company against you.  In exchange, you agree to repay the Company the signing bonus and any amounts paid under this provision if you produce work product for the Company that you know or should have known infringes on the intellectual property rights of any third party, including any of your former employers.  To the extent allowable under any relevant litigation, and subject and in addition to the other terms and conditions of your employment, including its at-will nature and the Company’s severance obligations, the Company agrees to * * * whether directly or indirectly, as an employee, contractor, advisor, director or proprietor, during that period, other than employment for non-profit organizations, as such term is defined under the Internal Revenue Code, in areas wholly unrelated to the Company’s business, provided that, if you do not commence working with the Company within thirty (30) days * * * you are terminated for Cause or resign voluntarily, you shall reimburse to the Company all salary paid to you * * *. Notwithstanding the above, * * *

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

Upon joining Vital Images, you will be eligible to participate in the Company’s fringe benefit program. Specifically, you will accrue 1.66 days per month (.833 days per pay period) which equals 20 days (4 weeks) of vacation per year. You will also receive ten (10) paid holidays per calendar year.  Medical, Dental, and Disability Insurance will be effective the first of the month following the start date.  You may participate in the Vital Images Employee Stock Purchase Plan the first day of any quarter, and the Vital Images 401(k) plan the first day of the month, following a three-month waiting period.  Please be advised that Company fringe benefit programs are subject to change as a matter of Company policy.

In compliance with the Immigration Reform and Control Act, all new employees are required to provide proof of work eligibility and identification. In order to satisfy these requirements, certain documents must be presented within 72 hours of your start date.  Please review the list, which is attached to the Form I-9, of appropriate documentation and bring these with you on your first day of employment.

You should be aware that your employment with Vital Images is for no specified period and constitutes at will employment.  As a result, you are free to resign at any time, for any reason or for no reason.  Similarly, Vital Images is free to conclude our employment relationship with you at any time, with or without cause, and with or without notice, subject to any severance obligations under any written employment agreement with the Company.

This offer of employment is contingent upon successful completion of a background investigation by the Human Resources Department at Vital Images.  Confirmation of completion of the investigation will be provided to you as soon as the investigation is complete.

To accept this offer of employment, please sign below and return one copy of this letter as soon as possible in the enclosed envelope, along with your signed non-disclosure agreement.

Vikram, we are excited about having you on the Vital Images’ team.  We are confident that you will contribute to our Company’s growth and that we can provide a challenging and rewarding work environment to further your professional career.

Sincerely,

/s/ Michael H. Carrel

Michael Carrel

President/Chief Executive Officer

Accepted by  /s/Vikram Simha Date  8/6/2008

Exhibit A

VITAL IMAGES, INC.

RELOCATION AGREEMENT

THIS RELOCATION AGREEMENT (the “Agreement”) is entered into on the 6th day of August, 2008 by and between Vital Images, Inc. (the “Company”) and Vikram Simha (the “Employee”).

IT IS AGREED AS FOLLOWS:

I.)  Payment of Relocation Costs.  The Company will pay to Employee, or to designated third parties on behalf of Employee, the following Covered Relocation Costs:

Physical Move

The Company will pay reasonable costs (pre-approval based upon 3 estimates required) incurred in moving household effects from the old principal residence in Stow, MA to the new principal residence in Minnesota. This includes the costs of packing, unpacking, disconnecting and reconnecting appliances, and standard value insurance.  The Company will not assume the costs for the purchase of new items if the old items cannot be reinstalled. The Company will not be responsible for the expense of transporting personal effects which are heavy, bulky, or require handling and transportation costs which are disproportionate to the value of the items. Examples include, but are not limited to, the following: heavy hobby equipment, firewood, garden sheds and similar portable buildings and equipment, boats which cannot be accommodated in the van with household furnishings, and household pets which do not accompany the family. This exclusion also applies to furnishings and effects that are located elsewhere than Employee’s principal residence, as for example, in a second home, or in a storage warehouse. Arrangements and charges for these items, if transported, will be the employee’s responsibility and expense.

Vital Images, Inc. will not be responsible for the loss or damage to your property. Carriers normally disclaim responsibility for currency, valuable papers, watches, jewelry, collectables and precious metals. Property of this nature, as well as that of high sentimental value, should not be shipped or placed in storage, but transported personally.

II.)  Temporary Housing

During the interval between arrival of Employee’s family and the time when the new residence can be occupied (i.e., household effects have been delivered and set in place, necessary appliances connected, and utilities turned on) Vital Images will pay reasonable costs for reasonable living expenses (lodging), for a period not to exceed eighteen (18) months.

III.)  House Hunting Trip

All actual, reasonable expenses incurred for one (2) house hunting trips between the old and new location will be reimbursed. This will include transportation, food, and lodging  for the employee and spouse.  Reimbursement will be limited to a maximum of a four (4) day trip, exclusive of travel time.

IV.)Taxes.

Employee is advised to consult with his/her tax advisor or accountant or the Internal Revenue Service with regard to deductibility and nondeductibility of items reimbursed and paid for by the Company under this policy. The Company agrees to gross up the Employee an additional amount of his wages such that his total out of pocket costs arising out of any tax liability associated with the benefits provided hereunder together with such additional amount of his wages is zero.

V.)Repayment of Relocation Costs.

Upon Employee’s voluntary resignation with the Company (the “End Date”), Employee will immediately repay to the Company all Covered Relocation Costs advanced by the Company, reduced by an amount equal to 8.33% of such Costs for each full month that Employee has been employed by the Company since relocating to Minneapolis/St. Paul (the “Repayment Amount”).

VI.)Consent to Offset.

The Repayment Amount may be deducted from any and all amounts due permitted by law any payments that would otherwise be due to me, from the Company, including, without limitation, wages, accrued vacation pay and commissions, and Employee expressly authorizes the Company to effect such deductions up to the total relocation expenses.

VITAL IMAGES, INC.		EMPLOYEE
Sign	/s/ Michael H. Carrel	Sign	/s/ Vikram Simha
Print	Michael Carrel	Print	Vikram Simha
Date:	8/6/08	Date:	8/6/2008

EX-10.18

Exhibit 10.18

EMPLOYMENT AGREEMENT

THIS AGREEMENT, made and entered into as of the 6th day of August, 2008, by and between Vital Images, Inc. (“Company”) and Vikram Simha (“Executive”).

W I T N E S S E T H:

WHEREAS, Company desires to retain the services of Executive for and on behalf of Company on the terms and subject to the conditions set forth herein.

WHEREAS, each of the parties acknowledge that they are receiving good and valuable consideration for entering into this Employee Agreement and Executive acknowledges that this Employment Agreement, including the non-disclosure agreement set forth herein, was negotiated between the parties hereto and that Executive received bargained for consideration in the form of benefits resulting to Executive from the terms and conditions of such employment, in exchange for entering into this Employment Agreement.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

ARTICLE I.

EMPLOYMENT AND TERM

1.1EMPLOYMENT.  Upon the terms subject to the conditions herein contained, Company hereby employs Executive as Chief Technology Officer and Executive Vice President of Engineering, and Executive hereby accepts such employment, subject to the supervision of the President and Chief Executive Officer of the Company.  Executive shall devote his best skill and efforts (reasonable sick leave and vacations excepted) to the performance of his duties under this Agreement.

1.2TERM.  This Agreement shall take effect upon the date first above written, and shall remain in effect as “at-will” employment until terminated in accordance with Article IV.  Upon termination of this Agreement, except as otherwise provided herein, neither the Company nor Executive shall have any further rights, duties, privileges, or obligations hereunder.

1.3COMPLIANCE WITH COMMITMENTS AND OBLIGATIONS.    Executive represents and warrants as follows: (i) he is not a party to any other agreement or obligation for personal services; (ii) there exist no impediments or restraints, contractual or otherwise on Executive’s power, right or ability to enter into this Agreement and to perform his duties and obligations hereunder; and (iii) the performance of his obligations under this Agreement do not and will not violate or conflict with any agreement relating

VS	Executive
MC	Company

to confidentiality, non-competition or exclusive employment to which Executive is or was subject.

1.4INSIDER TRADING POLICY.  Executive will be required, as a condition of employment with the Company, to sign and comply in every respect with the Company’s Insider Trading Policy, a copy of which is enclosed.

ARTICLE II.

COMPENSATION

2.1BASE SALARY.  In exchange for the provision of services, Company agrees that it will pay Executive commencing August 6th, 2008, at the rate of $240,000 per year, payable in accordance with standard pay practices of Company, less any applicable withholdings or deductions.

2.2BENEFITS.  In addition to the compensation set forth under Section 2.1, Executive shall be entitled to participate in any of Company’s standard benefit policies or plans, including its Employee Stock Purchase plan, according to their terms.  Subject to the provisions of Section 4.1(d) of this Agreement, these policies may be modified or terminated from time to time by Company, but not retroactively.  The written terms of the policies shall govern any questions of eligibility, coverage, or duration of coverage.

2.3INCENTIVE COMPENSATION.  As an incentive to performance, Executive shall be eligible to receive initiative compensation and/or benefits as follows:

a.Executive shall be eligible to participate in Company’s Management Incentive Plan (the “Plan”) as it is established annually by the Board of Directors.  Pursuant to the Plan, Executive’s incentive target for calendar year 2008 shall be thirty-five percent (35%) of Executive’s base salary for calendar year 2008.  Executive’s incentive compensation for calendar year 2008 under the Plan, if any, will be determined as soon as practical after December 31, 2008, and will be paid to Executive in a lump sum, less any withholdings or deductions, on or before March 31, 2009.

b.The Company’s Board of Directors has approved that Executive shall be entitled to receive (i) a stock option grant exercisable for 150,000 shares, which shall vest as to 28% on August 6th, 2009, and 2% will vest each month thereafter; and (ii) 15,000 shares of restricted stock, which shall vest as to 25% on the one-year anniversary of grant date of August 6th, 2008, and as to additional increments of 25% on each anniversary thereafter, which shall be more fully set forth in a Restricted Stock Agreement that you will be provided separately.

2.4VACATION.  Executive shall initially receive twenty (20) days of vacation per year.

2.5BUSINESS EXPENSES.  The Company will reimburse Executive for all reasonable, ordinary, and necessary expenses incurred by him in the performance of his duties hereunder, provided that Executive accounts to Company for such expenses in a manner normally prescribed by Company for reimbursement of expenses.  Such reimbursement

VS	Executive
MC	Company

2

requests must be accompanied by the appropriate documentation and shall be subject to review by Company’s President and Chief Executive Officer.

ARTICLE III.

DUTIES OF EXECUTIVE

3.1SERVICES.  Executive shall perform all duties and obligations charged to Executive by the President and Chief Executive Officer of Company, as the same may be determined from time to time.  The President and Chief Executive Officer shall assure adequate time, resources, and authority for Executive to reach goals mutually agreed upon by Company and Executive.

3.2TIME AND EFFORT.  Executive shall devote his full time and effort to the business of Company.  Executive shall perform the duties and obligations required of Executive hereunder in a competent, efficient, and satisfactory manner at such hours and work conditions as the performance of these duties may require.

3.3ARTICLES AND BY-LAWS.  Executive shall act in accordance with so as to abide by the Articles of Incorporation of Company, the Bylaws of Company and all decisions of the Board of Directors of Company.

3.4CONFIDENTIALITY AND LOYALTY.  Executive acknowledges that during the course of his employment he has produced and may produce and have access to material, records, data, and information not generally available to the public (“Confidential Information”) regarding Company, its customers and affiliates.  Accordingly, during and subsequent to the termination of this Agreement, Executive shall hold in confidence and not directly or indirectly disclose, use, copy, or make lists of any such confidential information, except to the extent authorized in writing by Company, or as required by law or any competent administrative agency or as otherwise is reasonable necessary or appropriate in connection with the performance by Executive of his duties pursuant to this Agreement.  Upon termination of his employment under this Agreement, Executive shall promptly deliver to Company (i) all records, manuals, books, documents, letters, reports, data, calculations, and all copies of any of the foregoing which are the property of Company and (ii) all other property of Company and Confidential Information which in any of these cases are in his possession or under his control.  Executive agrees to abide by Company’s reasonable policies as in effect from time to time, respecting avoidance of interests conflicting with those of Company.

3.5WORKS MADE FOR HIRE.  Executive acknowledges and agrees that any and all works of authorship by Executive made pursuant to this Agreement or any prior agreements are within the scope of services to be provided to Company and shall constitute “works made for hire” as defined by the Copyright Act of 1976, Title 17 of the United States Code, as now enacted or hereinafter amended.  To the extent Employee retains any rights of any nature in any Work Product, Employee hereby assigns to Company all of Employee’s right, title, and interest (including but not limited to all patent, copyright, trade secret, and moral rights) in and to all Work Products prepared by Employee, whether patentable or not, made or conceived in whole or in part by Employee

VS	Executive
MC	Company

3

within the scope of Employee’s employment by Company, or that involve the use of Confidential Information.  Accordingly, Executive acknowledges and agrees that Company shall be the sole and exclusive owner of any and all copyright(s) with respect to such works of authorship and that Executive shall not be entitled to any additional compensation over and above the compensation set forth herein or otherwise already received by Executive unless otherwise agreed in writing by Company.  If any work of authorship created hereunder or prior to hereto is not deemed to be a “work made for hire,” Executive hereby assigns all right, title, and interest therein to Company.  Executive is hereby notified that this assignment of Work Product does not include any invention where (i) Executive did not use the equipment, supplies, facility or trade secret information of Company; (ii) Executive developed the invention on his own time; (iii) the invention does not directly relate to the business of Company or Company’s actual or anticipated research or development; and (iv) the invention did not result from any work performed for Company.

3.6COMPANY TO HOLD PROPRIETARY RIGHTS.  Furthermore, and without limiting the foregoing, Executive acknowledges and agrees that all proprietary rights, including, without limitation, all patent, trademark, trade secret, copyright, and other rights, which may exist in connection with any and all inventions, ideas, and works created or conceived by Executive for Company, either before or after the date hereof, shall be the sole and exclusive property of Company and Executive shall have no further rights therein and, to the extent necessary, assigns all such rights to Company.  All patent, copyright, and other rights in such inventions, ideas, and works shall be the property of Company, who shall have the sole right to seek patent, copy, registered design or other protection in connection therewith.  Executive shall at Company’s reasonable expense do all things and execute all such documents as Company may reasonably require to vest in Company the rights and protection herein described.

3.7 RESTRICTION ON COMPETITION. Executive agrees that Executive shall not, directly or indirectly, and regardless of whether Executive is acting as owner, partner, stockholder, employee, broker, agent, principal, trustee, corporate officer, director, consultant or in any other capacity, do any of the following:

(1) For a period of twelve (12) months from the date of Executive’s termination of employment with the Company, irrespective of the reasons for termination, own, manage, operate, join, control, consult with, participate in the ownership, operation or control of, be employed by, or be connected in any manner with any person or entity which manufactures, sells, solicits, offers, offers to provide, or provides any Competitive Products and Services, unless such employment is by a large diversified entity and on a basis such that Executive will have no involvement whatsoever with the provision of Competitive Products and Services during the Restricted Period. For purposes of this Agreement, Competitive Products and Services shall include all products and services similar to or the same as those offered by Company to its customers involving advanced medical visualization and analysis software technologies beyond MIP (Minimum Intensity Projection) and MPR (Multi Planar Reformation) that allow for analysis, manipulation, and distribution of images, such as radiological studies, in 2D, 3D and 4D. This restriction applies worldwide, and Executive agrees and acknowledges a worldwide

VS	Executive
MC	Company

4

restriction is reasonable in scope given the Company’s worldwide territory;

(2) For a period of twenty-four (24) months from the date of Executive’s termination of employment with the Company, irrespective of the reasons for termination, solicit customers or the business of any person, firm, corporation or other entity who is or who was a customer or account of Company or any of Company’s affiliates and subsidiaries while Employee was employed by Company, including but not limited to resellers or distributors of Company products or services, or accept business from any person, firm, corporation or other entity who is or who was a customer or account of Company or any of Company’s affiliates and subsidiaries while Executive was employed by Company, for the purpose of selling to such customer or account any Competitive Product or Service; and

(3) For a period of twenty-four (24) months from the date of Executive’s termination of employment with the Company, irrespective of the reasons for termination, induce or seek to induce any person employed with Company or its affiliates as of the Separation Date to discontinue that person’s employment with Company and/or solicit, recruit, hire or participate in any other person’s or entity’s effort to hire an employee of Company.

3.8REMEDIES.  Executive agrees and understands that any breach of any of the covenants or agreements set forth in this ARTICLE III of this Agreement will cause Company irreparable harm for which there is no adequate remedy at law, and, without limiting whatever other rights and remedies Company may have under this paragraph, Executive consents to the issuance of an injunction in favor of Company enjoining the breach of any of the aforesaid covenants or agreements by any court of competent jurisdiction.  If any or all of the aforesaid covenants or agreements are held to be unenforceable because of the scope or duration of such covenant or agreement or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce or modify the scope, duration, and/or area of such covenant to the extent that allows the maximum scope, duration, and/or area permitted by applicable law.

ARTICLE IV.

TERMINATION

4.1RESIGNATION OF EXECUTIVE.  Executive may resign his employment at any time for any reason upon fifteen (15) days advance written notice to the President and Chief Executive Officer.  If Executive resigns his employment without Good Reason (as that term is defined below), he shall not be entitled to severance pay.  If Executive resigns his employment for Good Reason, the Company shall pay Executive the severance pay set forth in Section 4.2 below provided Executive agrees to release any claims he may have against the Company in exchange for receipt of severance pay.  For purposes of the Agreement, Good Reason shall mean the occurrence of any of the following events, which the Company has not cured within thirty (30) days of notice thereof:

a.A material breach of this Agreement or any other written agreement with the Executive by the Company;

VS	Executive
MC	Company

5

b.A material adverse change in Executive’s status or position as an executive officer of the Company as a result of a material diminution in Executive’s duties, responsibilities, or authority as of the date of this Agreement (except in connection with the termination of Executive’s employment in accordance with Section 4.3 hereof);

c.A reduction by the Company of the Executive’s base salary as the same may be increased from time to time;

d.Without replacement by a plan providing benefits to Executive equal to or greater than those discontinued or by payment of cash in lieu of such benefits, the failure by the Company to continue in effect, within its maximum stated term, any employee benefit plan in which Executive is participating in prior to the date of this Agreement or taking of any action by the Company that would adversely affect Executive’s participation or materially reduce Executive’s benefits under all such plans; provided, however, that Good Reason shall not include changes, modifications, and terminations of the Company’s standard benefit policies and plans which are generally applicable to the Company’s officers and employees; or

e.The Company’s requiring Executive to be based anywhere other than that Minneapolis/St. Paul, Minnesota metropolitan statistical area, except for required travel on the Company’s business.

4.2TERMINATION BY COMPANY.  Company shall have the right to terminate Executive’s employment without notice and with or without Cause, as that term is defined below.  If Company terminates Executive’s employment without cause, Company shall pay Executive nine (9) months of severance pay based on Executive’s base salary at the time of termination provided Executive agrees to release any claims he may have against the company, pursuant to Company’s standard release agreement for such circumstances, in exchange for the receipt of severance pay.  Executive’s severance pay, if any, shall be payable in one lump sum, less any applicable withholdings or deductions, within ten (10) days after the expirations of any applicable rescission periods.  If Company terminates Executive’s employment with Cause, Executive shall not receive severance pay.

Medical Insurance Benefits.  If Executive is eligible for severance pay hereunder, Company, pursuant to federal and state law, will also provide, for a period of nine (9) months following Executive’s termination date (“Benefits Period”), a continuation of the group medical and dental insurance coverage on the same basis as it was previously provided to Executive by Company.  Through the earlier of (i) Executive’s participation in equivalent group medical and dental insurance benefits with a new employer or (ii) the end of the Benefits Period, Company will pay that portion of the premium for group medical and dental insurance that it paid during Executive’s employment, with the remainder to be paid by Executive.  After such conclusion, Executive will be required to pay for all such benefits for the remainder of the period in which Executive is eligible for COBRA, if any, should Executive elect to continue COBRA coverage.

Notwithstanding anything in this Agreement to the contrary, if all or any portion of the severance pay described in this Section 4.2 is subject to the requirements of Code Section 

VS	Executive
MC	Company

6

409A and the Company determines that Executive is a “specified employee” as defined in Code Section 409A as of the date of Executive’s termination of employment, such payments shall not be paid or commence earlier than the first day of the seventh month following the date of Executive’s termination of employment.

4.3TERMINATION FOR CAUSE.  Notwithstanding anything contained in this Agreement to the contrary, Company shall have the right to terminate the employment of Executive for Cause.  Cause means:

a.Executive’s gross misconduct;

b.Executive shall inexcusably violate or willfully refuse to obey the lawful and reasonable instructions of the President and Chief Executive Officer or the Board of Directors of the Company; or

c.Executive’s conviction (including a plea of nolo contendere) of willfully engaging in illegal conduct constituting a felony or gross misdemeanor under federal or state law which is materially and demonstrably injurious to the Company or which impairs Executive’s ability to perform substantially his duties for the Company.

An act, or failure to act, will be considered “gross” or “willful” for this purpose only if done, or omitted to be done, by Executive in bad faith and without reasonable belief that it was in, or not opposed to, the best interests in the Company.  Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Company’s Board of Directors (or a committee thereof) or based upon the advice of counsel for the Company will be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company.  It is also expressly understood that Executive’s attention to matters not directly related to business of the Company will not provide a basis for termination for Cause so long as the Board did not expressly disapprove in writing of Executive’s engagement in such activities either before or within a reasonable period of time after the Board knew or could have reasonably known the Executive engaged in those activities.  Notwithstanding the foregoing, Executive may not be terminated for Cause unless and until there has been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to Executive and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board Executive was guilty of the conduct set forth above in clauses a., b., or c. of this definition and specifying the particulars thereof in detail.

Where the employment of the Executive is terminated pursuant to this Article IV, Section 4.3 of this Agreement, such termination shall be effective upon the delivery of notice thereof to Executive.

VS	Executive
MC	Company

7

4.4.SURVIVING RIGHTS.  Notwithstanding the termination of Executive’s employment, the parties shall be required to carry out any provisions hereof which contemplate performance subsequent to such termination; and such termination shall not affect any liability or other obligation which shall have accrued prior to such termination, including, but not limited to, any liability for loss or damage on account of a prior default.

4.5.COOPERATION AND NON-DISPARAGEMENT.    Executive agrees that, during the term of this Agreement and for three (3) years following the termination of his employment, Executive will (i) assist and cooperate with the Company regarding any claims or disputes involving matters within the knowledge or responsibilities of Executive; and (ii) not in any way or by any means disparage the Company, the members of the Company’s Board of Directors or the Company’s officers and employees.

4.6.DISCLOSURE.    Executive agrees that, during the term of this Agreement and for three (3) years following the termination of his employment, Executive will inform any new employer or other person or entity with whom he enters into a business relationship, before accepting employment or entering into a business relationship, of the post-employment restrictions and obligations contained in this Agreement, including but not limited to the existence of Articles 3.4, 3.5, 3.7 and 4.5 above.

ARTICLE V.

GENERAL PROVISIONS

5.1NOTICES.  All notices, requests, and other communications shall be in writing and except as otherwise provided herein, shall be considered to have been delivered if personally delivered or when deposited in the United States mail, first class, or certified or registered, postage prepaid, return receipt requested, addressed to the proper party at its address set forth below, or to such other address as such party may hereafter designate by written notice to the other party:

a.	If to Company, to:	Vital Images, Inc.
		5850 Opus Parkway, Suite 300
		Minnetonka, MN 55343
		Attention: President and CEO
b.	If to Executive, to:	Vikram Simha
		49 Trefry Lane
		Stow, MA 01775

5.2WAIVER, MODIFICATION, or AMENDMENT.  No waiver, modification, or amendment of any term, condition, or provision of this Agreement shall be valid or of any effect unless made in writing, signed by the party to be bound or its duly authorized representative and specifying with particularity the nature and extent of such waiver, modification, or amendment.  Any waiver by any party of any default of the other shall not effect, or impair any right arising from, any subsequent default.  Nothing herein shall

VS	Executive
MC	Company

8

limit the rights and remedies of the parties hereto under and pursuant to this Agreement, except as hereinbefore set forth.  Notwithstanding anything in this Agreement to the contrary, the Company expressly reserves the right to amend this Agreement to the extent necessary to comply with Code Section 409A, as it may be amended from time to time, and the regulations, notices and other guidance of general applicability issued thereunder.

5.3ENTIRE AGREEMENT.  This Agreement together with the offer letter dated August 5, 2008 contains the entire understanding of the parties hereto in respect of transactions contemplated hereby and supersedes all prior agreements and understandings between the parties with respect to such subject matter.

5.4INTERPRETATION AND SEVERANCE.  The provisions of this Agreement shall be applied and interpreted in a manner consistent with each other so as to carry out the purposes and intent of the parties hereto, but if for any reason any provision hereof is determined to be unenforceable or invalid, such provision or such part thereof as may be unenforceable or invalid shall be deemed severed from this Agreement and the remaining provisions shall be carried out with the same force and effect as if the severed provision or part thereof had not been a part of this Agreement.

5.5GOVERNING LAW.  This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota.

5.6ASSIGNMENT.  Executive acknowledges that Executive’s services are unique and personal.  Accordingly, Executive may not assign Executive’s rights or delegate Executive’s duties or obligations under this Agreement.  Company’s rights and obligations under this Agreement shall inure to the benefit of and shall be binding on Company’s successors and assigns.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written by signature below and initialization of each page.

VITAL IMAGES, INC.:
By	/s/ Michael H. Carrel
	Michael H. Carrel
	President and Chief Executive Officer
EXECUTIVE:
By	/s/ Vikram Simha
	Vikram Simha

VS	Executive
MC	Company

9

EX-10.19

Exhibit 10.19

CHANGE IN CONTROL AGREEMENT

August 5, 2008

Dear Vikram Simha:

In connection with your hiring as the Chief Technology Officer and Executive Vice President of Engineering of Vital Images, Inc., a Minnesota corporation (the “Company”), we hereby offer you valuable and unique benefits.  The Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders.  In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control may arise and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders.

Accordingly, the Board has determined that appropriate steps should be taken to minimize the risk that Company management will depart prior to a Change in Control, thereby leaving the Company without adequate management personnel during such a critical period, and that appropriate steps also be taken to reinforce and encourage the continued attention and dedication of members of the Company’s management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control.  In particular, the Board believes it important, should the Company or its shareholders receive a proposal for transfer of control, that you be able to continue your management responsibilities without being influenced by the uncertainties of your own personal situation.

The Board recognizes that continuance of your position with the Company involves a substantial commitment to the Company in terms of your personal life and professional career and the possibility of foregoing present and future career opportunities, for which the Company receives substantial benefits.  Therefore, to induce you to remain in the employ of the Company, this Agreement, which has been approved by the Board, sets forth the benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated in connection with a Change in Control under the circumstances described below.

The following terms will have the meaning set forth below unless the context clearly requires otherwise.  Terms defined elsewhere in this Agreement will have the same meaning throughout this Agreement.

ARTICLE I.

DEFINITIONS

1.“Affiliate” means (i) any corporation more than 50% of whose outstanding securities ordinarily having the right to vote at elections of directors is owned directly or indirectly by the Company or (ii) any other form of business entity in which the Company, by virtue of a direct or indirect ownership interest, has the right to elect a majority of the members of such entity’s governing body.

2.“Agreement” means this letter agreement as amended, extended or renewed from time to time in accordance with its terms.

3.“Board” means the board of directors of the Company duly qualified and acting at the time in question.  On and after the date of a Change in Control, any duty of the Board in connection with this Agreement is nondelegable and any attempt by the Board to delegate any such duty is ineffective.

4.“Cause” means:

a.your gross misconduct;

b.your willful and continued failure to perform substantially your duties with the Company (other than any such failure (1) resulting from your Disability or incapacity due to bodily injury or physical or mental illness or (2) relating to changes in your duties after a Change in Control which constitute Good Reason) after a demand for substantial performance is delivered to you by the chair of the Board which specifically identifies the manner in which you have not substantially performed your duties and provides for a reasonable period of time within which you may take corrective actions; or

c.your conviction (including a plea of nolo contendere) of willfully engaging in illegal conduct constituting a felony or gross misdemeanor under federal or state law which is materially and demonstrably injurious to the Company or which impairs your ability to perform substantially your duties for the Company.

An act or failure to act will be considered “gross” or “willful” for this purpose only if done, or omitted to be done, by you in bad faith and without reasonable belief that it was in, or not opposed to, the best interests of the Company.  Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Company’s board of directors (or a committee thereof) or based upon the advice of counsel for the Company will be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company.  It is also expressly understood that your attention to matters not directly related to the business of the Company will not provide a basis for termination for Cause so long as the Board did not expressly disapprove in writing of your engagement in such activities either before or within a reasonable period of time after the Board knew or could reasonably have known that you engaged in those activities.  Notwithstanding the foregoing, you may not be terminated for Cause unless and until there has been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in clauses a., b. or c. of this definition and specifying the particulars thereof in detail.

5.“Change in Control” means any of the following:

a.the sale, exchange or other transfer, directly or indirectly, of all or substantially all of the assets of the Company to any Person in one transaction or in a series of related transactions which occur during the twelve-month period ending on the date of the most recent purchase or other acquisition by such Person;

b.any Person is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of (1) 30 percent or more, but not more than 50 percent, of the combined voting power of the outstanding securities of the Company ordinarily having the right to vote at elections of directors, unless the transaction resulting in such ownership has been approved in advance by the “continuing directors” or (2) more than

2

50 percent of the combined voting power of the outstanding securities of the Company ordinarily having the right to vote at elections of directors (regardless of any approval by the continuing directors);

d.a merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to the effective date of such merger or consolidation have, solely on account of ownership of securities of the Company at such time, “beneficial ownership” (as defined in Rule 13d-3 under the Exchange Act) immediately following the effective date of such merger or consolidation of securities of the surviving company representing less than 50 percent of the combined voting power of the surviving corporation’s then outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the continuing directors); or

e.the continuing directors cease for any reason to constitute at least a majority of the Board.

For purposes of this Section 1(e), a “continuing director” means any individual who is a member of the Board on August 1, 2008, while he or she is a member of the Board, and any individual who subsequently becomes a member of the Board whose election or nomination for election by the Company’s shareholders was approved by a vote of at least a majority of the directors who are continuing directors (either by a specific vote or by approval of the proxy statement of the Company in which such individual is named as a nominee for director without objection to such nomination).

In all cases, the determination of whether a Change in Control has occurred shall be made in accordance with Code Section 409A and the regulations, notices and other guidance of general applicability issued thereunder.

6.“Code” means the Internal Revenue Code of 1986, as amended.  Any reference to a specific provision of the Code includes a reference to such provision as it may be amended from time to time and to any successor provision.

7.“Company” means Vital Images, Inc. and/or any Affiliate.

8.“Confidential Information” means information which is proprietary to the Company or proprietary to others and entrusted to the Company, whether or not trade secrets. It includes information relating to business plans and to business as conducted or anticipated to be conducted, and to past or current or anticipated products or services.  It also includes, without limitation, information concerning research, development, purchasing, accounting, marketing and selling.  All information which you have a reasonable basis to consider confidential is Confidential Information, whether or not originated by you and without regard to the manner in which you obtain access to that and any other proprietary information.

9.“Date of Termination” following a Change in Control (or prior to a Change in Control if your termination was either a condition of the Change in Control or was at the request or insistence of any Person related to the Change in Control) means:

a.if your employment is to be terminated for Disability, 30 days after Notice of Termination is given (provided that you have not returned to the performance of your duties on a full-time basis during such 30-day period);

3

b.if your employment is to be terminated by the Company for Cause or by you for Good Reason, the date specified in the Notice of Termination, which date may not be less than 30 days or more than 60 days after the date on which the Notice of Termination is given unless you and the Company otherwise expressly agree;

c.if your employment is to be terminated by the Company for any reason other than Cause, Disability, death or Retirement, the date specified in the Notice of Termination, which in no event may be a date earlier than 90 days after the date on which a Notice of Termination is given, unless an earlier date has been expressly agreed to by you in writing either in advance of, or after; receiving such Notice of Termination; or

d.if your employment is terminated by reason of death or Retirement, the date of death or Retirement, respectively.

In the case of termination by the Company of your employment for Cause, if you have not previously expressly agreed in writing to the termination, then within 30 days after receipt by you of the Notice of Termination with respect thereto, you may notify the Company that a dispute exists concerning the termination, in which event the Date of Termination will be the date set either by mutual written agreement of the parties or by the judge or arbitrators in a proceeding as provided in Article VII Section 6 of this Agreement.  During the pendency of any such dispute, you will continue to make yourself available to provide services to the Company and the Company will continue to pay you your full compensation and benefits in effect immediately prior to the date on which the Notice of Termination is given (without regard to any changes to such compensation or benefits which constitute Good Reason) and until the dispute is resolved in accordance with Article VII Section 6 of this Agreement.  You will be entitled to retain the full amount of any such compensation and benefits without regard to the resolution of the dispute unless the judge or arbitrators decide(s) that your claim of a dispute was frivolous or advanced by you in bad faith.

10.“Disability” means a disability as defined in the Company’s long-term disability plan as in effect immediately prior to the Change in Control or; in the absence of such a plan, means permanent and total disability as defined in section 22(e)(3) of the Code.

