** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **ý**                                                                                                        | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |
|-------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|                                                                                                              |
| **For  the quarterly period ended June 30, 2003**                                                                 |
|                                                                                                              |
| **OR**                                                                                                            |
|                                                                                                              |
| **o**                                                                                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                                                                              |
| **For the transition period from         to       .** |

 

**COMMISSION FILE NUMBER 000-22743**

 

| **VISTA  MEDICAL TECHNOLOGIES, INC.**                            |
|------------------------------------------------------------------|
| (Exact name of  Registrant as Specified in Its Charter)          |
|                                                             |
| **DELAWARE**                                                     |   | **94-3184035** |
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |   |
| **2101 FARADAY AVENUE  CARLSBAD, CA  92008**                |
| (Address of principal  executive offices, including zip code)    |
|                                                             |   |   |
| **(760) 603-9120**                                               |
| (Registrant’s telephone  number, including area code)       |

 

**Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days:**

 

**(1)           Yes****ý    No****o**

**(2)           Yes****ý    No****o**

 

**Indicateby check mark whether the registrant is an accelerated filer (as defined inrule 12b-2 of the Exchange Act) Yes ****o         No ****ý**

 

As of July 31, 2003, there were 5,003,471 shares of $.01 par valuecommon stock outstanding.

 

 

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**VISTA MEDICAL TECHNOLOGIES, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 
| PART  1.  FINANCIAL INFORMATION |
|--------------------------------------|
|                                 |   |
| Item  1.                             | Financial  Statements (unaudited) |
|                                 |   |
|                                 | Consolidated Balance Sheets  as of June 30, 2003 and December 31, 2002 |
|                                 | Consolidated  Statements of Operations for the three and six months ended June 30, 2003 and  2002, and the six months ended June 30, 2003 and 2002 |
|                                 | Consolidated  Statements of Cash Flows for the six months ended June 30, 2003 and 2002 |
|                                 | Notes to  Consolidated Financial Statements |
|                                 |   |
| Item  2.                             | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|                                 |   |
| Item  3.                             | Quantitative  and Qualitative Disclosures About Market Risk |
|                                 |   |
| Risks and Uncertainties              |
|                                 |   |
| Item  4.                             | Controls  and Procedures |
|                                 |   |
| PART  II.  OTHER INFORMATION    |
|                                 |   |
| Item 1.                              | Legal Proceedings |
|                                 |   |
| Item 2.                              | Changes in  Securities and Use of Proceeds |
|                                 |   |
| Item 3.                              | Defaults Upon Senior  Securities |
|                                 |   |
| Item  4.                             | Submission  of Matters to a Vote of Security Holders |
|                                 |   |
| Item  5.                             | Other  Information |
|                                 |   |
| Item  6.                             | Exhibits  and Reports on Form 8-K |
|                                 |   |
| SIGNATURES                           |

 

2

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PART 1. FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

Vista MedicalTechnologies, Inc.

