<PAGE>
 
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                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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                                    FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                  For the quarterly period ended March 31, 1999
                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                    For the transition period from ___ to ___

                         Commission File Number 0-22229

               ---------------------------------------------------

                               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)

3100 West Lake Street, Suite 100                        55416
    Minneapolis, Minnesota                         (Zip Code)
    (Address of principal
     executive offices)

                                 (612) 915-8000
              (Registrant's telephone number, including area code)

               ---------------------------------------------------

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 _____

               ---------------------------------------------------

On May 5, 1999, there were 4,918,764 shares of the Registrant's common stock,
par value $.01 per share, outstanding.

                                       1
<PAGE>
 
                              VITAL IMAGES, INC.
                              ------------------
                                   Form 10-Q

                                March 31, 1999

                               Table of Contents

                                                                           Page
                                                                          Number
                                                                          ------

PART I. FINANCIAL INFORMATION

        Item 1. Financial Statements

            Balance Sheets as of March 31, 1999 and December 31, 1998......3

            Statements of Operations for the Three Months Ended 
               March 31, 1999 and 1998.....................................4

            Statements of Cash Flows for the Three Months Ended 
               March 31, 1999 and 1998.....................................5

            Notes to Financial Statements..................................6

        Item 2. Management's Discussion and Analysis of 
                   Financial Condition and Results of Operations...........8

PART II. OTHER INFORMATION

        Item 6. Exhibits and Reports on Form 8-K..........................14

SIGNATURES................................................................15

INDEX TO EXHIBITS.........................................................16

                                       2
<PAGE>
 
--------------------------------------------------------------------------------

                          PART I. FINANCIAL INFORMATION

--------------------------------------------------------------------------------

ITEM 1. FINANCIAL STATEMENTS

VITAL IMAGES, INC.
BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     March 31,     December 31,
                                                                       1999            1998    
                                                                   ------------    ------------
                                                                    (Unaudited)
<S>                                                                <C>             <C>         
ASSETS
Current assets:
     Cash and cash equivalents                                     $  1,800,089    $  1,751,615
     Marketable securities                                              995,490       1,985,556
     Accounts receivable, net of allowance for doubtful 
        accounts of $93,000 and $78,000 as of March 31, 
        1999 and December 31, 1998, respectively                      1,522,518       1,149,109
     Prepaid expenses and other current assets                          242,959         135,117
                                                                   ------------    ------------
         Total current assets                                         4,561,056       5,021,397
Property and equipment, net                                             882,177         916,238
                                                                   ------------    ------------

         TOTAL ASSETS                                              $  5,443,233    $  5,937,635
                                                                   ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY 
Current liabilities:
     Accounts payable                                              $    664,214    $    505,260
     Accrued payroll                                                    345,556         587,261
     Deferred revenue                                                   442,794         380,851
     Other current liabilities                                          343,649         188,381
                                                                   ------------    ------------
         Total current liabilities                                    1,796,213       1,661,753
Deferred revenue                                                        198,912         141,615
                                                                   ------------    ------------
         Total liabilities                                            1,995,125       1,803,368

Shareholders' equity:
    Preferred stock: $.01 par value; 5,000,000 shares
       authorized; none issued or outstanding as of
       March 31, 1999 and December 31, 1998                                --              --
    Common stock: $.01 par value; 20,000,000 shares
       authorized; 4,909,108 and 4,870,497 shares issued
       and outstanding as of March 31, 1999 and
       December 31, 1998, respectively                                   49,091          48,705
    Additional paid-in capital                                       18,174,835      18,096,707
    Accumulated deficit                                             (14,775,818)    (14,011,145)
                                                                   ------------    ------------
         Total shareholders' equity                                   3,448,108       4,134,267
                                                                   ------------    ------------

         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                $  5,443,233    $  5,937,635
                                                                   ============    ============
</TABLE>

(The accompanying notes are an integral part of the interim financial
statements.)

                                       3
<PAGE>
 
VITAL IMAGES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                       For the Three
                                                                        Months Ended
                                                                         March 31,
                                                                    1999            1998
                                                                 -----------    -----------
                                                                        (Unaudited)
<S>                                                              <C>            <C>        
Revenue:
     License fees                                                $ 1,076,874    $   472,853
     Maintenance and services                                        204,632         93,680
     Hardware                                                        458,270        199,332
                                                                 -----------    -----------
         Total revenue                                             1,739,776        765,865

Cost of revenue:
     License fees                                                     33,370         36,446
     Maintenance and services                                         49,581         24,411
     Hardware                                                        364,344        158,020
                                                                 -----------    -----------
         Total cost of revenue                                       447,295        218,877

              Gross margin                                         1,292,481        546,988

Operating expenses:
     Sales and marketing                                             869,739        639,714
     Research and development                                        618,581        529,321
     General and administrative                                      600,312        600,135
                                                                 -----------    -----------
         Total operating expenses                                  2,088,632      1,769,170

              Operating loss                                        (796,151)    (1,222,182)

Interest income                                                       32,978         79,421
                                                                 -----------    -----------

Loss before income taxes                                            (763,173)    (1,142,761)
Income taxes                                                           1,500          3,118
                                                                 -----------    -----------

Net loss                                                         $  (764,673)   $(1,145,879)
                                                                 ===========    =========== 

Net loss per share - basic and diluted                           $     (0.16)   $     (0.24)
                                                                 ===========    =========== 

Weighted average common shares outstanding - basic and diluted     4,880,759      4,804,736
                                                                 ===========    =========== 
</TABLE>

(The accompanying notes are an integral part of the interim financial
statements.)