11.“Exchange Act” means the Securities Exchange Act of 1934, as amended.  Any reference to a specific provision of the Exchange Act or to any rule or regulation thereunder includes a reference to such provision as it may be amended from time to time and to any successor provision.

12.“Good Reason” means:

a.change in your status, position(s), duties or responsibilities as an executive of the Company as in effect immediately prior to the Change in Control which, in your reasonable judgment, is an adverse change (other than, if applicable, any such change directly attributable to the fact that the Company is no longer publicly owned) except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason;

b.a reduction by the Company in your base salary (or an adverse change in the form or timing of the payment thereof) as in effect immediately prior to the Change in Control or as thereafter increased;

4

c.the failure by the Company to continue in effect any Plan in which you (and/or your family) are eligible to participate at any time during the 90-day period immediately preceding the Change in Control (or Plans providing you (and/or your family) with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect immediately prior to the 90-day period immediately preceding the time of the Change in Control, or the taking of any action, or the failure to act, by the Company which would adversely affect your (and/or your family’s) continued eligibility to participate in any of such Plans on at least as favorable a basis to you (and/or your family) as is the case on the date of the Change in Control or which would materially reduce your (and/or your family’s) benefits in the future under any of such Plans or deprive you (and/or your family) of any material benefit enjoyed by you (and/or your family) at the time of the Change in Control;

d.the Company’s requiring you to be based more than 30 miles from where your office is located immediately prior to the Change in Control, except for required travel on the Company’s business, and then only to the extent substantially consistent with the business travel obligations which you undertook on behalf of the Company during the 90-day period immediately preceding the Change in Control (without regard to travel related to or in anticipation of the Change in Control);

e.the failure by the Company to obtain from any Successor the assent to this Agreement contemplated by Article VI of this Agreement;

f.any purported termination by the Company of your employment which is not properly effected pursuant to a Notice of Termination and pursuant to any other requirements of this Agreement, and for purposes of this Agreement, no such purported termination will be effective;

g.any refusal by the Company to continue to allow you to attend to matters or engage in activities not directly related to the business of the Company which, at any time prior to the Change in Control, you were not expressly prohibited in writing by the Board from attending to or engaging in; or

h.the termination of your employment by the Company for any reason other than death,  Cause, Disability or Retirement during the twelve (12) months following the month in which a Change in Control occurs.

13.“Notice of Termination” means a written notice given on or after the date of a Change in Control (unless your termination before the date of the Change in Control was either a condition of the Change in Control or was at the request or insistence of any Person related to the Change in Control) which indicates the specific termination provision in this Agreement pursuant to which the notice is given.  Any purported termination by the Company or by you for Good Reason on or after the date of a Change in Control (or before the date of a Change in Control if your termination was either a condition of the Change in Control or was at the request or insistence of any Person related to the Change in Control) must be communicated by written Notice of Termination to be effective; provided, that your failure to provide Notice of Termination will not limit any of your rights under this Agreement except to the extent the Company demonstrates that it suffered material actual damages by reason of such failure.

5

14.“Person” means any individual, corporation, partnership, group, association or other “person,” as such term is used in section 14(d) of the Exchange Act, other than the Company, any Affiliate or any employee benefit plan(s) sponsored by the Company or an Affiliate.

15.“Plan” means any compensation plan, program, policy or agreement (such as a stock option, restricted stock plan or other equity-based plan), any bonus or incentive compensation plan, program, policy or agreement, any employee benefit plan, program, policy or agreement (such as a thrift, pension, profit sharing, medical, dental, disability, accident, life insurance, relocation, salary continuation, expense reimbursements, vacation or fringe benefits plan or policy) or any other plan, program, policy or agreement of the Company intended to benefit employees (and/or their families) generally, management employees (and/or their families) as a group or you (and/or your family) in particular.

16.“Retirement” means termination of employment on or after the day on which you attain the age of 65.

17.“Successor” means any Person that succeeds to, or has the practical ability to control (either immediately or solely with the passage of time), the Company’s business directly, by merger, consolidation or other form of business combination, or indirectly, by purchase of the Company’s outstanding securities ordinarily having the right to vote at the election of directors or, all or substantially all of its assets or otherwise.

ARTICLE II.

TERM OF AGREEMENT

This Agreement is effective immediately and will continue in effect until July 31, 2009; provided, however; that commencing on July 31, 2009 and each July 31 thereafter, the term of this Agreement will automatically be extended for 12 additional months beyond the expiration date otherwise then in effect, unless at least 90 calendar days prior to any such July 31, the Company or you has given notice that this Agreement will not be extended; and, provided, further; that if a Change in Control has occurred during the term of this Agreement, this Agreement will continue in effect beyond the termination date then in effect for a period of 12 months following the month during which the Change in Control occurs or, if later, until the date on which the Company’s obligations to you arising under or in connection with this Agreement have been satisfied in full.

ARTICLE III.

CHANGE IN CONTROL BENEFITS

1.Benefits upon a Change in Control Termination.  You will become entitled to the payments and benefits described in clauses (a) and (b) of this Section 1 of Article III, subject to the limitations described in clause (c) of this Section 1 of Article III, and to the benefit of the provisions described in clause (c), if and only if (i) your employment with the Company is terminated by the Company for any reason other than death, Cause, Disability or Retirement, or if you terminate your employment with the Company for Good Reason; and (ii) the termination occurs either within the period beginning on the date of a Change in Control and ending on the last day of the twelfth month that begins after the month during which the Change in Control occurs or prior to a Change in Control if your termination was either a condition of the Change in Control or was at the request or insistence of a Person related to the Change in Control.

a.Cash Payment.  Within ten (10) business days following the Date of Termination or, if later, within ten (10) business days following the date of the Change in Control, the Company will

6

make a lump-sum cash payment to you in an amount equal to your annual base salary in effect on the date of the Change in Control.

b.Welfare Plans. The Company will maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating 24 months after the Date of Termination, all insured and self-insured employee welfare benefit Plans (including, without limitation, medical, life, dental, vision and disability plans) in which you were eligible to participate at any time during the 90-day period immediately preceding the Change in Control, provided that your continued participation is possible under the general terms and provisions of such Plans and any applicable funding media and without regard to any discretionary amendments to such Plans by the Company following the Change in Control (or prior to the Change in Control if amended as a condition or at the request or insistence of a Person (other than the Company) related to the Change in Control) and provided that you continue to pay an amount equal to your regular contribution under such Plans for such participation (based upon your level of benefits and employment status most favorable to you at any time during the 90-day period immediately preceding the Change in Control).  The continuation period under federal and state continuation laws, to the extent applicable, will begin to run from the date on which coverage pursuant to this clause (b) ends.  If, at the end of the 24-month period, you have not previously received or are not then receiving equivalent benefits from a new employer (including coverage for any pre-existing conditions), the Company, pursuant to federal and state law, will provide, for a period of eighteen (18) months (the “COBRA Period”), a continuation of your and your dependents’ coverage under such Plans (the “COBRA Coverage”), provided that you will be required to pay for such benefits during the COBRA Period, should you elect to receive COBRA Coverage.

c.Limitation on Payments and Benefits.  Notwithstanding anything in this Agreement to the contrary, if any of the payments or benefits to be made or provided in connection with this Agreement, together with any other payments, benefits or awards which you have the right to receive from the Company, or any corporation which is a member of an “affiliated group” (as defined in section 1504(a) of the Code without regard to section 1504(b) of the Code) of which the Company is a member (“Affiliate”), constitute an “excess parachute payment” (as defined in section 280G(b) of the Code), two calculations will be performed.  In the first calculation, the payments, benefits or awards will be reduced by the amount the Company deems necessary so that none of the payments or benefits under the Agreement (including from the existing Stock Option and Incentive Plan) are excess parachute payments.  In the second calculation, the payments will not be reduced so as to eliminate an excess parachute payment, but will be reduced by the amount of the applicable excise tax as imposed by section 4999 of the Code.  The two calculations will be compared and the calculation providing the largest net payment to the employee will be utilized.  The calculations must be made in good faith by legal counsel or a certified public accountant selected by the Company, and such determination will be conclusive and binding upon you and the Company.  If a reduction in payments or benefits is required by the comparison above, the payments or benefits under the Agreement shall be reduced in the order that minimizes the amount of total reduction in payments and benefits under the Agreement as a result of this provision.

d.409A Restrictions.  Notwithstanding the foregoing, if any of the payments or other benefits described in this Article III are subject to the requirements of Code Section 409A and the Company determines that you are a “specified employee” as defined in Code Section 409A

7

as of the Date of Termination, such payments shall not be paid or commence earlier than the first day of the seventh month following the Date of Termination.

2.Disposition.  If, on or after the date of a Change in Control, an Affiliate is sold, merged, transferred or in any other manner or for any other reason ceases to be an Affiliate or all or any portion of the business or assets of an Affiliate are sold, transferred or otherwise disposed of and the acquiror is not the Company or an Affiliate (a “Disposition”), and you remain or become employed by the acquiror or an affiliate of the acquiror (as defined in this Agreement but substituting “acquiror” for “Company”) in connection with the Disposition, you will be deemed to have terminated employment on the effective date of the Disposition for purposes of this section unless (a) the acquiror and its affiliates jointly and severally expressly assume and agree, in a manner that is enforceable by you, to perform the obligations of this Agreement to the same extent that the Company would be required to perform if the Disposition had not occurred and (b) the Successor guarantees, in a manner that is enforceable by you, payment and performance by the acquiror.  This Section 2 of Article III shall be applied in accordance with Code Section 409A and the regulations, notices and other guidance of general applicability issued thereunder.

ARTICLE IV.

INDEMNIFICATION

Following a Change in Control, the Company will indemnify and reimburse you to the full extent permitted by law and the Company’s articles of incorporation and bylaws for damages, costs and expenses (including, without limitation, judgments, fines, penalties, settlements and reasonable fees and expenses of your counsel) incurred in connection with all matters, events and transactions relating to your service to or status with the Company or any other corporation, employee benefit plan or other entity with whom you served at the request of the Company.

ARTICLE V.

CONFIDENTIALITY

You will not use, other than in connection with your employment with the Company, or disclose any Confidential Information to any person not employed by the Company or not authorized by the Company to receive such Confidential Information, without the prior written consent of the Company; and you will use reasonable and prudent care to safeguard and protect and prevent the unauthorized disclosure of Confidential Information. Nothing in this Agreement will prevent you from using, disclosing or authorizing the disclosure of any Confidential Information: (a) which is or hereafter becomes part of the public domain or otherwise becomes generally available to the public through no fault of yours; (b) to the extent and upon the terms and conditions that the Company may have previously made the Confidential Information available to certain persons; or (c) to the extent that you are required to disclose such Confidential Information by law or judicial or administrative process.

ARTICLE VI.

SUCCESSORS

The Company will seek to have any Successor, by agreement in form and substance satisfactory to you, assent to the fulfillment by the Company of the Company’s obligations under this Agreement. Failure of the Company to obtain such assent at least three business days prior to the time a Person becomes a Successor (or where the Company does not have at least three business days’ advance notice that a Person may become a Successor, within one business day after having notice that such Person may become or has become a Successor) will constitute Good Reason for termination by you of your employment.  The date on which any

8

such succession becomes effective will be deemed the Date of Termination and Notice of Termination will be deemed to have been given on that date.  A Successor has no rights, authority or power with respect to this Agreement prior to a Change in Control.

ARTICLE VII.

OTHER PROVISIONS

1.Binding Agreement.  This Agreement inures to the benefit of, and is enforceable by, you, your personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you die while any amount would still be payable to you under this Agreement if you had continued to live, all such amounts, unless otherwise provided in this Agreement, will be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or; if there be no such designee, to your estate.

2.No Mitigation.  You will not be required to mitigate the amount of any payments or benefits the Company becomes obligated to make or provide to you in connection with this Agreement by seeking other employment or otherwise. The payments or benefits to be made or provided to you in connection with this Agreement may not be reduced, offset or subject to recovery by the Company by any payments or benefits you may receive from other employment or otherwise.

3.No Setoff.  The Company has no right to delay or setoff payments or benefits owed to you under this Agreement against amounts owed or claimed to be owed by you to the Company under this Agreement or otherwise.

4.Taxes.  All payments and benefits to be made or provided to you in connection with this Agreement will be subject to required withholding of federal, state and local income, excise and employment-related taxes.

5.Notices.  For the purposes of this Agreement, notices and all other communications provided for in, or required under, this Agreement must be in writing and will be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid and addressed to each party’s respective address set forth on the first page of this Agreement (provided that all notices to the Company must be directed to the attention of the chair of the Board), or to such other address as either party may have furnished to the other in writing in accordance with these provisions, except that notice of change of address will be effective only upon receipt.

6.Disputes.  If you so elect, any dispute, controversy or claim arising under or in connection with this Agreement will be settled exclusively by binding arbitration administered by the American Arbitration Association in Minneapolis, Minnesota in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect.  Judgment may be entered on the arbitrator’s award in any court having jurisdiction; provided, that you may seek specific performance of your right to receive payment or benefits until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.  The Company will be entitled to seek an injunction or restraining order in a court of competent jurisdiction (within or without the State of Minnesota) to enforce the provisions of Article V of this Agreement.

7.Jurisdiction.  Except as specifically provided otherwise in this Agreement, the parties agree that any action or proceeding arising under or in connection with this Agreement must be brought in a court

9

of competent jurisdiction in the State of Minnesota, and hereby consent to the exclusive jurisdiction of said courts for this purpose and agree not to assert that such courts are an inconvenient forum

8.Related Agreements.  To the extent that any provision of any other Plan or agreement between the Company and you limits, qualifies or is inconsistent with any provision of this Agreement, then for purposes of this Agreement, while such other Plan or agreement remains in force, the provision of this Agreement will control and such provision of such other Plan or agreement will be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose.  Nothing in this Agreement prevents or limits your continuing or future participation in any Plan provided by the Company and for which you may qualify, and nothing in this Agreement limits or otherwise affects the rights you may have under any Plans or other agreements with the Company.  Amounts which are vested benefits or which you are otherwise entitled to receive under any Plan or other agreement with the Company at or subsequent to the Date of Termination will be payable in accordance with such Plan or other agreement.

9.No Employment or Service Contract.  Nothing in this Agreement is intended to provide you with any right to continue in the employ of the Company for any period of specific duration or interfere with or otherwise restrict in any way your rights or the rights of the Company, which rights are hereby expressly reserved by each, to terminate your employment at any time for any reason or no reason whatsoever, with or without cause.

10.Funding and Payment.  Benefits payable under this Agreement will be paid only from the general assets of the Company.  No person has any right to or interest in any specific assets of the Company by reason of this Agreement.  To the extent benefits under this Agreement are not paid when due to any individual, he or she is a general unsecured creditor of the Company with respect to any amounts due.  The Company with whom you were employed immediately before your Date of Termination has primary responsibility for benefits to which you or any other person are entitled pursuant to this Agreement but to the extent such Company is unable or unwilling to provide such benefits, the Company and each other Affiliate are jointly and severally responsible therefor to the extent permitted by applicable law.  If you were simultaneously employed by more than one Company immediately before your Date of Termination, each such Company has primary responsibility for a portion of the benefits to which you or any other person are entitled pursuant to this Agreement that bears the same ratio to the total benefits to which you or such other person are entitled pursuant to this Agreement as your base pay from the Company immediately before your Date of Termination bears to your aggregate base pay from all such Companies.

11.Survival.  The respective obligations of, and benefits afforded to, the Company and you which by their express terms or clear intent survive termination of your employment with the Company or termination of this Agreement, as the case may be, including without limitation the provisions of Articles III, IV, V and VI and Sections 3, 4, 5 and 6 of Article VII of this Agreement, will survive termination of your employment with the Company or termination of this Agreement, as the case may be, and will remain in full force and effect according to their terms.

ARTICLE VIII.

MISCELLANEOUS

1.Modification and Waiver.  No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the chair of the Board. No waiver by any party to this Agreement at any time of any breach by another party to

10

this Agreement of, or of compliance with, any condition or provision of this Agreement to be performed by such party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.  Notwithstanding anything in this Agreement to the contrary, the Company expressly reserves the right to amend this Agreement to the extent necessary to comply with Code Section 409A, as it may be amended from time to time, and the regulations, notices and other guidance of general applicability issued thereunder.

2.Entire Agreement.  No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter to this Agreement have been made by any party which are not expressly set forth in this Agreement.

3.Governing Law.  This Agreement and the legal relations among the parties as to all matters, including, without limitation, matters of validity, interpretation, construction, performance and remedies, will be governed by and construed exclusively in accordance with the internal laws of the State of Minnesota (without regard to the conflict of laws principles of any jurisdiction).

4.Headings.  Headings are for purposes of convenience only and do not constitute a part of this Agreement.

5.Further Acts.  The parties to this Agreement agree to perform, or cause to be performed, such further acts and deeds and to execute and deliver or cause to be executed and delivered, such additional or supplemental documents or instruments as may be reasonably required by the other party to carry into effect the intent and purpose of this Agreement.

6.Severability.  The invalidity or unenforceability of all or any part of any provision of this Agreement will not affect the validity or enforceability of the remainder of such provision or of any other provision of this Agreement, which will remain in full force and effect.

7.Counterparts.  This Agreement may be executed in several counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument.

If this letter correctly sets forth our agreement on the subject matter discussed above, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject.

Sincerely,

VITAL IMAGES, INC.
By:	/s/ Michael H. Carrel
Name:			Michael Carrel
Title:		CEO
Agreed to this 6 day of Aug, 2008.
/s/ Vikram Simha
Vikram Simha

11

EX-10.20

Exhibit 10.20

December 10, 2008

Reza A. Ghanbari, Ph.D

3144 Northview Road

Wayzata, MN  55391

Dear Ray,

On behalf of Vital Images, Inc., I am pleased to offer you the full-time position of Executive Vice President, Strategy and Products, reporting directly to me.  Your base salary will be $10,416.67 semi-monthly, which annualizes to $250,000.   Your start date will be December 10, 2008.  This offer letter will expire on December 10, 2008.

In addition to your base salary, you will be eligible for the management bonus program.   Your management bonus incentive target for calendar year 2008 will be 35% of base pay.  Awards under the management bonus incentive plan will be based on achievement of a combination of both company and personal performance goals. Moreover, there is an opportunity for the bonus payout to be more than your incentive target, based on overachievement of Company goals. Payouts under the management incentive bonus plan are expected to be made to qualifying employees on a lump sum basis on or before March 15, 2009.   Please be advised that Vital Images reserves the right, without prior notice, to make any changes to the manager bonus program at its discretion, of which you will be notified.

Additionally, the Company will pay you a signing bonus of $25,000.  Appropriate taxes will be withheld on this bonus.  Should you leave the Company voluntarily within one year after your start date; the sign-on bonus must be repaid to the Company.

In addition to your salary, management will recommend that you receive non-qualified options to purchase 150,000 shares of Vital Images Common Stock and 15,000 shares of restricted stock. The grants will be priced as of your start date with Vital Images (or the first preceding trading date, if the markets are closed on your start date) and will be under our standard terms and conditions for such grants.

Upon joining Vital Images, you will be eligible to participate in the Company’s fringe benefit program. Specifically, you will accrue 1.66 days

per month (.833 days per pay period) which equals 20 days (4 weeks) of vacation per year. You will also receive ten

(10) paid holidays per calendar year.   Medical, Dental, and Disability Insurance will be effective the first of the month following the start date.  You may participate in the Vital Images Employee Stock Purchase Plan the first day of any quarter, and the Vital Images 401(k) plan the first day of the month, following a three-month waiting period.  Please be advised that Company fringe benefit programs are subject to change as a matter of Company policy.

Initially, your position will be based in our corporate offices in Minnetonka, MN. After June 2009, you may be based out of any US city you wish, with reasonable business travel as required.

In compliance with the Immigration Reform and Control Act, all new employees are required to provide proof of work eligibility and identification. In order to satisfy these requirements, certain documents must be presented within 72 hours of your start date.  Please review the list, which is attached to the Form I-9, of appropriate documentation and bring these with you on your first day of employment.

You should be aware that your employment with Vital Images is for no specified period and constitutes at will employment.  As a result, you are free to resign at any time, for any reason or for no reason.  Similarly, Vital Images is free to conclude our employment relationship with you at any time, with or without cause, and with or without notice.

This offer of employment is contingent upon successful completion of a background investigation by the Human Resources Department at Vital Images.  Confirmation of completion of the investigation will be provided to you as soon as the investigation is complete.

To accept this offer of employment, please sign below and return one copy of this letter as soon as possible in the enclosed envelope, along with your signed non-disclosure agreement.

Ray, we are excited about having you on the Vital Images’ team.  We are confident that you will contribute to our Company’s growth and that we can provide a challenging and rewarding work environment to further your professional career.

Sincerely,

/s/ Michael H. Carrel
Michael Carrel
President/Chief Executive Officer
Accepted by	/s/ Reza Ghanbari	Date	12/10/08

EX-10.21

Exhibit 10.21

EMPLOYMENT AGREEMENT

THIS AGREEMENT, made and entered into as of the 10th day of December, 2008, by and between Vital Images, Inc. (“Company”) and Reza A. Ghanbari (“Executive”).

W I T N E S S E T H:

WHEREAS, Company desires to retain the services of Executive for and on behalf of Company on the terms and subject to the conditions set forth herein.

WHEREAS, each of the parties acknowledge that they are receiving good and valuable consideration for entering into this Employee Agreement and Executive acknowledges that this Employment Agreement, including the non-disclosure agreement set forth herein, was negotiated between the parties hereto and that Executive received bargained for consideration in the form of benefits resulting to Executive from the terms and conditions of such employment, in exchange for entering into this Employment Agreement.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

ARTICLE I.

EMPLOYMENT AND TERM

1.1EMPLOYMENT.  Upon the terms subject to the conditions herein contained, Company hereby employs Executive as Executive Vice President, Strategy and Products, and Executive hereby accepts such employment, subject to the supervision of the President and Chief Executive Officer of the Company.  Executive shall devote his best skill and efforts (reasonable sick leave and vacations excepted) to the performance of his duties under this Agreement.

1.2TERM.  This Agreement shall take effect upon the date first above written, and shall remain in effect as “at-will” employment until terminated in accordance with Article IV.  Upon termination of this Agreement, except as otherwise provided herein, neither the Company nor Executive shall have any further rights, duties, privileges, or obligations hereunder.

1.3COMPLIANCE WITH COMMITMENTS AND OBLIGATIONS.    Executive represents and warrants as follows: (i) he is not a party to any other agreement or obligation for personal services; (ii) there exist no impediments or restraints, contractual or otherwise on Executive’s power, right or ability to enter into this Agreement and to perform his duties and obligations hereunder; and (iii) the performance of his obligations

RG	Executive
MC	Company

under this Agreement do not and will not violate or conflict with any agreement relating to confidentiality, non-competition or exclusive employment to which Executive is or was subject.

1.4INSIDER TRADING POLICY.  Execu tive will be required, as a condition of employment with the Company, to sign and comply in every respect with the Company’s Insider Trading Policy, a copy of which is enclosed.

ARTICLE II.

COMPENSATION

2.1BASE SALARY.  In exchange for the provision of services, Company agrees that it will pay Executive commencing December 10, 2008, at the rate of $250,000 per year, payable in accordance with standard pay practices of Company, less any applicable withholdings or deductions.

2.2BENEFITS.  In addition to the compensation set forth under Section 2.1, Executive shall be entitled to participate in any of Company’s standard benefit policies or plans, including its Employee Stock Purchase plan, according to their terms.  Subject to the provisions of Section 4.1(d) of this Agreement, these policies may be modified or terminated from time to time by Company, but not retroactively.  The written terms of the policies shall govern any questions of eligibility, coverage, or duration of coverage.

2.3INCENTIVE COMPENSATION.  As an incentive to performance, Executive shall be eligible to receive initiative compensation and/or benefits as follows:

a.Executive shall be eligible to participate in Company’s Management Incentive Plan (the “Plan”) as it is established annually by the Board of Directors.  Pursuant to the Plan, Executive’s incentive target for calendar year 2008 shall be thirty-five percent (35%) of Executive’s base salary for calendar year 2008.  Executive’s incentive compensation for calendar year 2008 under the Plan, if any, will be determined as soon as practical after December 31, 2008, and will be paid to Executive in a lump sum, less any withholdings or deductions, on or before March 31, 2009.

b.The Company’s Board of Directors has approved that Executive shall be entitled to receive (i) a stock option grant exercisable for 150,000 shares, which shall vest as to 28% on December 10th, 2009, and 2% will vest each month thereafter; and (ii) 15,000 shares of restricted stock, which shall vest as to 25% on the one-year anniversary of grant date of December 10th, 2008, and as to additional increments of 25% on each anniversary thereafter, which shall be more fully set forth in a Restricted Stock Agreement that you will be provided separately.

2.4VACATION.  Executive shall initially receive twenty (20) days of vacation per year.

2.5BUSINESS EXPENSES.  The Company will reimburse Executive for all reasonable, ordinary, and necessary expenses incurred by him in the performance of his duties

RG	Executive
MC	Company

2

hereunder, provided that Executive accounts to Company for such expenses in a manner normally prescribed by Company for reimbursement of expenses.  Such reimbursement requests must be accompanied by the appropriate documentation and shall be subject to review by Company’s President and Chief Executive Officer.

ARTICLE III.

DUTIES OF EXECUTIVE

3.1SERVICES.  Executive shall perform all duties and obligations charged to Executive by the Board of Directors of Company, as the same may be determined from time to time.  The Board shall assure adequate time, resources, and authority for Executive to reach goals mutually agreed upon by Company and Executive.

3.2TIME AND EFFORT.  Executive shall devote his full time and effort to the business of Company.  Executive shall perform the duties and obligations required of Executive hereunder in a competent, efficient, and satisfactory manner at such hours and work conditions as the performance of these duties may require.

3.3ARTICLES AND BY-LAWS.  Executive shall act in accordance with so as to abide by the Articles of Incorporation of Company, the Bylaws of Company and all decisions of the Board of Directors of Company.

3.4CONFIDENTIALITY AND LOYALTY.  Executive acknowledges that during the course of his employment he has produced and may produce and have access to material, records, data, and information not generally available to the public (“Confidential Information”) regarding Company, its customers and affiliates.  Accordingly, during and subsequent to the termination of this Agreement, Executive shall hold in confidence and not directly or indirectly disclose, use, copy, or make lists of any such confidential information, except to the extent authorized in writing by Company, or as required by law or any competent administrative agency or as otherwise is reasonable necessary or appropriate in connection with the performance by Executive of his duties pursuant to this Agreement.  Upon termination of his employment under this Agreement, Executive shall promptly deliver to Company (i) all records, manuals, books, documents, letters, reports, data, calculations, and all copies of any of the foregoing which are the property of Company and (ii) all other property of Company and Confidential Information which in any of these cases are in his possession or under his control.  Executive agrees to abide by Company’s reasonable policies as in effect from time to time, respecting avoidance of interests conflicting with those of Company.

3.5WORKS MADE FOR HIRE.  Executive acknowledges and agrees that any and all works of authorship by Executive made pursuant to this Agreement or any prior agreements are within the scope of services to be provided to Company and shall constitute “works made for hire” as defined by the Copyright Act of 1976, Title 17 of the United States Code, as now enacted or hereinafter amended.  To the extent Employee retains any rights of any nature in any Work Product, Employee hereby assigns to Company all of Employee’s right, title, and interest (including but not limited to all

RG	Executive
MC	Company

3

patent, copyright, trade secret, and moral rights) in and to all Work Products prepared by Employee, whether patentable or not, made or conceived in whole or in part by Employee within the scope of Employee’s employment by Company, or that involve the use of Confidential Information.  Accordingly, Executive acknowledges and agrees that Company shall be the sole and exclusive owner of any and all copyright(s) with respect to such works of authorship and that Executive shall not be entitled to any additional compensation over and above the compensation set forth herein or otherwise already received by Executive unless otherwise agreed in writing by Company.  If any work of authorship created hereunder or prior to hereto is not deemed to be a “work made for hire,” Executive hereby assigns all right, title, and interest therein to Company.  Executive is hereby notified that this assignment of Work Product does not include any invention where (i) Executive did not use the equipment, supplies, facility or trade secret information of Company; (ii) Executive developed the invention on his own time; (iii) the invention does not directly relate to the business of Company or Company’s actual or anticipated research or development; and (iv) the invention did not result from any work performed for Company.

3.6COMPANY TO HOLD PROPRIETARY RIGHTS.  Furthermore, and without limiting the foregoing, Executive acknowledges and agrees that all proprietary rights, including, without limitation, all patent, trademark, trade secret, copyright, and other rights, which may exist in connection with any and all inventions, ideas, and works created or conceived by Executive for Company, either before or after the date hereof, shall be the sole and exclusive property of Company and Executive shall have no further rights therein and, to the extent necessary, assigns all such rights to Company.  All patent, copyright, and other rights in such inventions, ideas, and works shall be the property of Company, who shall have the sole right to seek patent, copy, registered design or other protection in connection therewith.  Executive shall at Company’s reasonable expense do all things and execute all such documents as Company may reasonably require to vest in Company the rights and protection herein described.

3.7RESTRICTION ON COMPETITION.  Executive agrees that for a period of eighteen (18) months from the date of Executive’s termination of employment with the Company, irrespective of the reasons for termination, Executive shall not, directly or indirectly, and regardless of whether Executive is acting as owner, partner, stockholder, employee, broker, agent, principal, trustee, corporate officer, director, consultant or in any other capacity, do any of the following:

(1) Own, manage, operate, join, control, consult with, participate in the ownership, operation or control of, be employed by, or be connected in any manner with any person or entity which manufactures, sells, solicits, offers, offers to provide, or provides any Competitive Products and Services, unless such employment is by a large diversified entity and on a basis such that Executive will have no involvement whatsoever with the provision of Competitive Products and Services during the Restricted Period.  For purposes of this Agreement, Competitive Products and Services shall include all products and services similar to or the same as those offered by Company to its customers involving advanced medical visualization and analysis software technologies beyond MIP (Minimum Intensity Projection) and MPR (Multi Planar Reformation) that allow for

RG	Executive
MC	Company

4

analysis, manipulation, and distribution of images, such as radiological studies, in 2D, 3D and 4D.  This restriction applies worldwide, and Executive agrees and acknowledges a worldwide restriction is reasonable in scope given the Company’s worldwide territory;

(2) Solicit customers or the business of any person, firm, corporation or other entity who is or who was a customer or account of Company or any of Company’s affiliates and subsidiaries while Employee was employed by Company, including but not limited to resellers or distributors of Company products or services, or accept business from any person, firm, corporation or other entity who is or who was a customer or account of Company or any of Company’s affiliates and subsidiaries while Executive was employed by Company, for the purpose of selling to such customer or account any Competitive Product or Service; and

(3)Induce or seek to induce any person employed with Company or its affiliates as of the Separation Date to discontinue that person’s employment with Company and/or solicit, recruit, hire or participate in any other person’s or entity’s effort to hire an employee of Company.

3.8REMEDIES.  Executive agrees and understands that any breach of any of the covenants or agreements set forth in this ARTICLE III of this Agreement will cause Company irreparable harm for which there is no adequate remedy at law, and, without limiting whatever other rights and remedies Company may have under this paragraph, Executive consents to the issuance of an injunction in favor of Company enjoining the breach of any of the aforesaid covenants or agreements by any court of competent jurisdiction.  If any or all of the aforesaid covenants or agreements are held to be unenforceable because of the scope or duration of such covenant or agreement or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce or modify the scope, duration, and/or area of such covenant to the extent that allows the maximum scope, duration, and/or area permitted by applicable law.

ARTICLE IV.

TERMINATION

4.1RESIGNATION OF EXECUTIVE.  Executive may resign his employment at any time for any reason upon fifteen (15) days advance written notice to the President and Chief Executive Officer.  If Executive resigns his employment without Good Reason (as that term is defined below), he shall not be entitled to severance pay.  If Executive resigns his employment for Good Reason, the Company shall pay Executive the severance pay set forth in Section 4.2 below provided Executive agrees to release any claims he may have against the Company in exchange for receipt of severance pay.  For purposes of the Agreement, Good Reason shall mean the occurrence of any of the following events, which the Company has not cured within thirty (30) days of notice thereof:

a.A material breach of this Agreement by the Company;

RG	Executive
MC	Company

5

b.A material adverse change in Executive’s status or position as an executive officer of the Company as a result of a material diminution in Executive’s duties, responsibilities, or authority as of the date of this Agreement (except in connection with the termination of Executive’s employment in accordance with Section 4.3 hereof);

c.A reduction by the Company of the Executive’s base salary as the same may be increased from time to time;

d.Without replacement by a plan providing benefits to Executive equal to or greater than those discontinued or by payment of cash in lieu of such benefits, the failure by the Company to continue in effect, within its maximum stated term, any employee benefit plan in which Executive is participating in prior to the date of this Agreement or taking of any action by the Company that would adversely affect Executive’s participation or materially reduce Executive’s benefits under all such plans; provided, however, that Good Reason shall not include changes, modifications, and terminations of the Company’s standard benefit policies and plans which are generally applicable to the Company’s officers and employees; or

e.The Company’s requiring Executive to be based anywhere other than that Minneapolis/St. Paul, Minnesota metropolitan statistical area or the location Executive has chosen to be based out of, except for required travel on the Company’s business.