Consolidated Balance Sheets

 
|                                                                                                                                                |   | **June 30, 2003** |      | **December 31, 2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|-----------------------|--------|
|                                                                                                                                                |   | **(Unaudited)**   |      |                  |   |
| ASSETS                                                                                                                                              |   |              |      |                  |   |
| Current assets:                                                                                                                                     |   |              |      |                  |   |
| Cash and cash equivalents                                                                                                                           |   | $                 | 750,639   |                  | $      | 457,052 |   |
| Marketable securities                                                                                                                               |   | 203,537           |      | 372,320               |   |
| Accounts receivable, net                                                                                                                            |   | 1,683,200         |      | 1,670,480             |   |
| Inventories, net                                                                                                                                    |   | 1,590,064         |      | 1,493,278             |   |
| Other current assets                                                                                                                                |   | 86,941            |      | 108,536               |   |
| Total current assets                                                                                                                                |   | 4,314,381         |      | 4,101,666             |   |
| Property and equipment, net                                                                                                                         |   | 94,954            |      | 77,431                |   |
| Patents and other assets, net                                                                                                                       |   | 1,648             |      | 3,061                 |   |
| TOTAL ASSETS                                                                                                                                        |   | $                 | 4,410,983 |                  | $      | 4,182,158 |   |
|                                                                                                                                                |   |              |      |                  |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                           |   |              |      |                  |   |
| Current liabilities:                                                                                                                                |   |              |      |                  |   |
| Accounts payable                                                                                                                                    |   | $                 | 802,818   |                  | $      | 955,961 |   |
| Short term bank borrowings                                                                                                                          |   | $                 | —    |                  | $      | — |   |
| Accrued compensation                                                                                                                                |   | 242,625           |      | 262,225               |   |
| Deferred revenue payments                                                                                                                           |   | 588,497           |      | 499,167               |   |
| Accrued liabilities                                                                                                                                 |   | 129,188           |      | 383,848               |   |
| Total current liabilities                                                                                                                           |   | 1,763,128         |      | 2,101,201             |   |
|                                                                                                                                                |   |              |      |                  |   |
| Total long term lease obligations                                                                                                                   |   | 26,042            |      |                  |   |
|                                                                                                                                                |   |              |      |                  |   |
| TOTAL LIABILITIES                                                                                                                                   |   | 1,789,170         |      | 2,101,201             |   |
|                                                                                                                                                |   |              |      |                  |   |
| Commitments and Contingencies                                                                                                                       |   |              |      |                  |   |
| Stockholders’ equity:                                                                                                                          |   |              |      |                  |   |
| Preferred stock, $.01 par value:                                                                                                                    |   |              |      |                  |   |
| Authorized shares - 5,000,000  Issued and outstanding shares - none at December 31, 2002 1,000,000 at June  30, 2003 (Liquidation Value $3,800,000) |   | 996,849           |      |                  |   |
| Common stock, $.01 par value:                                                                                                                       |   |              |      |                  |   |
| Authorized shares - 35,000,000  Issued and outstanding shares - 5,001,749 at December 31, 2002 and 5,003,471  at June 30, 2003                      |   | 50,035            |      | 50,017                |   |
| Additional paid-in capital                                                                                                                          |   | 68,082,055        |      | 68,079,862            |   |
| Notes receivable from stockholders                                                                                                                  |   | (5,625            | )         | (78,375               | )      |
| Deferred compensation                                                                                                                               |   | (26,006           | )         | (45,947               | )      |
| Accumulated deficit                                                                                                                                 |   | (66,475,495       | )         | (65,924,600           | )      |
| Total stockholders’ equity                                                                                                                     |   | 2,621,813         |      | 2,080,957             |   |
|                                                                                                                                                |   |              |      |                  |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                     |   | $                 | 4,410,983 |                  | $      | 4,182,158 |   |

 

Note: The balance sheet at December 31, 2002 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.

 

See accompanying notes.

 

3

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Vista MedicalTechnologies, Inc.

Consolidated Statements of Operation

(Unaudited)

 
|                                                      |   | **Three Months Ended June 30,** |      | **Six Months Ended June 30,** |   |
|-----------------------------------------------------------|--------|---------------------------------|-----------|-------------------------------|--------|
|                                                      |   | **2003**                        |      | **2002**                      |   | **2003** |   | **2002** |   |
|                                                      |   |                            |      |                          |   |   |   |   |   |
| Sales                                                     |   | $                               | 2,278,490 |                          | $      | 2,809,577 |   | $ | 5,128,075 |   | $ | 5,482,486 |   |
|                                                      |   |                            |      |                          |   |   |   |   |   |
| Cost of sales                                             |   | 1,295,329                       |      | 1,507,888                     |   | 2,870,507 |   | 2,871,028 |   |
| Research and development                                  |   | 295,021                         |      | 473,844                       |   | 552,181 |   | 898,068 |   |
| Sales and marketing                                       |   | 645,150                         |      | 735,837                       |   | 1,193,907 |   | 1,459,271 |   |
| General and administrative                                |   | 533,750                         |      | 471,515                       |   | 1,050,064 |   | 1,014,951 |   |
| Total cost and expenses                                   |   | 2,769,250                       |      | 3,189,084                     |   | 5,666,659 |   | 6,243,318 |   |
|                                                      |   |                            |      |                          |   |   |   |   |   |
| Loss from operations                                      |   | (490,760                        | )         | (379,507                      | )      | (538,584 | ) | (760,832 | ) |
|                                                      |   |                            |      |                          |   |   |   |   |   |
| Interest income                                           |   | 34,510                          |      | 4,975                         |   | 36,593 |   | 10,225 |   |
| Interest expense                                          |   | (2,054                          | )         | —                        |   | (2,054 | ) | — |   |
|                                                      |   |                            |      |                          |   |   |   |   |   |
| Net loss                                                  |   | $                               | (458,304  | )                             | $      | (374,532 | ) | $ | (504,045 | ) | $ | (750,607 | ) |
|                                                      |   |                            |      |                          |   |   |   |   |   |
| Less: Accretion of dividends on preferred stock           |   | 35,527                          |      | —                        |   | 46,849 |   | — |   |
|                                                      |   |                            |      |                          |   |   |   |   |   |
| Net loss applicable to common stockholders                |   | (493,831                        | )         | (374,532                      | )      | (550,894 | ) | (750,607 | ) |
|                                                      |   |                            |      |                          |   |   |   |   |   |
| Basic and diluted loss per share                          |   | $                               | (0.10     | )                             | $      | (0.08 | ) | $ | (0.11 | ) | $ | (0.15 | ) |
|                                                      |   |                            |      |                          |   |   |   |   |   |
| Shares used in computing basic and diluted loss per share |   | 5,003,471                       |      | 4,966,569                     |   | 5,002,620 |   | 4,941,171 |   |

