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

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.              )

VITAL IMAGES, INC.

5850 Opus Parkway, Suite 300

Minnetonka, Minnesota 55343

(952) 487-9500

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD JUNE 3, 2008

To the Shareholders of Vital Images, Inc.:

                                                NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Vital Images, Inc., a Minnesota corporation (the “Company”), which will be held on Tuesday, June 3, 2008, at 3:30 p.m. (Minneapolis, Minnesota time), at The Marquette Hotel, 710 Marquette Avenue, Minneapolis, Minnesota, for the following purposes:

1.                                                   To elect seven Directors of the Company for the coming year.

2.                                                   To act upon a proposal to amend the Vital Images, Inc. 2006 Long-Term Incentive Plan.

3.                                                   To act upon a proposal to amend the Vital Images, Inc. 1997 Employee Stock Purchase Plan.

4.                                                   To ratify the appointment by the Audit Committee of the Company’s Board of Directors of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2008.

5.                                                   To transact such other business as may properly come before the Annual Meeting or any adjournment or postponement of the Annual Meeting.

Only holders of record of the Company’s common stock at the close of business on April 10, 2008 are entitled to notice of and to vote at the Annual Meeting or any adjournment or postponement of the Annual Meeting.  If there is an insufficient number of votes for a quorum or to approve or ratify any of the foregoing proposals at the time of the Annual Meeting, the Annual Meeting may be adjourned or postponed to allow further solicitation of proxies by the Company.

Each of you is invited to attend the Annual Meeting in person, if possible.  Whether or not you plan to attend the Annual Meeting, the Company urges you to vote as soon as possible. Shareholders may vote their shares over the Internet. If a shareholder received a paper copy of a proxy card or voting instruction card by mail, that shareholder may submit the shareholder’s proxy or voting instruction card by completing, signing, dating and returning the proxy card or voting instruction card in the pre-addressed envelope provided. If a shareholder attends the Annual Meeting, that shareholder will have the right to revoke the proxy and vote the shareholder’s shares in person. For specific instruction on how to vote shares, please refer to the section heading “Voting and Revocation of Proxy” in the accompanying proxy statement.

By Order of the Board of Directors

WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING,

PLEASE SIGN THE PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE, IF YOU RECEIVED

A PAPER COPY OF THE PROXY CARD, OR VOTE THROUGH THE

INTERNET AS INSTRUCTED ON THE PROXY CARD.

IMPORTANT NOTICE REGARDING AVAILABILITY OF PROXY MATERIALS
FOR THE VITAL IMAGES, INC.
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JUNE 3, 2008

This notice, the accompanying proxy statement and the Company’s 2007 Annual Report to Shareholders, which includes the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, are available at the Company’s website at http://www.vitalimages.com. Additionally, and in accordance with the new rules of the Securities and Exchange Commission, shareholders may access these materials at the cookies-free website indicated in the Important Notice Regarding the Availability of Proxy Materials that you receive in connection with this notice and the accompanying proxy statement.

TABLE OF CONTENTS

i

ii

VITAL IMAGES, INC.

5850 Opus Parkway, Suite 300

Minnetonka, Minnesota 55343

(952) 487-9500

PROXY STATEMENT

SOLICITATION OF PROXIES

The enclosed proxy is solicited by and on behalf of the Board of Directors of Vital Images, Inc., a Minnesota corporation (“Vital Images” or the “Company”), for use at the Annual Meeting of Shareholders (the “Annual Meeting”) to be held at The Marquette Hotel, 710 Marquette Avenue, Minneapolis, Minnesota, on Tuesday, June 3, 2008, at 3:30 p.m. (Minneapolis, Minnesota time), and any adjournment of the Annual Meeting.  This Proxy Statement and the accompanying form of proxy are being made available to shareholders on the Internet or are being mailed to shareholders beginning on or about April 21, 2008.

The Company will bear all costs and expenses of preparing, assembling and mailing the proxy materials and soliciting proxies for the Annual Meeting, will arrange with brokerage houses and other custodian nominees and fiduciaries to send proxies and proxy materials to their principals, and will reimburse them for their expense in so doing.  The Company has retained The Altman Group to assist it in soliciting proxies, for which the estimated cost is $6,500, plus reasonable out-of-pocket expenses.  Proxies also may be solicited by telephone, facsimile or personally.

VOTING AND REVOCATION OF PROXY

Shareholders Entitled to Vote; Record Date

Only holders of record of the Company’s common stock at the close of business on April 10, 2008, the record date for the Annual Meeting, are entitled to notice of and to vote at the Annual Meeting.  On the record date, 17,181,526 shares of the Company’s common stock were outstanding.  Each share of common stock entitles the holder of the share to one vote upon each matter to be presented at the Annual Meeting.

Notice of Internet Availability of Proxy Materials

This year, the Company is pleased to be using the new U.S. Securities and Exchange Commission (“SEC”) rules that allow companies to furnish their proxy materials over the Internet. As a result, the Company is mailing to the majority of its shareholders a notice about the Internet availability of the proxy materials instead of a paper copy of the proxy materials.  The notice is entitled “Important Notice Regarding the Availability of Proxy Materials.”  All shareholders receiving the notice will have the ability to access the proxy materials over the Internet and request to receive a paper copy of the proxy materials by mail. Instructions on how to access the proxy materials over the Internet or to request a paper copy may be found on the notice.  The Company’s proxy materials may also be accessed on the Company’s website at http://www.vitalimages.com by selecting “Investors” and then “Proxy Materials.”  The Company is providing some of its shareholders, including shareholders who have previously requested to receive paper copies of the proxy materials, with paper copies of the proxy materials instead of a notice about the Internet availability of the proxy materials.

Voting Shares and Revoking Proxy

Each proxy returned to the Company will be voted according to the instructions on the proxy.  If no instructions are indicated, the shares will be voted (i) for the election of the nominees for the Board of Directors named in this Proxy Statement, (ii) for the approval of the amendment to our 2006 Long-Term Incentive Plan to increase the shares reserved under the plan by 1,800,000 shares, (iii) for the approval of the amendment to our 1997 Employee Stock Purchase Plan to increase the shares reserved under the plan by 150,000 shares, and (iv) for the ratification of the appointment by the Audit Committee of the Company’s Board of Directors of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2008.  Although the Board of Directors knows of no other matters to be presented at the Annual Meeting or any adjournment or postponement of the Annual Meeting, all proxies returned to the Company will be voted on any such matter according to the judgment of the proxy holders.

Instead of submitting a signed proxy card, shareholders may submit their proxies through the Internet using the control number and instructions on the proxy card.  Internet proxies must be used in compliance with, and will be subject to, the information and terms contained on the proxy card.  These procedures may not be available to shareholders who hold their shares through a broker, nominee, fiduciary or other custodian.

Any proxy for the Annual Meeting may be revoked by the person giving it at any time before it is voted.  Proxies may be revoked by:

·                                          giving written notice of such revocation to the Secretary of the Company,

·                                          submitting another written proxy bearing a later date,

·                                          attending the Annual Meeting and voting in person (although attendance at the Annual Meeting will not in and of itself revoke a proxy), or

·                                          voting via the Internet after your prior Internet vote.

A quorum, consisting of a majority of the shares of common stock entitled to vote at the Annual Meeting, must be present in person or by proxy before action may be taken at the Annual Meeting.  In general, for matters other than the election of Directors, the shareholders of the Company may take action by the affirmative vote of the holders of the greater of a majority of the voting power of the shares present and entitled to vote on a particular item of business, or a majority of the voting power of the minimum number of shares entitled to vote that would constitute a quorum.  However, Directors are elected by a plurality vote of the voting power of the shares present and entitled to vote.  If an executed proxy is returned and the shareholder has abstained from voting on any matter, the shares represented by such proxy will be considered present at the Annual Meeting for purposes of determining a quorum and for purposes of calculating the vote, but they will not be considered to have been voted in favor of such matter.  If a signed proxy is returned by a broker holding shares in “street name,” and it indicates that the broker does not have discretionary authority to vote certain shares on one or more matters, such shares will be considered present at the Annual Meeting for purposes of determining a quorum but will not be considered to be represented at the Annual Meeting for purposes of calculating the vote with respect to such matter.

PROPOSALS OF SHAREHOLDERS

Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, any shareholder wishing to have a proposal considered for inclusion in the Company’s proxy solicitation material for the Annual Meeting of Shareholders to be held in 2009 must set forth such proposal in writing and file it with the Secretary of the Company no later than December 22, 2008, the date that is 120 days before April 22, 2009.  Further, pursuant to Rule 14a-4, if a shareholder fails to notify the Company of a proposal before March 8, 2009, the date that is 45 days before April 22, 2009, such notice will be considered untimely, and management proxies may use their discretionary voting authority to vote on any such proposal.