                                       4
<PAGE>
 
VITAL IMAGES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           For the Three
                                                                            Months Ended
                                                                             March 31,
                                                                       1999           1998    
                                                                    -----------    -----------
                                                                            (Unaudited)
<S>                                                                 <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                       $  (764,673)   $(1,145,879)
     Adjustments to reconcile net loss to net cash used in
       operating activities:
         Depreciation and amortization                                  138,504        118,740
         Provision for uncollectible accounts receivable                 15,000         20,000
         Changes in operating assets and liabilities:
             Accounts receivable                                       (388,409)       169,637
             Prepaid expenses and other current assets                 (107,842)        30,851
             Accounts payable                                           158,954         48,744
             Deferred revenue                                           119,240          3,741
             Accrued payroll and other liabilities                      (86,437)      (109,117)
                                                                    -----------    -----------
                Net cash used in operating activities                  (915,663)      (863,283)

CASH FLOWS FROM INVESTING ACTIVITIES:
     Additions to property and equipment                               (104,443)       (62,603)
     Investments in marketable securities                            (1,009,934)    (3,717,487)
     Maturities of marketable securities                              2,000,000      4,500,000
                                                                    -----------    -----------
                Net cash provided by investing activities               885,623        719,910

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from sales of common stock under stock option plans        78,514          9,378
                                                                    -----------    -----------
                Net cash provided by financing activities                78,514          9,378

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     48,474       (133,995)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                        1,751,615        448,377
                                                                    -----------    -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                            $ 1,800,089    $   314,382
                                                                    ===========    ===========
</TABLE>

(The accompanying notes are an integral part of the interim financial
statements.)

                                       5
<PAGE>
 
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(1) BASIS OF PRESENTATION:

The accompanying unaudited financial statements of Vital Images, Inc. ("Vital
Images" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary, including items of a normal
recurring nature, for a fair presentation have been included. Operating results
for the three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. These
financial statements should be read in conjunction with the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.

(2) MAJOR CUSTOMERS AND GEOGRAPHIC DATA:

The following customers accounted for more than 10% of the Company's total
revenue for the periods indicated:

                               Significant                       Percentage of
                                Customer            Revenue      Total Revenue
                               -----------         ---------     -------------
   Three months ended    Toshiba America Medical   $ 709,000          41%
     March 31, 1999        Systems, Inc.

   Three months ended    Toshiba America Medical   $ 329,000          43%
     March 31, 1998        Systems, Inc.
                         Paradigm Geophysical      $ 153,000          20%
                           Corporation

The Company's accounts receivable are generally concentrated with a small base
of customers. As of March 31, 1999, one customer accounted for 42% of accounts
receivable, while as of December 31, 1998, two customers, each accounting for
more than 10% of accounts receivable, accounted for 22% of accounts receivable.

Export revenue amounted to 8% and 3% of total revenue for the three months ended
March 31, 1999 and 1998, respectively. Substantially all of the Company's export
revenue is negotiated, invoiced and paid in U.S. dollars. Gross export revenue
by geographic area is summarized as follows:

                                                         Three Months Ended
                                                             March 31,
                                                       ---------------------
                                                        1999          1998  
                                                       -------       -------
Europe.............................................    $68,000       $16,000
Asia and Pacific Region............................     56,000         4,000
Canada, Mexico and others..........................     19,000         2,000

                                       6
<PAGE>
 
(3) NET LOSS PER SHARE:

For the three months ended March 31, 1999 and 1998, net loss per share is
computed using the weighted average common shares outstanding during the period.
Common share equivalents are not included in the net loss per share
calculations, since they are anti-dilutive. Warrants and options to purchase
1,406,879 shares of the Company's common stock were outstanding as of March 31,
1999 and could potentially dilute basic earnings per share in future periods if
the Company generates net income.

(4) COMPREHENSIVE INCOME:

During the first quarters of 1999 and 1998, total comprehensive loss was
$765,000 and $1,146,000, respectively. There was no accumulated other
comprehensive income or loss as of March 31, 1999 and December 31, 1998.

                                       7
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
        AND RESULTS OF OPERATIONS

Overview

Vital Images, Inc. (the "Company" or "Vital Images") develops and markets
visualization and analysis software for clinical diagnosis, surgical planning
and medical research. The Company's technology, which utilizes high-speed
visualization and analysis, as well as network communications based on DICOM and
Internet protocols, cost-effectively brings 3D visualization and analysis into
the routine, day-to-day practice of medicine. The Company, which operates in a
single business segment, markets its products to healthcare providers and to
manufacturers of diagnostic imaging systems through a direct sales force in the
United States and independent distributors in international markets.

Revenue

Revenue was $1,740,000 for the three months ended March 31, 1999, compared with
$766,000 for the three months ended March 31, 1998, a 127% increase. This
increase was primarily the result of volume increases in shipments of Vitrea(R),
the Company's flagship medical visualization and analysis product for
radiological and surgical applications in the clinical market. Software and
hardware revenue from Vitrea shipments totaled $1,230,000 for the quarter ended
March 31, 1999 compared with $488,000 for the quarter ended March 31, 1998.
There was also an increase in maintenance and service revenue related to Vitrea
sales.

It is expected that total revenue will continue to increase in future quarters
due to increased sales of Vitrea software and systems. However, actual results
could vary materially from the foregoing forward-looking statement as a result
of lower than expected demand for the Vitrea product or the timing of future
releases of Vitrea software.

Gross Margin

The gross margin percentage increased from 71% for the three months ended March
31, 1998 to 74% for the three months ended March 31, 1999, primarily as a result
of economies of scale in the cost of revenue structure related to license fees
and maintenance and services revenue. The Company anticipates that as Vitrea
software and systems continue as a significant proportion of the Company's
product mix, the overall gross margin percentage will approximate the results of
this quarter. This forward-looking statement will be influenced primarily by
vendor discounts on the third party hardware and peripheral components of the
Vitrea system and on the Company's product mix.

                                       8
<PAGE>
 
Sales and Marketing

Sales and marketing expenses increased to $870,000 for the three months ended
March 31, 1999, from $640,000 for the three months ended March 31, 1998, a 36%
increase. The increase was primarily due to increased compensation costs as a
result of increased sales commission and additional personnel, including a full
quarter of compensation expense for the Vice President - U.S. Sales hired in
March 1998, and increased travel expenses related to selling and promoting the
Vitrea product. The Company expects sales and marketing costs to increase in
future periods as a result of the cost of additional sales and customer support
personnel.