4.2TERMINATION BY COMPANY.  Company shall have the right to terminate Executive’s employment without notice and with or without Cause, as that term is defined below.  If Company terminates Executive’s employment without cause, Company shall pay Executive nine (9) months of severance pay based on Executive’s base salary at the time of termination and nine months of continuation of benefits, provided Executive agrees to release any claims he may have against the company, pursuant to Company’s standard release agreement for such circumstances, in exchange for the receipt of severance pay.  Executive’s severance pay, if any, shall be payable in one lump sum, less any applicable withholdings or deductions, within ten (10) days after the expirations of any applicable rescission periods.  If Company terminates Executive’s employment with Cause, Executive shall not receive severance pay.

Notwithstanding anything in this Agreement to the contrary, if all or any portion of the severance pay described in this Section 4.2 is subject to the requirements of Code Section 409A and the Company determines that Executive is a “specified employee” as defined in Code Section 409A as of the date of Executive’s termination of employment, such payments shall not be paid or commence earlier than the first day of the seventh month following the date of Executive’s termination of employment.

4.3TERMINATION FOR CAUSE.  Notwithstanding anything contained in this Agreement to the contrary, Company shall have the right to terminate the employment of Executive for Cause.  Cause means:

a.Executive’s gross misconduct;

RG	Executive
MC	Company

6

b.Executive shall inexcusably violate or willfully refuse to obey the lawful and reasonable instructions of the President and Chief Executive Officer or the Board of Directors of the Company; or

c.Executive’s conviction (including a plea of nolo contendere) of willfully engaging in illegal conduct constituting a felony or gross misdemeanor under federal or state law which is materially and demonstrably injurious to the Company or which impairs Executive’s ability to perform substantially his duties for the Company.

An act, or failure to act, will be considered “gross” or “willful” for this purpose only if done, or omitted to be done, by Executive in bad faith and without reasonable belief that it was in, or not opposed to, the best interests in the Company.  Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Company’s Board of Directors (or a committee thereof) or based upon the advice of counsel for the Company will be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company.  It is also expressly understood that Executive’s attention to matters not directly related to business of the Company will not provide a basis for termination for Cause so long as the Board did not expressly disapprove in writing of Executive’s engagement in such activities either before or within a reasonable period of time after the Board knew or could have reasonably known the Executive engaged in those activities.  Notwithstanding the foregoing, Executive may not be terminated for Cause unless and until there has been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to Executive and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board Executive was guilty of the conduct set forth above in clauses a., b., or c. of this definition and specifying the particulars thereof in detail.

Where the employment of the Executive is terminated pursuant to this Article IV, Section 4.3 of this Agreement, such termination shall be effective upon the delivery of notice thereof to Executive.

4.4.SURVIVING RIGHTS.  Notwithstanding the termination of Executive’s employment, the parties shall be required to carry out any provisions hereof which contemplate performance subsequent to such termination; and such termination shall not affect any liability or other obligation which shall have accrued prior to such termination, including, but not limited to, any liability for loss or damage on account of a prior default.

4.5.COOPERATION AND NON-DISPARAGEMENT.    Executive agrees that, during the term of this Agreement and for three (3) years following the termination of his employment, Executive will (i) assist and cooperate with the Company regarding any claims or disputes involving matters within the knowledge or responsibilities of Executive; and (ii) not in any way or by any means disparage the Company, the members of the Company’s Board of Directors or the Company’s officers and employees. During

RG	Executive
MC	Company

7

the same period, Company agrees to not in any way or by any means disparage the Executive.

4.6.DISCLOSURE.    Executive agrees that, during the term of this Agreement and for three (3) years following the termination of his employment, Executive will inform any new employer or other person or entity with whom he enters into a business relationship, before accepting employment or entering into a business relationship, of the post-employment restrictions and obligations contained in this Agreement, including but not limited to the existence of Articles 3.4, 3.5, 3.7 and 4.5 above.

ARTICLE V.

GENERAL PROVISIONS

5.1NOTICES.  All notices, requests, and other communications shall be in writing and except as otherwise provided herein, shall be considered to have been delivered if personally delivered or when deposited in the United States mail, first class, or certified or registered, postage prepaid, return receipt requested, addressed to the proper party at its address set forth below, or to such other address as such party may hereafter designate by written notice to the other party:

a.	If to Company, to:	Vital Images, Inc.
		5850 Opus Parkway, Suite 300
		Minnetonka, MN 55343
		Attention: President and CEO
b.	If to Executive, to:	Ray A. Ghanbari
		3144 Northview Road
		Wayzata, MN 55391

5.2WAIVER, MODIFICATION, or AMENDMENT.  No waiver, modification, or amendment of any term, condition, or provision of this Agreement shall be valid or of any effect unless made in writing, signed by the party to be bound or its duly authorized representative and specifying with particularity the nature and extent of such waiver, modification, or amendment.  Any waiver by any party of any default of the other shall not effect, or impair any right arising from, any subsequent default.  Nothing herein shall limit the rights and remedies of the parties hereto under and pursuant to this Agreement, except as hereinbefore set forth.  Notwithstanding anything in this Agreement to the contrary, the Company expressly reserves the right to amend this Agreement to the extent necessary to comply with Code Section 409A, as it may be amended from time to time, and the regulations, notices and other guidance of general applicability issued thereunder.

5.3ENTIRE AGREEMENT.  This Agreement contains the entire understanding of the parties hereto in respect of transactions contemplated hereby and supersedes all prior agreements and understandings between the parties with respect to such subject matter.

RG	Executive
MC	Company

8

5.4INTERPRETATION AND SEVERANCE.  The provisions of this Agreement shall be applied and interpreted in a manner consistent with each other so as to carry out the purposes and intent of the parties hereto, but if for any reason any provision hereof is determined to be unenforceable or invalid, such provision or such part thereof as may be unenforceable or invalid shall be deemed severed from this Agreement and the remaining provisions shall be carried out with the same force and effect as if the severed provision or part thereof had not been a part of this Agreement.

5.5GOVERNING LAW.  This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota.

5.6ASSIGNMENT.  Executive acknowledges that Executive’s services are unique and personal.  Accordingly, Executive may not assign Executive’s rights or delegate Executive’s duties or obligations under this Agreement.  Company’s rights and obligations under this Agreement shall inure to the benefit of and shall be binding on Company’s successors and assigns.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written by signature below and initialization of each page.

VITAL IMAGES, INC.:
By	/s/ Michael H. Carrel
	Michael H. Carrel
	President and Chief Executive Officer
EXECUTIVE:
By	/s/ Reza Ghanbari
	Reza A. Ghanbari

RG	Executive
MC	Company

9

EX-10.22

Exhibit 10.22

CHANGE IN CONTROL AGREEMENT

December 10, 2008

Reza A. Ghanbari

3144 Northview Road

Wayzata, MN 55391

Dear Dr. Ghanbari:

In connection with your hiring as the Executive Vice President, Strategy and Products of Vital Images, Inc., a Minnesota corporation (the “Company”), we hereby offer you valuable and unique benefits.  The Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders.  In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control may arise and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders.

Accordingly, the Board has determined that appropriate steps should be taken to minimize the risk that Company management will depart prior to a Change in Control, thereby leaving the Company without adequate management personnel during such a critical period, and that appropriate steps also be taken to reinforce and encourage the continued attention and dedication of members of the Company’s management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control.  In particular, the Board believes it important, should the Company or its shareholders receive a proposal for transfer of control, that you be able to continue your management responsibilities without being influenced by the uncertainties of your own personal situation.

The Board recognizes that continuance of your position with the Company involves a substantial commitment to the Company in terms of your personal life and professional career and the possibility of foregoing present and future career opportunities, for which the Company receives substantial benefits.  Therefore, to induce you to remain in the employ of the Company, this Agreement, which has been approved by the Board, sets forth the benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated in connection with a Change in Control under the circumstances described below.

The following terms will have the meaning set forth below unless the context clearly requires otherwise.  Terms defined elsewhere in this Agreement will have the same meaning throughout this Agreement.

ARTICLE I.

DEFINITIONS

1.“Affiliate” means (i) any corporation more than 50% of whose outstanding securities ordinarily having the right to vote at elections of directors is owned directly or indirectly by the Company or (ii) any other form of business entity in which the Company, by virtue of a direct or indirect ownership interest, has the right to elect a majority of the members of such entity’s governing body.

2.“Agreement” means this letter agreement as amended, extended or renewed from time to time in accordance with its terms.

3.“Board” means the board of directors of the Company duly qualified and acting at the time in question.  On and after the date of a Change in Control, any duty of the Board in connection with this Agreement is nondelegable and any attempt by the Board to delegate any such duty is ineffective.

4.“Cause” means:

a.your gross misconduct;

b.your willful and continued failure to perform substantially your duties with the Company (other than any such failure (1) resulting from your Disability or incapacity due to bodily injury or physical or mental illness or (2) relating to changes in your duties after a Change in Control which constitute Good Reason) after a demand for substantial performance is delivered to you by the chair of the Board which specifically identifies the manner in which you have not substantially performed your duties and provides for a reasonable period of time within which you may take corrective actions; or

c.your conviction (including a plea of nolo contendere) of willfully engaging in illegal conduct constituting a felony or gross misdemeanor under federal or state law which is materially and demonstrably injurious to the Company or which impairs your ability to perform substantially your duties for the Company.

An act or failure to act will be considered “gross” or “willful” for this purpose only if done, or omitted to be done, by you in bad faith and without reasonable belief that it was in, or not opposed to, the best interests of the Company.  Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Company’s board of directors (or a committee thereof) or based upon the advice of counsel for the Company will be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company.  It is also expressly understood that your attention to matters not directly related to the business of the Company will not provide a basis for termination for Cause so long as the Board did not expressly disapprove in writing of your engagement in such activities either before or within a reasonable period of time after the Board knew or could reasonably have known that you engaged in those activities.  Notwithstanding the foregoing, you may not be terminated for Cause unless and until there has been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in clauses a., b. or c. of this definition and specifying the particulars thereof in detail.

5.“Change in Control” means any of the following:

a.the sale, exchange or other transfer, directly or indirectly, of all or substantially all of the assets of the Company to any Person in one transaction or in a series of related transactions which occur during the twelve-month period ending on the date of the most recent purchase or other acquisition by such Person;

b.any Person is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of (1) 30 percent or more, but not more than 50

2

percent, of the combined voting power of the outstanding securities of the Company ordinarily having the right to vote at elections of directors, unless the transaction resulting in such ownership has been approved in advance by the “continuing directors” or (2) more than 50 percent of the combined voting power of the outstanding securities of the Company ordinarily having the right to vote at elections of directors (regardless of any approval by the continuing directors);

d.a merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to the effective date of such merger or consolidation have, solely on account of ownership of securities of the Company at such time, “beneficial ownership” (as defined in Rule 13d-3 under the Exchange Act) immediately following the effective date of such merger or consolidation of securities of the surviving company representing less than 50 percent of the combined voting power of the surviving corporation’s then outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the continuing directors); or

e.the continuing directors cease for any reason to constitute at least a majority of the Board.

For purposes of this Section 1(e), a “continuing director” means any individual who is a member of the Board on August 1, 2008, while he or she is a member of the Board, and any individual who subsequently becomes a member of the Board whose election or nomination for election by the Company’s shareholders was approved by a vote of at least a majority of the directors who are continuing directors (either by a specific vote or by approval of the proxy statement of the Company in which such individual is named as a nominee for director without objection to such nomination).

In all cases, the determination of whether a Change in Control has occurred shall be made in accordance with Code Section 409A and the regulations, notices and other guidance of general applicability issued thereunder.

6.“Code” means the Internal Revenue Code of 1986, as amended.  Any reference to a specific provision of the Code includes a reference to such provision as it may be amended from time to time and to any successor provision.

7.“Company” means Vital Images, Inc. and/or any Affiliate.

8.“Confidential Information” means information which is proprietary to the Company or proprietary to others and entrusted to the Company, whether or not trade secrets. It includes information relating to business plans and to business as conducted or anticipated to be conducted, and to past or current or anticipated products or services.  It also includes, without limitation, information concerning research, development, purchasing, accounting, marketing and selling.  All information which you have a reasonable basis to consider confidential is Confidential Information, whether or not originated by you and without regard to the manner in which you obtain access to that and any other proprietary information.

9.“Date of Termination” following a Change in Control (or prior to a Change in Control if your termination was either a condition of the Change in Control or was at the request or insistence of any Person related to the Change in Control) means:

3

a.if your employment is to be terminated for Disability, 30 days after Notice of Termination is given (provided that you have not returned to the performance of your duties on a full-time basis during such 30-day period);

b.if your employment is to be terminated by the Company for Cause or by you for Good Reason, the date specified in the Notice of Termination, which date may not be less than 30 days or more than 60 days after the date on which the Notice of Termination is given unless you and the Company otherwise expressly agree;

c.if your employment is to be terminated by the Company for any reason other than Cause, Disability, death or Retirement, the date specified in the Notice of Termination, which in no event may be a date earlier than 90 days after the date on which a Notice of Termination is given, unless an earlier date has been expressly agreed to by you in writing either in advance of, or after; receiving such Notice of Termination; or

d.if your employment is terminated by reason of death or Retirement, the date of death or Retirement, respectively.

In the case of termination by the Company of your employment for Cause, if you have not previously expressly agreed in writing to the termination, then within 30 days after receipt by you of the Notice of Termination with respect thereto, you may notify the Company that a dispute exists concerning the termination, in which event the Date of Termination will be the date set either by mutual written agreement of the parties or by the judge or arbitrators in a proceeding as provided in Article VII Section 6 of this Agreement.  During the pendency of any such dispute, you will continue to make yourself available to provide services to the Company and the Company will continue to pay you your full compensation and benefits in effect immediately prior to the date on which the Notice of Termination is given (without regard to any changes to such compensation or benefits which constitute Good Reason) and until the dispute is resolved in accordance with Article VII Section 6 of this Agreement.  You will be entitled to retain the full amount of any such compensation and benefits without regard to the resolution of the dispute unless the judge or arbitrators decide(s) that your claim of a dispute was frivolous or advanced by you in bad faith.

10.“Disability” means a disability as defined in the Company’s long-term disability plan as in effect immediately prior to the Change in Control or; in the absence of such a plan, means permanent and total disability as defined in section 22(e)(3) of the Code.

11.“Exchange Act” means the Securities Exchange Act of 1934, as amended.  Any reference to a specific provision of the Exchange Act or to any rule or regulation thereunder includes a reference to such provision as it may be amended from time to time and to any successor provision.

12.“Good Reason” means:

a.change in your status, position(s), duties or responsibilities as an executive of the Company as in effect immediately prior to the Change in Control which, in your reasonable judgment, is an adverse change (other than, if applicable, any such change directly attributable to the fact that the Company is no longer publicly owned) except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason;

4

b.a reduction by the Company in your base salary (or an adverse change in the form or timing of the payment thereof) as in effect immediately prior to the Change in Control or as thereafter increased;

c.the failure by the Company to continue in effect any Plan in which you (and/or your family) are eligible to participate at any time during the 90-day period immediately preceding the Change in Control (or Plans providing you (and/or your family) with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect immediately prior to the 90-day period immediately preceding the time of the Change in Control, or the taking of any action, or the failure to act, by the Company which would adversely affect your (and/or your family’s) continued eligibility to participate in any of such Plans on at least as favorable a basis to you (and/or your family) as is the case on the date of the Change in Control or which would materially reduce your (and/or your family’s) benefits in the future under any of such Plans or deprive you (and/or your family) of any material benefit enjoyed by you (and/or your family) at the time of the Change in Control;

d.the Company’s requiring you to be based more than 30 miles from where your office is located immediately prior to the Change in Control, except for required travel on the Company’s business, and then only to the extent substantially consistent with the business travel obligations which you undertook on behalf of the Company during the 90-day period immediately preceding the Change in Control (without regard to travel related to or in anticipation of the Change in Control);

e.the failure by the Company to obtain from any Successor the assent to this Agreement contemplated by Article VI of this Agreement;

f.any purported termination by the Company of your employment which is not properly effected pursuant to a Notice of Termination and pursuant to any other requirements of this Agreement, and for purposes of this Agreement, no such purported termination will be effective;

g.any refusal by the Company to continue to allow you to attend to matters or engage in activities not directly related to the business of the Company which, at any time prior to the Change in Control, you were not expressly prohibited in writing by the Board from attending to or engaging in; or

h.the termination of your employment by the Company for any reason other than death,  Cause, Disability or Retirement during the twelve (12) months following the month in which a Change in Control occurs.

13.“Notice of Termination” means a written notice given on or after the date of a Change in Control (unless your termination before the date of the Change in Control was either a condition of the Change in Control or was at the request or insistence of any Person related to the Change in Control) which indicates the specific termination provision in this Agreement pursuant to which the notice is given.  Any purported termination by the Company or by you for Good Reason on or after the date of a Change in Control (or before the date of a Change in Control if your termination was either a condition of the Change in Control or was at the request or insistence of any Person related to the Change in Control) must be communicated by written Notice of Termination to be effective; provided, that your failure to provide Notice of Termination will not limit any of your rights under

5

this Agreement except to the extent the Company demonstrates that it suffered material actual damages by reason of such failure.

14.“Person” means any individual, corporation, partnership, group, association or other “person,” as such term is used in section 14(d) of the Exchange Act, other than the Company, any Affiliate or any employee benefit plan(s) sponsored by the Company or an Affiliate.

15.“Plan” means any compensation plan, program, policy or agreement (such as a stock option, restricted stock plan or other equity-based plan), any bonus or incentive compensation plan, program, policy or agreement, any employee benefit plan, program, policy or agreement (such as a thrift, pension, profit sharing, medical, dental, disability, accident, life insurance, relocation, salary continuation, expense reimbursements, vacation or fringe benefits plan or policy) or any other plan, program, policy or agreement of the Company intended to benefit employees (and/or their families) generally, management employees (and/or their families) as a group or you (and/or your family) in particular.

16.“Retirement” means termination of employment on or after the day on which you attain the age of 65.

17.“Successor” means any Person that succeeds to, or has the practical ability to control (either immediately or solely with the passage of time), the Company’s business directly, by merger, consolidation or other form of business combination, or indirectly, by purchase of the Company’s outstanding securities ordinarily having the right to vote at the election of directors or, all or substantially all of its assets or otherwise.

ARTICLE II.

TERM OF AGREEMENT

This Agreement is effective immediately and will continue in effect until December 10, 2009; provided, however; that commencing on December 10, 2009 and each December 10 thereafter, the term of this Agreement will automatically be extended for 12 additional months beyond the expiration date otherwise then in effect, unless at least 90 calendar days prior to any such December 10, the Company or you has given notice that this Agreement will not be extended; and, provided, further; that if a Change in Control has occurred during the term of this Agreement, this Agreement will continue in effect beyond the termination date then in effect for a period of 12 months following the month during which the Change in Control occurs or, if later, until the date on which the Company’s obligations to you arising under or in connection with this Agreement have been satisfied in full.

ARTICLE III.

CHANGE IN CONTROL BENEFITS

1.Benefits upon a Change in Control Termination.  You will become entitled to the payments and benefits described in clauses (a) and (b) of this Section 1 of Article III, subject to the limitations described in clause (c) of this Section 1 of Article III, and to the benefit of the provisions described in clause (c), if and only if (i) your employment with the Company is terminated by the Company for any reason other than death, Cause, Disability or Retirement, or if you terminate your employment with the Company for Good Reason; and (ii) the termination occurs either within the period beginning on the date of a Change in Control and ending on the last day of the twelfth month that begins after the month during which the Change in Control occurs or prior to a Change in Control if

6

your termination was either a condition of the Change in Control or was at the request or insistence of a Person related to the Change in Control.

a.Cash Payment.  Within ten (10) business days following the Date of Termination or, if later, within ten (10) business days following the date of the Change in Control, the Company will make a lump-sum cash payment to you in an amount equal to your annual base salary in effect on the date of the Change in Control.

b.Welfare Plans. The Company will maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating 24 months after the Date of Termination, all insured and self-insured employee welfare benefit Plans (including, without limitation, medical, life, dental, vision and disability plans) in which you were eligible to participate at any time during the 90-day period immediately preceding the Change in Control, provided that your continued participation is possible under the general terms and provisions of such Plans and any applicable funding media and without regard to any discretionary amendments to such Plans by the Company following the Change in Control (or prior to the Change in Control if amended as a condition or at the request or insistence of a Person (other than the Company) related to the Change in Control) and provided that you continue to pay an amount equal to your regular contribution under such Plans for such participation (based upon your level of benefits and employment status most favorable to you at any time during the 90-day period immediately preceding the Change in Control).  The continuation period under federal and state continuation laws, to the extent applicable, will begin to run from the date on which coverage pursuant to this clause (b) ends.  If, at the end of the 24-month period, you have not previously received or are not then receiving equivalent benefits from a new employer (including coverage for any pre-existing conditions), the Company, pursuant to federal and state law, will provide, for a period of eighteen (18) months (the “COBRA Period”), a continuation of your and your dependents’ coverage under such Plans (the “COBRA Coverage”), provided that you will be required to pay for such benefits during the COBRA Period, should you elect to receive COBRA Coverage.

c.Limitation on Payments and Benefits.  Notwithstanding anything in this Agreement to the contrary, if any of the payments or benefits to be made or provided in connection with this Agreement, together with any other payments, benefits or awards which you have the right to receive from the Company, or any corporation which is a member of an “affiliated group” (as defined in section 1504(a) of the Code without regard to section 1504(b) of the Code) of which the Company is a member (“Affiliate”), constitute an “excess parachute payment” (as defined in section 280G(b) of the Code), two calculations will be performed.  In the first calculation, the payments, benefits or awards will be reduced by the amount the Company deems necessary so that none of the payments or benefits under the Agreement (including from the existing Stock Option and Incentive Plan) are excess parachute payments.  In the second calculation, the payments will not be reduced so as to eliminate an excess parachute payment, but will be reduced by the amount of the applicable excise tax as imposed by section 4999 of the Code.  The two calculations will be compared and the calculation providing the largest net payment to the employee will be utilized.  The calculations must be made in good faith by legal counsel or a certified public accountant selected by the Company, and such determination will be conclusive and binding upon you and the Company.  If a reduction in payments or benefits is required by the comparison above, the payments or benefits under the Agreement shall be reduced in the order that minimizes the

7

amount of total reduction in payments and benefits under the Agreement as a result of this provision.

d.409A Restrictions.  Notwithstanding the foregoing, if any of the payments or other benefits described in this Article III are subject to the requirements of Code Section 409A and the Company determines that you are a “specified employee” as defined in Code Section 409A as of the Date of Termination, such payments shall not be paid or commence earlier than the first day of the seventh month following the Date of Termination.

2.Disposition.  If, on or after the date of a Change in Control, an Affiliate is sold, merged, transferred or in any other manner or for any other reason ceases to be an Affiliate or all or any portion of the business or assets of an Affiliate are sold, transferred or otherwise disposed of and the acquiror is not the Company or an Affiliate (a “Disposition”), and you remain or become employed by the acquiror or an affiliate of the acquiror (as defined in this Agreement but substituting “acquiror” for “Company”) in connection with the Disposition, you will be deemed to have terminated employment on the effective date of the Disposition for purposes of this section unless (a) the acquiror and its affiliates jointly and severally expressly assume and agree, in a manner that is enforceable by you, to perform the obligations of this Agreement to the same extent that the Company would be required to perform if the Disposition had not occurred and (b) the Successor guarantees, in a manner that is enforceable by you, payment and performance by the acquiror.  This Section 2 of Article III shall be applied in accordance with Code Section 409A and the regulations, notices and other guidance of general applicability issued thereunder.

ARTICLE IV.

INDEMNIFICATION

Following a Change in Control, the Company will indemnify and reimburse you to the full extent permitted by law and the Company’s articles of incorporation and bylaws for damages, costs and expenses (including, without limitation, judgments, fines, penalties, settlements and reasonable fees and expenses of your counsel) incurred in connection with all matters, events and transactions relating to your service to or status with the Company or any other corporation, employee benefit plan or other entity with whom you served at the request of the Company.

ARTICLE V.

CONFIDENTIALITY

You will not use, other than in connection with your employment with the Company, or disclose any Confidential Information to any person not employed by the Company or not authorized by the Company to receive such Confidential Information, without the prior written consent of the Company; and you will use reasonable and prudent care to safeguard and protect and prevent the unauthorized disclosure of Confidential Information. Nothing in this Agreement will prevent you from using, disclosing or authorizing the disclosure of any Confidential Information: (a) which is or hereafter becomes part of the public domain or otherwise becomes generally available to the public through no fault of yours; (b) to the extent and upon the terms and conditions that the Company may have previously made the Confidential Information available to certain persons; or (c) to the extent that you are required to disclose such Confidential Information by law or judicial or administrative process.

8

ARTICLE VI.

SUCCESSORS

The Company will seek to have any Successor, by agreement in form and substance satisfactory to you, assent to the fulfillment by the Company of the Company’s obligations under this Agreement. Failure of the Company to obtain such assent at least three business days prior to the time a Person becomes a Successor (or where the Company does not have at least three business days’ advance notice that a Person may become a Successor, within one business day after having notice that such Person may become or has become a Successor) will constitute Good Reason for termination by you of your employment.  The date on which any such succession becomes effective will be deemed the Date of Termination and Notice of Termination will be deemed to have been given on that date.  A Successor has no rights, authority or power with respect to this Agreement prior to a Change in Control.

ARTICLE VII.

OTHER PROVISIONS

1.Binding Agreement.  This Agreement inures to the benefit of, and is enforceable by, you, your personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you die while any amount would still be payable to you under this Agreement if you had continued to live, all such amounts, unless otherwise provided in this Agreement, will be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or; if there be no such designee, to your estate.

2.No Mitigation.  You will not be required to mitigate the amount of any payments or benefits the Company becomes obligated to make or provide to you in connection with this Agreement by seeking other employment or otherwise. The payments or benefits to be made or provided to you in connection with this Agreement may not be reduced, offset or subject to recovery by the Company by any payments or benefits you may receive from other employment or otherwise.

3.No Setoff.  The Company has no right to delay or setoff payments or benefits owed to you under this Agreement against amounts owed or claimed to be owed by you to the Company under this Agreement or otherwise.

4.Taxes.  All payments and benefits to be made or provided to you in connection with this Agreement will be subject to required withholding of federal, state and local income, excise and employment-related taxes.

5.Notices.  For the purposes of this Agreement, notices and all other communications provided for in, or required under, this Agreement must be in writing and will be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid and addressed to each party’s respective address set forth on the first page of this Agreement (provided that all notices to the Company must be directed to the attention of the chair of the Board), or to such other address as either party may have furnished to the other in writing in accordance with these provisions, except that notice of change of address will be effective only upon receipt.

6.Disputes.  If you so elect, any dispute, controversy or claim arising under or in connection with this Agreement will be settled exclusively by binding arbitration administered by the American Arbitration Association in Minneapolis, Minnesota in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect.  Judgment may be entered on the

9

arbitrator’s award in any court having jurisdiction; provided, that you may seek specific performance of your right to receive payment or benefits until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.  The Company will be entitled to seek an injunction or restraining order in a court of competent jurisdiction (within or without the State of Minnesota) to enforce the provisions of Article V of this Agreement.

7.Jurisdiction.  Except as specifically provided otherwise in this Agreement, the parties agree that any action or proceeding arising under or in connection with this Agreement must be brought in a court of competent jurisdiction in the State of Minnesota, and hereby consent to the exclusive jurisdiction of said courts for this purpose and agree not to assert that such courts are an inconvenient forum

8.Related Agreements.  To the extent that any provision of any other Plan or agreement between the Company and you limits, qualifies or is inconsistent with any provision of this Agreement, then for purposes of this Agreement, while such other Plan or agreement remains in force, the provision of this Agreement will control and such provision of such other Plan or agreement will be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose.  Nothing in this Agreement prevents or limits your continuing or future participation in any Plan provided by the Company and for which you may qualify, and nothing in this Agreement limits or otherwise affects the rights you may have under any Plans or other agreements with the Company.  Amounts which are vested benefits or which you are otherwise entitled to receive under any Plan or other agreement with the Company at or subsequent to the Date of Termination will be payable in accordance with such Plan or other agreement.

9.No Employment or Service Contract.  Nothing in this Agreement is intended to provide you with any right to continue in the employ of the Company for any period of specific duration or interfere with or otherwise restrict in any way your rights or the rights of the Company, which rights are hereby expressly reserved by each, to terminate your employment at any time for any reason or no reason whatsoever, with or without cause.

10.Funding and Payment.  Benefits payable under this Agreement will be paid only from the general assets of the Company.  No person has any right to or interest in any specific assets of the Company by reason of this Agreement.  To the extent benefits under this Agreement are not paid when due to any individual, he or she is a general unsecured creditor of the Company with respect to any amounts due.  The Company with whom you were employed immediately before your Date of Termination has primary responsibility for benefits to which you or any other person are entitled pursuant to this Agreement but to the extent such Company is unable or unwilling to provide such benefits, the Company and each other Affiliate are jointly and severally responsible therefor to the extent permitted by applicable law.  If you were simultaneously employed by more than one Company immediately before your Date of Termination, each such Company has primary responsibility for a portion of the benefits to which you or any other person are entitled pursuant to this Agreement that bears the same ratio to the total benefits to which you or such other person are entitled pursuant to this Agreement as your base pay from the Company immediately before your Date of Termination bears to your aggregate base pay from all such Companies.

10

11.Survival.  The respective obligations of, and benefits afforded to, the Company and you which by their express terms or clear intent survive termination of your employment with the Company or termination of this Agreement, as the case may be, including without limitation the provisions of Articles III, IV, V and VI and Sections 3, 4, 5 and 6 of Article VII of this Agreement, will survive termination of your employment with the Company or termination of this Agreement, as the case may be, and will remain in full force and effect according to their terms.

ARTICLE VIII.

MISCELLANEOUS

1.Modification and Waiver.  No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the chair of the Board. No waiver by any party to this Agreement at any time of any breach by another party to this Agreement of, or of compliance with, any condition or provision of this Agreement to be performed by such party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.  Notwithstanding anything in this Agreement to the contrary, the Company expressly reserves the right to amend this Agreement to the extent necessary to comply with Code Section 409A, as it may be amended from time to time, and the regulations, notices and other guidance of general applicability issued thereunder.

2.Entire Agreement.  No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter to this Agreement have been made by any party which are not expressly set forth in this Agreement.

3.Governing Law.  This Agreement and the legal relations among the parties as to all matters, including, without limitation, matters of validity, interpretation, construction, performance and remedies, will be governed by and construed exclusively in accordance with the internal laws of the State of Minnesota (without regard to the conflict of laws principles of any jurisdiction).

4.Headings.  Headings are for purposes of convenience only and do not constitute a part of this Agreement.

5.Further Acts.  The parties to this Agreement agree to perform, or cause to be performed, such further acts and deeds and to execute and deliver or cause to be executed and delivered, such additional or supplemental documents or instruments as may be reasonably required by the other party to carry into effect the intent and purpose of this Agreement.

6.Severability.  The invalidity or unenforceability of all or any part of any provision of this Agreement will not affect the validity or enforceability of the remainder of such provision or of any other provision of this Agreement, which will remain in full force and effect.

7.Counterparts.  This Agreement may be executed in several counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument.

11

If this letter correctly sets forth our agreement on the subject matter discussed above, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject.

Sincerely,

VITAL IMAGES, INC.
By:	/s/ Michael H. Carrel
Name:			Michael H. Carrel
Title:		President & CEO
Agreed to this 10th day of December, 2008.
/s/ Reza Ghanbari
Dr. Reza A. Ghanbari

12

EX-10.23

Exhibit 10.23

VITAL IMAGES, INC.

AND

TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

THIS AGREEMENT is made as of November 21, 2008 by and between Vital Images, Inc., a Minnesota corporation having its principal place of business at 5850 Opus Parkway, Suite 300, Minnetonka, Minnesota 55343 USA (“Vital Images”)  and Toshiba Medical Systems Corporation having its place of business at 1385, Shimoishigami, Otawara-Shi, Tochigi 324-8550, Japan (“Toshiba”).

Recitals

A.Vital Images develops and licenses proprietary medical visualization software products (defined below as the “Products”) and desires to increase the marketing and distribution of the Products.

B.Toshiba develops and markets proprietary medical visualization scanners and related hardware and software products and desires to market the Products in combination with the marketing of its products.

C.Toshiba possesses the necessary expertise and marketing organization to promote, market, distribute and support the Products.

D.Vital Images desires to appoint Toshiba and the Dealer Associates, and Toshiba and the Dealer Associates desire appointment, as a nonexclusive reseller of the Products.

NOW, THEREFORE, in consideration of the mutual premises and covenants hereinafter set forth, the parties agree as follows:

ARTICLE 1:  DEFINITIONS

For purposes of this Agreement, the following words, terms and phrases shall have the following meanings unless the context otherwise requires:

1.1Confidential Information.  “Confidential Information” shall mean all information designated by a party as confidential and which is disclosed by Vital Images to Toshiba or its Dealer Associates, as hereinafter specified, is disclosed by Toshiba or its Dealer Associates to Vital Images, or is embodied in the Products, relating to markets, customers, products, patents, inventions, procedures, methods, designs, strategies, plans, assets, liabilities, prices, costs, revenues, profits, organization, employees, agents, resellers or business in general, or, in the case of Vital Images, the algorithms, programs, user interfaces and organization of the Products (except as otherwise agreed between the parties in a separate agreement concerning one or more options incorporated in the Products).