2

OTHER BUSINESS

At the date of this Proxy Statement, management knows of no other business that may properly come before the Annual Meeting.  However, if any other matters properly come before the Annual Meeting, the individuals named in the enclosed form of proxy will vote the proxies received in response to this solicitation in accordance with their best judgment on such matters.

FINANCIAL INFORMATION

The Company’s 2007 Annual Report to Shareholders including, but not limited to, the consolidated balance sheets as of December 31, 2007 and 2006 and the related consolidated income statements, statements of stockholders’ equity and comprehensive income, and statements of cash flows for each of the three years in the period ended December 31, 2007, accompanies these materials.  A copy of the 2007 Annual Report to Shareholders may be obtained without charge upon request to the Company.  The 2007 Annual Report to Shareholders can also be accessed on the Company’s website at http://www.vitalimages.com by selecting “Investors,” then “Financial Info & Filings” and then “Annual Reports.”  In addition, the Company will provide without charge to any shareholder, upon the shareholder’s written request, a copy of its Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission.  Requests should be directed to Investor Relations, Vital Images, Inc., 5850 Opus Parkway, Suite 300, Minnetonka, Minnesota 55343.

3

BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table sets forth, as of February 29, 2008 (except as otherwise expressly indicated), certain information regarding the beneficial ownership of shares of common stock of the Company by (i) each person or entity who is known by the Company to own more than 5% of the Company’s common stock, (ii) each Director or nominee for Director of the Company, (iii) each person listed in the Summary Compensation Table and (iv) all Directors, nominees and executive officers of the Company as a group.

*                                      Less than one percent.

(1)                 Each person has sole voting and sole dispositive power with respect to all outstanding shares, except as noted.  The individuals holding shares subject to restricted stock awards have the power to vote but not the power to dispose of such shares.

(2)                 Based on 17,148,768 shares outstanding as of February 29, 2008.  Such number does not include 2,210,583 shares of common stock subject to stock options outstanding as of February 29, 2008.  Each figure showing

4

the percentage of outstanding shares owned beneficially has been calculated by treating as outstanding and owned the shares which could be purchased by the indicated person(s) on February 29, 2008 or within 60 days of February 29, 2008 upon the exercise of stock options.

(3)                 Reflects information as of December 31, 2007 from Amendment No. 1 to Schedule 13G filed with the Securities Exchange Commission (“SEC”) by T. Rowe Price Associates, Inc. on February 12, 2008.  As set forth in the Schedule 13G, as amended, T. Rowe Price Associates, Inc. has sole voting power as to 216,800 shares and sole dispositive power as to 2,178,900 shares.  The principal business address of T. Rowe Price Associates, Inc. is 100 E. Pratt Street, Baltimore, Maryland 21202.

(4)                 Reflects information as of February 29, 2008 derived from Amendment No. 1 to Schedule 13G filed with the SEC by Capital Research Global Investors, a division of Capital Research and Management Company, on March 10, 2008. As set forth in the Schedule 13G, as amended, Capital Research Global Investors has sole voting and dispositive power as to 1,777,000 shares. The principal business address of Capital Research Global Investors is 333 South Hope Street, Los Angeles, California 90071.

(5)                 Reflects information as of December 31, 2007 derived from a Schedule 13G filed with the SEC by Royce & Associates, LLC on January 3, 2008. As set forth in the Schedule 13G, Royce & Associates, LLC has sole voting and dispositive power as to 1,735,000 shares. The principal business address of Royce & Associates, LLC is 1414 Avenue of the Americas, New York, New York 10019.

(6)                 Reflects information as of December 31, 2007 derived from Amendment No. 1 to Schedule 13G filed with the SEC by Morgan Stanley and FrontPoint Partners LLC on February 14, 2008. As set forth in the Schedule 13G, as amended, Morgan Stanley and FrontPoint Partners LLC each has sole voting and dispositive power as to 1,258,326 shares. FrontPoint Partners LLC is a wholly-owned subsidiary of Morgan Stanley. The principal business address of Morgan Stanley is 1585 Broadway, New York, New York 10036. The principal business address of FrontPoint Partners LLC is Two Greenwich Plaza, Greenwich, Connecticut 06830.

(7)                 Reflects information as of December 31, 2007 derived from Amendment No. 3 to Schedule 13G filed with the SEC on February 12, 2008 by Kairos Partners III Limited Partnership, John F. White, James F. Rice, Kenneth L. Wolfe and Foster L. Aborn. As set forth in the Schedule 13G, as amended, of these 1,062,204 shares, Kairos Partners III Limited Partnership has shared voting power and shared dispositive power as to 688,000 shares and each of John F. White, James F. Rice, Kenneth L. Wolfe and Foster L. Aborn has shared voting power and shared dispositive power as to 1,062,204 shares. Shares reported in the Schedule 13G, as amended, represent shares held by Kairos Partners II Limited Partnership and Kairos Partners III Limited Partnership (collectively, the “Partnerships”). Each of the individual Reporting Persons is a member of the investment committee of each of the Partnerships. Such committee has voting and investment power over the shares reported herein. The principal business address of the entities associated with Kairos Partners III Limited Partnership is 600 Longwater Drive, Suite 204, Norwell, Massachusetts 02061.

(8)                 Reflects information as of December 31, 2007 derived from a Schedule 13G filed with the SEC by Lord, Abbett & Co. LLC on February 14, 2008. As set forth in the Schedule 13G, Lord, Abbett & Co. LLC has sole voting power as to 854,184 shares and sole dispositive power as to 1,009,910 shares. The principal business address of Lord, Abbett & Co. LLC is 90 Hudson Street, Jersey City, New Jersey 07302.

(9)                 Reflects information as of December 31, 2007 derived from a Schedule 13G filed with the SEC by FMR LLC on February 14, 2008. As set forth in the Schedule 13G, Fidelity Management & Research Company (“Fidelity”), a wholly-owned subsidiary of FMR LLC, is the beneficial owner of 766,987 shares. FMR LLC, through its control of Fidelity, and Edward C. Johnson 3d each has sole dispositive power as to 766,987 shares. Neither FMR LLC nor Edward C. Johnson 3d, Chairman of FMR LLC, has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds’ Board of Trustees. The principal business address of Fidelity is 82 Devonshire Street, Boston, Massachusetts 02109. According to the Schedule 13G, Pyramis Global Advisors Trust Company (“Pyramis”), an indirect

5

wholly-owned subsidiary of FMR LLC, is the beneficial owner of 95,400 shares of common stock. FMR LLC, through its control of Pyramis, and Edward C. Johnson 3d each has sole voting power as to 73,800 shares and sole dispositive power as to 95,400 shares. The principal business address of Pyramis is 53 State Street, Boston, Massachusetts 02109.

(10)           Includes 48,000 shares that Mr. Pihl has the right to acquire upon the exercise of stock options.  Excludes shares held by Mr. Pihl’s spouse, as to which Mr. Pihl disclaims beneficial ownership.

(11)           Includes 126,520 shares that Mr. Carrel has the right to purchase upon the exercise of stock options and 9,100 shares subject to a restricted stock award.

(12)           Includes 36,000 shares that Mr. Hickey has the right to acquire upon the exercise of stock options.

(13)           Includes 5,000 shares held by the Perkins Foundation, 7,500 shares held by the Perkins Capital Management, Inc. Profit Sharing Plan and 57,500 shares held by various trusts of which Mr. Perkins is the sole trustee. Also includes 30,000 shares Mr. Perkins has the right to purchase upon the exercise of stock options. Excludes 396,239 shares of stock beneficially owned by Perkins Capital Management, Inc., as to which Mr. Perkins disclaims beneficial ownership.

(14)           Includes 48,000 shares that Dr. Vannier has the right to acquire upon the exercise of stock options.

(15)           Includes 48,000 shares that Mr. Wehrwein has the right to acquire upon the exercise of stock options.

(16)           Consists of shares that Mr. Peet has the right to purchase upon the exercise of stock options.

(17)           Includes 317,520 shares that Mr. Miller has the right to acquire upon the exercise of stock options and 4,850 shares subject to a restricted stock award.

(18)           Includes 20,830 shares that Mr. Goepfrich has the right to acquire upon the exercise of stock options and 1,200 shares subject to a restricted stock award.

(19)           Includes 86,960 shares that Mr. Canakes has the right to acquire upon the exercise of stock options and 4,550 shares subject to restricted stock awards.

(20)           Includes 40,360 shares that Mr. Smith has the right to acquire upon the exercise of stock options and 8,425 shares subject to restricted stock awards.

(21)           Includes 86,260 shares that Dr. Wood has the right to purchase upon the exercise of stock options and 8,800 shares subject to restricted stock awards.

(22)           Includes 906,450 shares that all Directors and executive officers as a group have the right to acquire upon the exercise of stock options and 36,925 shares subject to restricted stock awards.