Research and Development

Research and development expenses increased 17% to $619,000 for the three months
ended March 31, 1999, compared with $529,000 for the same period last year. The
increase was primarily due to increased compensation costs resulting from the
addition of a Vice President-Engineering in March 1999 and a decrease in the
reimbursement of engineering costs pursuant to the development contract with ATL
Ultrasound, Inc. for the three months ended March 31, 1999. The Company
anticipates that research and development costs will increase in future periods
as future releases of Vitrea software are developed.

General and Administrative

While overall general and administrative expenses remained flat at $600,000,
there were increases in certain expenses and decreases in other expenses for the
three months ended March 31, 1999, compared with the three months ended March
31, 1998. Compensation costs increased in the first quarter of 1999 primarily as
a result of staffing additions, including the addition of a Vice President of
Regulatory Affairs and Quality Assurance in October 1998. There were also
increases in recruiting costs, consulting fees, investor relations and
shareholder reporting. These increases were offset by a decrease in costs
associated with the resignation of the Company's former Chief Executive Officer
in the first quarter of 1998. The Company believes that general and
administrative costs will increase in future periods primarily due to increased
compensation expense for employees hired in 1998 that will be present for all of
1999 and additional new hires in 1999, as well as additional costs related to
the closing of the Company's Iowa facility.

Results of Operations

The increasing revenues from Vitrea shipments, net of the increased expenses
attributable to the development of the Company's management team and
infrastructure and the development and promotion of the Vitrea product, resulted
in an operating loss of $796,000 for the three months ended March 31, 1999,
compared with an operating loss of $1,222,000 for the three months ended March
31, 1998.

Interest Income

Interest income was $33,000 for the three months ended March 31, 1999 compared
with $79,000 for the comparable period in 1998. The decrease in interest income
was due to a lower balance of cash, cash equivalents and marketable securities
as a result of the use of cash to fund the Company's operations.

                                       9
<PAGE>
 
Income Taxes

The income tax provisions for the three months ended March 31, 1999 and 1998
consist solely of certain state minimum fees. A valuation allowance has been
established to completely reserve for the deferred tax assets of the Company.

Liquidity and Capital Resources

As of March 31, 1999, the Company had $2,796,000 in cash, cash equivalents and
marketable securities. The Company's working capital was $2,765,000 and the
Company had no material borrowings. In March 1999, the Company entered into a
collateralized line of credit agreement with a bank for $950,000. Borrowings
under the agreement are limited to the lower of $950,000 or the Company's
borrowing base, which consists of a specified percentage of certain accounts
receivable. The Company is also required to maintain a cash and cash equivalents
balance of at least $1,000,000. As of March 31, 1999, the Company's available
borrowings under the agreement were $950,000.

Cash flows used in operations increased to $916,000 in the first quarter of 1999
from $863,000 in the first quarter of 1998. In both quarters cash flows were
used primarily to fund operating losses, which were partially offset by non-cash
expenses for depreciation and amortization. Increases in accounts receivable and
prepaid expenses and other current assets decreased cash flows for the three
months ended March 31, 1999, while decreases in accounts receivable and prepaid
expenses and other current assets increased cash flows for the three months
ended March 31, 1998. Increases in current liabilities, primarily due to
increases in accounts payable and deferred revenue, increased cash flows in the
quarter ended March 31, 1999 and decreases in current liabilities, primarily due
to decreases in accrued payroll and other liabilities, decreased cash flows in
the quarter ended March 31, 1998.

The increases in accounts receivable and deferred revenue for the three months
ended March 31, 1999 were primarily due to volume increases in Vitrea sales and
the increase in accounts payable was due primarily to costs related to these
sales.

Net investing activities provided $886,000 of cash in the quarter ended March
31, 1999 and $720,000 in the quarter ended March 31, 1998, primarily due to the
conversion of marketable securities into cash. The Company added property and
equipment of $104,000 and $63,000 in the quarters ended March 31, 1999 and 1998,
respectively, primarily for computer equipment to accommodate the increases in
employee headcount.

Cash provided by financing activities totaled $79,000 and $9,000 for the three
months ended March 31, 1999 and 1998, respectively, as a result of proceeds from
the sales of common stock under stock option plans.

The Company has never paid or declared any cash dividend and does not intend to
pay dividends in the near future. The Company has no current commitments for
material capital expenditures. The Company expects to use cash in the near term
as it continues to develop the infrastructure to support its business and
develop the market for its products.

                                       10
<PAGE>
 
If the Company's operations progress as anticipated, of which there can be no
assurance, management believes that its cash, cash equivalents and marketable
securities and borrowings available under the credit agreement entered into in
March 1999 should be sufficient to satisfy its cash requirements for at least
the next twelve months. The timing of the Company's future capital requirements,
however, will depend on a number of factors, including the ability and
willingness of physicians to use three-dimensional visualization and analysis
software in clinical diagnosis, surgical planning, patient screening and other
diagnosis and treatment protocols; the ability of the Company to successfully
market its products; the ability of the Company to differentiate its volume
rendering software from competing products employing surface rendering or other
technologies; the ability of the Company to build an effective sales and
distribution channel; the impact of competition in the medical visualization
business; and the ability of the Company to enhance existing products and
develop new products on a timely basis. To the extent that the Company's
operations do not progress as anticipated, additional capital may be required
sooner. There can be no assurance that any required additional capital will be
available on acceptable terms or at all, and the failure to obtain any such
capital would have a material adverse effect on the Company's business.

Foreign Currency Transactions

Substantially all of the Company's foreign transactions are negotiated, invoiced
and paid in U.S. dollars.

Year 2000 Readiness

Many computer programs and embedded computer chips are unable to distinguish
between the year 1900 and the year 2000. Therefore, some computer hardware and
software will need to be modified prior to the year 2000 in order to remain
functional. This is commonly known as the Year 2000 ("Y2K") issue.