1.2First Level Maintenance.  “First Level Maintenance” shall mean electronic or telephone or on-site response to deal with any problem or software bug in the Product which is provided by Vital Images, Toshiba or the Dealer Associates, as hereinafter specified, to Toshiba’s or the Dealer Associates’ customers in the Territory who have installed the Products that are under a contractual warranty or software maintenance program with Toshiba or the Dealer Associates. Such response shall attempt (i) to identify the nature and extent of the customer’s problem, (ii) if appropriate, to obtain a copy of magnetic media, hard copy printout or electronic file forwarded over the internet containing the problem or software bug to be forwarded promptly to Vital Images electronically or by facsimile, and (iii) to advise

1

the customer in the application of any recommended solution or workaround to such problem or bug.  For outside the US, on-site response may be provided by Vital Images at an additional charge.

1.3Government Approval.  “Government Approval” shall mean any approvals, licenses, registrations or authorizations of any federal, state or local regulatory agency, department, bureau or other government entity, foreign or domestic, necessary for use, marketing, sale or distribution of the Products in a regulatory jurisdiction, including without limitation the U.S. Food and Drug Administration (“FDA”).

1.4Products.  “Products” shall mean only those software products in object code form as described in Exhibit A and any related user documentation as released from time to time by Vital Images, including any later authorized releases or versions of such software or documentation during the term of this Agreement.

1.5Second Level Maintenance.  “Second Level Maintenance” shall mean electronic or telephone response provided by Vital Images to Toshiba or the Dealer Associates to deal with any problem or software bug in the Products that cannot be handled by Toshiba or the Dealer Associate alone under the First Level Maintenance for such customers in the Territory who have installed the Products that are under Vital Images’ standard warranty or under a Toshiba or Dealer Associate current software maintenance contract.

1.6Services.  “Services” shall mean the software support and maintenance services described in Article 6 and Exhibit E hereof.

1.7Service Level Agreements. “Service Level Agreements” shall mean any agreements to be executed between Vital Images and Toshiba or a Dealer Associate, which define any applicable terms and conditions for Services.

1.8Territory.  “Territory” shall mean the area described in Exhibit B.

1.9Vitrea®.  “Vitrea® ” shall mean 2-D, 3-D and 4-D medical visualization software marketed by Vital Images under the name “Vitrea® .”

1.10Vitrea®  fX . “Vitrea®  fX” shall mean 2-D, 3-D, and 4-D medical visualization software marketed by both Toshiba and Vital Images under the name “Vitrea®  fX” for AquilionOne.

1.11ViTALConnect® .  ViTALConnect®  shall mean 2-D and 3-D medical visualization software accessible via a web interface marketed by Vital Images under the name ViTALConnect®.

1.12ViTAL Enterprise Workstation shall mean 2-D, 3-D, and 4-D medical visualization software accessible via a web interface or workstation and is expandable to Vital Images broader Enterprise solution marketed by Vital Images under the name ViTALEnterprise.

1.13Installation. With regard to Vitrea fX in Japan, “First Level Installation” shall mean unloading, assembling and powering up the applicable computer workstation(s), installing the Products onto such computer workstation(s) in its factory before shipping the Products to the customer sites and integrating such computer workstation(s) onto the customer’s computer network. With regard to the other Products, “First Level Installation” shall mean unloading, assembling and powering up the applicable computer workstation(s), installing the Products onto such computer workstation(s) and integrating such computer workstation(s) onto the customer’s computer network.

1.14Second Level Installation.  “Second Level Installation” shall mean working with the customer and non-Toshiba OEM’s to link non-Toshiba equipment to the computer workstation(s) on which the Products have been installed.

2

ARTICLE 2:  APPOINTMENT

2.1Scope.  Vital Images hereby appoints Toshiba, and Toshiba hereby accepts such appointment, as Vital Images’ nonexclusive reseller of the Products during the term of this Agreement in the Territory, in connection with sales of Toshiba’s medical equipments, subject to all the terms and conditions of this Agreement.  All sublicenses of the Products are one-time sublicenses, whether or not they are granted on a term or perpetual basis, and after the initial sublicense of any Product to a customer, Toshiba or the Dealer Associates may not sublicense any Products that are returned by that customer, provided that Toshiba may reinstall Products without paying an additional license fee when such reinstallation is in connection with a customer trade-in or upgrade of equipment purchased from Toshiba and it is the same customer for which the software was initially licensed, or, for Vitrea fX in Japan, a failed hardware replacement.   With regard to Vitrea fX in Japan, Toshiba may, at its discretion, install it as an accessory for computer workstation(s) sold in connection with Toshiba CT equipment (hereinafter collectively called as “Toshiba CT System(s)”) distributed, sold, leased or otherwise disposed by Toshiba in Japan, but may not distribute, sell, lease or otherwise dispose of the Products in any other manner.

2.2Dealer Associates.  Effective with the signing of this Agreement, Toshiba hereby appoints and Vital Images consents to the appointment of, the Toshiba subsidiaries and distributors listed in Exhibit C as its agents to market and distribute the Products within the Territory (collectively “Dealer Associates”). Provided, however, Toshiba shall remain fully liable for the performance of such Dealer Associates and Toshiba hereby indemnifies and holds Vital Images harmless from all damages, losses, costs or expenses  (excluding any consequential or incidental damages) arising in any manner from any act or omission on the part of such Dealer Associates if such act or omission constitutes a breach of this Agreement.  Toshiba shall advise Vital Images in writing of any such appointment agreement with any Dealer Associates.

2.3Use of Terms.  The terms “sale”, “purchase”, “distribution”, “resale”, “reseller” and “Dealer” are used herein for convenience only and refer to the sale of software licenses for the Products.  Toshiba hereby acknowledges Vital Images retains all right, title and interest in and to the copyrights and other intellectual property rights in the Products (except as otherwise agreed between the parties in a separate agreement concerning one or more options incorporated in the Products) and that such Products are to be distributed to Toshiba’s and Dealer Associate’s customers in compliance with such acknowledgment.

ARTICLE 3:  GENERAL OBLIGATIONS OF TOSHIBA

3.1Marketing.  Toshiba and the Dealer Associates shall have the following obligations with respect to the marketing and distribution of the Products:

(a)To use its commercially reasonable best efforts to further the promotion, marketing and distribution of the Products in the Territory;

(b)To perform the First Level Installation for customers in the Territory with respect to the Products, and to ensure that only authorized versions of the Products are installed as supplied by Vital Images for customers in the Territory.

(c)To promptly respond to all inquiries or complaints from customers; outside of the United States, to provide all necessary and appropriate First Level Maintenance of the Products; and to cooperate with Vital Images in the provision of the Second Level Maintenance;

(d)To provide Vital Images with appropriate details of all complaints and bugs found in the Products, whether such complaints or bugs were discovered by Toshiba, any of its Dealer Associates or customers thereof;

(e)To reasonably investigate possible leads with respect to potential customers in the Territory who are referred to Toshiba by Vital Images;

3

(f) To maintain an adequately trained and staffed sales and technical support group for the marketing and distribution of the Products in the Territory, for the First Level Installation in the United States, and for the First Level Installation and First Level Maintenance outside the United States;

(g)To provide appropriate sales staff for training by Vital Images in the United States, and both sales and technical support staff for training by Vital Images outside of the United States, at mutually-agreeable locations;

(h)To provide Vital Images with reports of its activities and other information regarding the Products in the Territory in such detail and with such frequency as is reasonably agreed between both parties;

(i)To conduct its business in a professional manner, which will reflect positively upon Vital Images and its Products;

(j)To provide Vital Images with customer registration information at the time Toshiba issues Vital Images a Purchase Order, with the exception of sales by Toshiba in Japan and by Toshiba Medical Systems Europe B.V. “TMSE” who will use best efforts to provide customer information with the purchase order;

(k)To abide by all applicable laws and regulations in the Territory, including, if applicable, the U.S. Export Administration Regulations; and

(l)To apprise all customers of the terms of Section 2.3 of this Agreement regarding the ownership of intellectual property embodied in the Products and obtain from all customers a written license agreement containing all of the terms and conditions (except those not related to the protection of Vital Images) contained in Exhibit J to this Agreement, or other similar terms and conditions that protect Vital Images to the same degree as the terms and conditions contained in Exhibit J, except as set forth in Exhibit E.

3.2Toshiba Demonstration License.  To enable Toshiba to better perform its marketing and distribution of the Products and Toshiba’s medical equipments, and to assist it with its product development and training activities, Vital Images will grant to Toshiba and/or its Dealer Associates an unlimited number of royalty free software licenses, for the latest version of the Products solely for their own customer and trade show demonstration, promotional and training uses (including a minimum of eight (8) copies for each Toshiba America and Japan Training Academy), subject to the Terms and Conditions for the Demonstration License attached hereto as Exhibit D.  This Demonstration License will be valid for the term of this Agreement, and will include upgrades and updates to the Products.  Toshiba and the Dealer Associates will provide all hardware related to the Demonstration Licenses, and must track the location of all Demonstration Licenses.

3.3Promotional Materials.  Vital Images shall furnish Toshiba with a reasonable quantity of Vital Images data sheets, brochures and other marketing materials for the Products in the English language for use by Toshiba and its Dealer Associates.

(a)Upon request of Toshiba or its Dealer Associates, Vital Images shall provide Toshiba and the Dealer Associates with sufficient quantities of promotional materials and any revision(s) thereof, at no charge.

(b)In lieu of providing such promotional materials directly, Vital Images, at its discretion, may provide Toshiba with an electronic media copy of same with a nonexclusive, nontransferable right and license to use same, without modification of any kind, for the local reproduction of such materials solely for purposes of Toshiba’s performance under this Agreement.

4

(c)If Toshiba or its Dealer Associates believes that non-English language versions of such promotional materials or non-English language advertising of the Products are necessary or desirable for effective marketing of the Products in the Territory, Toshiba shall arrange and pay for the preparation of such non-English language materials, which shall be subject to the prior review and written approval of Vital Images. If Toshiba or its Dealer Associates believe that non-English language versions of user’s manual of the Products are necessary in the Territory and upon request of Toshiba or its Dealer Associates and the agreement of Vital Images, acting reasonably, Vital Images shall provide such translated version to Toshiba or its Dealer Associates which made such request, at the expense of Toshiba; provided that if such translated version is necessary for Regulatory compliance in the Territory, in the reasonable opinion of Vital Images, Vital Images shall provide it to Toshiba or its Dealer Associates at no charge. In all cases, Vital Images shall be the sole and exclusive owner of the copyrights in any such materials, regardless of language.

(d)Toshiba and the Dealer Associates will not remove any marks of Vital Images or attributions to Vital Images from the promotional materials provided, even if the materials are combined with other materials not from Vital Images.

(e)Toshiba and Vital Images may create joint promotional material for certain markets.  This material must be approved by both parties prior to distribution.

3.4Reverse Engineering.  Toshiba shall not reverse engineer, decompile or disassemble the Products and shall not allow any other person to do so, nor, except as expressly permitted hereunder, copy the Products.

3.5Expenses.  Except as otherwise specified in this Agreement, Toshiba and its Dealer Associates assume full responsibility for all its own costs and expenses incurred in carrying out its obligations under this Agreement, including but not limited to all rents, salaries, commissions, advertising, demonstrations, travel and accommodations.

ARTICLE 4:  GENERAL OBLIGATIONS OF VITAL IMAGES

4.1Development and Integration.  Continued collaboration on product is a shared goal of the parties.  Vital Images will use reasonable and prompt commercial efforts to integrate new Products as defined in the Development Agreement  into its Product solution, when and if such Products are made commercially available.

4.2Market Awareness.  Vital Images will use reasonable commercial efforts to promote awareness of the Products for use in the radiology and cardiology market through tradeshows and other marketing venues.  At a minimum, Vital Images will attend the trade shows set forth in Exhibit G to this Agreement.  Vital Images will exercise its best efforts to attend other trade shows that are not set forth in Exhibit G, provided that Toshiba gives Vital Images reasonable advance notice sufficient to allow Vital Images to send representatives to such shows.  For the shows that are set forth in Exhibit G, if Vital Images will have a separate booth in any trade show in which Toshiba also participates, Vital Images will provide such workstations and qualified personnel for the Toshiba booth in addition to its own. Vital Images will exercise its reasonable efforts to provide such workstations and qualified personnel for the Toshiba booth for the trade shows that are not set forth in Exhibit G, provided that Toshiba gives Vital Images reasonable advance notice sufficient to allow Vital Images to provide such workstations and qualified personnel. Furthermore, Vital Images will exercise its best efforts to have its booth located adjacent to TAMS’ booth where both participate.  Vital Images will also advise TAMS of any trade shows in which Vital Images participates.  Any exhibits prepared by Vital Images for Toshiba’s booth at trade shows must show the Vital Images products working in conjunction with Toshiba’s images from Toshiba’s CT equipment, but Vital Images is not precluded from presenting

5

additional exhibits that show its products working in conjunction with images from other CT manufacturers.

4.3Support.  During the term of this Agreement, Vital Images agrees to maintain an adequate number of trained sales, applications and service support personnel to perform its duties under this Agreement.  Included within Vital Images’ support responsibilities are the following:

(a)Vital Images has available global support for customers who wish to purchase such support in accordance with (i) any Service Level Agreements between TAMS and Vital Images, and (ii) any Service Level Agreements or other agreements for support between Toshiba, Toshiba Medical Systems Europe B.V. (“TMSE”) or the other Dealer Associates and Vital Images.

(b)Vital Images agrees to share statistics and customer information for own call center support to Toshiba users

(c)To promptly  respond to all inquiries or complaints from Toshiba or its Dealer Associates; outside of the United States, to provide all appropriate Second Level Maintenance of the Products to Toshiba or its Dealer Associates.

4.4Training. During the term of this Agreement Vital Images will provide training at its headquarters location, or such other location mutually agreed between the parties, for Toshiba and Dealer Associate personnel in the function, application, installation and the First Level Maintenance of the Products and in the provision of assistance to Vital Images for Second Level Maintenance, provided, however, Toshiba or the Dealer Associates shall pay the salaries and all transportation and living expenses for its staff.  Toshiba and the Dealer Associates in aggregate may place up to four (4) staff members in any of Vital Images’ regularly-scheduled training classes, upon at least two weeks’ advance notice to Vital Images, provided space is available.  With regard to Vitrea fX in Japan, Vital Images grants to Toshiba the right to produce and copy training materials, either in English or Japanese, modifying Vital Images’ materials.

4.5Customer Training.  In the US market, Vital Images will provide training in the form of 8 education units per Vitrea and Vitrea fX license to be used according to the course equivalences outlined in Exhibit E.  Training shall include an overview of the Vital Images developed tools and features of the products purchased by the customer.  Training in non-US markets will be available for an additional charge per session.  Vital Images is under no obligation to provide applications training to end users beyond twelve (12) months from the license issuance date of the related software at the end users site or twelve (12) months from receipt of purchase order for training sold separately.

4.6Hardware Validation. Vital Images shall take measures prior to the release of any new version Vitrea, Vitrea fX or ViTALConnect or ViTAL Enterprise software to ensure that compatible hardware are rigorously tested and validated to determine a market ready recommended hardware specification that assures optimal performance of the software. Such recommended hardware specification shall be advised to Toshiba or its Dealer Associate before or upon release of the new version software.

ARTICLE 5:  ORDERS FOR PRODUCTS AND SERVICES

5.1Purchase Orders.  Toshiba shall cause its Dealer Associates, and itself shall use its best efforts to submit purchase orders for the Products and Services to Vital Images in writing (preferably by facsimile or other electronic means) at least fifteen (15) days prior to the requested delivery date, which orders shall include the following information:

(a)An identification of the Products and Services ordered;

6

(b)Quantity of Products and Services;

(c)Requested delivery dates;

(d)Shipping instructions and shipping address; and

(e)With the exception of sales by Toshiba in Japan and by TMSE, who will use best efforts to provide customer information with the purchase order, the defined Customer Information to process the license request; which includes, end user name, end user address, Products to be delivered, maintenance coverage dates and products covered for software maintenance contracts and

(f)If applicable, any relevant export control information or documentation to enable Toshiba and Vital Images to comply with applicable U.S. export control laws.

With regard to Products for Japan, Toshiba may order Products to Vital Images and pay for the Products, through the following Toshiba’s agent (“Agent”).

Agent:

Toshiba America, Inc. (Boston)

24 New England Executive Park,

Burlington MA, 01803, U.S.A.

Attention: Branch Manager

For the purpose of this Agreement, Toshiba hereby appoints Agent as its authorized agent having an authority to perform any and all of Toshiba’s obligations and undertakings under this Agreement under its own name and on behalf of Toshiba, including, without limitation:

(a) to submit purchase orders for the Products for Japan;

(b) to receive shipments of the Products for Japan and invoices therefore;

(c) to make payments due to the Vital Images for the Products for Japan purchased;

(d) to confirm and follow up deliveries of the Products for Japan; and

(e) to return the defective or non-conforming Products for Japan.

Notwithstanding anything else contained herein, Toshiba shall remain directly liable to the Vital Images for all actions taken by Agent. Toshiba may, at its sole discretion but with at least forty-five (45) days prior written notice to the Vital Images, withdraw all of the authority of Agent provided above.  Upon receipt of such notice, the parties shall agree upon alternative procedural arrangements in order to ensure the orderly and timely supply of the Products to Toshiba hereunder and payment therefor.

5.2Acceptance of Orders – All purchase orders from Toshiba and the Dealer Associate are subject to acceptance in writing by Vital Images, which acceptance shall not be unreasonably withheld and shall be delivered by reply facsimile or by e-mail. Vital Images may withhold its acceptance only if (a)  the lead time for delivery is less than ten (10) days; (b) Toshiba or the Dealer Associate who has submitted the purchase order is delinquent in its payments to Vital Images under this Agreement; or (c) Toshiba or the Dealer Associate show has submitted the purchase order is in breach of this Agreement. Failure to respond to each purchase order by Vital Images within  five (5) business days from receipt of such purchase order shall be deemed acceptance of such purchase order by Vital Images. Vital Images will provide to Toshiba monthly reports no later than 15 days from the end of each month listing all purchase orders and amounts of such purchase orders placed by each Dealer Associate during the prior month. Such report shall also list all service contracts and options purchased by each Dealer Associate during such month.

5.3Delivery.  All deliveries of the Products shall be from Vital Images’ facilities unless otherwise agreed in writing between the parties.  Vital Images shall bear shipping charges for the shipment of any Products to its destination specified in the purchase order.  All risk of damage to or loss or delay of the Products shall pass to Toshiba or the Dealer Associate upon their delivery to a common carrier.

7

5.4Modification of Orders.  No accepted purchase order may be modified or canceled later than thirty (30) days before the scheduled delivery date, except upon the written agreement of both parties, provided, however, any price decrease or increase for the Products shall be implemented upon the effective date of such decrease or increase and therefore, will apply to any purchase order for which delivery has not yet taken place. Furthermore, Vital Images will, at no additional cost to Toshiba and the Dealer Associate, ship its latest authorized version or release of a Product in response to any accepted purchase order.  Toshiba’s and the Dealer Associate’s purchase orders or mutually-agreed change orders shall be subject to all provisions of this Agreement, whether or not the purchase order or change order so states, and any terms and conditions of such purchase order or change order which conflict with the terms and conditions of this Agreement shall be deemed excluded and of no legal effect as between the parties.

5.5Purchase Commitment.  Toshiba annual purchase commitment is set forth on Exhibit F attached hereto and incorporated herein by this reference.  Vital Images shall ship to Toshiba and/or its Dealer Associates during the Term of this Agreement such Products as are identified in and in accordance with the purchase orders submitted by Toshiba and/or its Dealer Associates.  In the event of a Change of Control of Vital Images, as defined in Section 18.11 of this Agreement, Toshiba may, in its sole discretion, be relieved of its minimum purchase Commitment set forth in this Agreement. In such case, Toshiba will provide Vital Images with thirty (30) days’ prior written notice of its intent to be relieved of its minimum purchase Commitments.  Upon relief of the minimum purchase Commitment, the pricing set forth in this Agreement shall expire and Section 4.1, Section 4.2, this Section 5.5, and the fourth sentence of Section 7.1 shall no longer be in effect.

5.6           Product Changes. Vital Images may do any of the following upon sixty (60) days’ prior written notice (or such sooner notice as practicable, if required for regulatory or legal reasons) to Toshiba:

(a)Alter the specifications for any Product or any new release thereof, provided, however, that Toshiba has the option to request Vital Images to continue to provide Products without such alteration for any purchase orders submitted by Toshiba and/or Dealer Associates prior to the date that Vital Images notifies Toshiba of such alteration, unless such prior Product has been discontinued for regulatory or other legal reasons;

(b)Except as set forth below, discontinue the production of any Product. However, such discontinuation will not release or modify Vital Images’ obligations for warranty and service support specified in this Agreement;

(c)Discontinue the development of any new release of a Product, if such new release has not been announced publicly; or

(d)Commence the development and distribution of new software products having features, which may make any Product wholly or partially obsolete, provided Toshiba is granted  the right to continue to purchase the obsolete Products for a period of at least one year from the date that the new software products are commercially introduced by Vital Images, unless such prior Product has been discontinued for regulatory or other legal reasons or this Agreement terminates before the expiration of such one-year period.

Notwithstanding the foregoing, at all times throughout the term of this Agreement, Vital Images must have available for Toshiba Vitrea or Vitrea fX or a successor software of Vitrea or Vitrea fX® that will have specifications that are at least equal to or better than those for the version of Vitrea or Vitrea fX® software existing as of the date of this Agreement, and give at least six (6) months’ prior written notice (or such sooner notice as practicable, if required for regulatory or legal reasons) to Toshiba before discontinuing the production of Vitrea or Vitrea fX®. The following associated options shall also be subject to this provision: 3D Angiography, CT Perfusion, CT Colonography, Endovascular Planning (when and if available), CT Cardiac, Cardiac Functional Analysis, SUREPlaque, VScore, Peripheral Vessel Probe, Nodule Probe, Dynamic Volume 4D Brain Perfusion, * * * and * * *.” Toshiba’s minimum purchase commitments will end in the event Vital Images discontinues the production of

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

8

Vitrea or Vitrea fX® and does not provide Toshiba with a successor product acceptable to Toshiba.  Such discontinuation will not release or modify Vital Images’ obligations for warranty and service support specified in this Agreement.

5.7 Installation of Products.  Unless otherwise agreed in writing by Vital Images, for outside the U.S., all deliveries of the Products shall be directly to Toshiba or the Dealer Associates, unless the parties agree that Vital Images shall ship the Products directly to the customers, and Toshiba and the Dealer Associates shall then have the sole responsibility for the First Level Installation of such Products into a customer’s computer system in the Territory in accordance with the standards and specifications established by Vital Images from time to time and provided to Toshiba and the Dealer Associates hereunder. If the Products need to be integrated with non-Toshiba equipment, Vital Images will perform the Second Level Installation, upon request from Toshiba, or the Dealer Associates or the customers, to ensure proper integration. For the U.S., installation, the respective responsibilities shall be as set forth in Exhibit K.

5.8 Distribution Report.  Name, address, telephone and facsimile numbers of customers who purchased the Product and Service contracts in each calendar quarter shall be provided by Toshiba and TMSE to Vital Images within thirty (30) days after the end of such quarter.

ARTICLE 6:  SOFTWARE MAINTENANCE SERVICES

6.1Software Maintenance Agreements.  For each customer purchasing a license for the Products in the Territory, Toshiba and/or the Dealer Associates shall use its reasonable best efforts to persuade such customer to purchase annual or long-term software maintenance services under a software maintenance program. Such software maintenance services shall include updates and upgrades  to the Vitrea®, Vitrea fX and other applicable Products that have been purchased by the customer, free of charge to the customer, for so long as Toshiba and/or Dealer Associate is current in its payment of fees for software maintenance services.  Included in software maintenance services is the provision of updates, which are new versions of the products that include enhancements and upgrades and are released to Vital Images’ general installed base, and corrections, which are fixes to errors in the Products that are reported by Vital Images customers and are released to Vital Images’ general installed base. It is agreed between the parties that newly released options to Vitrea® or Vitrea fX except for those listed in Exhibit E and purchased by the customer, shall be excluded from such updates and upgrades, unless explicitly agreed between the parties.  Provided, however, even after the Warranty Period (hereinafter defined in Section 9.1(a)), upon written request from Toshiba or its Dealer Associates for any particular end-user, for up to six (6) months after the expiration date of the Warranty Period, Vital Images shall, without charge, upgrade or update such end-user’s Product to its latest version available within the end-user’s Warranty Period, with downward compatibility.  Further, regardless of whether a customer is under a warranty or software maintenance program, in the event Vital Images issues a correction related to a patient safety issue resulting in a product recall or similar governmental action, Vital Images shall provide such correction to the customers affected at no charge with prior written notice to Toshiba.

6.2 First Level Maintenance Service.   Toshiba and/or the Dealer Associates shall provide the First Level Maintenance to customers outside the United States.  Vital Images shall provide First Level Maintenance to customers within the United States, unless defined otherwise in a Service Level Agreement.

6.3 Second Level Maintenance Service.   Vital Images shall provide the Second Level Maintenance to Toshiba and the Dealer Associates.   In accordance with their technical ability, and based upon their prior experience and training by Vital Images, except for the United States, Toshiba and/or the Dealer Associates shall use their reasonable best efforts to assist Vital Images in providing the Second Level Maintenance for the benefit of customers in the Territory.  Toshiba shall pay Vital Images to provide Second Level Maintenance at the amounts set forth in Exhibit E.

6.4Customer Contact.  Except as set forth in Section 6.3 outside the U.S., and Sections 6.2 and 6.3 within the U.S., Toshiba and/or the Dealers Associates shall have the primary responsibility for direct contact with customers in the Territory in regard to the function, application, installation or maintenance of the

9

Products under the First Level Maintenance and the Second Level Maintenance, provided that Vital Images may contact directly any customer not enrolled in support to enter into a support and maintenance  agreement.

ARTICLE 7:  PRICES AND PAYMENTS

7.1Prices.  Toshiba and the Dealer Associates shall pay Vital Images in accordance with the prices for the Products and the Services as specified in the Product Price List, Exhibit E hereto. All Product Price List prices are for shipment from Vital Images’ facilities to its destination.  Any special packing or handling shall be at the sole expense of Toshiba.

In recognition of the purchase commitments made by Toshiba and its Dealer Associates pursuant to Section 5.5 of this Agreement, Vital Images hereby covenants and agrees that the transfer price charged to Toshiba and its Dealer Associates for the standalone Products and Product for Japan shall at all times be lowest transfer price charged by Vital Images to anyone, except for governmental customers, research sites, training sites, show sites, luminaries, collaborators, and resolution of customer satisfaction issues.  If Vital Images provides a lower transfer price to an entity not set forth above, the parties shall meet to discuss whether to adjust the pricing set forth herein.

Toshiba is free to resell the Products and maintenance support services at any price at which Toshiba deems appropriate. Vital Images will not coerce or otherwise dictate such resale price.

7.2Payment Terms.  For each order of the Products or Services Toshiba and/or its Dealer Associates, who ordered such Products or Services, shall pay for Product in accordance with the Product Price List in U.S. Dollars within forty-five (45) days of the date of shipment or forty-five (45) days from the invoice date whichever is later. Notwithstanding the foregoing, if a Service Level Agreement is agreed for Services in the US market, payment terms may be set forth in the Service Level Agreement. With regard to Products sold in Japan, Toshiba shall seek an exemption from withholding tax obligations to the extent available under applicable tax treaties between U.S.A. and Japan, and Vital Images shall reasonably cooperate with Toshiba in completing and executing any documents necessary for obtaining such exemption, including, without limitation, providing Toshiba with the U.S. residency certificates, completing and executing relevant documents to be submitted to applicable taxation authorities.

7.3Overdue Payments.  If and for so long as any payment from Toshiba to Vital Images under this Agreement shall be overdue:

(a)Interest at twelve percent (12%) per annum or the highest rate permitted under applicable law, whichever is lower, shall become due on all balances outstanding that are past due by more than 30 days from the date that Vital Images provides written notice to Toshiba or Dealer Associate, as the case may be, of such past due amount, provided, however, that if payment is not made by the expiration of such 30-day period, the above-mentioned interest will be paid beginning the original due date of the payment; and

(b)Vital Images reserves the right to withhold or suspend shipment of the Products to Toshiba and/or the Dealer Associate if there is an unsettled outstanding balance owed by Toshiba or the Dealer Associate to Vital Images, provided, however, that Vital Images shall first provide Toshiba or the Dealer Associate, as the case may be, with 30-days prior written notice and opportunity to cure before withholding or suspending shipment under this paragraph. Any such withholding or suspension will be effected only against the Dealer Associate that has an unsettled outstanding balance, and not other Dealer Associates or Toshiba.

ARTICLE 8:  APPROVALS; ADVERSE REACTIONS; PRODUCT RECALLS

8.1Government Approval.  Vital Images shall make diligent efforts to prepare and file all applications required to obtain all necessary Government Approval for each country in the Territory specified in Exhibit B hereto, the Principal Countries, where such Government Approval has not already been

10

obtained.  For all other countries in the Territory, if any, Vital Images shall diligently prepare and file all applications required to obtain all necessary Government Approval for each such country as Vital Images, in its sole discretion, deems necessary.  Vital Images shall keep Toshiba apprised of its progress with respect to any such applications.  Toshiba shall furnish Vital Images with such assistance and cooperation as may be reasonably requested in connection with the securing of such Government Approval.  Notwithstanding the above, with regard to the Products for Japan, it is understood between the parties that Toshiba will (i) be a legal manufacturer solely for the purpose of Government Approval of the Toshiba CT System incorporating the Products as option (provided that Toshiba’s status or appearance as such legal manufacturer and this Article 8.1 shall not affect the provisions in Article 3.4 nor Vital Images’s status as the developer of the Products and owner of all rights therein), and (ii) be required to file all applications required to obtain all necessary registration and/or Government Approval, including, without limitation, approval under the Pharmaceutical Affairs Laws of Japan as may be amended from time to time, for the Toshiba CT System to be sold by Toshiba in Japan.  Vital Images shall furnish Toshiba with such assistance and cooperation as may be reasonably requested in connection with the securing of such Government Approval.

8.2Compliance. Vital Images  shall  comply with all applicable regulatory requirements.  However, Toshiba shall provide all information within its possession  to Vital Images necessary for Vital Images to comply with its medical device reporting requirements to the FDA or any other comparable regulatory body elsewhere in the world.  Toshiba shall maintain records of distribution in case of recalls and handling of feedback to meet regulatory requirements.  Vital Images shall comply with all health registration laws, regulations and orders of any government entity within the Territory and with all other governmental requirements relating to the promotion, marketing and sale of the Products in each country in the Territory.  Toshiba shall submit all advertising claims to Vital Images for written approval prior to their first use by any party, such consent not to be unreasonably withheld. Toshiba will comply with all applicable regulatory requirements applicable to Toshiba’s marketing and sale of the Products.

8.3Adverse Event Reporting.  Toshiba shall advise Vital Images, by telephone or facsimile, or other electronic communication means within twenty-four (24) hours or in case the event occurred a day before or on a national holiday or weekend, then the next working business day after it becomes aware of any adverse event (which is defined as personal injury or death) from the use of any Product or malfunction of any Product.  Unless otherwise required by applicable local laws, Toshiba shall advise Vital Images of any such adverse event prior to any report or filing being made by Toshiba with the FDA or any other comparable regulatory body elsewhere in the world. Vital Images shall appoint an Authorised Representative according to the European Union Medical Devices Directive MDD 93/42/EEC as set forth in Exhibit I.

8.4Corrective Action.

(a)Notice of Corrective Action.  If Vital Images believes that a corrective action with respect to the Products is desirable or required by law, or if any governmental agency having jurisdiction (including, without limitation, the FDA) shall request or order any corrective action with respect to the Products, including any recall, customer notice, restriction, change, corrective action or market action or any Product change, Vital Images shall promptly notify Toshiba and the Dealer Associates.  Any and all corrective actions shall be conducted at the expense of Vital Images, except costs associated with notifying customers of such corrective action.  Toshiba and/or the Dealer Associates shall maintain complete and accurate records, for such periods as may be required by applicable law, of all Products they sold.  The parties shall cooperate fully with each other in effecting any corrective action with respect to the Products pursuant to this Article 8.4, including communication with any customers and Toshiba shall cause its Dealer Associates, and itself shall comply with all reasonable directions of Vital Images’ regarding such corrective action.  This Article 8.4 shall not limit the obligations of either party under law regarding any corrective action with respect to the Products required by law or properly mandated by governmental authority.  With regard to the Products for Japan,  if a corrective action with respect to the Products incorporated in the Toshiba CT Systems is required by law, or if any governmental agency having jurisdiction (including, without limitation, Ministry of Health,

11

Labour and Welfare) shall request or order any corrective action with respect to the Products incorporated in the Toshiba CT Systems, including any recall, customer notice, restriction, change, corrective action or market action or any Product change, TOSHIBA shall promptly notify Vital Images.  Any and all corrective actions shall be conducted at the expense of Vital Images, except costs associated with notifying customers of such corrective action.  Toshiba shall maintain complete and accurate records, for such periods as may be required by applicable law, of all Toshiba CT Systems they sold.  The parties shall cooperate fully with each other in effecting any corrective action with respect to the Products pursuant to this Article 8.4, including communication with any customers and Vital Images shall comply with all reasonable directions of TOSHIBA’ regarding such corrective action.  This Article 8.4 shall not limit the obligations of either party under law regarding any corrective action with respect to the Products required by law or properly mandated by governmental authority.