6

ELECTION OF DIRECTORS

(Proposal 1)

The business and affairs of the Company are managed under the direction of its Board of Directors.  Directors of the Company are elected annually to serve until the next annual meeting of shareholders until their successors are duly elected and qualify or until their earlier resignation, death or removal.  The Board has nominated the seven individuals named below to serve as Directors of the Company, and the shareholders will be asked at the Annual Meeting to elect such individuals as Board members.  Unless authority is withheld, all proxies received in response to this solicitation will be voted for the election of the nominees named below.  Each of the nominees named below is now a Director of the Company and has served continuously as a Director since the month and year indicated.  All nominees have indicated a willingness to serve if elected.  If any nominee becomes unable to serve before the Annual Meeting, the proxies received in response to this solicitation will be voted for a replacement nominee selected in accordance with the best judgment of the proxy holders named in the proxy.

Shareholder Approval

The affirmative vote of a plurality of the shares of common stock of the Company represented at the Annual Meeting either in person or by proxy, assuming a quorum is present, is required for the election of Directors.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE ELECTION OF THE NOMINEES FOR THE BOARD OF DIRECTORS AS SET FORTH ABOVE.

INFORMATION CONCERNING DIRECTORS,
NOMINEES AND EXECUTIVE OFFICERS

Directors and Nominees

The following discussion sets forth certain information concerning the individuals nominated by the Board of Directors to serve as Directors of the Company.

Douglas M. Pihl has been a Director of the Company since May 1997 and its Chair of the Board since December 1997, and he was its interim Chief Executive Officer from February 1998 to December 1999.  Mr. Pihl has over 44 years of experience in the computer industry, with extensive responsibility in design, product planning and management.  Since April 1997, Mr. Pihl has served as Chairman, Chief Executive Officer and President of MathStar, Inc., a publicly-held company that designs, develops and markets a new class of semiconductor integrated circuit, or chip, called field programmable object arrays.

Michael H. Carrel has been President and Chief Executive Officer and a Director of Vital Images since January 2008.  He served as Chief Operating Officer and Chief Financial Officer from May 2005 until January 2008.  Mr. Carrel was part-time Interim Chief Financial Officer of Vital Images from January 2005 until May 2005.  From January 1, 2005 until May 2005, he was employed as Senior Vice President of Strategy and Business Development of Technology Solutions Company (“TSC”), a publicly-held technology consulting company.

7

Mr. Carrel was President and Chief Executive Officer of Zamba Corporation (“Zamba”), a publicly-held customer relationship management company, from July 1, 2004 until December 31, 2004, when Zamba was acquired by TSC.  Mr. Carrel served as Executive Vice President of Zamba from October 2000 until July 1, 2004, its Vice President from October 1998 to October 2000, and its Chief Financial Officer from October 1998 until December 31, 2004.  He also served as Chief Financial Officer of NextNet Wireless, Inc., a privately-held provider of non-line-of-sight plug and play broadband wireless access systems, from October 1, 2003 through March 31, 2004, when it was sold to Clearwire Corporation.

James B. Hickey, Jr., has been a Director of the Company since May 1998.  Since December 2005, Mr. Hickey has been President and Chief Executive Officer of Myocor, Inc., a clinical-stage medical device company whose products are focused in the cardiac surgery and interventional cardiac markets.  From October 2001 through July 2005, he was President, Chief Executive Officer and a Director of Pulmonetic Systems, Inc., a privately-held manufacturer of medical devices in the respiratory/pulmonary markets.

Gregory J. Peet has been a Director of the Company since August 2005.  Since July 2004, his occupation has been independent corporate director.  From July 2002 until June 2004, he was Vice President and General Manager of the McKesson Medical Imaging Group of McKesson Corporation.  From 1993 until its acquisition by McKesson Corporation in 2002, he served with A.L.I. Technologies Inc., a leading medical image management solutions provider and picture archiving communications systems (PACS) vendor, most recently as its President, Chief Executive Officer and Chairman.  Mr. Peet also serves as a Director of Angiotech Pharmaceutical, Inc. and Vigil Health Solutions, Inc. (Chairman), both of which are public companies, and also with Contigo Systems, Inc. (Chairman), Cogent Health Solutions, Inc. and Conasys Consumer Assurance Systems Inc., which are privately-held.  In December 2005, Mr. Peet was appointed as the Co-Chair of the Premier’s Technology Council, which was established in August 2001 to advise the government on issues related to the advancement and application of technology in British Columbia.

Richard W. Perkins has been a Director of the Company since May 1997.  He has served as President, Chief Executive Officer and a Director of Perkins Capital Management, Inc., an investment management firm, since 1984.  Mr. Perkins also serves on the Board of Directors of the following public companies:  China Nuvo Solar Energy, Inc., Nortech Systems, Inc. and Synovis Life Technologies, Inc.  In addition, Mr. Perkins serves as a Director of several privately-held companies.

Michael W. Vannier, M.D. has been a Director of the Company since December 1997.  Dr. Vannier has been a Professor of Radiology at the University of Chicago since May 2004.  He was the Head of the Department of Radiology at the University of Iowa from June 1996 to November 2000, and professor of radiology there from 1996 until April 2004.  Dr. Vannier was a special assistant to the Director of the National Cancer Institute from 2001 to 2003.

Sven A. Wehrwein has been a Director of the Company since May 1997.  He has over 30 years experience in corporate finance and investment banking.  Since 1999, he has provided financial-consulting services to emerging growth companies.  Mr. Wehrwein also serves on the Board of Directors of the following public companies: Compellent Technologies, Inc., Image Sensing Systems, Inc., Synovis Life Technologies, Inc. and Uroplasty, Inc.  He received his master’s of science in management from the Sloan School at the Massachusetts Institute of Technology and is a certified public accountant.

Independent Directors

The Company’s Governance and Nominating Committee has determined that each of Messrs. Pihl, Hickey, Perkins, Wehrwein and Peet and Dr. Vannier are “independent,” as that term is defined in Rule 4200(a)(15) of the Marketplace Rules of The NASDAQ Stock Market, Inc. (“NASDAQ”).  Accordingly, the Board is composed of a majority of independent Directors as required by the NASDAQ Marketplace Rules.

8

Board and Committee Meetings; Attendance of Board Members at Annual Meeting of Shareholders

During 2007, the Board of Directors met eleven times and acted twice by written action.  Also during 2007, the Board of Directors had six standing Committees – a Compensation Committee, which met seven times during 2007, an Audit Committee, which met eight times during 2007, a Governance and Nominating Committee, which met four times during 2007, a Strategy Committee, which met five times during 2007, an Investment Committee, which met twice during 2007, and an Independent Committee, which met five times during 2007.  All Directors attended at least 75% of all meetings of the Board of Directors and 75% of all meetings of the Committees on which they served during the year ended December 31, 2007, except for Dr. Vannier, who attended 57% of the Compensation Committee meetings, and Mr. Wehrwein, who attended 50% of the Investment Committee meetings.

It is the policy of the Board that each member of the Board should attend the Company’s annual meeting of shareholders whenever practical, and that at least one member of the Board must attend each annual meeting of shareholders.  The Company regularly schedules a Board meeting on the same day as the annual meeting of shareholders.  All seven of the Directors being nominated to serve as Directors attended the annual meeting of shareholders held in 2007.  In addition, Jay D. Miller, who is a Director of the Company until May 15, 2008, attended that annual meeting.

Board Committees

The Compensation Committee, with input from the Board of Directors, reviews and approves salaries, compensation and benefits of executive officers and senior management of the Company and administers the Company’s 1997 Director Stock Option Plan, 1997 Stock Option and Incentive Plan and 2006 Long-Term Incentive Plan.  In addition to the meetings and actions of the Compensation Committee described above, the entire Board of Directors discussed and reviewed compensation issues throughout the year at its regular meetings.  The current members of the Compensation Committee who served as such throughout 2007 are James B. Hickey, Jr. (Chair), Gregory J. Peet, Michael W. Vannier, M.D. and Sven A. Wehrwein.  The Governance and Nominating Committee has determined that all members of the Compensation Committee are “independent,” as that term is defined in Rule 4200(a)(15) of NASDAQ’s Marketplace Rules.

The Audit Committee oversees the accounting and financial reporting processes and audits of the financial statements of the Company and is responsible for selecting, evaluating and, when it deems it to be appropriate, replacing the Company’s independent registered public accounting firm.  The Audit Committee assists the Board in fulfilling its oversight responsibilities for the quality and integrity of the Company’s financial reports, the Company’s compliance with legal and regulatory requirements and the independent registered public accounting firm’s qualifications and independence, as well as accounting and reporting processes.  The Audit Committee also reviews the internal and external financial reporting of the Company and reviews the scope of the independent audit.  It also oversees the Company’s Policy and Procedures with respect to Related Person Transactions.  The current members of the Audit Committee who served as such throughout 2007 are Sven A. Wehrwein (Chair), James B. Hickey, Jr. and Richard W. Perkins.  The Company’s Board of Directors has determined that all members of the Audit Committee are independent under Rule 4200(a)(15) of NASDAQ’s Marketplace Rules and Rule 10A-3 under the Securities Exchange Act of 1934 (“Exchange Act”).  The Board has determined that Sven A. Wehrwein is qualified as an “audit committee financial expert,” as that term is defined in Item 401(h)(2)(i) of Regulation S-K.