The Company has a formal program in place with an assigned Year 2000 project
team to ensure that its critical areas will operate normally at the turn of the
century. The goal of the Year 2000 team is to ensure that the Company's
equipment, systems and processes and those of its significant business partners
are sufficiently Year 2000 compliant such that no date/time issue will have any
material adverse impact on the products or services that the Company provides
its customers or the timely and accurate processing of transactions.

Throughout 1999, the Company will determine areas where contingency planning is
needed. The planning efforts include, but are not limited to, identification and
mitigation of potential serious business interruptions and establishing crisis
response processes to address unexpected problems.

The project team has identified its Y2K risks in the following four categories:
Company products, financial software, embedded chip technology and non-financial
software, and noncompliance by suppliers and customers.

Company Products. The Company is in the process of assessing the Y2K readiness
of its software products and has made the commitment that any product releases
in 1999 and later will be Y2K compliant. Management expects this assessment to
be completed by June 30, 1999. The Company has posted a table detailing the Y2K
readiness status of its products on its website at www.vitalimages.com. The
table will be updated periodically as the Company completes the testing and/or
review procedures on each of its products. Management believes that a lack of
Y2K readiness in any of its products, except for Vitrea, would not have a
material impact on the Company's results of operations or financial condition.
On March 31, 1999, the Company announced the release of a Y2K compliant version
of Vitrea.

                                       11
<PAGE>
 
Financial Software. During 1997, the Company purchased and installed a new
accounting software package. The Company has obtained a statement from the
vendor indicating that the software is Y2K compliant. The Company also plans to
test the Y2K readiness of this software by June 30, 1999.

Embedded Chip Technology and Non-financial Software. The Company has assessed
its Y2K readiness with regard to critical and non-critical embedded chip
technology and non-financial software. The Company's assessment of its Y2K
readiness did not reveal any critical embedded chip technology or non-financial
software that was not Y2K compliant. The Company's assessment did reveal that
certain non-critical assets containing embedded chip technology and certain
non-financial software were not Y2K compliant. The Company expects to replace or
upgrade these non-compliant assets and non-financial software products by June
30, 1999.

Noncompliance by Suppliers and Customers. The Company has identified its
critical suppliers and service providers. The Company intends to contact such
suppliers and service providers by June 30, 1999 to determine the state of their
Y2K readiness. To the extent that responses to the Y2K issue are unsatisfactory,
the Company will consider changing suppliers or service providers, but there can
be no assurance that the Company will be successful in finding such alternative
suppliers or service providers. The Company does not have any formal information
concerning the Y2K compliance status of its customers. If customers experience
significant Y2K problems, they may choose to delay or cancel orders for the
Company's products. In the event that any of the Company's significant suppliers
or customers do not achieve Y2K compliance in a timely manner, and the Company
is unable to replace them with alternate suppliers or customers, the Company's
operations could be materially adversely affected.

The costs incurred by the Company to date in addressing its Y2K readiness issues
have not been material. The Company currently estimates that the total
additional costs for addressing its internal Y2K readiness will not be material.
These costs are being expensed as they are incurred. The Company plans to devote
the necessary resources to resolve all significant Y2K issues in a timely
manner. 

The Company's statements regarding its Y2K readiness are forward-looking
statements and are, therefore, subject to change as a result of known and
unknown factors. Both the Company's cost estimates and completion time frames
could be influenced by the Company's ability to successfully identify all Y2K
issues, the nature and amount of remediation required, the availability and cost
of trained personnel in this area and the Y2K success that key third parties and
customers attain. While these and other unforeseen factors could have a material
adverse impact on the Company's financial position, results of operations or
liquidity in future periods due to possible business disruptions caused by a
lack of third party Y2K readiness, management believes that it has implemented
an effective Y2K compliance program that will minimize the possible negative
consequences to the Company.

The Y2K readiness disclosure statement set forth above is a "Year 2000 Readiness
Disclosure" under the federal Year 2000 Information and Readiness Disclosure
Act.

                                       12
<PAGE>
 
Certain Important Factors

This Form 10-Q contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and information that are
based on management's beliefs, as well as on assumptions made by, and upon
information currently available to, management. When used in this Form 10-Q, the
words "expect," "anticipate," "intend," "plan," "believe," "seek," and
"estimate" or similar expressions are intended to identify such forward-looking
statements. However, this Form 10-Q also contains other forward-looking
statements. Forward-looking statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions, including, but
not limited to, the following factors, which could cause the Company's future
results and shareholder values to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company: the dependence
on growth of the industry in which the Company operates, the extent to which the
Company's products gain market acceptance, the need for and availability of
additional capital, the potential for litigation regarding patent and other
intellectual property rights, the introduction of competitive products by
others, dependence on major customers, fluctuations in quarterly results, the
progress of product development, the availability of third-party reimbursement,
and the receipt and timing of regulatory approvals and other factors detailed
from time to time in the Company's filings with the Securities and Exchange
Commission, including those set forth under the heading "Important Factors" in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

                                       13
<PAGE>
 
-------------------------------------------------------------------------------

                           PART II. OTHER INFORMATION

-------------------------------------------------------------------------------

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits. The exhibits to this quarterly report on Form 10-Q are listed in
      the exhibit index beginning on page 16.

(b)   Form 8-K. The Company filed no reports on Form 8-K during the three months
      ended March 31, 1999.

                                       14
<PAGE>
 
SIGNATURES

      Pursuant to the requirements 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.

                                            VITAL IMAGES, INC.

May 12, 1999                                /s/  Gregory S. Furness            
                                            -----------------------------------
                                            Gregory S. Furness
                                            Chief Financial Officer and
                                               Senior Vice President-Finance
                                               (Chief Accounting Officer)

                                       15
<PAGE>
 
VITAL IMAGES, INC.
INDEX TO EXHIBITS 
--------------------------------------------------------------------------------

10.24   Loan Agreement dated March 19, 1999 between the Company and Riverside
        Bank (filed herewith electronically).

10.25   Promissory Note dated March 19, 1999 between the Company and Riverside
        Bank (filed herewith electronically).