(b)Refund.  If any Products are required to be returned to Vital Images pursuant to this Article 8.4 and no replacement is provided therefore by Vital Images, Vital Images shall refund to Toshiba’s or the Dealer Associate’s customers any unearned license fees paid to Toshiba or the Dealers Associates (the amount of the license fee each such customer paid for the products, less a reasonable value for use determined by prorating the license fee paid on a thirty-six (36) month straight-line amortization method). Vital Images shall indemnify Toshiba or the Dealer Associate from any actions made by Toshiba’s or the Dealer Associate’s customers claiming reimbursement of license fees, whether or not in excess of the amount specified in this paragraph.

ARTICLE 9:  WARRANTIES AND REPRESENTATIONS; INDEMNIFICATION

9.1Product Warranties to Customers.  Vital Images hereby authorizes Toshiba and the Dealer Associates to pass through to its customers Vital Images’ standard software warranties as set forth below.

(a)Limited Warranty.

(i) Vital  Images warrants to Toshiba and the Dealer Associates for * * * months from the license issuance date, or * * *months from the Delivery date, except for Toshiba in Japan where Vital Images warrants for * * *months from the license issuance date or * * *months from the Delivery date, whichever expires first (the “Warranty Period”), that the Products, when properly installed and operated, will perform the functions described in the functional specifications for the Products, as contained in the applicable written documentation for the Products, and that such Product shall be upgraded or updated to its latest version with the assurance of downward compatibility. Vital Images shall have no obligation under this provision if (a) the Products have not been properly installed, used or maintained (except for any maintenance performed by Vital Images), in accordance with Vital Images’ then-applicable operating manuals; or (b) the Products have been modified in any manner by anyone other than Vital Images, or are used or combined with other computer software programs (other than standard operating software) not approved by Vital Images, hardware not validated by Vital Images and without the prior written consent of Vital Images; or (c) the Products have been distributed to a customer with any warranties or representations, oral or written, made by Toshiba or any third party beyond those expressly set forth herein., however Vital Images will nevertheless be responsible for performing its warranty obligations to the extent set forth in this paragraph, but not for the additional warranties made by Toshiba or any third party.

(ii) Toshiba may offer its customers an extended software Warranty at the time of issuing Vital Images a Purchase Order, subject to the pricing set forth in Exhibit E and the terms set forth in Article 9.1(a)(i), and subject to Toshiba’s paying Vital Images with the software order.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

12

(iii)   The warranty for sale of any Product in Germany will be * * * months from installation, subject to Toshiba’s paying Vital Images an amount equal to * * * of the maintenance fees that would have been paid for the * * *months of the warranty period in Germany, had the warranty not been extended pursuant to this Article 9.1(a)(ii).

(iv) Toshiba may include annual or long-term software maintenance services for the Products as part of Toshiba’s service contract proposals to its customers. However, if the Toshiba customers do not wish to sign up to such extended software maintenance or software maintenance services, Toshiba is not precluded from offering its medical equipments or service contract without such software maintenance.

(b)Exclusive Remedy.  Vital Images’ entire liability for any warranty claim made by Toshiba or the Dealer Associates under Section 9.1(a) above during the Warranty Period, and Toshiba’s and its Dealer Associates’ exclusive remedy for any such claim, shall be for Vital Images, at its option, to either (i) replace any defective media which prevents the Products from satisfying the limited warranty described in Section 9.1(a); or (ii) attempt to correct any material and reproducible errors reported by Toshiba or the Dealer Associate. Toshiba will have the right to return the affected licenses and receive a refund of the license fees paid by the customers of Toshiba and the Dealer Associates for the affected Products if Vital Images, after exercising all reasonable commercial efforts, is unable to correct the errors within 30 days (unless otherwise agreed by the parties) from the date it receives notice of such error. Such refund will be provided no later than 60 days from the date of Toshiba’s written request for refund.  Vital Images does not warrant that the operation of the Products will be uninterrupted or error-free, that all errors in the Products will be corrected, that the Products will satisfy customer’s requirements or that the Products will operate in the combinations which such customer may select for use.

(c)  Warranty Extension.  Replacement or correction of all or any part of the Products does not extend the Warranty Period.  However, if Vital Images is unable to correct an error by the deadline by which it projected such correction, the warranty will be extended for the number of days for which the error remains uncorrected beyond such deadline Notwithstanding the foregoing, and notwithstanding Section 9.1(a) above, in the event that the Products have been installed on a hardware platform which has been recommended in writing by Vital Images, and do not perform because the Products are not compatible with such hardware, the Warranty Period shall not commence until the date on which all issues defined in the customer’s warranty claim regarding the hardware have been resolved. Vital Images and its third party licensors expressly disclaim any commitment to provide maintenance or support of the Products beyond the Warranty Period, in the absence of entering into a separate software maintenance arrangement with Vital Images and except to the extent stated in Section 6.1 for the 6 month post warranty grace period. Furthermore, the Products are derived from and include software from third party licensors, who make no warranty, express or implied, regarding the Products, who disclaim any and all liability for the Products and who will not undertake to provide any information or support regarding the Products.

(d)Maintenance Obligations.  As part of its First Level Maintenance obligations outside the U.S., Toshiba shall and it shall cause its Dealer Associates to promptly inform Vital Images of any claims made by their customers in the Territory under such software warranties.  All such warranty claims shall state the nature and details of the claim, the date the cause of the claim was first observed and the serial number of the Products concerned, if any.  Further, all such warranty claims must be received by Vital Images before the expiration of the Warranty Period for such customer, or will be handled as part of Maintenance and Support for customers who remain current in their fees for Maintenance and Support.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

13

9.2Warranty to Toshiba.  Vital Images hereby represents and warrants to Toshiba:

(a)Vital Images owns or has the lawful right from others to grant the rights to market and distribute the Products as set forth in this Agreement;

(b)Vital Images has entered into an agreement with PointDx, Inc. and has procured any necessary license from PointDx, Inc. to fulfill its obligations under this Agreement. Vital Images has no knowledge of any claim of infringement by the Products of any third party intellectual property rights, such as patents, copyrights, trade secrets or trademarks; and

(c)Vital Images has taken all appropriate corporate action to authorize execution and performance of this Agreement.

9.3Limited Warranty.  THE WARRANTIES SET FORTH IN ARTICLES 9.1 AND  9.2 ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY DISCLAIMED AND EXCLUDED BY VITAL IMAGES, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

9.4Indemnification of Toshiba.  Vital Images hereby agrees to indemnify, defend and hold Toshiba and/or Dealer Associates harmless from any third party suit, claim or other legal action (“Legal Action”) (i) that alleges any bodily injuries or death and damages to tangible property caused solely by use of the Products, but only to the extent caused or contributed to by Vital Images, and/or (ii) that alleges the Products, or any of them, infringe any patent, copyright, or trade secret, including any reasonable costs or legal fees thereby incurred by Toshiba and/or the Dealer Associates.  Vital Images shall be given written notice of any Legal Action within thirty (30) days of Toshiba’s and/or Dealer Associates first knowledge thereof, provided, that, the failure of Toshiba and/or Dealer Associates to notify Vital Images of any such matter within the thirty (30) day period shall not release Vital Images, in whole or in part, from its obligations under this Section 9.4, except to the extent Toshiba’s and/or Dealer Associates’ failure to so notify Vital Images materially prejudices Vital Images’ ability to defend against such Legal Action.  Vital Images shall have sole and exclusive control of the defense of any Legal Action, including the choice and direction of any legal counsel.  Toshiba and/or Dealer Associates may not settle or compromise any Legal Action without the written consent of Vital Images.  Toshiba and/or Dealer Associates shall provide all reasonably requested assistance to Vital Images, at Vital Images’ expense.  If a Product is found to infringe any such third party intellectual property right in such a Legal Action, at Vital Images’ sole discretion and expense, Vital Images may (i) obtain a license from such third party for the benefit of Toshiba and/or Dealer Associates and their customers; or (ii) replace or modify the Product so that it is no longer infringing; or (iii) if neither of the foregoing is commercially feasible, terminate this Agreement and refund to Toshiba and/or the Dealer Associates all amounts previously paid by Toshiba and/or the Dealer Associates for the Software and the Products.

9.5Indemnification of Vital Images.  Toshiba hereby agrees to indemnify, defend and hold Vital Images harmless from any and all claims, demands, losses and liabilities, including any reasonable costs or legal fees thereby incurred by Vital Images, resulting from Toshiba’s acts or omissions, including, without limitation, misrepresentations regarding the Products, any violation of applicable laws or regulations relating to the marketing and distribution of the Products, any breach of any covenant or term in this Agreement, any failure by Toshiba to provide the required support or training to end users or to properly install the Products to the extent specified in this Agreement; and any misappropriation by a Toshiba or the Dealer Associate customer of any Vital Images intellectual property.

Vital Images hereby agrees to indemnify, defend and hold Toshiba and/or Dealer Associates harmless from any and all claims, demands, losses and liabilities, including any reasonable costs or legal fees thereby incurred by Toshiba and/or Dealer Associates, resulting from Vital Images’ acts or omissions, including, without limitation, misrepresentations regarding the Products, any violation of applicable laws or regulations relating to the marketing and distribution of the Products, or any failure by Vital Images to provide the required support or training to end users or to properly install the Products to the extent specified in this Agreement.

14

ARTICLE 10:  LIMITATION OF REMEDIES

10.1Delay.   The delivery date for each order placed by Toshiba or the Dealer Associate will be indicated on Toshiba or the Dealer Associate’s purchase order.  Once Vital Images accepts such purchase order, if Vital Images fails to deliver the Products within twenty (20) days of the deadline(s) indicated in such purchase orders, Toshiba or the Dealer Associate shall have the right to cancel such order and  purchase equivalent products from an alternative source.  Vital Images shall pay Toshiba or the Dealer Associate for the difference between the price of the alternative product and the price for the Products under the cancelled purchase order(s), not later than twenty (20) days following receipt of Toshiba or the Dealer Associate’s invoice.

10.2Sole Remedies.   THE SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF ANY AND ALL WARRANTIES AND THE SOLE REMEDIES FOR VITAL IMAGES’ LIABILITY OF ANY KIND (INCLUDING LIABILITY FOR NEGLIGENCE OR PRODUCTS LIABILITY) WITH RESPECT TO THE PRODUCTS AND THEIR USE, THE SERVICES COVERED BY THIS AGREEMENT, AND ALL OTHER PERFORMANCE BY VITAL IMAGES UNDER THIS AGREEMENT SHALL BE LIMITED TO THE REMEDIES PROVIDED IN THIS AGREEMENT.

10.3Consequential Damages.  VITAL IMAGES AND TOSHIBA OR THE DEALER ASSOCIATE SHALL HAVE NO LIABILITY OF ANY KIND FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSS OR DAMAGE, EVEN IF VITAL IMAGES OR TOSHIBA OR THE DEALER ASSOCIATE SHALL HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE BY TOSHIBA OR THE DEALER ASSOCIATE OR VITAL IMAGES.  IN NO EVENT SHALL  VITAL IMAGES BE LIABLE FOR ANY DAMAGES IN EXCESS OF THE AGGREGATE AMOUNTS ACTUALLY PAID BY TOSHIBA OR DEALER ASSOCIATE TO VITAL IMAGES UNDER THIS AGREEMENT, EXCEPT FOR ACTIONS FOR BODILY INJURY OR DEATH BROUGHT BY THIRD PARTIES, TANGIBLE PROPERTY DAMAGE, INTELLECTUAL PROPERTY INFRINGEMENT, ACTIONS ARISING UNDER FDA OR APPLICABLE LOCAL REGULATIONS IN THE TERRITORY, OR AS OTHERWISE PROVIDED UNDER THIS AGREEMENT OR BY LAW.

ARTICLE 11:  CONFIDENTIALITY

11.1Confidential Information; Term.  All Confidential Information shall be deemed confidential and proprietary to the party disclosing such information hereunder.  Each party may use the Confidential Information of the other party during the term of this Agreement only as permitted or required for the receiving party’s performance hereunder.  The receiving party shall not disclose or provide any Confidential Information to any third party and shall take reasonable measures to prevent any unauthorized disclosure by its employees, agents, contractors or consultants during the term hereof including appropriate individual nondisclosure agreements.  The foregoing duty shall apply to any Confidential Information for a period of five (5) years from the date of its disclosure. All confidential information must be clearly and conspicuously marked by the disclosing party as proprietary information.  Any proprietary information that is disclosed orally must be identified as  confidential at the time of disclosure and must be confirmed in writing no later than thirty (30) days following disclosure.

11.2Exclusions.  The following shall not be considered Confidential Information for purposes of this Article 11:

(a)Information which is or becomes in the public domain through no fault or act of the receiving party;

(b)Information which was independently developed by the receiving party without the use of or reliance on the disclosing party’s Confidential Information;

15

(c)Information which was provided to the receiving party by a third party under no duty of confidentiality to the disclosing party; or

(d)Information which is required to be disclosed by law, provided, however, prompt prior notice thereof shall be given to the party whose Confidential Information is involved.

ARTICLE 12:  TRADEMARKS

12.1Use of Trademarks.  Vital Images hereby grants to Toshiba and the Dealer Associates, and Toshiba and the Dealer Associates hereby accepts from Vital Images, a nonexclusive, nontransferable and royalty-free license to use the Vital Images trademarks specified in the List of Trademarks, Exhibit H hereto, as such list may be modified from time to time, solely in connection with the distribution, promotion, advertising and maintenance of the Products.  Toshiba shall cause its Dealer Associates, and itself shall not use any other marks or trade names in connection with the marketing and distribution of the Products.  All such Vital Images trademarks shall be used by Toshiba and/or the Dealer Associates in accordance with Vital Images’ standards, specifications and instructions, but in no event beyond the term of this Agreement.    Toshiba and the Dealer Associates are not granted any right, title or interest in such trademarks other than the foregoing limited license, and Toshiba shall cause its Dealer Associates, and itself shall not use any Vital Image trademarks as part of Toshiba’s or the Dealer Associate’s corporate or trade name or permit any third party to do so.

12.2Registration.  Vital Images shall use its best efforts to register the Vital Images trademarks specified in the List of Trademarks, Exhibit H hereto, as such list may be modified during the term of this Agreement, within the Territory when and if Vital Images determines, in its sole discretion, that registration is necessary or useful to the successful distribution of the Products.  Vital Images shall be the sole party to initiate any such registration and shall bear all the expenses thereof.

12.3Markings.  Toshibas shall cause its Dealer Associates, and itself shall not remove or alter any Vital Images trade names, trademarks, copyright notices, serial numbers, labels, tags or other identifying marks, symbols or legends affixed to any Products, or images generated by such Products, documentation, containers or packages.  All promotional materials prepared by Toshiba relating to the Products, regardless of manner or media of display, shall conspicuously bear attribution to Vital Images.

12.4Infringement.  Toshiba shall cause its Dealer Associates, and itself shall promptly notify Vital Images in writing of any unauthorized use of Vital Images’ trademarks or similar marks which may constitute an infringement or passing off of Vital Images’ trademarks, to the extent known to Toshiba or its Dealer Associates.  Vital Images reserves the right in its sole discretion to institute any proceedings against such third party infringers, and Toshiba shall refrain from doing so.  Toshiba shall cooperate fully with Vital Images in any legal action taken by Vital Images against such third parties, provided that Vital Images shall pay all expenses of such action.  All damages, which may be awarded or agreed upon in settlement of any legal action, shall accrue to Vital Images.

12.5Termination of Use.  Toshiba shall not adopt, use or register any words, phrases or symbols which are identical to or confusingly similar to any of Vital Images’ trademarks.  Upon termination of this Agreement, Toshiba shall immediately cease any use of the Vital Images trademarks in any manner.  In addition, Toshiba hereby empowers Vital Images and shall assist Vital Images, if requested, to cancel, revoke or withdraw any governmental registration or authorization permitting Toshiba to use Vital Images trademarks in the Territory.

12.6Toshiba Trademarks. Vital Images will not, under any circumstances, use any of Toshiba’s or Dealer Associates’ trademarks, without Toshiba’s prior written consent.  Vital Images shall not adopt, use or register any words, phrases or symbols which are identical to or confusingly similar to any of Toshiba’s or Dealer Associates’  trademarks without Toshiba’s or the applicable Dealer Associate’s prior written consent.

16

ARTICLE 13:  TAXES AND DUTIES

13.1Taxes in the Territory.  Toshiba and/or its Dealer Associates shall be responsible for and shall pay all taxes (except Vital Images’ income taxes), duties, import deposits, assessments and other governmental charges, however designated, which are now or hereafter imposed by any governmental authority or agency that are based on (a) the payment of any amount by Toshiba or the Dealer Associates to Vital Images pursuant to this Agreement for the Products or the use thereof, or (b) the import of the Products into the Territory if such transaction is international in nature.

13.2Net Payments.  All payments to be made by Toshiba and its Dealer Associates to Vital Images pursuant to this Agreement represent net amounts Vital Images is entitled to receive and shall not be subject to any deductions for any reason whatsoever except as allowed in this Agreement or by law.  In the event any of said charges become subject to withholding taxes, duties, import deposits, assessments or other governmental charges, however designated, except Vital Images’ income taxes, said payments from Toshiba or its Dealer Associates shall be increased to such an extent as to allow Vital Images to receive the net amounts due under this Agreement.

ARTICLE 14:  IMPORT AND EXPORT OF PRODUCTS

14.1Import Documentation.  If applicable, Toshiba shall be responsible for obtaining all licenses and permits required to import the Products into the Territory in accordance with applicable laws or regulations in the Territory.

14.2Export Regulations.  If applicable, Toshiba shall supply Vital Images on a timely basis with all necessary information and documentation reasonably requested by Vital Images for export of the Products in accordance with U.S. export control laws or regulations. Promptly after execution of this Agreement, Vital Images will notify Toshiba and its Dealer Associates of the U.S. export status of the Products, and will make its best efforts to continue to update Toshiba and its Dealer Associates of any changes in the export status of the Products based on any changes in the U.S. export regulations.  Vital Images shall be responsible for compliance with all applicable U.S. Export Administration Regulations for all Products shipped by it to Toshiba or the Dealer Associates. If applicable, Toshiba hereby assures Vital Images that:

(a)Toshiba shall cause its Dealer Associates, and itself shall not re-export, directly or indirectly, the Products or the direct product of the Products to any destination forbidden under the then-applicable U.S. Export Administration Regulations;

(b)Toshiba’s commitment in paragraph (a) above shall apply in all cases unless the U.S. Export Administration Regulations expressly permit such re-export or the U.S. Commerce Department’s Office of Export Licensing has granted such authorization in writing; and

(c)Toshiba’s commitment in paragraph (a) above shall survive termination of this Agreement.

ARTICLE 15:  TERM AND TERMINATION

15.1Term.  This Agreement shall take effect as of January 1, 2009 and shall have an initial term through December 31, 2013 (the “Term”).  At the end of the Term, this Agreement shall automatically terminate unless prior to the date of termination, this Agreement is extended pursuant to the mutual written agreement of Toshiba and Vital Images. However, in the event of a Change of Control, as defined in Section 18.11 of this Agreement, Toshiba may, in its sole discretion, extend this Agreement for up to an additional term of three (3) years from the date of the Change of Control, by providing Vital Images written notice, specifying the term for which it seeks to extend the agreement. Such notice must be provided no later than 30 days prior to the expiration of the initial Term of this Agreement. In the event of such extension, Toshiba shall have the continued right for the duration of the extension to obtain the

17

products and services available under this Agreement at prices and under terms to be mutually determined, negotiating in good faith, which prices shall not exceed the commercially-available prices for such products and services, and all terms and conditions of this Agreement, including pricing and the Commitment, will discontinue for the extension term of the Agreement, unless otherwise agreed by the parties in writing.

15.2Termination.  Notwithstanding the provisions of Section 15.1 above, this Agreement may be terminated earlier by either party upon written notice to the other party:

(a)If the other party files a petition of any type as to its bankruptcy, is declared bankrupt, becomes insolvent, makes an assignment for the benefit of creditors, goes into liquidation or receivership or otherwise loses legal control of its business voluntarily;

(b)If the other party is in material breach of this Agreement and has failed to cure such breach within thirty (30) days of receipt of written notice thereof from the first party;

(c)If an event of Force Majeure continues for more than six (6) months.

(d)If Vital Images so elects due to a Legal Action, as specified in Article 9.4 above.

(e)Upon mutual agreement by both parties.

(f)After * * *, the agreement may be terminated on * * * of * * *  year provided a * * * is provided by Toshiba to ViTAL by * * * .  Toshiba is responsible for delivering the minimum commitment for then-current year.

This Agreement may also be terminated by Toshiba in the event of a Change of Control, if the acquiring entity is a competitor of Toshiba, defined as * * *, * * *, and* * *. Toshiba will provide Vital Images with thirty (30) days’ prior written notice of termination.

15.3Rights and Obligations on Termination.  Upon the effectiveness of any termination of this Agreement for any reason, the parties shall have the following rights and obligations:

(a)Subject to obligations set forth in Section 15.2(f) , neither party shall be released from the obligation to make payment of all amounts then or thereafter due and payable;

(b)The rights of any customer of Toshiba or the Dealer Associates who holds a valid license for the Products prior to the effective date of such termination shall not be affected;

(c)Toshiba’s indemnification obligation under Article 2.2, Vital Images’ obligations to provide First Level Maintenance (U.S.) and Second Level Maintenance as well as Second Level Installation for all purchase orders submitted by Toshiba and/or Dealer Associates prior to the date of termination of this Agreement, and the parties’ obligations under Articles 7, 8, 9, 10, 11, 12, 13, 16, 17, and 18.11 [need to update section numbers when contract final] shall survive any termination of this Agreement;

(d)Unless the parties otherwise agree in writing, Toshiba shall cause its Dealer Associates and itself shall return all copies of the Products and any other items of Confidential Information to Vital Images and, if applicable, shall erase all copies of the Products from its computer systems and shall certify in writing to Vital Images that it has done so; and

(e)Unless the parties otherwise agree in writing, Vital Images shall return all Confidential Information of Toshiba or the Dealer Associate and any copy thereof to Toshiba or the Dealer Associate.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

18

ARTICLE 16:  FORCE MAJEURE

16.1Definition.  “Force Majeure” shall mean any event or condition beyond the reasonable control of either party which prevents, in whole or in material part, the performance by one of the parties of its obligations hereunder or which renders the performance of such obligations so difficult or costly as to make such performance commercially unreasonable.  Without limiting the foregoing, the following shall constitute events or conditions of Force Majeure:  acts of State or governmental action, riots, disturbance, war, strikes, lockouts, slowdowns, prolonged shortage of energy or other supplies, epidemics, fire, flood, hurricane, typhoon, earthquake, lightning and explosion, or any refusal or failure of any governmental authority to grant any export license legally required.

16.2Notice.  Upon written notice to the other party, a party affected by an event of Force Majeure shall be suspended without any liability on its part from the performance of its obligations under this Agreement, except for the obligation to pay any amounts due and owing hereunder.  Such notice shall include a description of the nature of the event of Force Majeure, and its cause and possible consequences.  The party claiming Force Majeure shall also promptly notify the other party of the termination of such event.

16.3Suspension of Performance.  During the period that the performance by one of the parties of its obligations under this Agreement has been suspended by reason of an event of Force Majeure, the other party may likewise suspend the performance of all or part of its obligations hereunder to the extent that such suspension is commercially reasonable.

ARTICLE 17:  ARBITRATION

17.1Dispute Resolution.  Except as provided in Section 17.2 below, Vital Images and Toshiba shall each use its best efforts to resolve any dispute between them promptly and amicably and without resort to any legal process if feasible within thirty (30) days of receipt of a written notice by one party to the other party of the existence of such dispute.  Except as provided in Section 17.2 below, no further action may be taken under this Article 17 unless and until executive officers of Vital Images and Toshiba have met in good faith to discuss and settle such dispute.  The foregoing requirement in this Article 17.1 shall be without prejudice to either party’s right, if applicable, to terminate this Agreement under Article 14.2 above.

17.2Litigation Rights Reserved.  If any dispute arises with regard to the unauthorized use or infringement of the Confidential Information by any party hereto, the party whose Confidential Information is being infringed may seek any available remedy at law or in equity from a court of competent jurisdiction.

17.3Procedure for Arbitration.  Except as provided in Section 17.2 above, any dispute, claim or controversy arising out of or in connection with this Agreement which has not been settled through negotiation within a period of thirty (30) days after the date on which either party shall first have notified the other party in writing of the existence of a dispute shall be settled by final and binding arbitration under the International Arbitration Rules of the American Arbitration Association (“AAA”).  Any such arbitration shall be conducted by three (3) neutral arbitrators appointed by mutual agreement of the parties or, failing such agreement, in accordance with said Rules.  At least one (1) arbitrator shall be an experienced computer software professional, and at least one (1) arbitrator shall be an experienced business attorney with a background in the licensing and distribution of computer software. Any such arbitration initiated by Vital Images shall be conducted in Orange County, California, U.S.A., and any such arbitration initiated by Toshiba or Dealer Associate shall be conducted in Minneapolis, Minnesota, U.S.A., any such arbitration to be conducted in the English language.  An arbitral award may be enforced in any court of competent jurisdiction.  Notwithstanding any contrary provision in the AAA Rules, the following additional procedures and rules shall apply to any such arbitration:

(a)Each party shall have the right to request from the arbitrators, and the arbitrators shall order upon good cause shown, reasonable and limited pre-hearing discovery, including (i) exchange of witness lists, (ii) depositions under oath of named witnesses at a mutually convenient location, (iii) written interrogatories and (iv) document requests.

19

(b)Upon conclusion of the pre-hearing discovery, the arbitrators shall promptly hold a hearing upon the evidence to be adduced by the parties and shall promptly render a written opinion and award.

(c)The arbitrators may not award or assess punitive damages, consequential or indirect damages against either party.

(d)Each party shall bear its own costs and expenses of the arbitration and one-half (1/2) of the fees and costs of the arbitrators, subject to the power of the arbitrators, in their sole discretion, to award all such reasonable costs, expenses and fees to the prevailing party.

ARTICLE 18:  MISCELLANEOUS

18.1Relationship.  This Agreement does not make either party the employee, agent or legal representative of the other for any purposes whatsoever.  Neither party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other party.  Each party is acting as an independent contractor.

18.2Assignment.   Toshiba shall not assign or otherwise transfer its rights and obligations under this Agreement except with the prior written consent of Vital Images, which consent will not be unreasonably withheld.  Vital Images shall not assign or otherwise transfer its rights and obligations under this Agreement except with the prior written consent of Toshiba, which consent will not be unreasonably withheld, except that consent may be withheld for any reason (whether or not reasonable) for assignments or transfers to any of the following entities: * * *, * * *, and * * *.  This restriction against assignment or transfer by Vital Images shall not apply to any entity who purchases 50% or more of the shares of stock of Vital Images.  Any prohibited assignment shall be null and void.

18.3Notices.  Notices permitted or required to be given hereunder shall be deemed sufficient if given by registered or certified mail, postage prepaid, return receipt requested, by private courier service, or by facsimile addressed to the respective addresses of the parties as first written above or at such other addresses as the respective parties may designate by like notice from time to time.  Notices so given shall be effective upon (i) receipt by the party to which notice is given, or (ii) on the fifth (5th) day following domestic mailing or the tenth (10th) day following international mailing, as may be the case, whichever occurs first.

18.4Entire Agreement.  This Agreement, including the Exhibits hereto which are incorporated herein, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all proposals, oral or written, and all negotiations, conversations, discussions, and previous distribution or value added reseller agreements heretofore between the parties, including, without limitation, the Marketing and Distribution Agreement dated March 30, 2007, and the amendments 1, 2 and 3 to said Agreement (together “2007 Agreement”). However, Vital Images and Toshiba’s rights and obligations concerning pricing, installation (First Level and Second Level), warranty and maintenance (First Level and Second Level) for all purchase orders issued under the 2007 Agreement will continue to be subject to the 2007 Agreement. Toshiba and Vital Images hereby acknowledge that neither party has been induced to enter into this Agreement by any representations or statements, oral or written, not expressly contained herein. Vital Images and Toshiba’s rights and obligations concerning the SurePlaque will continue to be governed by the License Agreement entered into between the parties, dated September 7,. 2006.

18.5Amendment.  This Agreement may not be modified, amended, rescinded, canceled or waived, in whole or in part, except by written amendment signed by both parties hereto.

18.6Publicity.  This Agreement is confidential, and no party shall issue press releases or engage in other types of publicity of any nature dealing with the commercial or legal details of this Agreement without the other party’s prior written approval, which approval shall not be unreasonably withheld.  However, approval of such disclosure shall be deemed to be given to the extent such disclosure is required

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

20

tocomply with governmental rules, regulations or other governmental requirements.  In such event, the publishing party shall furnish a copy of such disclosure to the other party.

18.7Governing Law.    This Agreement shall be governed by and interpreted under the laws of the state within which the action is filed as specified in Section 17.3 above, excluding its choice of law rules. “The parties hereby exclude application of the 1980 United Nations Convention on Contracts for the International Sale of Goods.”

18.8Severability.  If any provision of this Agreement is found unenforceable under any of the laws or regulations applicable thereto, such provision terms shall be deemed stricken from this Agreement, but such invalidity or unenforceability shall not invalidate any of the other provisions of this Agreement.

18.9Counterparts.  This Agreement may be executed in two or more counterparts in the English language and each such counterpart shall be deemed an original hereof.  In case of any conflict between the English version and any translated version of this Agreement, the English version shall govern.

18.10Waiver.  No failure by either party to take any action or assert any right hereunder shall be deemed to be a waiver of such right in the event of the continuation or repetition of the circumstances giving rise to such right.

18.11Change of Control.  For purposes of this Agreement, “Change of Control” shall mean: (i) any merger, statutory share exchange or consolidation of a party with or into any third party, that entitles the shareholders of the third party to receive at least one (1) seat on the board of directors and at least thirty-three and one-third percent (33-1/3%) of the outstanding capital stock of the post-merger company (provided, however, that any acquisition merger, statutory share exchange or consolidation of a party with or into * * *, * * *, and * * *or any of their affiliates  that entitles any such company of at least thirty-three and one-third percent (33-1/3%) of the outstanding capital stock of Vital Images shall be a Change of Control, whether or not such entity also receives a seat on the board of directors of Vital Images; (ii) any third party becoming the holder of a majority of the capital stock of a party entitled to vote generally for the election of directors; or (iii) the sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of a party in any transaction or series of transactions by such party.  In case of “Change of Control” of either party, that party shall assure that the acquiring equity shall agree to honor and fullfill the obligation of the party as contained in this Agreement.

18.12Board Observer. The parties agree that a representative of Toshiba shall obtain non-voting “Observer” status for the meetings of the board of directors of Vital Images, Inc, subject to legal, regulatory or governance constraints and an agreement that is appropriate for such status. The parties further agree that they will diligently and in good faith use their best efforts to determine whether there are any legal, regulatory or governance obstacles to such an appointment which they mutually agree would render such an appointment inadvisable. The parties agree that there will be some instances in which the Observer should not participate and that they will diligently and in good faith use their best efforts to identify specific circumstances under which they mutually agree such an Observer would not participate in that portion of the board meeting (such as owing to conflict-of-interest on a particular issue or attorney/client communication with the board in a specific instance). The parties will use their good faith and diligent best efforts to resolve these issues on or before the 2007 annual meeting of Vital Images, Inc.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

21

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives below.