The Governance and Nominating Committee is responsible for making recommendations to the full Board of Directors regarding candidates for election to the Board and for overseeing the Company’s Code of Business Conduct and Ethics.  It determines the independence of all Directors under Rule 4200(a)(15) of NASDAQ’s Marketplace Rules.  The current members of the Governance and Nominating Committee who served as such throughout 2007 are Richard W. Perkins (Chair), James B. Hickey, Jr. and Douglas M. Pihl.

The Strategy Committee is responsible for evaluating the Company’s long-term strategy and ensuring consistent alignment with business objectives.  The Strategy Committee also evaluates market conditions and researches potential competitive advantages and how those opportunities can be maximized as it relates to acquisitions, product development and other business activities.  During 2007, the Strategy Committee consisted of

9

Gregory J. Peet (Chair), Douglas M. Pihl, Michael W. Vannier, M.D. and Jay D. Miller.  The Strategy Committee has no formal charter.

The Investment Committee reviews the activity in the Company’s investment portfolio, monitors compliance with the Company’s investment policy and assists management with the development of investment strategies.  The current members of the Investment Committee who served as such throughout 2007 are Richard W. Perkins (Chair) and Sven A. Wehrwein.  The Investment Committee has no formal charter.

The Independent Committee is directed to review matters for which the Board of Directors desires the review and guidance of members of the Board of Directors that are not otherwise affiliated with the Company.   The members of the Independent Committee during 2007 were Gregory J. Peet  (Chair), James B. Hickey, Jr. and Sven A. Wehrwein.  The Independent Committee has no formal charter.

The charters for the Compensation Committee, Audit Committee and Governance and Nominating Committee can be accessed on the Company’s website at http://www.vitalimages.com by selecting “Investors,” then “Corporate Governance,” then “Governance Documents” and then the charters under “Committee Charters.”

Executive Sessions of the Board

The Board has formally adopted a policy of meeting in executive session, with only independent Directors being present, on a regular basis and at least two times each year.  During 2007, the Board met in executive session five times.

Code of Business Conduct and Ethics

The Company has a Code of Business Conduct and Ethics that applies to all Directors, officers and employees of the Company, and it can be found on the Company’s website at http://www.vitalimages.com by selecting “Investors,” then “Corporate Governance,” then “Governance Documents” and then “Code of Business Conduct and Ethics” under “Governance Documents.”  The Governance and Nominating Committee of the Board is responsible for overseeing the code.  In accordance with NASDAQ’s Marketplace Rules, any waivers of the code for Directors and executive officers must be approved by the Company’s Board of Directors.

Policy and Procedures with Respect to Related Person Transactions

On March 7, 2007, the Company’s Board of Directors adopted the Company’s written Policy and Procedures with Respect to Related Person Transactions, which the Audit Committee oversees.  Under the policy, a “related party transaction” is a transaction, arrangement or relationship in which the Company was, is or will be a participant and the amount involved exceeds $50,000, and in which any “related person” had, has or will have a direct or indirect material interest.  The policy generally defines a “related person” as a Director, executive officer or beneficial owner of more than 5% of any class of the Company’s voting securities and any immediate family member of any of the foregoing persons.

Under the policy, the related person; the Director, executive officer or beneficial owner who is an immediate family member of the related person; or the head of the business unit that is responsible for a potential related person transaction must notify the Company’s general counsel of facts and circumstances involved in the potential related person transaction.  If the general counsel determines that the transaction is a related person transaction, he must submit it to the Audit Committee or the Chair of the Audit Committee for review and, if appropriate, approval.  The policy provides that, on an annual basis, the Audit Committee shall review any previously approved related person transaction that is ongoing.  The policy also provides that proposed charitable contributions or pledges of charitable contributions by the Company in the amount of at least $10,000 that would otherwise qualify as a related person transaction are subject to prior review by the Audit Committee or the Chair of the Audit Committee.

10

Qualifications of Candidates for Election to the Board

The Company’s Directors take a critical role in guiding the Company’s strategic direction, and they oversee the management of the Company.  Many of the Directors have served as Directors since or soon after the Company became a publicly-held company in May 1997.  See “Election of Directors.”  When Board candidates are considered, they are evaluated based upon various criteria, such as their broad-based business and professional skills and experiences, experience serving as management or on the Board of Directors of other companies, concern for the long-term interests of the shareholders, financial literacy and personal integrity in judgment.  The Governance and Nominating Committee and the Board seek to attract and attain highly qualified Directors who have sufficient time to attend to their duties and responsibilities to the Company.  Recent developments in corporate governance and financial reporting have resulted in an increased demand for such highly-qualified and productive public company Directors.

The Governance and Nominating Committee and the Board have established the following minimum requirements for Director candidates: being able to read and understand fundamental financial statements; having at least 10 years of relevant business experience; having no identified conflicts of interest as a prospective Director of the Company; having not been convicted in a criminal proceeding other than traffic violations; and being willing to comply with the Company’s Code of Business Conduct and Ethics.  The Governance and Nominating Committee retains the right to modify these minimum qualifications from time to time.  Exceptional candidates who do not meet all of these criteria still may be considered.

Process for Identifying and Evaluating Candidates for Election to the Board

The Governance and Nominating Committee reviews the qualifications and backgrounds of the Directors, as well as the overall composition of the Board of Directors, and recommends to the full Board the Directors to be nominated for election at each annual meeting of shareholders of the Company.  In the case of incumbent Directors, the Governance and Nominating Committee reviews such Directors’ overall service to the Company, including the number of meetings attended, level of participation, quality of performance, and whether the Director continues to meet the applicable independence standards.  For any new Director candidates, the questions of independence and financial expertise are important to determine what roles can be performed by the candidate, and the Governance and Nominating Committee determines whether the candidate meets the applicable independence standards and the level of the candidate’s financial expertise.  Any new candidates will be interviewed by the Governance and Nominating Committee.  The full Board will approve the final nominations.  The Chair of the Board, acting on behalf of the full Board, will extend the formal invitation to become a nominee of the Board of Directors.

Shareholder Nominations

Shareholders may nominate Director candidates for consideration by the Governance and Nominating Committee by writing to Mr. Ian L. Nemerov, the Company’s Secretary, and providing to the Secretary the candidate’s name, biographical data and qualifications, including five-year employment history with employer names, a description of the employer’s business, and all other information relating to such nominee that is required to be disclosed by Schedule 14A under the Securities Exchange Act of 1934; other Board memberships (if any); and such other information as is reasonably available and sufficient to enable the Governance and Nominating Committee to evaluate the minimum qualifications stated above under the section of this proxy statement entitled “Information Concerning Directors, Nominees and Executive Officers – Qualifications of Candidates for Election to the Board.”  The submission must be accompanied by a written consent of the individual being named in the proxy statement to be a nominee and to serve as a Director if elected by the shareholders.  The submission must also include the name, address and number of shares of the Company’s common stock owned by each shareholder submitting the nomination.  Written notice must be given at least 120 days before the date of the next annual meeting of shareholders.  If a shareholder nominee is eligible, and if the nomination is proper, the Governance and Nominating Committee then will deliberate and make its recommendation to the Board of Directors.

11

The Governance and Nominating Committee will not change the manner in which it evaluates candidates, including the applicable minimum criteria set forth above, based on whether the candidate was recommended by a shareholder.

Communications with the Board

Shareholders can communicate directly with the Board, or with any Committee of the Board, by writing to Mr. Ian L. Nemerov at the Company’s address, by calling Mr. Nemerov at (952) 487-9500 or by contacting him via e-mail at boardofdirectors@vitalimages.com.  All communications will be reviewed by management and then forwarded to the appropriate Director or Directors or to the full Board, as appropriate.

Director Compensation

The following table sets forth information about the compensation paid by the Company to and earned by its Directors for the year ended December 31, 2007:

DIRECTOR COMPENSATION TABLE – 2007

(1)          As an employee of the Company, Jay D. Miller, who resigned as the Company’s President and Chief Executive Officer on January 9, 2008, received no Director fees from the Company during 2007 and thus is not included in the table.

(2)          Consists of fees earned in 2007 and paid in either 2007 or 2008.

(3)          The value of the stock options is the amount of the options that the Company recognizes for financial reporting purposes under Statement of Financial Accounting Standard (“SFAS”) No. 123(R).  Refer to “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical accounting policies and estimates – Equity-based compensation” in our Annual Report on Form 10-K for the year ended December 31, 2007 for discussion of the assumptions used in calculating the expense under SFAS No. 123(R).  This portion of the Annual Report on Form 10-K is included in our 2007 Annual Report to Shareholders.