10.26   Commercial Security Agreement dated March 19, 1999 between the Company
        and Riverside Bank (filed herewith electronically).

27.1    Financial Data Schedule for the Three Months Ended March 31, 1999 (filed
        herewith electronically).
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--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

--------------------------------------------------------------------------------

                                    FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                  For the quarterly period ended March 31, 1999
                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                    For the transition period from ___ to ___

                         Commission File Number 0-22229

               ---------------------------------------------------

                               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)

3100 West Lake Street, Suite 100                        55416
    Minneapolis, Minnesota                         (Zip Code)
    (Address of principal
     executive offices)

                                 (612) 915-8000
              (Registrant's telephone number, including area code)

               ---------------------------------------------------

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 _____

               ---------------------------------------------------

On May 5, 1999, there were 4,918,764 shares of the Registrant's common stock,
par value $.01 per share, outstanding.

                                       1
VITAL IMAGES, INC.
                              ------------------
                                   Form 10-Q

                                March 31, 1999

                               Table of Contents

                                                                           Page
                                                                          Number
                                                                          ------

PART I. FINANCIAL INFORMATION

        Item 1. Financial Statements

            Balance Sheets as of March 31, 1999 and December 31, 1998......3

            Statements of Operations for the Three Months Ended 
               March 31, 1999 and 1998.....................................4

            Statements of Cash Flows for the Three Months Ended 
               March 31, 1999 and 1998.....................................5

            Notes to Financial Statements..................................6

        Item 2. Management's Discussion and Analysis of 
                   Financial Condition and Results of Operations...........8

PART II. OTHER INFORMATION

        Item 6. Exhibits and Reports on Form 8-K..........................14

SIGNATURES................................................................15

INDEX TO EXHIBITS.........................................................16

                                       2
--------------------------------------------------------------------------------

                          PART I. FINANCIAL INFORMATION

--------------------------------------------------------------------------------

ITEM 1. FINANCIAL STATEMENTS

VITAL IMAGES, INC.
BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
--------------------------------------------------------------------------------
March 31,     December 31,
                                                                       1999            1998    
                                                                   ------------    ------------
                                                                    (Unaudited)
ASSETS
Current assets:
     Cash and cash equivalents                                     $  1,800,089    $  1,751,615
     Marketable securities                                              995,490       1,985,556
     Accounts receivable, net of allowance for doubtful 
        accounts of $93,000 and $78,000 as of March 31, 
        1999 and December 31, 1998, respectively                      1,522,518       1,149,109
     Prepaid expenses and other current assets                          242,959         135,117
                                                                   ------------    ------------
         Total current assets                                         4,561,056       5,021,397
Property and equipment, net                                             882,177         916,238
                                                                   ------------    ------------

         TOTAL ASSETS                                              $  5,443,233    $  5,937,635
                                                                   ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY 
Current liabilities:
     Accounts payable                                              $    664,214    $    505,260
     Accrued payroll                                                    345,556         587,261
     Deferred revenue                                                   442,794         380,851
     Other current liabilities                                          343,649         188,381
                                                                   ------------    ------------
         Total current liabilities                                    1,796,213       1,661,753
Deferred revenue                                                        198,912         141,615
                                                                   ------------    ------------
         Total liabilities                                            1,995,125       1,803,368

Shareholders' equity:
    Preferred stock: $.01 par value; 5,000,000 shares
       authorized; none issued or outstanding as of
       March 31, 1999 and December 31, 1998                                --              --
    Common stock: $.01 par value; 20,000,000 shares
       authorized; 4,909,108 and 4,870,497 shares issued
       and outstanding as of March 31, 1999 and
       December 31, 1998, respectively                                   49,091          48,705
    Additional paid-in capital                                       18,174,835      18,096,707
    Accumulated deficit                                             (14,775,818)    (14,011,145)
                                                                   ------------    ------------
         Total shareholders' equity                                   3,448,108       4,134,267
                                                                   ------------    ------------

         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                $  5,443,233    $  5,937,635
                                                                   ============    ============
(The accompanying notes are an integral part of the interim financial
statements.)

                                       3
VITAL IMAGES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
--------------------------------------------------------------------------------
For the Three
                                                                        Months Ended
                                                                         March 31,
                                                                    1999            1998
                                                                 -----------    -----------
                                                                        (Unaudited)
Revenue:
     License fees                                                $ 1,076,874    $   472,853
     Maintenance and services                                        204,632         93,680
     Hardware                                                        458,270        199,332
                                                                 -----------    -----------
         Total revenue                                             1,739,776        765,865

Cost of revenue:
     License fees                                                     33,370         36,446
     Maintenance and services                                         49,581         24,411
     Hardware                                                        364,344        158,020
                                                                 -----------    -----------
         Total cost of revenue                                       447,295        218,877

              Gross margin                                         1,292,481        546,988

Operating expenses:
     Sales and marketing                                             869,739        639,714
     Research and development                                        618,581        529,321
     General and administrative                                      600,312        600,135
                                                                 -----------    -----------
         Total operating expenses                                  2,088,632      1,769,170

              Operating loss                                        (796,151)    (1,222,182)

Interest income                                                       32,978         79,421
                                                                 -----------    -----------

Loss before income taxes                                            (763,173)    (1,142,761)
Income taxes                                                           1,500          3,118
                                                                 -----------    -----------

Net loss                                                         $  (764,673)   $(1,145,879)
                                                                 ===========    =========== 

Net loss per share - basic and diluted                           $     (0.16)   $     (0.24)
                                                                 ===========    =========== 

Weighted average common shares outstanding - basic and diluted     4,880,759      4,804,736
                                                                 ===========    ===========
(The accompanying notes are an integral part of the interim financial
statements.)