VITAL IMAGES, INC.		Toshiba Medical Systems
By	/s/ Michael H. Carrel	By	/s/ Yasuo Nobuta
Name Michael H. Carrel		Name Yasuo Nobuta
Title President and CEO		Title General Manager / CT Systems

LIST OF EXHIBITS

A	Products
B	Territory
C	List of Dealer Associates
D	Terms and Conditions for the Demonstration License
E	Product Price List
F	Product Commitments
G	Major Trade Show List
H	List of Vital Images Trademarks
I	Authorized Representative
J	Terms and Conditions for the Customer Agreement
K	US Installation, Education, and Service

22

VITAL IMAGES, INC. AND TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

EXHIBIT A

PRODUCTS

Vitrea ®

VScore™ option

3D Angiography option

CT Perfusion option

CT Colonography option

* * *(a)

Automated Vessel Measurements option(b)

CT Cardiac option

Cardiac Functional Analysis option

CT Cardiac Option with Peripheral Vessel Probe option

SUREPlaque™ option

Electro-physiology option

Peripheral Vessel Probe option

Soft Read option**

Nodule Probe option (Lung option)

Fusion7D™ Basic option

Fusion7D™ Advanced option

Fusion7D™ Standard option

Fusion7D™ Advanced option with DICOMPrint &CDburn

Fusion7D™ Standard option with DICOMPrint &CDburn

Fusion7D™ Basic option with DICOMPrint &CDburn

MeVis ImageChecker® Lung CAD(Ver.2.0) option

MeVis AutoPoint Temporal Comparison option (must also buy Lung CAD)

MeVis Pulmonary Artery Patency Exam option (must also buy Lung CAD)

Vitrea ACCESSTM option

VitreaACCESS Remote option

Medicsight Colon CAR option

Vitrea® fX

Dynamic Volume 4D Brain Perfusion option

* * *(a)

* * *(a)

ViTALConnect®

ViTALEnterprise Workstation

(a)when and if available

(b) * * *

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

23

VITAL IMAGES, INC. AND TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

EXHIBIT B

TERRITORY

Worldwide, except for those countries barred by the

Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury

24

VITAL IMAGES, INC. AND TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

EXHIBIT C

LIST OF DEALER ASSOCIATES

Company Name	MAIN COUNTRY	Address
TOSHIBA AMERICA MEDICAL SYSTEMS, INC.	U.S.A.	2441 MICHELLE DR., TUSTIN, CA 92780, U.S.A.
TOSHIBA OF CANADA LTD.	CANADA	191 McNABB STREET, MARKHAM, ONTARIO, L3R 8H2 CANADA
TOSHIBA MEDICAL SYSTEMS EUROPE B.V.	EUROPE	ZILVERSTRAAT 1, 2718 RP ZOETERMEER, THE NETHERLAND
TOSHIBA MEDICAL SYSTEMS NV/SA	BELGIUM	Bijkhoevelaan, 32C 2110 Wijnegem-Antwerpen, Belgium
TOSHIBA MEDICAL SYSTEMS GmbH	GERMANY	Hellersbergstrasse 4, D-41460 Neuss 1, Germany
TOSHIBA MEDICAL SYSTEMS S.R.L.	ITALY	Via Canton 115, 00144 Roma,Italy
TOSHIBA MEDICAL SYSTEMS Ltd.	U.K.	Boundary Court, Gatwick Road, Crawley RH10 9X, U.K.
TOSHIBA MEDICAL SYSTEMS S.A.	SPAIN PORTUGAL	Carretera de Fuencarral,Km15,100 Poligono Industrial de Alcobendas 28100,Madrid,Spain
TOSHIBA MEDICAL SYSTEMS AG	SWITZERLAND	Kreuzlenstrasse 5.CH-8618, Oetwil am See. Switzerland
TOSHIBA MEDICAL SYSTEMS Gesellschaft m.b.H.	AUSTRIA	Industriezentrum No-Sud Ricoweg 40 A-2351 Wiener Neudorf,Austria
TOSHIBA MEDICAL FRANCE S.A.	FRANCE	7,Rue Ampere-BP14,92802,PUTEAUX Cedex,France
TOSHIBA (AUSTRALIA) PTY., LTD	AUSTRALIA	MEDICAL DIVISION BUILDING C, 12-24 Talavera Road, North Ryde, NSW 2113, AUSTRALIA
TOSHIBA MEDICAL DO BRAZIL LTDA	BRAZIL BOLIVIA PARAGUAY	Av. CECI, 328-TAMBORÉ, 06460-120-BARUERI-SP-BRASIL
TOSHIBA MEDICAL SYSTEMS ASIA PTE., LTD.	SINGAPORE	BLOCK 211, HENDERSON ROAD, #08-02, HENDERSON INDUSTRIAL PARK SINGAPORE 159552
TOSHIBA MEDICAL SYSTEMS (CHINA) CO., LTD	CHINA	BUILDING 1, YARD 9, NANHUNANLU, CHAOYANG DISTRICT, BEIJING, CHINA
ROTARY TRADING CO., LTD	TAIWAN	5F, NO.233, CHUNG-YANG RD., NAN-KANG DISTRICT, TAIPEI, TAIWAN
TAIHAN METRA CORPORATION	KOREA	HEASUNG B/D 5F, 147-4 KURO-3DONG, KURO-KU, SEOUL, KOREA
SANKO MEDICAL SYSTEMS (H.K.) LTD.	HONGKONG	RM808, 8/F TOWER 1, THE GATEWAY, HARBOUR CITY, 25 CANTON ROAD, TSIM SHA TSUI, KOWLOON, HONG KONG

25

PHILIPPINE MEDICAL SYSTEMS INC.	PHILIPPINES	SUITE 4A, VERNIDA IL CONDOMINIUM 120 AMORSOLO ST. LEGASPI VILLAGE, MAKATI CITY, PHILIPPINES
PT. MURTI INDAH SENTOSA	INDONESIA	JI. SULTAN ISKANDAR MUDA KAV. 29 KEBAYORAN LAMA, SELATAN JAKARTA 12240, INDONESIA
ABEX MEDICAL SYSTEM SDN. BHD.	MALAYSIA	LOT 2-6, JALAN SU/6A LION INDUSTRIAL PARK SECTION 26, 40000 SHAH ALAM SELANGOR DARUL EHSAN
CMC BIOTECH COMPANY LIMITED	THAILAND	364 MUBAN TOWN-IN-TOWN, SOI LADPHRAO 94 LADPHRAOROAD(WANGTHONGLANG, BANGKOK 10310, THAILAND
GOLD LITE	VIET NAM MYAMMAR CAMBODIA	BLOCK 211, HENDERSON ROAD, #13-01, HENDERSON INDUSTRIAL PARK, SINGAPORE 159552
ERBIS ENGINEERING CO.LTD.	INDIA BANGLADESH NEPAL	KAMIYA-CHO PLAZA BUILDING 1-14, 4CHOME-TORANOMON, MINATO-KU, TOKYO, JAPAN
MEDIQUIPMENT LTD.	SRI LANKA	95, COTTA ROAD, COLOMBO 8, SRI LANKA
MEDEQUIPS	PAKISTAN	30, SHAHRAH-E-QUAID-E-AZAM LAHORE, PAKISTAN
MODERN MEDICAL TECHNOLOGY EST	YEMEN	HADDA ST. BOX16165, SANA’A,YEMEN
EBIN RUSHED PHARMACY CO. LLC.	OMAN	PO BOX 169, MUSCAT SULTANATE OF OMAN
EMIRATES HOSPITAL SUPPLIES	U.A.E.	PO BOX 366, ABU DHABI, U.A.E.
MEDISERV	SAUDI ARABIA	P.O. BOX 17550, AL TAHLIA ST. OLAYA, RIYADH 11494, SAUDI ARABIA
AL-JISHI CORPORATION WLL.	BAHRAIN	PO BOX 617, SALMANIYA AVE. STATE OF BAHRAIN
TAREQ COMPANY	KUWAIT	PO BOX 20506, 13066 SAFAT, KUWAIT
TMST TIBBI SISTEMLER PAZARLAMA TICARET VE SERVIS A.S.	TURKEY	ALEMDAG CAD. NO.46 MASALDAN IS MERKEZI E BLOK NO. 10 CAMLICA 81190 ISTANBUL, TURKEY
FILM TRADING COMPANY	SYRIA	AL CHABANDAR BOURAN ST. P.O. BOX 5350, DAMASCUS, SYRIA
TRADING MEDICAL SYSTEM JORDAN EST.	JORDAN	SIXTH CIRCLE- 2nd FLOOR —ORBIT BUILDING, OPPOSITE AMRA HOTEL P.O. BOX 3279 AMMAN 11181. JORDAN
LIFE SCIENCE EQUIPMENT SARL	LEBANON	VILLA ESTEPHAN NAWFAL, GREEN ZONE, ADONIS, ZOUK MODSBEH, KESROUAN, BEIRUT, LEBANON, 90-2000
BEIT AL MAKDES HEALTH SERVICES, BEAM	PALESTINE	THALATHINI STREET REMAL P.O. BOX4040 GAZA, PALESTINE
TRADING MEDICAL SYSTEMS	EGYPT	16 EL KHARTOUM STREET, HELIOPOLIS, CAIRO, EGYPT

26

MEDICAL TECHNOLOGY FOR TRADING	EGYPT	16 EL KHARTOUM STREET, HELIOPOLIS, CAIRO, EGYPT
UNIVERSEL SYSTEM	MOROCCO	207-209 BOULEVARD DE LA RESISTANCE, CASABLANCA, MOROCCO
AFRIC MEDICAL	IVORY COAST	ZONE 3, RUE DES CARROSSIERS, 25 BP 897, ABIDJAN 25, IVORY COAST
SAVANNAH HOSPITAL & MEDICAL APPLICATIONS LTD.	NIGERIA	PLOT 1438, SANUSI FAFUNWA STREET, VICTORIA ISLAND, LAGOS, NIGERIA
TECMED (PTY) LTD.	S.AFRICA	TECMED CENTRE, GEORGE ROAD ERAND GARDENS, MIDRAND PO BOX 4229, HALFWAY HOUSE 1685 REPUBLIC OF SOUTH AFRICA
GRIENSU S.A.	ARGENTINA URUGUAY	AV. JULIO A. ROCA 636 (F10, 11 & 12) 1067 BUENOS AIRES, ARGENTINA
TECNOIMAGEN S.A.	CHILE	LAUTARO NO.754, PROVIDENCIA, SANTIAGO, CHILE
CYMED MEDICAL S.A.C.	PERU	AV.GUILLERMO PRESCOT 346-352 SAN ISIDRO-LIMA-PERU
TOP MEDICAL ECUADOR S.A.	ECUADOR	Av. AMAZONAS 4430 Y VILLALENGUA, PISO 7, OF. 709, QUITO-ECUADOR
TOP MEDICAL SYSTEMS S.A.	COLOMBIA	CRA. 18A No. 103A-30 BOGOTÁ, COLOMBIA
SEIJIRO YAZAWA IWAI C.A.	VENEZUELA	CALLE PARIS ENTRE MUCUCHIES Y LA TRINIDAD EDIFICIO SEIJIRO YAZAWA IWAI, LAS MERCEDES, CARACAS 1060, VENEZUELA
RESERMA S. A.	PANAMA	AVENIDA 1RA D. SUR Y CALLE 60 E, OBARRIO APARDADO 55-0645 PAITILLA, PANAMA, REPUBLICA DE PANAMA
MULTISERVICIOS ELECTROMEDICOS S.A.	COSTA RICA	APDO. 74-1005 SAN JOSE, COSTA RICA
TEKMEDICA, S.A.	GUATEMALA	6 AV. L 103A, KANAJUYU I ZONA 16, GUATEMALA GUATEMALA 01016
ELECOMUNICACION Y EQUIPOS S.A.	MEXICO	AV. GOBERNADOR JOSE GUADALUPE COVARRUBIAS NO.78, COL. SAN MIGUEL CHAPULTEPEC, DELEG. MIGUEL HIDALGO, C.P. 11850, MEXICO D.F. MEXICO
TOYO MEDICAL COMPANY	VENEZUELA HONDURAS	CANTEL WEST INDUSTRIAL PARK, 10645 N.W 37TH TERRACE MIAMI FLORIDA U.S.A
BIOMEL S.A. DE C.V.	EL SALVADOR	25 CALLE PONIENTE 1254. COL. LAYCO, SAN SALVADOR EL SALVADOR

27

VITAL IMAGES, INC. AND TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

EXHIBIT D

TERMS AND CONDITIONS FOR THE DEMONSTRATION LICENSE

ARTICLE 1: LICENSE GRANT AND USE FOR DEMONSTRATION LICENSE

1.1License Grant.  Subject to the terms of this Exhibit D, Vital Images hereby grants to Toshiba and its Dealer Associates (“Licensees”) a nonexclusive, non-transferable, royalty free license (“Demonstration License”) to use the Products limited solely to promotion, demonstration, evaluation and testing.  Except as provided herein, Licensees hereby agree that the Products under this License shall not be used for any business activities of the Licensees without the prior written consent of Vital Images, such consent to be at the sole discretion of Vital Images.  No software provided under this Demonstration License may be provided to customers for production or testing; provided, however, that Toshiba may provide demonstration software to customers for training and showsite purposes on a limited term, not perpetual, basis, upon the execution by the customer of a software license agreement with terms and conditions protecting Vital Images to the same extent as the terms and conditions contained in this Demonstration License, and with the consent of Vital Images, such consent not to be unreasonably withheld.

1.2Restrictions on Use.  Licensees agree not to engage in, cause or permit the reverse engineering, disassembly, recompilation, modification or any similar manipulation of the Products, nor, except as expressly set forth herein, may Licensees loan, lease, distribute, assign or otherwise transfer the Products or copies thereof, in whole or in part, to any third party.

1.3Copying.  Licensees shall not copy the Products, except that each Licensee may make and maintain one (1) copy of the Products for back-up and archival purposes, provided such copy includes all Vital Images copyright, proprietary rights and other notices included on or in the Products.

1.4Ownership.  All right, title and interest in the Products (except as otherwise agreed between the parties in a separate agreement concerning one or more options incorporated in the Products) shall at all times remain the property of Vital Images and its licensors, subject to the Demonstration Licenses granted to Licensees under this Exhibit D.  Licensees understand and agree that it takes title only to the media on which the Products are provided to it, but that the Products shall remain the property of, and proprietary to, Vital Images.

ARTICLE 2: TERM AND TERMINATION

2.1Term.  The term of each Demonstration License shall be for the duration of the Agreement.

2.2Termination.  Each Licensee may terminate the Demonstration License at any time by giving written notice to Vital Images.

2.3Termination of a Demonstration License.  Upon any termination of a Demonstration License, Licensee shall

(a) immediately cease all use of the Products licensed pursuant to such Demonstration License, and (b) certify in writing to Vital Images within thirty (30) days after such termination that Licensee has either destroyed, permanently erased or returned to Vital Images the Products and all copies thereof licensed pursuant to such Demonstration License.

28

2.4Effect of Termination of Demonstration License.  Upon termination of the Demonstration License,  such License to the Products granted under this Exhibit D shall immediately terminate.  Articles 1.4, 3, 4 and 5 of this Exhibit D shall survive such termination of the Demonstration License, if the Product(s) licensed pursuant to such Demonstration License is not purchased. Otherwise, as provided in Section 3.2 of the main body of that certain Marketing and Distribution Agreement between Toshiba and Vital Images, Inc. dated November 21, 2008 (the “Agreement’), the terms and conditions under this Exhibit D shall be superseded upon purchase of the Products and shall be totally subject to the terms and conditions provided in the main body of the Agreement.

ARTICLE 3: WARRANTIES; INDEMNIFICATION

3.1No Warranty.  Vital  Images makes no warranty to Licensees that the Products licensed under the Demonstration License, even when properly installed and operated, will substantially perform the functions described in the functional specifications for the Products, as contained in the applicable written documentation for the Products.  All Products licensed under the Demonstration License are provided to Licensees “AS IS.” Provided however, during the term of each Demonstration License, Vital Images shall provide Licensees with any update or upgrade releases to the Vitrea® or other applicable Products licensed thereunder, as soon as they become available.  It is agreed between the parties that newly released options to Vitrea®, except for those listed in Exhibit E to the Marketing and Distribution Agreement between Toshiba and Vital Images, Inc. dated November 21, 2008 (the “Agreement”) and licensed under the applicable Demonstration License, shall be excluded from such updates and upgrades unless explicitly agreed between the parties.

3.2Exclusive Remedy.  Vital Images’ entire liability, and Licensees’ exclusive remedy, for any claim made by Licensees under Article 3.1 above shall be for Licensee to terminate the Demonstration License for such Product.   Vital Images does not warrant that the operation of the Products will be uninterrupted or error-free, that all errors in the Products will be corrected, that the Products will satisfy Licensee’s requirements or that the Products will operate in the combinations which Licensees may select for use.

3.3Warranty Disclaimer.  THE WARRANTY SET FORTH IN ARTICLE 3.1 ABOVE IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY DISCLAIMED AND EXCLUDED BY VITAL IMAGES, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OR USE, AND ALL OBLIGATIONS OR LIABILITIES ON THE PART OF VITAL IMAGES FOR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE USE, MAINTENANCE OR PERFORMANCE OF THE PRODUCTS.  Furthermore, the Products are derived from and include software from third party licensors, who make no warranty, express or implied, regarding the Products, who disclaim any and all liability for the Products and who will not undertake to provide any information or support regarding the Products.

ARTICLE 4: LIMITATION OF REMEDIES

4.1Delay.  VITAL IMAGES SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE CAUSED BY DELAY IN FURNISHING PRODUCTS OR ANY OTHER PERFORMANCE UNDER THIS EXHIBIT D.

4.2Sole Remedies.  THE SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF ANY AND ALL WARRANTIES AND THE SOLE REMEDIES FOR VITAL IMAGES’ LIABILITY OF ANY KIND (INCLUDING LIABILITY FOR NEGLIGENCE OR PRODUCT LIABILITY) WITH RESPECT TO THE PRODUCTS COVERED BY THIS EXHIBIT D AND ALL OTHER PERFORMANCE BY VITAL IMAGES UNDER THIS EXHIBIT D SHALL BE LIMITED TO THE REMEDIES PROVIDED IN ARTICLE 3 OF THIS EXHIBIT D.

29

4.3Damages Limitation.  VITAL IMAGES SHALL HAVE NO LIABILITY OF ANY KIND FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSS OR DAMAGE, EVEN IF VITAL IMAGES SHALL HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE, INCLUDING ANY LIABILITY FOR DAMAGES ARISING OUT OF OR RESULTING FROM THE USE, MAINTENANCE OR PERFORMANCE OF THE PRODUCTS, INCLUDING, WITHOUT LIMITATION, THE LOSS OR CORRUPTION OF LICENSEES’ OR ANY THIRD PARTY DATA.

ARTICLE 5: RELATIONSHIP OF THIS EXHIBIT D AND THE MAIN BODY OF THE AGREEMENT

In all other respects, the main body of the Agreement shall prevail and shall apply to the Demonstration Licenses granted under this Exhibit D as well.  Specifically, and not in limitation of the foregoing, defined terms used in this Exhibit D, if not defined herein, shall have the meaning given them in the Agreement.

30

VITAL IMAGES, INC. AND TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

EXHIBIT E

PRODUCT PRICE LIST - VITREA

	U.S. (1)	Non-U.S. (2)
License (4)	(2009-2010)	(2009-2010)
Vitrea ®	* * *	* * *
Peripheral Vessel Probe option	* * *	* * *
Vitrea ACCESSTM option	* * *	* * *
VitreaACCESS Remote option	* * *	* * *
CT Colonography option	* * *	* * *
Automated Vessel Measurements option(b)	* * *	* * *
* * *(c)	* * *	* * *
CT Cardiac option	* * *	* * *
Cardiac Functional Analysis option	* * *	* * *
SUREPlaque option	* * *	* * *
CT Cardiac Option with Peripheral Vessel Probe option	* * *	* * *
EP (Electro-physiology) Planning option	* * *	* * *
VScoreTM option	* * *	* * *
CT Perfusion option	* * *	* * *
CT Lung / Nodule Probe option	* * *	* * *
3D Angiography Option	* * *	* * *
Soft Read option(b)	* * *	* * *
Medicsight Colon CAR	* * *	* * *
Fusion7D™ Advanced option	* * *	* * *
Fusion7D™ Standard option	* * *	* * *
Fusion7D™ Basic option	* * *	* * *
Fusion7D™ Advanced option with DICOMPrint &CDburn	* * *	* * *
Fusion7D™ Standard option with DICOMPrint &CDburn	* * *	* * *
Fusion7D™ Basic option with DICOMPrint &CDburn	* * *	* * *
MeVis ImageChecker® Lung CAD(Ver.2.0) option	* * *	* * *
MeVis AutoPoint Temporal Comparison option (must also buy Lung CAD)	* * *	* * *
MeVis Pulmonary Artery Patency Exam option (must also buy Lung CAD)	* * *	* * *

(a) Software options are included in the transfer pricing for Vitrea ®

(b)  * * *(c) when and if available

(1)	Includes warranty pursuant to Section 9.1(a) of the Agreement and end user training, and the Second Level Installation.
(2)	Includes warranty pursuant to Section 9.1(a) of the Agreement, and the Second Level Installation.
(3)	Prices are subject to an additional 15% discount on additional Vitrea purchases for multi-license purchases by the same customer site on the same purchase order (the customer purchases more than one Vitrea ® Software License).
(4)	Any purchases made by Toshiba and/or its Dealer Associates pursuant to Sections 3.2 and 3.3 of this Agreement shall not be credited against the Commitment.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

31

SOFTWARE PACKAGE PRICING - VITREA

	Pricing (2009-2010)
Vitrea Package	U.S. (1)	Non U.S. (2)
US Radiology Package	* * *	* * *
· Vitrea ®
· VitreaAccess
· VitreaAccess Remote
· * * *
· * * *(a)
· * * *
· * * *
· * * *
· * * *
· * * *
· * * *
US Cardiology Package	* * *	* * *
· Vitrea ®
· VitreaAccess
· VitreaAccess Remote
· * * *
· * * *
· * * *
· * * *(a)
· * * *
Non-US Package -1	* * *	* * *
· Vitrea ®
· VitreaAccess
· * * *
· * * *
· * * *
· * * *
· * * *
Non-US Package -2	* * *	* * *
· Vitrea ®
· VitreaAccess
· * * *
· * * *
· * * *
· * * *
· * * *)
Non-US Package -3	* * *	* * *
· Vitrea ®
· VitreaAccess
· * * *
· * * *
· * * *
· * * *

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

32

Angio XA Basic Package	* * *	* * *
· Vitrea ® for Angio XA(b)
· * * *
Angio XA CT Package	* * *	* * *
· Vitrea ® for Angio XA(b)
· * * *
· * * *
· * * *
Angio XA Basic Package for Existing Customers off Maintenance	* * *	* * *
· Vitrea ® for Angio XA(b)
· * * *
Angio XA CT Package for Existing Customers off Maintenance	* * *	* * *
· Vitrea ® for Angio XA(b)
· * * *
· * * *
· * * *

(a) * * *(b) Does not include VitreaAccess, VitreaAccessRemote, * * *, and * * *option

(1)  Includes warranty pursuant to Section 9.1(a) of the Agreement and end user training, and the Second Level Installation.

(2)  Includes warranty pursuant to Section 9.1(a) of the Agreement, and the Second Level Installation.

SOFTWARE MAINTENANCE PRICING OPTIONS - VITREA

	U.S. (4)	Non-U.S.(3)
Vitrea® - Annual Renewal	* * *	* * *
Vitrea® - Extended Warranty Option Per Year (1)	* * *	* * *
Vitrea® - One-Time SW Upgrade	* * *	* * *
Fusion7D™ option (2)	* * *	* * *
ImageChecker® option (2)	* * *	* * *
Medicsight Colon CAR (2)	* * *	* * *

(1)	Must be ordered from Vital Images upon placement of the software license order for a specific customer site and will be paid with the software license according to terms defined in Article 7.2.
(2)	If the customer purchases any of the above 3rd Party options through Vital Images, the customer must purchase maintenance for Vitrea and all of 3rd Party Option purchased to receive upgrades to these options.
(3)	Vital Images and Toshiba, * * *agree to create an Installed Base program to increase the attachment rate of Software Maintenance.
(4)	* * * commits to a * * *annual increase to the annual renewal software maintenance transfer price beginning January 1, 2010 and each subsequent year after through the term of this agreement. This increase does not apply to any existing customer contracts.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

33

ADDITIONAL SOFTWARE PACKAGE PRICING - VITREA fX

	Pricing (2009-2010)
VitreafX Package	U.S. (1)	Non U.S. (2)
Base Vitrea fX Package	* * *	* * *
· Vitrea ® fX
· * * *
· * * *
· * * *(a)
· * * *
· * * *
· * * *
· * * *
· * * *
· * * *
Vitrea fX Neuro Package (3)	* * *	* * *
· Vitrea ® fX
· * * *
· * * *
· * * *
Vitrea fX Cardiology Package (3)	* * *	* * *
· Vitrea ® fX
· * * *
· * * *
· * * *
· * * *
· * * *
· * * *
· * * *
Vitrea fX Radiology Package (3)	* * *	* * *
· Vitrea ® fX
· * * *
· * * *
· * * *
· * * *
· * * *
Existing Aquilion customer Upgrade from Vitrea2 to Vitrea fX.	* * *	* * *

	(a) * * *
(1)	Includes warranty pursuant to Section 9.1(a) of the Agreement and end user training, and the Second Level Installation.
(2)	Includes warranty pursuant to Section 9.1(a) of the Agreement, and the Second Level Installation.
(3)	These packages may only be sold when multiple Vitrea fX licenses are sold to a single customer site and Toshiba is delivering a Base Vitrea fX Package as the first workstation.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

34

ADDITIONAL PRODUCT PRICE LIST – VITREA fX

License	U.S.(2009-2010)	Non-U.S.(2009-2010)
Dynamic Volume 4D Brain Perfusion option	* * *	* * *
* * *(a)	* * *	* * *
* * *(a)	* * *	* * *
Peripheral Vessel Probe option	* * *	* * *
VitreaACCESS Remote option(a)	* * *	* * *
CT Colonography option	* * *	* * *
Automated Vessel Measurements option(b)	* * *	* * *
EP (Electro-physiology) Planning option	* * *	* * *
* * *(a)	* * *	* * *
CT Cardiac option	* * *	* * *
Cardiac Functional Analysis option	* * *	* * *
SUREPlaque option	* * *	* * *
CT Cardiac Option with Peripheral Vessel Probe option	* * *	* * *
VScoreTM option	* * *	* * *
CT Lung / Nodule Probe option	* * *	* * *

(a) * * *(b)  * * *

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

35

ADDITIONAL SOFTWARE MAINTENANCE PRICING OPTIONS — VITREA fX

	U.S. (2)	Non-U.S.
Vitrea®fX - Annual Renewal	* * *	* * *
Vitrea®fX - Extended Warranty Option Per Year (1)	* * *	* * *
Vitrea®fX - One Time SW Upgrade	* * *	* * *

(1) Must be ordered from Vital Images upon placement of the software license order for a specific customer site and will be paid with the software license according to terms defined in Article 7.2.

(2)* * *, * * *commits to a * * *annual increase to the annual renewal software maintenance transfer price beginning January 1, 2010 and each subsequent year after through the term of this agreement. .  This increase does not apply to any existing customer contracts.

ADDITIONAL SERVICE OPTIONS — VITREA & VITREA fX

	U.S.(2)	Non-U.S.(3)
Customer Education (1)	* * *	* * *

(1)Education Units are equivalent to * * *per Education Unit.

(2)In * * *, * * *units are included with each Vitrea license and can be applied according to the below table

(3)In * * *, Toshiba may purchase Education units for * * *per unit and apply according to below table.

	Setting	Days	Units***
Basic Course for Advanced Visualization (In-House or Road Show)*	Classroom	* * *	* * *
Specialty Course for Cardiovascular, CT Colonography, Neurology or Oncology	Classroom	* * *	* * *
Administrator On-Site Course	Your Facility	* * *	* * *
On-Site Advanced Visualization Course	Your Facility	* * *	* * *
Enterprise Administrator On-Site Course	Your Facility	* * *	* * *
3-hour Webinar	online	* * *	* * *
Five Laptops for On-Site Course	Your Facility	* * *	* * *
eLearning*	online	* * *	* * *
VITAL UTM Live*	online	* * *	* * *
Travel**	N/A	* * *	* * *

*Available to VITALPerformance customers at no additional charge

** Eight education units included with purchase includes classroom courses with travel or any combination of education units determined by customer requirements.

***1 Education Unit =* * *

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

36

ADDITIONAL PRODUCT PRICE LIST — VITALCONNECT

		Pricing (2009-2010)
ViTALConnect® Pricing(1)		U.S.	Non U.S.
ViTALConnect® 5 Concurrent User Package (2)		* * *	* * *
·	* * *
·	* * *
·	* * *
·	* * *
·	Professional Services (Implementation & Setup)
	·      Up to * * *hours of remote and on-site service at Vital Images standard rates
	·      The customer needs to commit resources on-site to assist with installation and setup.
·	12 Education Units
·	1 Year Software Maintenance and Warranty
ViTALConnect® 5 Concurrent User Package — Software Only (3)		* * *	* * *
·	* * *
·	* * *
·	* * *
·	* * *
·	1 Year Software Maintenance and Warranty

(1)Toshiba may sell these products, packages and options to new customers only as components of sales of Toshiba scanner bundles including Vitrea and to existing customers only as components of sales of Toshiba scanner upgrades to customers already running Vitrea.  Toshiba may not sell these products, packages and options to run on a PACS.

(2)Vital Images conducts Professional Services and End-User Education.  Within the US, Customer must sign Vital Images Software License Agreement at the point of sale as Vital Images will be responsible for on-going support and maintenance.  Professional services offered with the Software license will expire 6 months from the delivery date of the software to the customer.

(3)Toshiba conducts Professional Services and End-User Education

ADDITIONAL MAINTENANCE PRICING - VITALCONNECT

	U.S.(1)	Non-U.S.
ViTALConnect — Annual Renewal	* * *	* * *
ViTALConnect - Extended Warranty Option Per Year (1)	* * *	* * *
Vitrea®fX - One Time SW Upgrade	* * *	* * *

(1)Must be ordered from Vital Images upon placement of the software license order for a specific customer site and will be paid with the software license according to terms defined in Article 7.2.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

37

ADDITIONAL PRODUCT PRICE LIST — VITALENTERPRISE - FULL

		Pricing (2009-2010)
ViTALEnterprise - Full Pricing		U.S.	Non U.S.
ViTALEnterprise — Full (1)		* * *	* * *
·	Includes Vitrea, ViTALConnect, * * *
·	1 Concurrent User
·	Professional Services (Implementation & Setup)
	·      Up to * * *hours of remote and on-site service at Vital Images standard rates
	·      The customer needs to commit resources on-site to assist with installation and setup.
·	* * * Education Units
·	1 Year Software Maintenance and Warranty
	·      24x7 live Customer Support
	·      Dedicated Service Account Manager
	·3 Education units - Annually
VitalEnterprise - Full — Software Only (1)(2)		* * *	* * *
·	Includes Vitrea, ViTALConnect, * * *
·	1 Concurrent User
·	1 Year Software Maintenance and Warranty
	·      24x7 live Customer Support
	·      Dedicated Service Account Manager
	·      3 Education units - Annually

(1)Vital Images conducts Professional Services and End-User Education.  Customer must sign Vital Images Software License Agreement at the point of sale as Vital Images will be responsible for on-going support and maintenance.  Professional services offered with the Software license will expire 6 months from the delivery date of the software to the customer.

(2)May only be sold when a Vital Images salesperson is involved in the opportunity and the opportunity is expanded to include multiple concurrent users.  Professional Services and End-User Education will sold by Vital Images.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

38

VITAL IMAGES, INC. AND TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

EXHIBIT F

PRODUCT COMMITMENTS

		(US dollar)
Calendar Year	2009	2010
Commitment	* * *	* * *

Conditions :

1)The Minimum Commitment and subsequent Transfer Pricing for each year beginning in 2011, will be agreed upon no later than September 30 of the current year.  For example, the Minimum Commitment for 2011 will be agreed upon no later than September 30, 2010.

2)If the Minimum Commitment for the following year is not agreed upon by September 30 of any given year and Toshiba has not provided Vital Images with written notice of its intent to terminate per the terms of Article 15.2(f), the current year’s Minimum Commitment will be applied to the following year.

3)Vital Images is committed to launching a version of * * * with mutually agreed upon specifications to Toshiba.  Until this version is launched, Toshiba may apply any * * *sales sold directly to Toshiba and Dealer Associates to the Minimum Commitment.

4)If agreed upon Development activities are delayed significantly and there is a significant variance in the actual results compared to the Minimum Commitment, both parties agree in good faith to resolve any variance.

5)If Vital Images is not able to obtain * * *approval for * * *or * * *for the China market and there is a significant variance in the actual results compared to the Minimum Commitment, both parties agree in good faith to resolve any variance.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

39

VITAL IMAGES, INC. AND TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

EXHIBIT G

PRINCIPAL COUNTRIES

2009 MAJOR TRADE SHOW LIST

US

Event	Date	Location
ACC	March 24-27	New Orleans
Stanford Annual Symposium on MDCT (WS Face Off)	June 13-16	San Francisco, CA
SCCT	July	Arlington, VA
RSNA	Nov25-30	Chicago, IL
Europe
Event	Date	Location
ECR	March	Vienna, Austria
JFR	Oct. 20-24	Paris, France
International
Event	Date	Location
China Med	Apr. 22-24	Beijing, China

40

VITAL IMAGES, INC. AND TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

EXHIBIT H

LIST OF VITAL IMAGES TRADEMARKS

Vital Images®

Vitreaâ

Vitreaâ fX

ViTALConnect®

LIST OF TOSHIBA TRADEMARKS

SUREPlaqueTM

CorE64TM

41

VITAL IMAGES, INC. AND TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

EXHIBIT I

AUTHORISED REPRESENTATIVE

Medimark Europe

Address: 11, rue Emile Zola - BP 2332,
38033 Grenoble Cedex 2 -FRANCE

Phone: +33 (0)4 76 86 43 22
Fax: +33 (0)4 76 17 19 82

42

VITAL IMAGES, INC. AND TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

EXHIBIT J

CUSTOMER AGREEMENT

TERMS AND CONDITIONS OF SALE

1.GENERAL TERMS.   Unless otherwise specified on the face of this document, this Quotation/Order (“Agreement”) will remain valid only if accepted by Customer no later than 60 days from date of submission to Customer.