(4)          On May 23, 2007, Mr. Hickey received a stock option award with a grant date fair value of $145,680 (12,000 shares).  On May 23, 2007, Mr. Peet received a stock option award with a grant date fair value of $60,700 (5,000 shares).  The grant date fair values were computed in accordance with SFAS No. 123(R).

(5)          As of December 31, 2007, the following non-employee Directors had outstanding options to purchase the following number of shares of the Company’s common stock, all of which had been granted under the Vital Images, Inc. 1997 Director Stock Option Plan:  Mr. Pihl (54,000 shares, of which options to purchase 48,000 shares were exercisable), Mr. Hickey (48,000 shares, of which options to purchase 36,000 shares were exercisable), Mr. Peet (23,000 shares, of which options to purchase 18,000 shares were exercisable), Mr. Perkins (36,000 shares, of which options to purchase 30,000 shares were exercisable), Dr. Vannier (54,000 shares, of which options to purchase 48,000 shares were exercisable) and Mr. Wehrwein (54,000 shares, of which options to purchase 48,000 shares were exercisable).

12

Non-employee Director Fees.  For 2007, each non-employee Director received an annual retainer of $16,000, and the following Chairs received the following additional annual retainers:

·                                          Chair of the Board: $6,000;

·                                          Chair of the Audit Committee: $5,000;

·                                          Chair of the Compensation Committee: $4,000;

·                                          Chair of the Governance and Nominating Committee: $3,000;

·                                          Chair of the Investment Committee: $3,000; and

·                                          Chair of the Strategy Committee: $3,000.

In addition, non-employee Board members received the following meeting fees for meetings attended:

Non-employee Board members of the Independent Committee also received monthly fees for the months in which meetings were held. The chair received $2,500 per month and other members received $1,500 per month.  The Independent Committee members received fees for two months during 2007.

1997 Director Stock Option Plan.  The Vital Images, Inc. 1997 Director Stock Option Plan (the “1997 Director Plan”) was adopted by the Board of Directors on March 19, 1997 and approved by the sole shareholder of the Company on May 1, 1997.  It automatically terminated on March 19, 2007, although options outstanding under the 1997 Director Plan on that date were not affected by the 1997 Director Plan’s termination.  The 1997 Director Plan was intended to assist the Company in attracting, motivating and retaining well-qualified individuals to serve as Directors of the Company.  The 1997 Director Plan provided for both the automatic and discretionary grant of options.  The only individuals eligible to receive options under the 1997 Director Plan were members of the Board of Directors of the Company, and the only individuals eligible to receive automatic grants of options under the 1997 Director Plan were those Directors of the Company who were not employees of the Company.  The 1997 Director Plan provided that the total number of shares of the Company’s common stock that may be purchased upon the exercise of options could not exceed 500,000 shares, subject to adjustment as provided in the 1997 Director Plan.  The 1997 Director Plan was administered by the Board of Directors of the Company.

During the term of the 1997 Director Plan, all grants of stock options under the 1997 Director Plan and the amounts and terms of the options so granted were automatically determined under the 1997 Director Plan, and there were no discretionary grants of options under the 1997 Director Plan.  As such, the Board of Directors had no authority to determine the grant or terms of such automatic options.  Under the 1997 Director Plan, non-employee Directors of the Company received automatic grants of stock options to purchase 18,000 shares on their initial election or appointment to the Board of Directors and on each third anniversary of their appointment to the Board so long as they were members of the Company’s Board.  On February 29, 2008, there were options to purchase 252,000 shares outstanding under the 1997 Director Plan, all of which were automatic options.

2006 Long-Term Incentive Plan.  On March 9, 2006, the Company’s Board of Directors adopted and, on May 4, 2006, the Company’s shareholders approved, the Vital Images, Inc. 2006 Long-Term Incentive Plan (the “2006 Plan”).  Throughout 2006, the provisions of the 2006 Plan providing for the automatic grant of options to non-employee Directors generally were the same as those of the 1997 Director Plan, although no options were granted under the 2006 Plan to non-employee Directors during 2006.  The 2006 Plan was amended by the Board of Directors on February 2, 2007 to change certain features of the automatic grants of options to non-employee Directors.  As amended on February 2, 2007, the 2006 Plan provides that when a non-employee Director is first elected or appointed to the Board, the Director will automatically receive an option to purchase a number of

13

shares of common stock determined by multiplying 9,000 by a fraction, the numerator of which is the expected number of months until the next annual meeting of the Company’s shareholders and the denominator of which is twelve.  As amended in February 2007, the 2006 Plan provides that beginning in 2008, each non-employee Director will be automatically granted, on the day after the Company’s annual meeting of shareholders, an option to purchase 9,000 shares of common stock, with the exception of Michael W. Vannier, M.D., who will receive an option to purchase 5,000 shares on such date in 2008.  Beginning in 2009, each non-employee Director will receive an annual automatic grant of an option to purchase 9,000 shares of common stock on the day after the annual shareholders’ meeting.  In addition, the Compensation Committee and the Board of Directors approved the one-time grant under the 2006 Plan to James B. Hickey, Jr. and Gregory J. Peet on the day after the 2007 annual shareholders’ meeting of an option to purchase 12,000 shares and 5,000 shares, respectively, as a time cycle adjustment for them.  All of these options will vest one year after the date of grant, have a term of five years, and have an exercise price equal to the closing price of the Company’s common stock as of the date of grant.

In addition to such automatic option grants, the 2006 Plan permits the Compensation Committee to make discretionary grants of stock options to any and all Directors, including non-employee Directors.  Upon the discretionary grant of options to the Company’s non-employee Directors under the 2006 Plan, the Compensation Committee will fix the number of shares of the Company’s common stock that the optionee may purchase upon exercise of the option and the exercise price at which the shares may be purchased.  The exercise price of such options cannot be less than the fair market value of the common stock at the time the option is granted.  Each option will be exercisable by the optionee only during the term fixed by the Compensation Committee, with such term ending not later than five years after the date of grant.

All options granted to non-employee Directors under the 2006 Plan are non-qualified options not intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended.  Payment for shares upon exercise of any automatic or discretionary options granted to non-employee Directors under the 2006 Plan may be made in cash, in shares of Company’s common stock that have been owned for more than six months having an aggregate fair market value on the date of exercise which is not less than the exercise price of the shares of common stock being purchased, partly in cash and partly in such shares, or by the delivery of irrevocable instructions to a broker to sell shares of common stock obtained upon the exercise of an option and to deliver to the Company an amount out of the proceeds of such sale equal to the aggregate exercise price of the shares being purchased.

Executive Officers

The following discussion sets forth information as of April 1, 2008 about the executive officers of the Company who are not Directors.

Peter J. Goepfrich was named Chief Financial Officer in January 2008.  Since March 2007, Mr. Goepfrich had been Vice President – Finance and Accounting.  Previously, he was Senior Director of Finance from March 2005 to March 2007 and Controller from August 2004 to March 2005.  From September 1997 to August 2004, Mr. Goepfrich served in PricewaterhouseCoopers LLP’s Assurance and Business Advisory Services practice with a specialization in the audit of technology companies.  From December 1996 to August 1997, Mr.Goepfrich was assistant controller at Management Resource Initiatives, Inc., a consulting firm to emerging companies providing key infrastructure support.

14

Steven P. Canakes was named Executive Vice President – Sales and International Operations in March 2008.  He was Executive Vice President – Global Sales from September 2005 until March 2008.  Mr. Canakes was the Company’s Vice President-Sales from March 2000 until September 2005, its Vice President-U.S. Sales from August 1998 to March 2000 and its Director of U.S. Sales from March 1998 to August 1998.  From July 1996 to March 1998, Mr. Canakes was Vice President of Business Development for MedManagement, LLC in Plymouth, Minnesota.  From February 1994 to July 1996, he served as Vice President of Sales for Medintell Systems and Value Health Corporation, a Medintell Systems Division.  Before February 1994, Mr. Canakes was a CT Product Sales Manager for Picker International, Inc.

Philip I. Smith was named Executive Vice President – Corporate Development and Strategic Planning in March 2008.  From September 2005 until March 2008, he was Executive Vice President – Corporate Development.  He served as the Company’s Vice President-Marketing and Corporate Development from January 2004 until September 2005 and its Vice President-Corporate Development from February 2003 until January 2004.  From April 2002 to November 2002, Mr. Smith served as President and Chief Executive Officer of Thermonix, a medical technology company.  From April 2000 until April 2002, Mr. Smith was employed as Vice President, Marketing and Corporate Development of Image-Guided Neurologics, Inc., a medical technology company.  From August 1997 to February 2000, Mr. Smith was employed as an investment banker with US Bancorp Piper Jaffray.  Before August 1997, Mr. Smith held senior sales positions at GE Medical Systems.  Since November 2006, Mr. Smith has served as a Director of Angeion Corporation.