                                       4
VITAL IMAGES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
--------------------------------------------------------------------------------
For the Three
                                                                            Months Ended
                                                                             March 31,
                                                                       1999           1998    
                                                                    -----------    -----------
                                                                            (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                       $  (764,673)   $(1,145,879)
     Adjustments to reconcile net loss to net cash used in
       operating activities:
         Depreciation and amortization                                  138,504        118,740
         Provision for uncollectible accounts receivable                 15,000         20,000
         Changes in operating assets and liabilities:
             Accounts receivable                                       (388,409)       169,637
             Prepaid expenses and other current assets                 (107,842)        30,851
             Accounts payable                                           158,954         48,744
             Deferred revenue                                           119,240          3,741
             Accrued payroll and other liabilities                      (86,437)      (109,117)
                                                                    -----------    -----------
                Net cash used in operating activities                  (915,663)      (863,283)

CASH FLOWS FROM INVESTING ACTIVITIES:
     Additions to property and equipment                               (104,443)       (62,603)
     Investments in marketable securities                            (1,009,934)    (3,717,487)
     Maturities of marketable securities                              2,000,000      4,500,000
                                                                    -----------    -----------
                Net cash provided by investing activities               885,623        719,910

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from sales of common stock under stock option plans        78,514          9,378
                                                                    -----------    -----------
                Net cash provided by financing activities                78,514          9,378

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     48,474       (133,995)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                        1,751,615        448,377
                                                                    -----------    -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                            $ 1,800,089    $   314,382
                                                                    ===========    ===========
(The accompanying notes are an integral part of the interim financial
statements.)

                                       5
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(1) BASIS OF PRESENTATION:

The accompanying unaudited financial statements of Vital Images, Inc. ("Vital
Images" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary, including items of a normal
recurring nature, for a fair presentation have been included. Operating results
for the three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. These
financial statements should be read in conjunction with the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.

(2) MAJOR CUSTOMERS AND GEOGRAPHIC DATA:

The following customers accounted for more than 10% of the Company's total
revenue for the periods indicated:

                               Significant                       Percentage of
                                Customer            Revenue      Total Revenue
                               -----------         ---------     -------------
   Three months ended    Toshiba America Medical   $ 709,000          41%
     March 31, 1999        Systems, Inc.

   Three months ended    Toshiba America Medical   $ 329,000          43%
     March 31, 1998        Systems, Inc.
                         Paradigm Geophysical      $ 153,000          20%
                           Corporation

The Company's accounts receivable are generally concentrated with a small base
of customers. As of March 31, 1999, one customer accounted for 42% of accounts
receivable, while as of December 31, 1998, two customers, each accounting for
more than 10% of accounts receivable, accounted for 22% of accounts receivable.

Export revenue amounted to 8% and 3% of total revenue for the three months ended
March 31, 1999 and 1998, respectively. Substantially all of the Company's export
revenue is negotiated, invoiced and paid in U.S. dollars. Gross export revenue
by geographic area is summarized as follows:

                                                         Three Months Ended
                                                             March 31,
                                                       ---------------------
                                                        1999          1998  
                                                       -------       -------
Europe.............................................    $68,000       $16,000
Asia and Pacific Region............................     56,000         4,000
Canada, Mexico and others..........................     19,000         2,000

                                       6
(3) NET LOSS PER SHARE:

For the three months ended March 31, 1999 and 1998, net loss per share is
computed using the weighted average common shares outstanding during the period.
Common share equivalents are not included in the net loss per share
calculations, since they are anti-dilutive. Warrants and options to purchase
1,406,879 shares of the Company's common stock were outstanding as of March 31,
1999 and could potentially dilute basic earnings per share in future periods if
the Company generates net income.

(4) COMPREHENSIVE INCOME:

During the first quarters of 1999 and 1998, total comprehensive loss was
$765,000 and $1,146,000, respectively. There was no accumulated other
comprehensive income or loss as of March 31, 1999 and December 31, 1998.

                                       7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
        AND RESULTS OF OPERATIONS

Overview

Vital Images, Inc. (the "Company" or "Vital Images") develops and markets
visualization and analysis software for clinical diagnosis, surgical planning
and medical research. The Company's technology, which utilizes high-speed
visualization and analysis, as well as network communications based on DICOM and
Internet protocols, cost-effectively brings 3D visualization and analysis into
the routine, day-to-day practice of medicine. The Company, which operates in a
single business segment, markets its products to healthcare providers and to
manufacturers of diagnostic imaging systems through a direct sales force in the
United States and independent distributors in international markets.

Revenue

Revenue was $1,740,000 for the three months ended March 31, 1999, compared with
$766,000 for the three months ended March 31, 1998, a 127% increase. This
increase was primarily the result of volume increases in shipments of Vitrea(R),
the Company's flagship medical visualization and analysis product for
radiological and surgical applications in the clinical market. Software and
hardware revenue from Vitrea shipments totaled $1,230,000 for the quarter ended
March 31, 1999 compared with $488,000 for the quarter ended March 31, 1998.
There was also an increase in maintenance and service revenue related to Vitrea
sales.

It is expected that total revenue will continue to increase in future quarters
due to increased sales of Vitrea software and systems. However, actual results
could vary materially from the foregoing forward-looking statement as a result
of lower than expected demand for the Vitrea product or the timing of future
releases of Vitrea software.

Gross Margin

The gross margin percentage increased from 71% for the three months ended March
31, 1998 to 74% for the three months ended March 31, 1999, primarily as a result
of economies of scale in the cost of revenue structure related to license fees
and maintenance and services revenue. The Company anticipates that as Vitrea
software and systems continue as a significant proportion of the Company's
product mix, the overall gross margin percentage will approximate the results of
this quarter. This forward-looking statement will be influenced primarily by
vendor discounts on the third party hardware and peripheral components of the
Vitrea system and on the Company's product mix.

                                       8
Sales and Marketing

Sales and marketing expenses increased to $870,000 for the three months ended
March 31, 1999, from $640,000 for the three months ended March 31, 1998, a 36%
increase. The increase was primarily due to increased compensation costs as a
result of increased sales commission and additional personnel, including a full
quarter of compensation expense for the Vice President - U.S. Sales hired in
March 1998, and increased travel expenses related to selling and promoting the
Vitrea product. The Company expects sales and marketing costs to increase in
future periods as a result of the cost of additional sales and customer support
personnel.