2.TITLE AND RISK OF LOSS.  Title and risk of loss to the Equipment purchased under this Agreement will pass to Customer: (a) if Toshiba is to provide installation, upon Toshiba’s completion of installation, or (b) if Toshiba will not provide installation, upon delivery by Toshiba to a common carrier at Toshiba’s facility from which the Equipment is shipped.

3.TERMS OF PAYMENT.   Unless otherwise specified on the face of this document, prices stated are F.O.B.  Tustin, CA. or other facilities of Toshiba in the U.S.A. from which the Equipment may be shipped, freight prepaid and charged. All taxes which are payable by Toshiba in connection with the sale, use, or possession of the Equipment (excluding income taxes), and transportation charges (including rigging) for shipment to installation site will be paid by Customer in addition to the quoted price.  Terms of payment for, * * *, * * * and * * * will be * * *upon * * *, * * *upon * * *, * * *upon * * *, whichever is earlier.  Terms of payment for * * *and * * *will be * * *upon * * *, * * *upon * * *, whichever is earlier. All invoices paid after due date will be assessed a late payment charge of the lesser of 1 1/2% per month or the maximum rate permitted by law.

4.DELAYS. If Customer changes the scheduled delivery date specified on the face of this document (“Scheduled Delivery Date”) during the period of * * *days preceding such date, Customer will nevertheless pay * * *, on the Scheduled Delivery Date as if delivery had been made on such date.  In addition, Customer will pay all extra costs incurred by Toshiba as a result of such delay, including, without limitation, storage and transportation.  Storage fees will be charged at commercially comparable rates for storage on Toshiba’s site.  If delivery is delayed by 12 months or more from the Scheduled Delivery Date, except through the fault of Toshiba, the price set forth in this Agreement may be increased by Toshiba to a level equal to the prevailing price in effect at the time of the revised delivery date.

5.ACCEPTANCE BY TOSHIBA. This Quotation/Order will not be binding on Toshiba even if signed by a Toshiba employee, until Customer’s order for the Equipment is booked by Toshiba’s Headquarter office.

6.EQUIPMENT INSTALLATION.  Toshiba will install all Equipment purchased under this Agreement and connect them to existing power and/or plumbing lines at no additional charge to Customer. Customer will be responsible for electrical wiring, plumbing, carpentry, plastering, painting, or all other site preparation required prior to installation and connection of the Equipment by Toshiba.  Customer will provide space at the installation site for the safe storage of Toshiba’s tools, test equipment and other materials used for installation at no charge to Toshiba.  Customer shall, at its cost, obtain all permits and licenses required by governmental authorities in connection with the installation and operation of the Equipment. The Equipment may contain certain components that may have been re-manufactured. However, such components will meet the manufacturer’s specifications for new components as of the date of completion of installation.

7.EQUIPMENT OPERATION AND INDEMNITY.  Customer agrees that all Equipment purchased under this Agreement will be operated exclusively by duly qualified technicians and/or medical doctors in a safe and reasonable manner in accordance with Toshiba’s written instructions, applicable laws and regulations, and for the

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

43

purposes for which such Equipment was intended.  Customer agrees to defend, indemnify and hold Toshiba and Toshiba’s officers, directors and employees harmless from and against all claims, demands, lawsuits, liabilities, judgments and costs (including reasonable attorney’s fees, expert fees, and other litigation costs) arising out of or in connection with the Customer’s negligent operation of the Equipment.

8.LIMITED WARRANTY AND REMEDY.  For the warranty period described below by product, Toshiba, as its only obligation, will replace or repair, without charge to Customer during Toshiba’s normal working hours (if Customer requests warranty service outside such hours, Customer will pay overtime premium for labor), any component of the Equipment that is defective in materials or workmanship, provided such defect is reported to Toshiba within the warranty period. Toshiba’s warranty period is as follows:  (a) Systems and Major Components - one year from date of completion of installation; (b) Accessories/Options (except glassware) - six months from date of completion of installation.  Toshiba does not warrant that the operation of the Equipment will be uninterrupted. Components not manufactured by Toshiba, including but not limited to X-Ray tubes, monitors, glassware, VTRS, cameras, computer equipment, and software will be furnished subject only to the manufacturer’s warranty, if any, and without any warranty whatsoever by Toshiba.  During the warranty period, Toshiba will furnish free of charge any upgrades, including software required to correct any defect in the Equipment or as required under applicable laws.  All defective parts replaced by Toshiba will become the property of Toshiba. Replacement parts may be re-manufactured. However, such parts will meet the manufacturer’s specifications for new components as of the date of completion of installation. TOSHIBA’S OBLIGATION TO REPAIR OR REPLACE DEFECTIVE PARTS WILL BE CUSTOMER’S SOLE AND EXCLUSIVE REMEDY FOR A BREACH OF THE WARRANTY SET FORTH IN THIS SECTION.  SUCH WARRANTY WILL BE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.  The warranty set forth in this Section will not apply to, and Toshiba will not be liable for any defects resulting from misuse, repairs performed by unauthorized third parties, accidents, acts of God, or neglect of anyone other than Toshiba.

9.LIMITATION OF LIABILITY.  TOSHIBA WILL NOT UNDER ANY CIRCUMSTANCES BE LIABLE FOR CONSEQUENTIAL, SPECIAL, INCIDENTAL, OR EXEMPLARY DAMAGES OR ECONOMIC LOSS ARISING OUT OF OR RELATED TO THE TRANSACTIONS CONTEMPLATED IN THIS AGREEMENT, EVEN IF TOSHIBA IS APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING.  IN NO EVENT WILL TOSHIBA’S LIABILITY TO CUSTOMER (WHETHER BASED ON AN ACTION OR CLAIM IN CONTRACT, TORT, INCLUDING NEGLIGENCE, STRICT LIABILITY, OR OTHERWISE) ARISING OUT OF OR RELATING TO THE TRANSACTIONS CONTEMPLATED IN THIS AGREEMENT EXCEED THE AGGREGATE AMOUNT ACTUALLY PAID BY CUSTOMER TO TOSHIBA UNDER THIS AGREEMENT. THE LIMITATION OF LIABILITY SET FORTH ABOVE WILL NOT APPLY TO CLAIMS FOR PERSONAL INJURY OR PROPERTY DAMAGE CAUSED BY EQUIPMENT DEFECTS, OR TO CLAIMS FOR PATENT INFRINGEMENT.

10.SECURITY INTEREST.   Toshiba hereby reserves and Customer grants to Toshiba a security interest pursuant to the Uniform Commercial Code, in and to the Equipment (and all products and proceeds of it) until full payment of the purchase price is received.

11.REMOVAL OF EQUIPMENT.  Until Toshiba has received full payment of the purchase price, Customer will not remove all or any part of the Equipment from Customer’s premises, nor will Customer sell, lease, transfer or otherwise part with the possession of, or permit any lien or encumbrance to be placed on all or any part of the Equipment.

12.REMEDIES OF TOSHIBA.  If Customer fails to make any payment when due under this Agreement or under any other agreement between Customer and Toshiba, or becomes insolvent or makes an assignment for the benefit of creditors, or if a petition in Bankruptcy is filed by or against Customer, or if the financial responsibility of Customer becomes impaired or unsatisfactory in Toshiba’s judgment, or if Customer otherwise breaches any of the terms and conditions of this Agreement, then Toshiba may, without prior notice or demand, defer shipments, cancel

44

the balance of the order, suspend performance of any obligation (including without limitation, all obligations set forth under Limited Warranty And Remedy above), and/or take immediate possession of the Equipment delivered, until the full purchase price of the Equipment is paid by Customer or, at Toshiba’s discretion, until security satisfactory to Toshiba is given by Customer.  Any costs incurred by Toshiba as a result of suspending performance or repossession or collection will be payable by Customer. Toshiba may sell repossessed Equipment with proceeds to be applied to unpaid balance and expenses incurred in sale, repossession and collection. Customer will pay any remaining deficiency.  Toshiba may exercise any other rights available to it by law.

13.EXCUSED PERFORMANCES. Neither party will be liable to the other for non-performance or delay in performance resulting directly or indirectly from any occurrences beyond such party’s control, including without limitation, strikes or other labor troubles, acts of God, war, accidents, fires, floods, other catastrophes, inclement weather, transportation, unavailability of materials and labor, delays caused by suppliers, or laws, regulations, or acts of any governmental agency.

14.SOFTWARE.  All rights and interest in any software that may be furnished under this Agreement, and any updates and enhancements to it, will remain the property of Toshiba or its licensors.  Such software is being furnished to Customer under a non-exclusive license.  Customer will not, or allow others to reverse-engineer, disassemble, decompile, modify, copy, reproduce, or transcribe the software nor use it to create derivative works, nor allow third parties to use the same without Toshiba’s prior written consent.  All rights, title and interest to the Software not expressly granted to you will remain the property of Toshiba or its licensors.  Customer may not sublicense, loan, lease, distribute, assign or otherwise transfer any Software or copies thereof, in whole or in part, or otherwise make any Software available to third parties or allow third parties to use of the Software without the written consent of Toshiba or, if such Software is owned by a licensor to Toshiba, such licensor.  Upon Toshiba’s request, Customer will execute an End-User Software License Contract, in a form to be mutually agreed between the parties.

15.CANCELLATION.  Customer may not cancel the order subject to this Agreement except with Toshiba’s prior written consent. In the event of such cancellation, Toshiba will be entitled to recover any and all damages suffered by it caused by the cancellation as allowed by law, but in no event less than an amount equal to * * * of the purchase price for a restocking charge.

16.ASSIGNMENT. Neither party may assign any of its obligations under this Agreement without the prior written consent of the other party.

17.EXPORT REGULATIONS.  This Agreement involves products, and/or technical data that may be controlled under the U.S. Export Administration Regulations and may be subject to the approval of the U.S. Department of Commerce prior to export.  Any export or re-export by Customer, directly or indirectly, in contravention of such Regulations is prohibited.

18.ENTIRE AGREEMENT.  This quotation contains the entire agreement between the parties and supersedes all prior and contemporaneous agreements between the parties, whether oral or written, relating to its subject matter, including, without limitation, all different or additional terms and conditions which may be contained in Customer’s bid documents, purchase order or any other documents furnished by Customer. The provisions of this Agreement may not be modified unless in writing and executed by both parties.

19.U.S. GOVERNMENT RIGHTS.  The Software is provided with Restricted Rights.  Use, duplication or disclosure by the U.S. government is subject to restrictions as set forth in (a) this Agreement pursuant to DFARs 227.7202-3(a); (b) subparagraph (c)(1)(i) of the Rights in Technical Data and Computer Software clause at DFARs 252.227-7013; or (c) the Commercial Computer Software Restricted Rights clause at FAR 52.227-110 subdivision (c)(1) and (2), as applicable.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

45

VITAL IMAGES, INC. AND TOSHIBA MEDICAL SYSTEMS CORPORATION

MARKETING AND DISTRIBUTION AGREEMENT

EXHIBIT K

U.S., INSTALLATION, EDUCATION AND SERVICE

Here is the go to market strategy that lists the different configurations that ViTAL and TAMS will provide to our mutual customers:

A.One CT with One ViTAL Workstation

B.ViTALConnect, as an added option to configuration A.

C.One CT with One ViTAL Enterprise — Full configuration (expandable to ViTAL Enterprise)

D.Aquilion ONE with Vitrea fX

Here are the respective responsibilities for each configuration

Configuration	HW Procurement	Installation/Deployment	Education	Actual Support	Who owns contract
A	T*	T	V**	V	T
B	T	V	V	V	V
C	T	V	V	V	V
D	T	T	V	V	T

* TAMS

** ViTAL Images

Actual Support includes first and second level.

46

EX-10.24

Exhibit 10.24

DEVELOPMENT AGREEMENT

THIS DEVELOPMENT AGREEMENT (“Agreement”) is made effective this 8th day of January, 2009 (the “Effective Date”), by and between Toshiba Medical Systems Corporation, a Japanese corporation, having its place of business at 1385 Shimoishigami, Otawara-Shi, Tochigi 324-8550, Japan (“Toshiba”) and Vital Images, Inc., a Minnesota corporation having its principal place of business at 5850 Opus Parkway, Suite 300, Minnetonka, Minnesota 55343 USA (“Vital Images”).

RECITALS

A.Vital Images is in the business of developing and licensing proprietary medical visualization application software products.

B.Toshiba is in the business of developing and marketing proprietary medical visualization scanners and related hardware and software products.

C.Toshiba  and Vital Images desire to collaborate to develop and commercialize  visualization application software.

NOW THEREFORE, in consideration of the terms, covenants, premises and conditions contained herein and for other good and valuable consideration, the parties hereto agree as follows:

1.  Definitions

a.“Affiliate” of a person means another person that directly or indirectly controls, is controlled by or is under common control with the first person and, for this purpose, the term “control” (and the terms “controlling”, “controlled by” and “under common control”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.

b.“Agreed Royalties” means the stream of running royalty payments payable by Vital Images to Toshiba in consideration of the grant of the Non-Exclusive License, as determined in accordance with the following provisions. Promptly after the determination of the Fair Market Value of the Option Rights, Toshiba and Vital Images shall negotiate in good faith, using the most recent information available which is capable of verification (including the Fair Market Value of the Option Rights), with a view to determining the Agreed Royalties, including the amount, frequency and duration of the payments.  If Toshiba and Vital Images are unable to agree on the Agreed Royalties within thirty (30) days of the determination of the Fair Market Value of the Option Rights, then the Parties shall submit to mediation and, if necessary, arbitration in accordance with the principles and procedures set forth in the definition of

1

“Fair Market Value of the Option Rights”, which shall apply to the determination of the Agreed Royalties, mutatis mutandis, provided that the relevant time periods therein shall commence as at the end of the 30-day period referred to above.   In the event the Fair Market Value of the Option Rights has been determined through mediation or arbitration, the parties agree to appoint, subject to their availability, the same mediators and arbitrators to determine the Agreed Royalties as were appointed to determine the Fair Market Value of the Option  Rights.

c.“Algorithm” means the mathematical equation underlying the process of identifying structures and calculating values that guides the development of a software application, whether or not patentable.

d.“Change in Control” shall mean (i) any merger, statutory share exchange or consolidation of a party with or into any third party, that entitles the shareholders of the third party to receive at least one (1) seat on the board of directors and at least thirty-three and one-third percent (33-1/3%) of the outstanding capital stock of the post-merger company (provided, however, that any acquisition merger, statutory share exchange or consolidation of a party with or into * * *, * * *, and * * * or any of their affiliates  that entitles any such company of at least thirty-three and one-third percent (33-1/3%) of the outstanding capital stock of Vital Images shall be a Change in Control, whether or not such entity also receives a seat on the board of directors of Vital Images; (ii) any third party becoming the holder of a majority of the capital stock of a party entitled to vote generally for the election of directors; or (iii) the sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of a party in any transaction or series of transactions by such party.  In case of “Change in Control” of either party, that party shall assure that the acquiring equity shall agree to honor and fullfill the obligation of the party as contained in this Agreement.

e.“Confidential Information” means, in relation to any Party, any confidential or proprietary information of such Party, whether in written, graphic, electronic, oral or physical form, including without limitation, (i) all Intellectual Property of such Party (including without limitation its Background Rights, Foreground Rights and Jointly-Owned Foreground Rights), (ii) any Product Development Plan, (iii) the terms of this Agreement, and (iv) the Parties’ discussions in connection with any of the foregoing.  The term “Confidential Information” shall not include any information which (1) is or becomes generally available to the public or the industry other than as a result of a breach of this Agreement by the recipient Party; (2) becomes available to the recipient Party on a non-confidential basis from a third party which, to the knowledge of the recipient Party (after reasonable inquiry), is not bound by any obligation of confidentiality to the disclosing Party in respect of such information; (3) the recipient Party can establish by its written records was already in its possession on a non-confidential basis prior to disclosure by or on behalf of the disclosing Party; (4) the recipient Party can establish by its written records was

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

2

independently developed by the recipient Party without the use of any Confidential Information of the disclosing Party; or (5) is the subject of a written consent to disclose by the disclosing Party or otherwise is expressly acknowledged or agreed in writing by the disclosing party to not be or no longer be confidential or proprietary information.

f.“Documentation” means user documentation created by Vital Images for use with the Project Software.

g.“Fair Market Value of the Option Rights” means the fair market value of the Option Rights as at the date of occurrence of a Change in Control (but immediately prior, and without giving any effect, to such Change in Control), as determined in accordance with the following provisions.  Toshiba and Vital Images shall negotiate in good faith, using the most recent information available which is capable of verification, with a view to determining the Fair Market Value of the Option Rights.  If Toshiba and Vital Images are unable to agree on the Fair Market Value of the Option Rights within thirty (30) days of the occurrence of a Change in Control or a mutually-agreed upon longer period of time (the “Negotiation Period”), Toshiba and Vital Images shall attempt to establish the Fair Market Value of the Option Rights by submitting, within ten (10) days following the expiration of the Negotiation Period, to non-binding mediation in accordance with the Model Procedures for the Mediation of Business Disputes promulgated by the Center for Public Resources (“CPR”) then in effect, except where those procedures conflict with the terms and conditions of this definition, in which case this definition shall control.  The mediation shall be conducted in the Borough of Manhattan in New York, New York and shall be attended by senior executives of Toshiba and Vital Images with authority to make binding decisions with respect to the Fair Market Value of the Option Rights.  The mediator shall be experienced in mediating intellectual property right disputes and appointed from the list of neutrals maintained by CPR.  Following their submission to non-binding mediation, Toshiba and Vital Images shall promptly confer in an effort to select a mediator by mutual agreement.  In the absence of such an agreement, the mediator shall be selected from a list generated by CPR with each of Toshiba and Vital Images having the right to exercise challenges for cause and two (2) peremptory challenges within five (5) days after receiving the CPR list.  The mediator shall confer with Toshiba and Vital Images to design procedures to conclude the mediation within no more than twenty (20) days after initiation.  No statements or offers (written, electronic, verbal or otherwise) made by Toshiba and Vital Images during the mediation may be used by the other in any subsequent arbitration or litigation (other than in respect of any fraud).  If Toshiba and Vital Images are unable to determine the Fair Market Value of the Option Rights through mediation, Toshiba and Vital Images shall, within ten (10) days following the expiration of the mediation period set forth above, submit the issue of determination of the Fair Market Value of the Option Rights to binding arbitration pursuant to the Rules of the American Arbitration Association for Commercial Arbitration then in effect, except where those rules 

3

conflict with the terms and conditions of this definition, in which case this definition shall control.  Concurrently with its submission to arbitration, each of Toshiba and Vital Images shall (i) select an arbitrator (each a “Valuing Arbitrator”) who is unaffiliated with such Party and experienced in arbitrating intellectual property disputes and (ii) notify the other in writing of the identity of the arbitrator so selected.  In the event that Toshiba or Vital Images shall fail to timely select its Valuing Arbitrator, such Valuing Arbitrator shall be selected by the office of the American Arbitration Association (or any successor thereto) located in the Borough of Manhattan in New York, New York.  The Valuing Arbitrators shall, within twenty (20) days following their selection, select a third arbitrator (the “Deciding Arbitrator” and collectively with the Valuing Arbitrators, the “Arbitrators”).  If the Valuing Arbitrators are unable to agree on the Deciding Arbitrator, within such twenty (20)-day period, then the Deciding Arbitrator shall be selected by the office of the American Arbitration Association (or any successor thereto) located in the Borough of Manhattan in New York, New York.  Each of Toshiba and Vital Images shall pay the fees and expenses of the Valuing Arbitrator selected by it.  The fees and expenses of the Deciding Arbitrator shall be borne equally by Toshiba and Vital Images.  The arbitration hearing shall be conducted in the Borough of Manhattan in New York, New York and conclude no later than sixty (60) days after the date on which the Deciding Arbitrator is selected.  The Arbitrators shall set a date for the arbitration hearing; make determinations based solely on the documents and other evidence presented at the arbitration hearing; commit to the rendering of a determination of the Fair Market Value of the Option Rights within twenty (20) days after the conclusion of the arbitration hearing (the date on which such arbitration hearing concludes being hereinafter referred to as the “Conclusion Date”) and provide discovery according to the time limits specified herein, giving recognition to the understanding of Toshiba and Vital Images that they contemplate reasonable discovery, including document demands and depositions, but that such discovery be limited so that the time limits specified herein may be met without undue difficulty.  In no event shall the Arbitrators allow either Toshiba or Vital Images to obtain more than a total of thirty (30) hours of deposition testimony from all witnesses, including both fact and expert witnesses.  In the event multiple hearing days are required, they shall be scheduled consecutively to the greatest extent possible.  The Arbitrators shall, within twenty (20) days after the Conclusion Date, render a written opinion (the “Valuation Opinion”) to each of Toshiba and Vital Images setting forth in reasonable detail the Fair Market Value of the Option Rights and the criteria upon which such value is based.  The Fair Market Value of the Option Rights established shall be final and binding on Toshiba and Vital Images.  Neither Toshiba nor Vital Images may apply to any court to vacate, modify or appeal the Fair Market Value of the Option Rights as established pursuant to this definition, but may apply to an appropriate court solely for the purpose, if necessary, of enforcing the recognition of the Fair Market Value of the Option Rights as established pursuant to this definition.  Notwithstanding the foregoing, Toshiba or Vital Images may seek to vacate or modify the Fair

4

Market Value of the Option Rights as established pursuant to this definition solely on the grounds of fraud or miscalculation of figures.

h.“Foreground Rights” means any Patents, Algorithms or other Intellectual Property authored, conceived and/or reduced to practice by Toshiba and/or Vital Images employees or agents during the Term pursuant to this Agreement or any Product Development Plan.

i.“Intellectual Property” means all forms of intellectual property in any jurisdiction and under any law, whether now or hereafter existing, including (a) Patents; (b) Algorithms; (c) trade secrets and other confidential or non-public business information, including, ideas, formulas, compositions, inventor’s notes, discoveries, improvements, concepts, know-how, manufacturing and development information, data resulting or derived from research activities, inventions, invention disclosures, unpatented blue prints, drawings, specifications designs, plans, proposals and technical data, business and marketing plans, market surveys, market know-how and customer lists and related information; (d) copyrights, whether or not registered, and any non-registered copyright to any writings and other copyrightable works of authorship, including source code, object code, documentation (whether or not released), and databases; (e) integrated circuit topographies and mask works; (f) features of shape, configuration, pattern or ornament; and (g) registrations of, and applications to register, any of the foregoing with any governmental entity and any renewals or extensions thereof and all other rights to any of the foregoing, but excluding trademarks and related rights.

j.“Jointly-Owned Foreground Rights” means any Foreground Rights (including any improvements, modifications or derivative works thereto) authored, conceived and/or reduced to practice jointly by both Toshiba and Vital Images employees or agents in the performance of a Product Development Plan. Notwithstanding the foregoing, any source code written by, on behalf of or with the participation of Vital Images, its employees or agents is not a part of Jointly-Owned Foreground Rights, regardless whether such source code is part of Project Software and even if Toshiba employees or agents participate in the creation of such source code. For purposes of clarity, the fact that the development of Foreground Rights by Vital Images employees or agents may be funded in whole or in part by Toshiba does not make such Foreground Rights Jointly-Owned Foreground Rights unless Toshiba employees or agents also authored, conceived and/or reduced to practice such Foreground Rights.

k.“Party” means each of Toshiba and Vital Images, and their respective successors and assigns.

l.“Patents” means inventions, discoveries, patent applications, patents (including letters patent, industrial designs, and inventor’s certificates), design registrations, invention disclosures, and applications to register industrial designs, and any and all rights to any of the foregoing anywhere in the world,

5

including any provisionals, substitutions, extensions, supplementary patent certificates, reissues, re-exams, renewals, divisions, continuations, continuations in part, continued prosecution applications, and other similar filings or notices provided for under the laws of the United States or of any other country.

m. “Product Development Plan” means a written statement of work with respect to particular Project Software that is executed by Toshiba and Vital Images in substantially the form of Exhibit B attached hereto.

n.“Product Development Plan Commencement Date” means, with respect to each Product Development Plan, the date work is to begin on such Product Development Plan (which shall be noted on such Product Development Plan).

o.“Product Roadmap” is defined in Section 3.b.

p. “Project Software” means software or clinical applications developed pursuant to this Agreement, as more fully described in a Product Development Plan.  Project Software may be based on, covered by, incorporate or use Toshiba Background Rights, Toshiba Foreground Rights, Vital Images Background Rights, Vital Images Foreground Rights, or Jointly-Owned Foreground Rights, and such underlying rights are not within the definition of “Project Software”. Each Product Development Plan will specifically describe the Project Software to be developed pursuant to such Product Development Plan.

q.“Release of Project Software” means achievement of Vital Images Milestone 3 (M3), i.e., the completion of testing and fulfillment of release requirements of Project Software, as more fully described in the Product Development Plan applicable to such Project Software.

r.“Reseller Agreement” means the Marketing and Distribution Agreement between Toshiba and Vital Images dated as of November 21, 2008, and effective as of January 1, 2009, as amended, restated, supplemented, extended, renewed or otherwise modified from time to time.

s.“Silent Period” means any period of time during the Term during which no Product Development Plans are active.

t.“Specifications” means instructions, drawings, technical specifications and any other requirements for the Project Software agreed between Toshiba and Vital Images.

u. “Third Party Tools” means programming, development, or other tools of third parties that Vital Images desires to use or does use or incorporates in the Project Software or Documentation.

6

v.“Toshiba Background Rights” means any Intellectual Property authored, conceived and/or reduced to practice by Toshiba (i) prior to the Effective Date, (ii) after the expiration or termination of this Agreement or (iii) during the Term but which is outside the scope of the work contemplated by any Product Development Plan.

w.“Toshiba Competitor” means (i) each of * * *, * * *, and * * * and their respective Affiliates and (ii) each of the medical visualization subsidiaries or businesses of the entities in subsection (i), if and when such subsidiaries or business is no longer owned by such entities.

x.“Toshiba Field of Use” means software residing on modality scanner hardware and any related consoles  that is developed, manufactured, promoted, marketed, sold and/or distributed by or on behalf of Toshiba.

y.“Toshiba Foreground Rights” means any Foreground Rights authored, conceived, and/or reduced to practice solely by Toshiba’s employees or agents.

z.“Vital Images Background Rights” means any Intellectual Property authored, conceived and/or reduced to practice by Vital Images (i) prior to the Effective Date, (ii) after the expiration or termination of this Agreement or (iii) during the Term but which is outside the scope of the work contemplated by any Product Development Plan.

aa.“Vital Images Field of Use” means software for medical visualization that is developed, manufactured, promoted, marketed, sold and/or distributed by or on behalf of Vital Images.

bb.“Vital Images Foreground Rights” means any Foreground Rights authored, conceived, and/or reduced to practice solely by Vital Images’ employees or agents.  Notwithstanding the foregoing, any source code written by, on behalf of or with the participation of Vital Images, its employees or agents is not a part of Vital Images Foreground Rights, regardless whether such source code is part of Project Software.

cc.“Work Product” means all reports, designs, data, test results, drawings, models, algorithms, instructions, specifications, notes, analysis, memoranda, designs, software, object code, source code, plans, records, hardware, manuals, documents, prototypes, trade secrets, inventions, discoveries, works of authorship, deliverables and other materials and work products created or made by or on behalf of a Party pursuant to this Agreement.

2.Development of Project Software.

a.Product Development Plans.  From time to time during the Term of this Agreement, Toshiba and Vital Images may enter into Product Development

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

7

Plans with respect to Project Software.   Upon the execution of a Product Development Plan, Vital Images shall begin developing the Project Software described in such Product Development Plan in accordance with the schedule and other terms set forth in such Product Development Plan and the other terms and conditions set forth in this Agreement.

b.Changes to Product Development Plans.  The Parties may amend a Product Development Plan at any time by mutual written agreement. Any changes or amendments shall be made in accordance with Vital Images’ change control process.

c.Cooperation.  The performance of the development contemplated hereunder shall be coordinated by the Project Managers (defined in Section 3).  The Parties agree that the successful completion of any development activities is largely dependent upon the cooperation and the regular exchange of information between the Parties.  The Parties shall facilitate the development contemplated hereunder through the regular exchange of information.  Each Party shall inform the other without undue delay about any delays in the performance under any ongoing Product Development Plan or the achievement of any milestones under any ongoing Product Development Plan.

d.Release of Project Software.  Upon Release of Project Software with respect to any Project Software described in a Product Development Plan (the date of Release of Project Software, the “Release Date”), such Project Software shall become a “Product” (as such term is defined in the Reseller Agreement) and shall be subject to all terms and conditions of the Reseller Agreement.  The Parties shall agree upon pricing for the Project Software and shall amend Exhibit E to the Reseller Agreement to reflect the pricing for the Project Software that the parties have agreed upon.  The Product Development Plan shall terminate on the Release Date of the related Project Software.  For purposes of clarity, ownership of Project Software, including the source code and object code, shall remain with Vital Images (subject to Toshiba’s rights in any Toshiba Background Rights, Toshiba Foreground Rights or Jointly-Owned Foreground Rights incorporated therein) and Toshiba shall have no rights to reverse engineer or decompile such Project Software.

e.Toshiba Exclusive Resell Period.  With respect to Project Software that becomes a Product as described above, notwithstanding any provisions to the contrary in any other agreement between the parties, Toshiba shall have the exclusive right to resell such Product in accordance with the Reseller Agreement, until the date that is one hundred eighty (180) days after the Release Date (the “Exclusive Period”).  Vital Images agrees that it will not sell, license, sub-license or otherwise transfer or dispose of such Product to any person other than Toshiba during the applicable Exclusive Period.

8

3.Project Management.

  a.Each Party shall each designate a “Project Manager” for each Product Development Plan in effect from time to time who shall be the principal point of contact for all matters relating to such Product Development Plan.  The Project Manager designated by a Party for a Product Development Plan may be changed by written notice to the other Party.

  b.Toshiba and Vital Images agree to develop a “Product Roadmap” that will describe the development activities the parties desire to undertake under this Agreement.  The Product Roadmap shall be revised by the parties every six months and shall describe the Parties’ development and release plans relating to this Agreement for the next two years (or until the end of the term of this Agreement, if the remaining term of this Agreement is less than two years at the time of the revision of the Product Roadmap).

  c.Toshiba and Vital Images will meet on an as needed basis, but at least twice annually, at mutually agreed times and places to:

(i)review and revise the Product Roadmap;

(ii)review the progress of each ongoing Product Development Plan and discuss necessary changes to the scope, development schedule or actions to be taken;

(iii)synchronize the Parties’ product development plans and processes; and

(iv)discuss any other matters as agreed upon by the Parties.

4.Funding of Development Costs; Resources Devoted to Development.

  a.Vital Images Resources. Vital Images agrees to devote at least * * * full-time product development engineering personnel (including project management, scientist/algorithm development engineers, software/clinical development engineers, and quality/test engineers) during the term of this Agreement to work exclusively on activities defined in the Product Development Plans in effect from time to time and to accelerating clinical application development as defined in the Product Roadmap.  In addition, Vital Images will assign without limitation the necessary shared resources to support the validation and testing, alpha/beta testing, clinical evaluation support, and program and release management defined in the Product Development Plans in effect from time to time.

  b.Toshiba Funding/Resources.  Toshiba shall pay Vital Images for the efforts expended in each Product Development Plan in effect from time to time at the rates set forth on Exhibit A (the “Toshiba Funding”).  Toshiba agrees that so long as at least one Product Development Plan is in effect, Toshiba Funding will not be less than an amount sufficient to provide funding for the * * * full-time

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

9

product development engineering personnel referred to in Section 4.a. Toshiba will devote such internal resources and personnel as are reasonably necessary to fulfill Toshiba’s obligations under this Agreement.  Toshiba shall be responsible for managing and funding clinical evaluation and validation of Project Software and shall enable the participation of Vital Images’ personnel in such process; provided, however, that Vital Images may also conduct independent clinical evaluation and validation.  Clinical evaluation and validation for Project Software shall be defined in each Product Development Plan in effect from time to time.

  c.Silent Period.  During any Silent Period but not to exceed six (6) months, Toshiba will continue to provide funding to Vital Images, at the rates set forth in Exhibit A, for any Vital Images personnel who, during such Silent Period, are assigned to and actively engaged on projects related to errors reported in any Project Software that has been released prior to such Silent Period pursuant to this Agreement.  In addition, during any Silent Period and also after any expiration of the Term (but not after any termination of the Term under Section 6(b), (c) or (d)), Toshiba will provide funding for * * * full-time product development engineering personnel for a period, not to exceed six (6) months during and after the expiration of the Term in order to assist Vital Images to cover reallocation and/or termination costs.

  d.Reporting and Audit Provisions.  Vital Images will implement a project accounting system to track its spending and time worked, on an employee-by-employee basis, on (i) each Product Development Plan in effect from time to time, or (ii) any other work performed by Vital Images personnel for which Toshiba is required to provide any funding under this Agreement.  Vital Images will provide to Toshiba a periodic report of such spending and time worked in a form and frequency to be agreed upon by the Parties (the “Spending Reports”).  Toshiba shall have the right, at its cost and expense, to audit the Spending Reports from time to time.  Upon reasonable prior request by Toshiba, Vital Images will permit Toshiba personnel and Toshiba’s designated outside accountant to review the Spending Reports and all supporting or related books, records, systems, invoices, receipts and other documents of Vital Images (all of which shall be treated as Confidential Information of Vital Images).  Vital Images shall cooperate reasonably with Toshiba personnel and its accountant in connection with any such audit.