Susan A. Wood, Ph.D., was named Executive Vice President – Marketing and Technology in March 2008.  From May 2007 until March 2008, she was Executive Vice President – Product Marketing and Development.  From September 2005 until May 2007, she was Executive Vice President – Marketing and Clinical Development.  From November 2004 until July 2005, Dr. Wood served as consultant and Chief Operating Officer of Medicsight, PLC, a medical imaging software company based in London, England.  From November 1997 until October 2004, she served with R2 Technology, Inc., a computer-aided detection company, most recently in the position of Vice President of Marketing and earlier in other product development leadership positions.  From May 1995 until October 1997, Dr. Wood was with ISG Technology (formerly Cedara Software, now Merge Healthcare).  Dr. Wood is the co-inventor of several innovations in medical imaging for which United States and foreign patents are granted or pending, and she has written several articles in trade journals and chapters in books dealing with advanced analysis and CAD in medical imaging.  She holds a bachelor of science in engineering from the University of Maryland, a master of science in biomedical engineering from Duke University and a doctor of philosophy from The Johns Hopkins Medical Institutions, School of Hygiene and Public Health in Baltimore, Maryland.  Dr. Wood also received a post-doctoral fellowship from Johns Hopkins to research quantification of three-dimensional airway trees during inflation using computed tomography.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s Directors, executive officers, and any persons holding more than 10% of the outstanding common stock of the Company to file reports with the Securities and Exchange Commission concerning their initial ownership of common stock and any subsequent changes in that ownership.  The Company believes that for 2007, the filing requirements were satisfied.  In making this disclosure, the Company has relied solely on written representations of its Directors, executive officers and beneficial owners of more than 10% of its common stock and on copies of the reports that they have filed with the Securities and Exchange Commission.

Compensation Discussion and Analysis

Compensation Philosophy and Components

We compete in a competitive market for personnel, both for executives and for non-executive employees.  Desirable candidates for employment at Vital Images may also have attractive opportunities from many other employers, such as multi-national medical device companies, venture-backed or fast-growing medical device or technology companies, and academic research institutions.  Our long-term success depends on our ability to develop

15

and market innovative enterprise-wide advanced visualization and analysis solutions that address important medical needs. In addition, the intense global pressures on health care costs require us to continually improve our productivity. To achieve these goals, it is critical that we be able to attract, motivate and retain highly talented individuals at all levels of the organization.

The Compensation Committee of our Board of Directors bases its executive compensation programs on the same objectives that guide the Company in establishing all of its compensation programs:

·                                          Compensation should be based on the level of job responsibility, individual performance and Company performance. As employees progress to higher levels in the organization, an increasing proportion of their pay should be linked to Company performance because they are more able to affect its results.

·                                          Compensation should reflect the value of the job in the marketplace. To attract and retain a highly skilled work force, we must remain competitive with the pay of other premier employers who compete with us for talent.

·                                          Compensation should reward performance, and the objectives of pay-for-performance and retention must be balanced.

·                                          To be effective, performance-based compensation programs should measure the achievement of objectives that are critical for driving the success of the Company.

·                                          Although compensation and benefit programs and individual pay levels will reflect differences in job responsibilities, geographies and marketplace considerations, the overall structure of compensation and benefit programs should be broadly similar across the organization. Perquisites for executives should be rare and limited to those that are important to the executive’s ability to safely and effectively carry out his or her responsibilities.

·                                          Except for benefits and programs that are available to all of our employees or a broad selection of our general employee population, our executives should receive few perquisites, if any, and those that are provided should receive specific approval and meet a defined business purpose.

The Compensation Committee is responsible for assuring that compensation for our executives is consistent with our compensation philosophy.  The Compensation Committee reviews our compensation philosophy and trends in our industry to ensure that our executive compensation program is competitive and attracts and retains talented management, motivates our executives to achieve short- and long-range corporate objectives, and aligns the motivation and interests of the executives with the interests of our shareholders.

The Compensation Committee administers our equity-based compensation and management incentive programs and other compensation initiatives identified by the Board.  The Compensation Committee reviews and approves each executive’s base salary, bonus, and equity incentives annually, as well as our management incentive plan under which the executive officers may receive non-equity incentive compensation.

We view the various components of compensation as related but distinct.  Although the Compensation Committee does review and consider total compensation for each executive officer and for all executive officers as a group, we do not believe that significant compensation derived from one component of compensation should necessarily negate or reduce compensation from other components.  We determine the appropriate level for each compensation component based in part, but not exclusively, on the following factors:

·                                          internal equity and consistency;

·                                          the executive compensation paid by other companies with which we compete for executive talent;

·                                          individual performance, and

·                                          Company performance.

The Compensation Committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid-out compensation, between cash and non-cash compensation, or among different forms of non-cash compensation.

16

For 2007, our named executive officers were Jay D. Miller, President and Chief Executive Officer, Michael H. Carrel, Chief Operating Officer and Chief Financial Officer, Steven P. Canakes, Executive Vice President – Global Sales, Philip I. Smith, Executive Vice President – Corporate Development, and Susan A. Wood, Ph.D., Executive Vice President – Product Marketing and Development (the “Named Executive Officers”).

Role of Executive Officers in Compensation Decisions

During several meetings with the Compensation Committee held each year in December, January and February, our President and Chief Executive Officer presents to the Compensation Committee his recommendations regarding changes in his compensation and the compensation for our other executive officers.  The Compensation Committee discusses these recommendations and accepts or adjusts them, in whole or in part.  The President and Chief Executive Officer is not present during the Compensation Committee’s final discussions or determination of his compensation, but he participates in the discussions regarding other executive officers’ compensation.  The Chief Financial Officer also may be present for discussions regarding compensation for the vice presidents.  The other executive officers are not present during the Compensation Committee’s discussions of their compensation.  The chair of the Compensation Committee presents the Compensation Committee’s findings regarding compensation for executive officers to the Board of Directors at one or more meetings typically held before mid-March of each year to obtain the Board’s input.  Based on such input, at these meetings, the Compensation Committee approves and adopts executive compensation for that year, including executive salaries, the management incentive plan, and stock options and restricted stock awards.

Setting Executive Compensation

In making decisions regarding elements and amounts of compensation, the Compensation Committee considers compensation paid to executive officers at similar levels and with similar experience and responsibility at public companies in our industry and region that it deems to be comparable in terms of revenue, market capitalization, complexity, number of employees and profitability.

The companies that comprised this peer group in 2007 were:

The Compensation Committee also reviewed compensation data from surveys prepared by Culpepper & Associates, Inc. and Radford Surveys & Consulting (which is part of AON Consulting, Inc.), focusing on companies with comparable revenue and in a similar industry and location as Vital Images. The Compensation Committee is also mindful of the effect of any percentage increases in executive compensation on all of our employees.  The Compensation Committee did not use outside advisors in 2007.

Base Salary

Executive officers receive a base salary to compensate them for services rendered during each year.  Base salary is determined by assessing the executive’s sustained performance against his or her individual job responsibilities, including the impact of such performance on our business results, market data and comparisons to other Company officers.

Salary levels are considered annually as part of our performance review process as well as upon a promotion or other change in job responsibility.  Increases in the salary of the President and Chief Executive Officer are determined by the Compensation Committee based on its assessment of his performance and his achievement of goals.  For 2007, the base salary of the President and Chief Executive Officer was increased to $345,000 after

17

reviewing salary data from comparable companies, salary surveys from Culpepper and Radford, his salary history, his past performance, and the Company’s historical performance.  Merit-based increases in the salaries of other executive officers are based on the assessment by the President and Chief Executive Officer and the Compensation Committee of his or her overall performance and by achievement of each individual’s objectives.  For determining the base salary of our other executive officers, the Compensation Committee weighed similar factors as it considered for our President and Chief Executive Officer – comparable companies, Company and executive performance, external salary surveys, and our desire to align the interests of our executive officers and promote teamwork among them.

Bonus

Bonuses to executive officers are determined and paid under the management incentive plan established each year.  Payments under the annual management incentive plan are tied to the level of achievement of annual performance targets by our executives.  These targets are based on our annual budget as approved by the Board of Directors.  An executive’s annual incentive opportunity is based upon a percentage of his or her base salary.  The management incentive plan under which bonuses are determined and paid consists of two major components that we believe will have the most positive effect on shareholder value – corporate performance and personal performance.

For 2007, we based the corporate performance portion of the management bonus upon achievement as measured by three financial performance criteria:

·                                          orders, which we refer to as “bookings;”

·                                          revenue as determined in accordance with generally accepted accounting principles, consistently applied, or “GAAP”; and

·                                          income before taxes, interest and equity-based compensation, which we refer to as “adjusted EBIT.”