Research and Development

Research and development expenses increased 17% to $619,000 for the three months
ended March 31, 1999, compared with $529,000 for the same period last year. The
increase was primarily due to increased compensation costs resulting from the
addition of a Vice President-Engineering in March 1999 and a decrease in the
reimbursement of engineering costs pursuant to the development contract with ATL
Ultrasound, Inc. for the three months ended March 31, 1999. The Company
anticipates that research and development costs will increase in future periods
as future releases of Vitrea software are developed.

General and Administrative

While overall general and administrative expenses remained flat at $600,000,
there were increases in certain expenses and decreases in other expenses for the
three months ended March 31, 1999, compared with the three months ended March
31, 1998. Compensation costs increased in the first quarter of 1999 primarily as
a result of staffing additions, including the addition of a Vice President of
Regulatory Affairs and Quality Assurance in October 1998. There were also
increases in recruiting costs, consulting fees, investor relations and
shareholder reporting. These increases were offset by a decrease in costs
associated with the resignation of the Company's former Chief Executive Officer
in the first quarter of 1998. The Company believes that general and
administrative costs will increase in future periods primarily due to increased
compensation expense for employees hired in 1998 that will be present for all of
1999 and additional new hires in 1999, as well as additional costs related to
the closing of the Company's Iowa facility.

Results of Operations

The increasing revenues from Vitrea shipments, net of the increased expenses
attributable to the development of the Company's management team and
infrastructure and the development and promotion of the Vitrea product, resulted
in an operating loss of $796,000 for the three months ended March 31, 1999,
compared with an operating loss of $1,222,000 for the three months ended March
31, 1998.

Interest Income

Interest income was $33,000 for the three months ended March 31, 1999 compared
with $79,000 for the comparable period in 1998. The decrease in interest income
was due to a lower balance of cash, cash equivalents and marketable securities
as a result of the use of cash to fund the Company's operations.

                                       9
Income Taxes

The income tax provisions for the three months ended March 31, 1999 and 1998
consist solely of certain state minimum fees. A valuation allowance has been
established to completely reserve for the deferred tax assets of the Company.

Liquidity and Capital Resources

As of March 31, 1999, the Company had $2,796,000 in cash, cash equivalents and
marketable securities. The Company's working capital was $2,765,000 and the
Company had no material borrowings. In March 1999, the Company entered into a
collateralized line of credit agreement with a bank for $950,000. Borrowings
under the agreement are limited to the lower of $950,000 or the Company's
borrowing base, which consists of a specified percentage of certain accounts
receivable. The Company is also required to maintain a cash and cash equivalents
balance of at least $1,000,000. As of March 31, 1999, the Company's available
borrowings under the agreement were $950,000.

Cash flows used in operations increased to $916,000 in the first quarter of 1999
from $863,000 in the first quarter of 1998. In both quarters cash flows were
used primarily to fund operating losses, which were partially offset by non-cash
expenses for depreciation and amortization. Increases in accounts receivable and
prepaid expenses and other current assets decreased cash flows for the three
months ended March 31, 1999, while decreases in accounts receivable and prepaid
expenses and other current assets increased cash flows for the three months
ended March 31, 1998. Increases in current liabilities, primarily due to
increases in accounts payable and deferred revenue, increased cash flows in the
quarter ended March 31, 1999 and decreases in current liabilities, primarily due
to decreases in accrued payroll and other liabilities, decreased cash flows in
the quarter ended March 31, 1998.

The increases in accounts receivable and deferred revenue for the three months
ended March 31, 1999 were primarily due to volume increases in Vitrea sales and
the increase in accounts payable was due primarily to costs related to these
sales.

Net investing activities provided $886,000 of cash in the quarter ended March
31, 1999 and $720,000 in the quarter ended March 31, 1998, primarily due to the
conversion of marketable securities into cash. The Company added property and
equipment of $104,000 and $63,000 in the quarters ended March 31, 1999 and 1998,
respectively, primarily for computer equipment to accommodate the increases in
employee headcount.

Cash provided by financing activities totaled $79,000 and $9,000 for the three
months ended March 31, 1999 and 1998, respectively, as a result of proceeds from
the sales of common stock under stock option plans.

The Company has never paid or declared any cash dividend and does not intend to
pay dividends in the near future. The Company has no current commitments for
material capital expenditures. The Company expects to use cash in the near term
as it continues to develop the infrastructure to support its business and
develop the market for its products.

                                       10
If the Company's operations progress as anticipated, of which there can be no
assurance, management believes that its cash, cash equivalents and marketable
securities and borrowings available under the credit agreement entered into in
March 1999 should be sufficient to satisfy its cash requirements for at least
the next twelve months. The timing of the Company's future capital requirements,
however, will depend on a number of factors, including the ability and
willingness of physicians to use three-dimensional visualization and analysis
software in clinical diagnosis, surgical planning, patient screening and other
diagnosis and treatment protocols; the ability of the Company to successfully
market its products; the ability of the Company to differentiate its volume
rendering software from competing products employing surface rendering or other
technologies; the ability of the Company to build an effective sales and
distribution channel; the impact of competition in the medical visualization
business; and the ability of the Company to enhance existing products and
develop new products on a timely basis. To the extent that the Company's
operations do not progress as anticipated, additional capital may be required
sooner. There can be no assurance that any required additional capital will be
available on acceptable terms or at all, and the failure to obtain any such
capital would have a material adverse effect on the Company's business.

Foreign Currency Transactions

Substantially all of the Company's foreign transactions are negotiated, invoiced
and paid in U.S. dollars.

Year 2000 Readiness

Many computer programs and embedded computer chips are unable to distinguish
between the year 1900 and the year 2000. Therefore, some computer hardware and
software will need to be modified prior to the year 2000 in order to remain
functional. This is commonly known as the Year 2000 ("Y2K") issue.