5.Original Works.

  a.Except for Third-Party Tools, all Vital Images’ Work Product shall constitute original works under all applicable copyright laws.

  b.Vital Images shall obtain in writing all rights, licenses, grants, consents, and/or permissions necessary to use or incorporate any Third Party Tools.  Vital Images shall further ensure that no fees, payments, royalties, or any additional

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

10

consideration of any kind will be imposed upon Toshiba by any third party with respect to any such Third Party Tools.

6.Term and Termination.

  a.Term of Agreement.  The “Term” of this Agreement shall begin on the Effective Date and shall, unless terminated earlier as provided herein, terminate immediately on December 31, 2009, provided that the Agreement shall renew if, at any time during the Term, a new Product Development Plan is agreed to that will extend into the next calendar year, in which case this Agreement shall automatically renew until six (6) months following the end of all active Product Development Plans (and the word “Term”, where used herein, shall be deemed to include such extended period).  Upon expiration of the Term or termination of this Agreement, neither Party shall have any further obligation to the other Party under this Agreement (including, for avoidance of doubt, any obligation of Toshiba to provide any further funding to Vital Images pursuant to the Agreement other than payment of invoices for efforts expended by Vital Images prior to the expiration of the Term or termination of this Agreement); provided, however, that upon such expiration or termination (i) each Party shall return to the other Party any property of such other Party in its possession including, but not limited to, the other party’s Confidential Information and any technical documents related to the other party’s Background Rights, (ii) each party shall retain ownership of its Intellectual Property (subject to the provisions of Sections 7, 8 and 9 below), (iii) the provisions of the second sentence of Section 4(c) shall survive expiration of this Agreement in accordance with its terms, (iv) Section 4(d) shall survive expiration or termination and continue in full force and effect for a period of six months, and (v) the provisions of this Section 6 and Sections 2(e), 7, 8(a), 8(b) (subject to any duration periods provided therein), 9, 10 and 11 shall survive expiration or termination and continue in full force and effect; provided that (i) Section 8(b) shall not survive termination in case this Agreement is terminated by Toshiba in accordance with Section 6(b), (ii) Section 8(a) shall not survive termination in case this Agreement is terminated by Vital Images in accordance with Section 6(b), and (iii) Sections 8(a) and 8(b) shall not survive the occurrence of a Change in Control to a Toshiba Competitor in case this Agreement is terminated by Toshiba in accordance with Section 6(c) due to the occurrence of such Change in Control during the term of this Agreement or in case Toshiba so requests to Vital Images in writing due to the occurrence of such Change in Control after the termination or expiration of this Agreement, provided, however, that each Party may continue to develop, manufacture, market, and maintain its then current products within its Field of Use after invalidation of Sections 8(a) and 8(b) hereunder.

11

  b.Termination for Cause.

(i)Material Breach.  Either Party shall have the right to terminate this Agreement and any or all ongoing Product Development Plans upon immediate written notice if the other Party is in material breach or default of any of its representations, warranties, covenants, or other obligations set forth in this Agreement or any Product Development Plan and such Party fails to cure such breach or default within thirty (30) calendar days following receipt of written notice of such breach.

(ii)Insolvency.  Either Party may, at its sole option, immediately terminate this Agreement and any or all ongoing Product Development Plans upon written notice, but without prior advance notice, to the other Party in the event that (A) the other Party is or becomes insolvent or is declared bankrupt by a court of competent jurisdiction; (B) a voluntary petition of bankruptcy is filed in any court of competent jurisdiction by such other Party; (C) an involuntary petition for bankruptcy is filed in any court of competent jurisdiction against such other Party; (D) a receiver or trustee is appointed for such other Party; or (E) this Agreement is assigned by such other Party for the benefit of creditors.  For purposes of this Agreement, a Party shall be deemed to be “insolvent” when such Party has ceased to pay its debts in the ordinary course of business, cannot pay its debts as they become due, or is insolvent within the meaning of the federal bankruptcy law.

c.Termination upon Change in Control.  Vital Images shall give Toshiba notice of the occurrence of a Change in Control no later than two (2) business days after the occurrence of such Change in Control.  Neither the failure nor delay by Vital Images in giving such notice shall affect any of Toshiba’s rights under this Agreement.  Toshiba may terminate this Agreement and any or all ongoing Product Development Plans upon thirty (30) days written notice to Vital Images in the event of a Change in Control; provided, however, that such notice must be given to Vital Images within thirty (30) days of the date Vital Images gives notice of the occurrence of a Change in Control.

  d.Termination Without Cause.  Either Party shall have the right to terminate this Agreement upon six (6) month advance written notice, provided that if at the end of such 6-month notice period there is one or more ongoing Product Development Plans, the notice period will be extended automatically until the Release Date of such ongoing Product Development Plan (or the last Release Date, if there was more than one such ongoing Product Development Plan) and upon such Release Date this Agreement will then terminate.

12

7.Ownership of Intellectual Property.  Ownership of Intellectual Property shall be as follows:

  a.Vital Images shall not acquire any ownership interest in any Toshiba Background Rights or Toshiba Foreground Rights as a result of entering into or performing this Agreement or any Product Development Plan.  Toshiba shall not acquire any ownership interest in any Vital Images Background Rights, Vital Images Foreground Rights or Project Software as a result of entering into or performing this Agreement or any Product Development Plan.  Each Party shall own all Intellectual Property in any improvements, modifications, or derivative works that are authored, conceived, and/or reduced to practice solely by such Party’s employees or agents and based upon the other Party’s Background Rights or Foreground Rights (subject to the other Party’s ownership of the original underlying rights).

  b.If and to the extent any Jointly-Owned Foreground Rights are created:

(i)Each of Toshiba and Vital Images shall have an undivided ownership interest in the Jointly-Owned Foreground Rights, and such ownership interest shall survive termination of this Agreement and the Reseller Agreement, and neither party shall owe the other any royalty, license fee or other sum for such ownership rights.

(ii)The Parties may elect to jointly file for patent or other Intellectual Property protection with respect to Jointly-Owned Foreground Rights, and shall share the cost of such filing equally.  If either Party chooses not to seek such protection, the other Party may proceed at its own expense; provided that the non-filing party shall provide reasonable assistance in connection with the preparation and prosecution of such patent application.

(iii)Toshiba grants to Vital Images a worldwide, exclusive (even as against Toshiba), royalty-free license, with respect to the Jointly-Owned Foreground Rights, to practice the methods of any Patents included therein, to make, use, offer to sell, sell and import products covered thereby, and to distribute, perform, display, use, modify, improve and make derivatives works based upon such rights, in each case, within the Vital Images Field of Use. Vital Images grants to Toshiba a worldwide, exclusive (even against Vital Images), royalty-free license, with respect to the Jointly-Owned Foreground Rights, to practice the methods of any Patents included therein, to make, use, offer to sell, sell and import products covered thereby, and to distribute, perform, display, use, modify, improve and make derivatives works based upon such rights, in each case, within the Toshiba Field of Use.

13

8.Mutual License Grants.

  a.Vital Images Grant to Toshiba.  Vital Images hereby grants and agrees to grant to Toshiba:

(i)for the Term, a worldwide, non-exclusive and royalty-free license to the Vital Images Background Rights solely for the purpose of performing under any Product Development Plan; and

(ii)a worldwide, non-exclusive and royalty-free license to the Vital Images Foreground Rights solely in the Toshiba Field of Use.

  b.Toshiba Grant to Vital Images.  Toshiba hereby grants and agrees to grant to Vital Images:

(i)for the Term, a worldwide, non-exclusive and royalty-free license to the Toshiba Background Rights solely for the purpose of performing under any Product Development Plan; and

(ii)a worldwide, non-exclusive and royalty-free license to the Toshiba Foreground Rights solely in the Vital Images Field of Use.

  c.To the extent any Intellectual Property is based upon, incorporates, or requires intellectual property owned (either jointly or in whole) or controlled by a third party and must be used in connection with a Product Development Plan, the Party providing such Intellectual Property to the other party shall obtain any such necessary licenses or consents from such third party.  If such Intellectual Property is used jointly by the Parties, the Parties shall negotiate in good faith with such third party to obtain any such necessary licenses or consents from such third party.  The Parties acknowledge that the Project Development Plan may not be completed until any necessary third party licenses or consents are obtained.

  d.Representations and Warranties with Respect to Intellectual Property.  Each Party represents and warrants to the other that it has the legal power to extend the rights granted to the other with respect to such Party’s Intellectual Property and that it has not made and will not make any commitments to others inconsistent with or in derogation of such rights. Each Party represents and warrants to the other that no fees, payments, royalties, or any additional consideration of any kind will be imposed upon the other by any third party with respect to any of such Party’s Intellectual Property.

  e.Notwithstanding anything herein to the contrary, except as for the representations and warranties contained in Section 8(d), the Parties do not make any representation or warranty of any kind (whether express, implied or otherwise) with respect to any Intellectual Property licensed hereunder, including its validity, enforceability, value, reliability, suitability, fitness for use or purpose, or non-infringement of third party rights.  In no event shall either party’s liability

14

hereunder exceed the amounts paid by Toshiba to Vital Images other than liability derived from infringement of third party rights.

9.Option Upon Change in Control to a Toshiba Competitor.

  a.Upon the occurrence of a Change in Control to a Toshiba Competitor, Toshiba shall have the option, in its sole discretion, to purchase Vital Images’ interest in the Jointly-Owned Foreground Rights (the “Option Rights”) and, if Toshiba exercises such option (i) ownership of the Option Rights shall vest solely in Toshiba and the licenses in Section 7(b)(iii) shall terminate upon consummation of such purchase, and (ii) Toshiba may (but shall not be obligated to)  grant (subject to the consent of Vital Images, or its successors, in its discretion) a worldwide, non-exclusive license to Vital Images in the Option Rights to practice the methods of any Patents included therein, to make, use, offer to sell, sell and import products covered thereby, and to distribute, perform, display, use, modify, improve and make derivative works based upon such rights, in each case, solely within the Vital Images Field of Use, in consideration of which license (which shall contain the foregoing terms and other reasonable terms and conditions which are agreed in good faith by the Parties) Toshiba shall be entitled to the Agreed Royalties (the “Non-Exclusive License”).  The terms of the Non-Exclusive License may contain, among other things, the requirement that Vital Images implement reasonable policies and procedures to protect Toshiba’s Confidential Information.  The purchase price for the Option Rights (the “Purchase Price”) shall be equal to the Fair Market Value of the Option Rights.  Within thirty (30) days after the determination of the Purchase Price, Toshiba shall elect whether to exercise the option to purchase the Option Rights and whether to grant the Non-Exclusive License, by giving Vital Images written notice of its intent to do so (the “Option Notice”).

  b.As soon as practicable after the delivery of the Option Notice but no later than sixty (60) days thereafter, (i) Vital Images shall sell and transfer the Option Rights to Toshiba, free and clear of any liens or other encumbrances (other than the Non-Exclusive License), and Toshiba shall pay the Purchase Price to Vital Images in immediately available US dollar-denominated funds, and (ii) if Toshiba and Vital Images have elected to do so, Toshiba shall grant the Non-Exclusive License to Vital Images, subject to the terms of Section 9(a)(ii), provided that the time period to consummate the foregoing transactions may be extended for such period of time as is required to obtain any necessary regulatory approvals in connection therewith (without prejudice to the Parties’ obligations under Section 9(c) below).

  c.Each Party hereto shall, and shall cause its Affiliates to, use its reasonable commercial efforts to take all action necessary or appropriate to consummate the transactions contemplated by this Section 9, including acknowledging, executing and/or delivering, in a timely manner and in form and substance reasonably satisfactory to the other Party, any instruments of transfer and all other documents, instruments or assurances as may reasonably be requested by

15

the other Party and making any filings with any governmental authority necessary, appropriate or reasonably requested by the other Party to enable such other party to satisfy its obligations or to obtain the benefits of the transactions contemplated by this Section 9.

10.Confidentiality and Use.  A Party shall not disclose to any person or issue any press release or otherwise publish any Confidential Information of the other Party by any means or in any form other than any disclosure expressly permitted by this Agreement.  A Party shall not use any Confidential Information of the other Party for any purpose, including taking measures that would avoid creating a premature bar to a US or foreign patent application or any other use detrimental to the other Party, other than any use that is expressly permitted by this Agreement or any use that is necessary for the recipient Party to perform its obligations under this Agreement.  Each Party shall employ the same reasonable safeguards in receiving, storing, transmitting, and using proprietary confidential information that prudent organizations normally exercise with respect to their own property of significant value.  A Party may disclose Confidential Information to (a) its Affiliates and its and their respective directors, officers, employees and professional advisers (“Representatives”) solely on a need to know basis in connection with the purposes of this Agreement or the Reseller Agreement, provided that each such Representative agrees to be bound by the terms of this Section or (b) the other Party or such other Party’s Representatives.  A Party shall be liable for any breach of this Section by any of its Representatives.  If a Party or any of its Representatives is required by law or regulation or otherwise becomes legally compelled (by deposition, interrogatory, request for information or documents, subpoena, civil investigative demand, governmental agency action or similar process) to disclose any Confidential Information of the other Party to a person not otherwise permitted to receive such Confidential Information, then, any disclosure pursuant thereto shall not breach this Agreement if it complies with the provisions in the next two sentences. To the extent legally permissible, such Party and/or such of its Representatives, as the case may be, shall provide such other Party with prompt written notice of such legal requirement or compulsion and shall cooperate with such other Party in seeking a protective order or other appropriate remedy.  If such protective order or other remedy is not obtained or reasonably obtainable, or if such other Party waives compliance with the provisions hereof, then the legally compelled Party or Representative, as the case may be, (i) may disclose to the person compelling disclosure only that portion of such Confidential Information that such Party or Representative is advised by opinion of its legal counsel is legally required to be disclosed and (ii) shall exercise its reasonable commercial efforts to ensure that such Confidential Information so disclosed will be accorded confidential treatment.  A Party may disclose Confidential Information it determines is necessary or appropriate to disclose in any legal proceeding to enforce its rights against the other Party or defend any claim by the other Party arising under this Agreement; provided such Party exercises its reasonable commercial efforts to ensure that such Confidential Information so disclosed will be accorded confidential treatment. Upon the occurrence of a Change in Control, without limiting Vital Images’ other obligations herein, Toshiba shall have the right to request that Vital Images implement, and upon such request Vital Images shall implement promptly, such additional reasonable policies and procedures designed to protect Toshiba’s Confidential Information and any technical information related to

16

Toshiba Foreground Rights and Toshiba Background Rights from disclosure to a Toshiba Competitor or its Representatives in a manner reasonably satisfactory to Toshiba.

11.Miscellaneous.

  a.Indemnification of Toshiba.  Subject to Article 8(e), Vital Images hereby agrees to indemnify, defend and hold Toshiba and its Affiliates and their respective officers, directors, employees, agents and representatives (collectively, the “Toshiba Indemnified Parties” and, individually, a “Toshiba Indemnified Party”) harmless from and against any and all damages, liabilities, losses, claims, judgments, fines, penalties, costs and expenses, including reasonable attorneys fees (“Losses”) sustained or suffered by any such Toshiba Indemnified Party as a result of any breach of any representation, warranty, covenant or agreement made by Vital Images in this Agreement.  Vital Images shall be given written notice of any third party suit, claim or other legal action for which Vital Images may have indemnification liability hereunder (“Vital Images Legal Action”) within thirty (30) days of Toshiba’s first knowledge thereof, provided, that, the failure of Toshiba to notify Vital Images of any such matter within the thirty (30) day period shall not release Vital Images, in whole or in part, from its obligations under this Section 11(a), except to the extent Toshiba’s failure to so notify Vital Images materially prejudices Vital Images’ ability to or materially increases Vital Images’ costs to defend against such Vital Images Legal Action.  Vital Images shall have sole and exclusive control of the defense of any Vital Images Legal Action, including the choice and direction of any legal counsel.  Toshiba may not settle or compromise any Vital Images Legal Action without the written consent of Vital Images unless such settlement or compromise contains an unconditional release of Vital Images from any indemnification liability hereunder.  Toshiba shall provide all reasonably requested assistance to Vital Images, at Vital Images’ expense.

  b.Indemnification of Vital Images.  Subject to Article 8(e), Toshiba hereby agrees to indemnify, defend and hold Vital Images and its Affiliates and their respective officers, directors, employees, agents and representatives (collectively, the “Vital Images Indemnified Parties” and, individually, a “Vital Images Indemnified Party”) harmless from and against any and all Losses sustained or suffered by any such Vital Images Indemnified Party as a result of any breach of any representation, warranty, covenant or agreement made by Toshiba in this Agreement.  Toshiba shall be given written notice of any third party suit, claim or other legal action for which Toshiba may have indemnification liability hereunder (“Toshiba Legal Action”) within thirty (30) days of Vital Images’ first knowledge thereof, provided, that, the failure of Vital Images to notify Toshiba of any such matter within the thirty (30) day period shall not release Toshiba, in whole or in part, from its obligations under this Section 11(b), except to the extent Vital Images’ failure to so notify Toshiba materially prejudices Toshiba’s ability to or materially increases Toshiba’s costs to defend against such Toshiba Legal Action.  Toshiba shall have sole and exclusive control of the defense of any Toshiba Legal Action,

17

including the choice and direction of any legal counsel.  Vital Images may not settle or compromise any Toshiba Legal Action without the written consent of Toshiba unless such settlement or compromise contains an unconditional release of Toshiba from any indemnification liability hereunder.  Vital Images shall provide all reasonably requested assistance to Toshiba, at Toshiba’s expense.

  c.No Implied Waivers, Rights Cumulative.  No failure or delay on the part of either Party in exercising any right, power, remedy or privilege under this Agreement or provided by statute or at law or in equity or otherwise, including, without limitation, the right or power to terminate this Agreement, shall impair, prejudice or constitute a waiver of any such right, power, remedy or privilege or be construed as a waiver of any breach of this Agreement or as an acquiescence therein, nor shall any single or partial exercise of any such right, power remedy or privilege preclude any other or further exercise thereof or the exercise of any other right, power, remedy or privilege.

  d.Relationship of the Parties.  Nothing contained in this Agreement is intended or is to be construed to make the Parties partners, principal-agent, or joint venturers.  Except as expressly provided herein, neither Party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other Party or to bind the other Party to any contract, agreement or undertaking with any third party.  Each Party is an independent contractor to the other Party.  Each Party shall be responsible for its own taxes.

  e.Notices.  Notices permitted or required to be given hereunder shall be deemed sufficient if given by registered or certified mail, postage prepaid, return receipt requested, by private courier service, or by facsimile addressed to the respective addresses of the parties as first written above or at such other addresses as the respective parties may designate by like notice from time to time.  Notices so given shall be effective upon (i) receipt by the party to which notice is given, or (ii) on the fifth (5th) day following domestic mailing or the tenth (10th) day following international mailing, as may be the case, whichever occurs first.

  f.Successors and Assigns; Binding Effect.  The terms and provisions of this Agreement shall inure to the benefit of, and be binding upon each Party and their respective successors and permitted assigns.  The terms of this Agreement are intended solely for the benefit of the Parties hereto and, except as otherwise provided in this Section 11(f), are not intended to confer upon any third party the status of a third party beneficiary.  The Toshiba Indemnified Parties and the Vital Images Indemnified Parties are third party beneficiaries of the provisions of Section 11(a) and Section 11(b), respectively.  Toshiba and Vital Images may amend, restate, supplement, extend, renew or otherwise modify, or cancel or terminate, all or any part of this Agreement and either of them may waive any provision of this Agreement, without the consent of any third party.

18

  g.Assignment.  Vital Images may assign all (but not less than all) of its rights, interests and obligations hereunder to a third party in connection with a Change in Control; provided that such assignment shall not affect Toshiba’s rights to terminate this Agreement pursuant to Section 6(c). nor shall such assignment affect Toshiba’s rights under Section 9.  Except as provided in the foregoing sentence, neither Party may assign or otherwise transfer any of its respective rights and interests, nor delegate any of its obligations, hereunder, without the prior written consent of the other Party in its sole discretion, provided that such consent shall not be unreasonably withheld if the proposed assignment is an Affiliate of the assigning Party.  Each Party may sublicense its licensed rights hereunder to its vendors, suppliers and development partners in connection with such Party’s authorized activities in its Field of Use, solely for use in accordance with the purpose of this Agreement but not for any unrelated use by any such party, subject however, in the case of Vital Images, to the provisions of Section 2(e).  For clarity, nothing in this Agreement shall prevent Vital Images (subject to the provisions of Section 2(e)) from selling Project Software and/or its other products for which the Intellectual Property licensed to Vital Images hereunder is used to its distributors, resellers, customers and end users, and from licensing end users to use such Project Software and/or its other products for which the Intellectual Property licensed to Vital Images hereunder is used, nor shall anything in this Agreement prevent Toshiba (subject to the provisions of the Reseller Agreement) from selling Project Software and/or its other products for which the Intellectual Property licensed to Toshiba hereunder is used to its distributors, resellers, customers and end users, and from licensing end users to use such Project Software and/or its other products for which the Intellectual Property licensed to Toshiba hereunder is used.  Also for clarity, in the event of an assignment, the licenses in Section 8 shall not include any Intellectual Property of the acquirer of any Party hereto.

  h.Amendments.  No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent by either Party to any departure therefrom, shall in any event be effective unless the same shall be in writing specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged and signed by the Parties, and each amendment, modification, waiver, termination or discharge shall be effective only in the specific instance and for the specific purpose for which given.  No provision of this Agreement shall be varied, contradicted or explained by any other agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by the parties.

  i.Arbitration and Governing Law.  This Agreement shall be subject to the dispute resolutions set forth in Article 17 of the Reseller Agreement and the choice of law provisions set forth in Section 18.7 of the Reseller Agreement.

  j.Severability.  If any provision hereof should be held invalid, illegal or unenforceable in any respect in any jurisdiction, then, to the fullest extent permitted by law, (a) all other provisions hereof shall remain in full force and

19

effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the parties hereto as nearly as may be possible and (b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction.  To the extent permitted by applicable law, each Party hereby waives any provision of law that would render any provision hereof prohibited or unenforceable in any respect.

  k.Entire Agreement.  This Agreement, together with the applicable provisions of any agreements or other documents expressly referenced herein, constitutes, on and as of the Effective Date, the entire agreement of the Parties with respect to the subject matter hereof, and all prior or contemporaneous understandings or agreements, whether written or oral, between the Parties with respect to such subject matter are hereby superseded in their entirety.  Toshiba and Vital Images hereby acknowledge that neither Party has been induced to enter into this Agreement by any representations or statements, oral or written, not expressly contained herein.  This Agreement shall not be deemed to amend or modify any provisions in the Reseller Agreement.

  l.Section Headings.  The section headings in this Agreement are for convenience only and in no way define, limit, extend or interpret the scope of this Agreement or of any particular section hereof.

  m.Construction.  This Agreement has been reviewed and approved by each of the Parties.  In the event that it should be determined that any provision of this Agreement is uncertain or ambiguous, the language in all parts of this Agreement shall be in all cases construed as a whole according to its fair meaning and not strictly construed for nor against any Party and without regard to which Party may have drafted the language.

  n.Compliance with Laws.  Each party agrees to comply with the Japanese Foreign Exchange and Foreign Trade Laws, the U.S. Export Administration Regulations and any other applicable export laws and regulations, and neither party shall, directly or indirectly, export or re-export any technical information or data, including products or the derivatives of products, to any destination or country restricted or prohibited by such laws and/or regulations, unless properly authorized by the appropriate governmental authorities.

  o.Counterpart Originals.  This Agreement may be signed in counterparts, and each counterpart shall be deemed to be an original.

  p.Bankruptcy.  The Parties intend and agree that the licenses herein shall be considered licenses to “Intellectual Property” pursuant to Section 101 of the U.S. Bankruptcy Code, and that in the event a Party hereunder enters into bankruptcy, the other Party shall be entitled to exercise its rights under Section 365(n) of the U.S. Bankruptcy Code to the fullest extent permitted therein.

20

[Development Agreement Signature Page]

IN WITNESS WHEREOF, Toshiba and Vital Images have caused this Agreement to be executed by their duly authorized representatives.

Vital Images, Inc.		Toshiba Medical Systems Corporation
By:	/s/Michael H. Carrel	By:	/s/Yasuo Nobuta
Name and Title: Michael H. Carrel, President		Name & Title: Yasuo Nobuta, General
and CEO		Manager of CT Systems

21

EXHIBIT A

Toshiba Funding

Toshiba Funding shall be provided at the rate of * * * per man-year (* * * per man-month) for the period commencing on the Effective Date and termination on December 31, 2009 (as may be extended in accordance with Section 6(a)).  If the Parties agree to re new the term of this Agreement for an additional year, the Parties will adjust the man-year rate for the following year to ensure that funding takes into account inflation and employment market conditions; provided, however, that such rate may increase no more than * * * (* * *) each year.

Unless otherwise stated in a Product Development Plan, the Parties will agree upon the total Toshiba Funding required for each Product Development Plan and Toshiba will pay the amount of such agreed Toshiba Funding with respect to each Product Development Plan as follows:

* * *% Within * * *

* * *% Within * * *

* * *% Within * * *

[Vital Images issues invoice to Toshiba each time]

If the scope of any project changes from the originally-agreed upon Product Development Plan and additional Vital Images resources are required, the Parties will negotiate in good faith to agree on (i) an amendment to such Product Development Plan to reflect such project changes and (ii) an amendment to this Exhibit A to reflect the amount and timing of payment for such additional resources.  Neither Party shall have any obligation under this Agreement in respect of the project change or additional resources unless and until such amendments are agreed and executed by the Parties.  Unutilized resources during the Silent Period will be billed monthly and payable net 30 days from the invoice date.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

22

EXHIBIT B

PRODUCT DEVELOPMENT PLAN
VITAL IMAGES, INC. & TOSHIBA MEDICAL SYSTEMS CORPORATION

* * *

(* * *)

Document Control History

Rev	Date	Author(s)	Description of Change	ECO No.
A	* * *	* * *	Initial Release

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

23

1.0  Project Purpose

The purpose of this project is to deliver * * *and enhance the features * * *application on the * * *software platform * * *. This would incorporate feedback from Toshiba’s * * *process and directly from * * *, and improve the quality of * * *.  The project would comprise * * * in * * *for the * * *, a * * * by * * * and * * * by * * * for the * * *.

2.0  Goals and Objectives

The following chart contains the goals and objectives for this project.

Goals

Release * * * by * * *

Provide * * *Software by * * *

Release * * * by * * *

3.0  Project Overview & Key Feature Definition

The scope of the * * *will include the software development and testing of the features described below.  The detailed feature specifications will be described in the Product Definition Statement (PDS) and will be delivered and iterated upon during the Requirements Phase.

* * *

* * *

·* * * to * * *results (* * *) — also * * *as * * *software update

·Combination of * * * into * * *

·Display * * * in * * *view

·Shortcut for creating * * * with * * *

·* * *for * * *

·* * * in * * *protocol

·Apply * * *during * * *

·Show the * * *of the * * *so it can be * * *to the * * * in * * *in * * *and on * * *

Other Quality and Performance Enhancements

·* * *improvements for * * *

·* * * tools (ability to * * *at any time, * * *)

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

24

* * *

* * *Phase I

·Ability to * * *and/or * * * (support * * *)

·* * * with * * *tools

·* * *of * * * (* * *)

·* * *layouts for * * *using * * *, along with * * *

·* * *on * * *

·* * *, including * * *

·* * *

* * *

* * *Phase II

·* * *and * * *in * * *

·* * *

·* * *based on feedback from users

* * *

·* * *view of * * *

·General * * *enhancements

4.0  Project Organization

Project Management

Both Toshiba and Vital Images have assigned a Project Manager to coordinate all aspects of the project.  The project teams will communicate as appropriate via Video or Telephone conference on a weekly basis.  Listed below are the 2 project managers assigned to this project.

Roles	Company	Team Member
Project Manager	Vital Images	* * *
Project Manager	Toshiba	* * *

Product Development Team & Responsibilities

A key component of the development activities requires gaining feedback from key Clinical collaborators.  Below is a table that describes the primary Vital Images interface to these clinical collaborators.  It is essential that the Vital and Toshiba interfaces keep in regular contact.

Site	Collaboration Activity	Vital Contact	Toshiba Contact	Collaborator Contact
* * *	* * *	* * *	* * *	* * *

Other members of the project development team including their roles/responsibilities are:

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

25

Roles	Company	Team Member
* * *	Vital Images	* * *
* * *	Vital Images	* * *
* * *	Vital Images	* * *
* * *	Vital Images	* * *
* * *	Vital Images	* * *
* * *	Vital Images	* * *
* * *	Vital Images	* * *

Toshiba will assign the following resources to the * * *project.

1 * * *

1 * * *

1 * * *

5.0  Project Plan & Schedule

Below is an overview of the schedule and the key milestones and deliverables for the * * * project:

Events	Estimated Date
* * *	* * *
* * *	* * *
* * *	* * *
* * *	* * *
* * *	* * *
* * *	* * *
* * *	* * *
* * *	* * *

Below is an overview of the schedule and the key milestones and deliverables for the * * *project:

Events	Estimated Date
* * *	* * *
* * *	* * *
* * *	* * *
* * *	* * *
* * *	* * *
* * *	* * *
* * *	* * *

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

26

* * *	* * *
* * *	* * *
* * *	* * *
* * *	* * *
* * *	* * *

6.0  Evolution/Iteration of Product Development Plan

At least once per month, the items described in this Product Development Plan will be reviewed by the Project Managers and will be updated appropriately.  Any significant changes will be communicated to both parties and this document will be revised.  In revisions will follow Vital Images Change Control Process and will require signature by both parties.

7.0  Toshiba * * *

Based on the above milestones, the * * *from Toshiba for this Product Development Plan is agreed upon * * *of which * * * for development activities completed in 2008 (* * *man months) and * * *for development activities in 2009 (* * *man months).  These amounts are based on * * *for the duration of the project.

The * * *period of the * * *in this Product Development Plan is when the * * *of the * * *.

8.0  Miscellaneous

Notwithstanding any provisions of this Agreement, either party shall not disclose any Confidential Information to the other party in connection with the Product Development Plan set forth in this Exhibit B. In the event that the disclosure to the other party of one party’s Confidential Information is indispensable for performing the Product Development Plan, the disclosing party shall provide, on non-confidential basis, the summary of such Confidential Information and obtain the written consent of the receiving party prior to the disclosure of such Confidential Information to the receiving party.

* * * Confidential Treatment has been requested, the portion indicated has been redacted and the redacted portion has been separately filed with the Securities and Exchange Commission.

27

EX-21.1

Exhibit 21.1

Subsidiaries of Registrant

HInnovation Inc., a Minnesota corporation

Subsidiary of HInnovation Inc.:

Vital Images (Beijing) Science and Technology, Inc., incorporated under the laws of the People’s Republic of China

Vital Images Holding B.V., incorporated under the laws of the Netherlands

Subsidiaries of Vital Images Holding B.V.:

Vital Images Europe B.V.

Vital Images France Sarl

Vital Images Scandinavia AS

Vital Images Italy Srl

Vital Images Germany Gmbh

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-137217, 333-125139, 333-111253, 333-97891, 333-67790, 333-93407, 333-93413, 333-69761, 333-69765, 333-39189, 333-39213, 333-30771 and 333-26797) and Form S-3 (No. 333-137237) of Vital Images, Inc. of our report dated March 16, 2009 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

PricewaterhouseCoopers LLP

Minneapolis, Minnesota

March 16, 2009

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael H. Carrel, certify that:

1.I have reviewed this annual report on Form 10-K of Vital Images, 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 officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)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

d)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;

5.The registrant’s other certifying officer 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:	March 16, 2009	/s/ Michael H. Carrel
		Michael H. Carrel
		President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Peter J. Goepfrich, certify that:

1.I have reviewed this annual report on Form 10-K of Vital Images, 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 officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)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

d)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;

5.The registrant’s other certifying officer 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:	March 16, 2009	/s/ Peter J. Goepfrich
		Peter J. Goepfrich
		Chief Financial Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

Vital Images, Inc.

Certification Pursuant to 18 U.S.C. Section 1350

In connection with this Annual Report on Form 10-K of Vital Images, Inc. (the “Company”) for the period ended December 31, 2008 (the “Annual Report”), I, Michael H. Carrel, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, that:

1.The Annual Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

2.The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	March 16, 2009	/s/ Michael H. Carrel
		Michael H. Carrel
		President and Chief Executive Officer
		(Principal Executive Officer)
		Vital Images, Inc.

EX-32.2

Exhibit 32.2

Vital Images, Inc.

Certification Pursuant to 18 U.S.C. Section 1350

In connection with this Annual Report on Form 10-K of Vital Images, Inc. (the “Company”) for the period ended December 31, 2008 (the “Annual Report”), I, Peter J. Goepfrich, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, that:

1.The Annual Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

2.The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	March 16, 2009	/s/Peter J. Goepfrich
		Peter J. Goepfrich
		Chief Financial Officer
		(Principal Financial Officer)
		Vital Images, Inc.