The targeted bonus for Mr. Miller during 2007 was 65% of his base salary, and the targeted bonus for all other Named Executive Officers was 50% of their base salaries.  In 2007, the Compensation Committee increased Mr. Miller’s target bonus percentage to 65% from 60% in 2006 to reflect the aggressive nature of the Company’s objectives and after analyzing industry trends.   The Compensation Committee maintained the 50% target bonus percentage for the other Named Executive Officers also to reflect the aggressive objectives and to continue to highly motivate them to work together as a group and achieve those objectives.  In 2007, the potential bonus for each Named Executive Officer was allocated as follows:

For our corporate performance objectives, the Compensation Committee chose the measures of bookings, revenue and adjusted EBIT because it believed they were the most appropriate measures of what the Company needed to accomplish in 2007.

Each financial performance objective has minimum achievement levels and maximum potential bonuses for overachievement.  Results below the minimum achievement levels will result in no bonus for that objective.  After

18

the minimum is obtained, actual results within an achievement range will be interpolated until the maximum potential bonus is achieved.

Our 2007 corporate performance measurement amounts for bookings, revenue and adjusted EBIT were the same for all of our Named Executive Officers.  For 2007, the Board approved 100% bonuses for Named Executive Officers upon the achievement of $90.0 million in bookings, $93.5 million in revenue and $17.83 million in adjusted EBIT.  Overachievement against the bookings and revenue targets could have earned up to 250% bonuses, and overachievement against the adjusted EBIT target could have earned up to 200% bonuses.  Our Named Executive Officers could have achieved greater bonuses for overachievement against the bookings and revenue objectives than for the adjusted EBIT objective because we felt that weighting the bookings and revenue objectives more heavily reflected the growth priorities of the Company in 2007.

Our targets for bookings, revenue and adjusted EBIT were chosen to represent aggressive growth over our results in 2006, particularly in bookings and revenue, and thus were considered to be difficult to achieve.  The Compensation Committee also felt achievement of these objectives would drive significant value for our shareholders. Our targets for adjusted EBIT did not reflect as large an increase over our results in 2006 because the Company expected to make investments in 2007 in research and development, sales and marketing and infrastructure, causing our adjusted EBIT to increase at a lower rate.

In 2007, the Company did not achieve any of its corporate performance objectives, so no bonus compensation for corporate performance was paid to any of the Named Executive Officers for 2007.

The personal performance portion of the management incentive plan is based on specific objectives set annually for each individual.  Individual performance objectives are determined by the executive officer to whom the potential bonus recipient reports or, in the case of the President and Chief Executive Officer, by the Compensation Committee.  Because the personal objectives are based upon achieving identified tasks, an executive officer cannot receive more than 100% of the possible bonus for any overachievement of these objectives.  The personal objectives for each Named Executive Officer are related to achievements within their specific functions, including expanding the Company into new markets, both organically and inorganically; increasing the Company’s product offerings; improving the Company’s service offerings; management of the Company’s business partnerships; conducting investor relations activities; improving the Company’s intellectual property and clinical validation infrastructure; and recruitment and retention of employees.  They also have more personal qualitative objectives, such as self-development and executive team development, to improve their skills and performance as officers of the Company.  The Compensation Committee approves the personal objectives of the President and Chief Executive Officer and determines his performance against his personal objectives.  The President and Chief Executive Officer approves the personal objectives of the other Named Executive Officers and measures their performance.  Most of the personal objectives are considered to be difficult to achieve, but attainable. Achievement of the goals was measured both quantitatively and qualitatively by the Compensation Committee and the President and Chief Executive Officer.

The management incentive plan is administered by the Board of Directors and Compensation Committee, which have the right, at any time and at their discretion, to amend the plan, increase or decrease individual payout amounts, whether earned or unearned, or terminate the plan, in whole or in part.  The Company follows applicable laws and regulations regarding recovery of any bonus or other incentive-based or equity-based compensation, or profits realized from the sale of securities, resulting from misconduct.  The Compensation Committee also retains discretion to award special bonuses for outstanding achievement, which discretion it exercised to award a special bonus for 2007 to Susan A. Wood, Ph.D. our Executive Vice President – Product Marketing and Development, for her work related to our agreement with Toshiba Medical Systems under which Toshiba will resell our products in Japan. Total cash bonus amounts, if any, paid to the Named Executive Officers for 2007 performance are listed in the Summary Compensation Table included elsewhere in this proxy statement.

19

Equity-Based Compensation Program

Our shareholder-approved equity compensation plan permits a variety of equity awards. Grants of stock options and restricted stock awards are the primary vehicles for offering long-term incentives to executive officers and key employees.  The objectives of our equity-based compensation program are to advance the longer-term interests of the Company, complement incentives tied to annual performance and align the interests of executives more closely with those of our shareholders.  We believe that long-term incentives provided by stock options and restricted stock awards are especially significant in motivating our executives and retaining their services.  The number of stock options and restricted stock awards granted is based on the executive’s position and performance in that position.  During 2007, as in prior years, we granted stock options and awarded restricted stock to executives and other senior officers in March 2007 as part of our Company-wide annual grant. We will continue to evaluate what types of equity award vehicles achieve the best balance between continuing our successful practice of providing equity-based compensation and creating and maintaining long-term shareholder value.

The President and Chief Executive Officer makes recommendations for grants of options and restricted stock awards to executive officers and key employees.  The Compensation Committee reviews these recommendations and approves grants of options and restricted stock awards based on, among other factors, historical grants, the value of past grants and the Company’s performance.  In granting stock options and restricted stock awards, the Compensation Committee and President and Chief Executive Officer consider trends in equity-based compensation and whether they are consistent with our compensation philosophy.  They also consider our “overhang” percentage; that is, the number of our shares that are subject to outstanding options and other awards, such as restricted stock, as a percentage of the number of our shares outstanding.

Grants of stock options and awards of restricted stock to executive officers and other key employees are considered at a series of meetings of the Compensation Committee that are held in the first quarter of each year.  Grants to newly-hired employees are effective on the employee’s first day of employment, and grants to employees who are promoted during the fiscal year are effective on the later of the date of their promotion and the date the Compensation Committee approves the grants.  To facilitate the grant of options and restricted stock awards to existing and newly-hired employees, the Board of Directors and the Compensation Committee authorized Jay D. Miller and Michael H. Carrel to grant individual stock options and restricted stock awards during 2007 to such employees, subject to the terms of the applicable plan and guidelines approved by the Compensation Committee and the Board.  As Mr. Miller is no longer the Company’s President and Chief Executive Officer, the Compensation Committee authorized Peter J. Goepfrich, who became the Company’s Chief Financial Officer on January 9, 2008, to make such awards in conjunction with Mr. Carrel.  The exercise price of all stock options granted is equal to the closing price of our common stock as reported on The NASDAQ Global Select Market on the date of grant.

All grants of stock options and awards of restricted stock to Named Executive Officers during 2007 contained vesting provisions.  Options granted during 2007 were to vest as to 28% of the amount granted on the first anniversary of the grant date, with an additional 2% of the grant amount to vest each month thereafter until the entire option vests on the fourth anniversary of the date of its grant.  Awards of restricted stock during 2007 are to vest on a three-year schedule, beginning on the first anniversary date of the date of grant, based on achievement of aggressive revenue performance goals over those three years.  If the revenue target in one year is missed, the portion of the award that was to vest upon achievement of that target may still vest if the revenue target in a subsequent year is achieved.  The performance goals were chosen to provide incentive to achieve longer-term growth targets and drive shareholder value.

Stock Ownership and Retention Guidelines.  In May 2006, the Board of Directors approved stock ownership guidelines that apply to all Directors and executive officers.  The guidelines are overseen by our Governance and Nominating Committee.  Under these guidelines, ownership targets for executive officers are a multiple of base salary (not including bonuses, such as performance or signing bonuses), varying by management level, and the ownership target for members of the Board is based on the value of our common stock, as follows:

20

The guidelines provided that ownership was to be measured as of December 31, 2007 for those who were executive officers on that date, with reference to the executive officer’s base salary for the year then ended and using the fair market value of our common stock as of December 31, 2007.  To the extent that a Board member or executive officer did not already satisfy the applicable ownership and valuation requirements, he or she is expected to meet the target over the later of four years from December 31, 2007 or five years from the date such person became a Board member or executive officer.  Ownership for new executive officers and Board members is measured on the last trading date of the year in which they became an executive officer or Board member, with reference to the executive officers’ annualized base salaries.  Shares that count include all shares directly or beneficially owned by the executive officer or Board member, except for shares subject to options and unvested restricted stock awards.  As of December 31, 2007, all the Directors and Named Executive Officers either met the guidelines or were making satisfactory progress toward meeting them, in the opinion of the Governance and Nominating Committee.