The Company has a formal program in place with an assigned Year 2000 project
team to ensure that its critical areas will operate normally at the turn of the
century. The goal of the Year 2000 team is to ensure that the Company's
equipment, systems and processes and those of its significant business partners
are sufficiently Year 2000 compliant such that no date/time issue will have any
material adverse impact on the products or services that the Company provides
its customers or the timely and accurate processing of transactions.

Throughout 1999, the Company will determine areas where contingency planning is
needed. The planning efforts include, but are not limited to, identification and
mitigation of potential serious business interruptions and establishing crisis
response processes to address unexpected problems.

The project team has identified its Y2K risks in the following four categories:
Company products, financial software, embedded chip technology and non-financial
software, and noncompliance by suppliers and customers.

Company Products. The Company is in the process of assessing the Y2K readiness
of its software products and has made the commitment that any product releases
in 1999 and later will be Y2K compliant. Management expects this assessment to
be completed by June 30, 1999. The Company has posted a table detailing the Y2K
readiness status of its products on its website at www.vitalimages.com. The
table will be updated periodically as the Company completes the testing and/or
review procedures on each of its products. Management believes that a lack of
Y2K readiness in any of its products, except for Vitrea, would not have a
material impact on the Company's results of operations or financial condition.
On March 31, 1999, the Company announced the release of a Y2K compliant version
of Vitrea.

                                       11
Financial Software. During 1997, the Company purchased and installed a new
accounting software package. The Company has obtained a statement from the
vendor indicating that the software is Y2K compliant. The Company also plans to
test the Y2K readiness of this software by June 30, 1999.

Embedded Chip Technology and Non-financial Software. The Company has assessed
its Y2K readiness with regard to critical and non-critical embedded chip
technology and non-financial software. The Company's assessment of its Y2K
readiness did not reveal any critical embedded chip technology or non-financial
software that was not Y2K compliant. The Company's assessment did reveal that
certain non-critical assets containing embedded chip technology and certain
non-financial software were not Y2K compliant. The Company expects to replace or
upgrade these non-compliant assets and non-financial software products by June
30, 1999.

Noncompliance by Suppliers and Customers. The Company has identified its
critical suppliers and service providers. The Company intends to contact such
suppliers and service providers by June 30, 1999 to determine the state of their
Y2K readiness. To the extent that responses to the Y2K issue are unsatisfactory,
the Company will consider changing suppliers or service providers, but there can
be no assurance that the Company will be successful in finding such alternative
suppliers or service providers. The Company does not have any formal information
concerning the Y2K compliance status of its customers. If customers experience
significant Y2K problems, they may choose to delay or cancel orders for the
Company's products. In the event that any of the Company's significant suppliers
or customers do not achieve Y2K compliance in a timely manner, and the Company
is unable to replace them with alternate suppliers or customers, the Company's
operations could be materially adversely affected.

The costs incurred by the Company to date in addressing its Y2K readiness issues
have not been material. The Company currently estimates that the total
additional costs for addressing its internal Y2K readiness will not be material.
These costs are being expensed as they are incurred. The Company plans to devote
the necessary resources to resolve all significant Y2K issues in a timely
manner. 

The Company's statements regarding its Y2K readiness are forward-looking
statements and are, therefore, subject to change as a result of known and
unknown factors. Both the Company's cost estimates and completion time frames
could be influenced by the Company's ability to successfully identify all Y2K
issues, the nature and amount of remediation required, the availability and cost
of trained personnel in this area and the Y2K success that key third parties and
customers attain. While these and other unforeseen factors could have a material
adverse impact on the Company's financial position, results of operations or
liquidity in future periods due to possible business disruptions caused by a
lack of third party Y2K readiness, management believes that it has implemented
an effective Y2K compliance program that will minimize the possible negative
consequences to the Company.

The Y2K readiness disclosure statement set forth above is a "Year 2000 Readiness
Disclosure" under the federal Year 2000 Information and Readiness Disclosure
Act.

                                       12
Certain Important Factors

This Form 10-Q contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and information that are
based on management's beliefs, as well as on assumptions made by, and upon
information currently available to, management. When used in this Form 10-Q, the
words "expect," "anticipate," "intend," "plan," "believe," "seek," and
"estimate" or similar expressions are intended to identify such forward-looking
statements. However, this Form 10-Q also contains other forward-looking
statements. Forward-looking statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions, including, but
not limited to, the following factors, which could cause the Company's future
results and shareholder values to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company: the dependence
on growth of the industry in which the Company operates, the extent to which the
Company's products gain market acceptance, the need for and availability of
additional capital, the potential for litigation regarding patent and other
intellectual property rights, the introduction of competitive products by
others, dependence on major customers, fluctuations in quarterly results, the
progress of product development, the availability of third-party reimbursement,
and the receipt and timing of regulatory approvals and other factors detailed
from time to time in the Company's filings with the Securities and Exchange
Commission, including those set forth under the heading "Important Factors" in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

                                       13
-------------------------------------------------------------------------------

                           PART II. OTHER INFORMATION

-------------------------------------------------------------------------------

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits. The exhibits to this quarterly report on Form 10-Q are listed in
      the exhibit index beginning on page 16.

(b)   Form 8-K. The Company filed no reports on Form 8-K during the three months
      ended March 31, 1999.

                                       14
SIGNATURES

      Pursuant to the requirements 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.

                                            VITAL IMAGES, INC.

May 12, 1999                                /s/  Gregory S. Furness            
                                            -----------------------------------
                                            Gregory S. Furness
                                            Chief Financial Officer and
                                               Senior Vice President-Finance
                                               (Chief Accounting Officer)

                                       15
VITAL IMAGES, INC.
INDEX TO EXHIBITS 
--------------------------------------------------------------------------------

10.24   Loan Agreement dated March 19, 1999 between the Company and Riverside
        Bank (filed herewith electronically).

10.25   Promissory Note dated March 19, 1999 between the Company and Riverside
        Bank (filed herewith electronically).

10.26   Commercial Security Agreement dated March 19, 1999 between the Company
        and Riverside Bank (filed herewith electronically).

27.1    Financial Data Schedule for the Three Months Ended March 31, 1999 (filed
        herewith electronically).