If a Director or executive officer desires to sell any shares of our stock, we recommend that person adopt a 10b5-1 plan, which provides a safe harbor from liability under the anti-fraud provisions of the Securities Exchange Act of 1934 for sales following such a written plan that includes either the number of shares to be sold and the prices at which they will be sold or a formula under which the number of shares and sales prices are determined.  We also encourage all Directors and Named Executive Officers who exercise options to retain and hold at least 10% of the shares obtained upon their exercise.  Under our policy prohibiting insider trading, which applies to all Directors and employees, the 10b5-1 plans must be reviewed and approved by the chair of the Compensation Committee and outside securities counsel before they can be adopted.

Benefits

Our executive officers are eligible for all benefits generally available to our full-time permanent employees.  We do not provide pension arrangements, post-retirement health coverage, or similar benefits for our executives or employees.  Any benefits that are provided only to executive officers are usually directly related to unique features of that executive’s position, such as being an expatriate, or when the executive officer undertakes actions at our request, such as relocating.  The benefits we provided in 2007 to executive officers are described in the Summary Compensation Table included elsewhere in this proxy statement.

All employees, including the executive officers, are entitled to participate in the Vital Images, Inc. Salary Savings Plan qualified under Section 401(k) of the Internal Revenue Code of 1986, or 401(k) plan.  The 401(k) plan has been consistently highlighted as a positive element of compensation in our employee satisfaction survey results for the past four years.  Each employee that is at least 21 years of age may, commencing on the first day of the quarter after which the employee has attained three months of service, elect to contribute to the 401(k) plan through payroll deductions of up to 100% of his or her salary, subject to certain limitations.  At the discretion of the Board of Directors, we may make matching contributions equal to a percentage of the salary deduction contributions or other discretionary amounts.  The Company paid $410,000 in matching contributions in 2007, $214,000 in 2006 and $103,000 in 2005.  Matching contributions to the 401(k) plan on behalf of the Named Executive Officers are described in the Summary Compensation Table.

During 2006 and 2007, we paid relocation costs and expenses for Susan A. Wood, Ph.D., whom we hired as Executive Vice President – Marketing and Clinical Development in September 2005, when she and her family lived in San Francisco, California.  These costs and expenses are described in the Summary Compensation Table.

Executive Compensation

The following table sets forth information about compensation awarded, earned by or paid to the Company’s Named Executive Officers for the years ended December 31, 2007 and 2006, which Named Executive Officers consist of the Company’s principal executive officer and principal financial officer and its three other most

21

highly compensated executive officers whose total compensation was greater than $100,000 for the year ended December 31, 2007:

SUMMARY COMPENSATION TABLE

(1)   Consists of restricted stock awards granted under the Vital Images, Inc. 1997 Stock Option and Incentive Plan.  The stock awards for 2006 vest as to 25% of the number of shares subject to the awards on each of the first, second, third and fourth anniversary dates of the date of grant of the award so long as the recipient of the award is then an employee of the Company.  The stock awards for 2007 vest upon achievement of certain Company performance metrics for each of the three years ending December 31, 2009, with one-third eligible for vesting upon 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 that year; provided that, if the performance metrics not be met for a given year, the unvested portion will carry forward to the next year and may vest if that year’s metric is met.  Any amounts of the 2007 stock awards that are not vested as of the Company’s Form 10-K filing date for the year ended December 31, 2009 will be forfeited. The holders of the stock awards have the right to receive any dividends declared on the Company’s common stock but not the right to vote the shares of restricted stock.  The value of the stock awards is the amount of the awards that the Company recognizes for financial reporting purposes under SFAS No. 123(R).  Refer to “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical accounting policies and estimates – Equity-based compensation” in our Annual Report on Form 10-K for the year ended December 31, 2007 for discussion of the assumptions used in calculating the expense under SFAS No. 123(R).  This portion of our Annual Report on Form 10-K is included in our 2007 Annual Report to Shareholders.

(2)   Consists of stock options granted under the Vital Images, Inc. 1997 Stock Option and Incentive Plan.  The options vest and become exercisable as to 28% of the shares one year after the date of grant and as to an additional 2% in each succeeding month, but only if the Named Executive Officer is then an employee of the Company.  The value of the option awards is the amount of the awards that the Company recognizes for financial reporting purposes under SFAS No. 123(R).  Refer to “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical accounting policies and estimates – Equity-based compensation” in our Annual Report on Form 10-K for the year ended December 31, 2007 for discussion of the assumptions used in calculating the expense under SFAS No. 123(R).  This portion of our Annual Report on Form 10-K is included in our 2007 Annual Report to Shareholders.

(3)   Consists of cash bonuses earned for 2007 and paid in 2008 under the Company’s management incentive plan for 2007 and cash bonuses earned for 2006 and paid in 2007 under the Company’s management incentive plan for 2006.  The

22

management incentive plans provide that the executive officers of the Company are eligible to earn annual cash bonuses tied to the level of achievement of annual performance targets.  See “Information Concerning Directors, Nominees and Executive Officers – Compensation Discussion and Analysis – Setting Executive Compensation – Bonus.”

(4)   Mr. Miller’s employment as President and Chief Executive Officer terminated on January 9, 2008.  Mr. Carrel was then appointed as President and Chief Executive Officer.

(5)   Includes the amount recognized by the Company for financial reporting purposes under SFAS No. 123(R) in connection with the extension of the exercise period for the stock options held by Mr. Miller under a separation and non-compete agreement between the Company and Mr. Miller dated January 16, 2008.  Refer to the section of this Proxy Statement entitled “Information Concerning Directors, Nominees and Executive Officers – Post-Employment Compensation – Potential Payments upon Termination of Employment or Change in Control” for a discussion of the terms of this agreement.

(6)   Includes matching contributions made by the Company under the Vital Images, Inc. Salary Savings Plan, which is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, and group term life premiums. Also includes the following amounts accrued by the Company under the separation and non-compete agreement dated January 16, 2008 between Mr. Miller and the Company:  $500,000 severance payment, $53,520 in payment of transition services provided, $14,346 in taxes on the severance and transition services payment and $12,501 in medical and dental insurance premiums.  Refer to the section of this Proxy Statement entitled “Information Concerning Directors, Nominees and Executive Officers – Post-Employment Compensation – Potential Payments upon Termination of Employment or Change in Control” for a discussion of the terms of this agreement.

(7)   Consists of matching contributions made by the Company under the Vital Images, Inc. Salary Savings Plan, which is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, and group term life premiums.

(8)   Consists of amounts paid for attendance by spouse at 2007 sales award trip, matching contributions made by the Company under the Vital Images, Inc. Salary Savings Plan, and group term life premiums

(9)   Consists of a special bonus of $22,500 for work related to the Company’s agreement with its reseller, Toshiba Medical Systems, under which Toshiba will resell the Company’s products in Japan; relocation expenses; amounts paid for attendance by spouse at 2007 sales award trip; matching contributions made by the Company under the Vital Images, Inc. Salary Savings Plan; and group term life premiums.

(10) Consists of relocation expenses, matching contributions made by the Company under the Vital Images, Inc. Salary Savings Plan, and group term life premiums.

23

The following table sets forth information regarding grants of stock options and awards of restricted stock to the Named Executive Officers during 2007:

GRANTS OF PLAN-BASED AWARDS – 2007

(1)   Consists of cash bonuses under the Company’s 2007 management incentive plan.  The amounts in these columns reflect the minimum payment level, if an award is achieved, the target payment level and the maximum payment level under our 2007 management incentive plan. For additional information concerning our annual incentive award program, see the section of this proxy statement entitled “Information Concerning Directors, Nominees and Executive Officers – Compensation Discussion and Analysis.”

(2)   Consists of stock options and restricted stock awards granted to the Named Executive Officers in 2007 under the Vital Images, Inc. 1997 Stock Option and Incentive Plan.

(3)   The exercise price of all options was equal to the closing price of the common stock as quoted on The NASDAQ Global Select Market on the date of grant.

(4)   Represents the full grant date fair value determined pursuant to SFAS No. 123(R) as reflected in the Company’s financial statements, based on the numbers of shares subject to options and restricted stock awards granted and the closing price of the common stock as quoted on The NASDAQ Global Select Market on the date of grant.

(5)   Consists of stock options, which vest and become exercisable as to 28% of the shares one year after the date of grant and as to an additional 2% in each succeeding month, but only if the Named Executive Officer is then an employee of the Company.

(6)   Consists of restricted stock awards, which vest upon achievement of certain Company performance metrics for each of the three years ending December 31, 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 that year. Should the performance metrics not be met for a given year, the unvested portion will carry forward to the next year and may vest if that year’s metric is met. As of the Company’s Form 10-K filing date for the year ended December 31, 2009, any unvested portion of the award will be forfeited. The performance metrics for the year ended December 31, 2007 were not met. Therefore, no equity-based compensation expense for the awards was recognized

24

for 2007. The first quarter of 2007 was the first period in which the Company granted restricted stock awards with performance-based vesting.

The following table sets for the information about unexercised options and awards of restricted stock that had not vested and that were held at December 31, 2007 by the Named Executive Officers:

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END – 2007