 

Seeaccompanying notes.

 

4

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Vista MedicalTechnologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 
|                                                                          |   | **Six Months  Ended June 30,** |     |
|-------------------------------------------------------------------------------|--------|--------------------------------|----------|
|                                                                          |   | **2003**                       |     | **2002** |   |
| OPERATING ACTIVITIES                                                          |   |                           |     |   |   |
| Net loss                                                                      |   | $                              | (504,045 | ) | $ | (750,607 | ) |
| Adjustments to reconcile net loss to net cash used for operating  activities: |   |                           |     |   |   |
| Noncash compensation expense                                                  |   | 72,750                         |     | — |   |
| Depreciation and amortization                                                 |   | 108,923                        |     | 209,741 |   |
| Amortization of deferred compensation                                         |   | 19,941                         |     | 40,102 |   |
| Changes in operating assets and liabilities:                                  |   |                           |     |   |   |
| Accounts receivable                                                           |   | (12,720                        | )        | 252,032 |   |
| Inventories                                                                   |   | (96,786                        | )        | (384,384 | ) |
| Other current assets                                                          |   | 21,595                         |     | 35,818 |   |
| Accounts payable                                                              |   | (153,143                       | )        | (138,578 | ) |
| Accrued compensation                                                          |   | (19,600                        | )        | 38,245 |   |
| Deferred revenue                                                              |   | 89,330                         |     | — |   |
| Accrued liabilities                                                           |   | (254,660                       | )        | 194,151 |   |
| Net cash flows used for operating activities                                  |   | (728,415                       | )        | (503,480 | ) |
|                                                                          |   |                           |     |   |   |
| INVESTING ACTIVITIES                                                          |   |                           |     |   |   |
| Purchases of short-term investments                                           |   | 168,783                        |     | 154,787 |   |
| Purchases of property and equipment                                           |   | (125,034                       | )        | (55,577 | ) |
| Net cash flows provided by investing activities                               |   | 43,749                         |     | 99,210 |   |
|                                                                          |   |                           |     |   |   |
| FINANCING ACTIVITIES                                                          |   |                           |     |   |   |
| Issuance of common stock                                                      |   | 2,211                          |     | 51,466 |   |
| Issuance of preferred stock                                                   |   | 950,000                        |     | — |   |
| Long term lease obligations                                                   |   | 26,042                         |     | — |   |
| Net short term bank borrowings                                                |   | —                         |     | 536,567 |   |
| Net cash flows provided by financing activities                               |   | 978,253                        |     | 588,033 |   |
| Net increase (decrease) in cash and cash equivalents                          |   | 293,587                        |     | 183,763 |   |
| Cash and cash equivalents at beginning of period                              |   | 457,052                        |     | 800,547 |   |
| Cash and cash equivalents at end of period                                    |   | 750,639                        |     | 984,310 |   |
|                                                                               |        |                                |          |  |  |  |  |

 

See accompanying notes.

 

5

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VISTA MEDICALTECHNOLOGIES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

1.       Basis ofPresentation

 

The auditedfinancial statements of Vista Medical Technologies, Inc. (the “Company”) andthe notes thereto for the year ended December 31, 2002 included in theCompany’s Annual Report on Form 10-K filed with the Securities and ExchangeCommission, contain additional information about the Company, its operations,and its financial statements and accounting practices, and should be read inconjunction with this quarterly report on Form 10-Q.  These unaudited consolidated financial statements have been preparedin accordance with generally accepted accounting principles and with theinstructions on Form 10-Q except that certain information and footnotedisclosures normally contained in financial statements prepared in accordancewith generally accepted accounting principles have been condensed or omitted.

 

The accompanyingunaudited consolidated financial statements of the Company reflect alladjustments of a normal recurring nature which are, in the opinion ofmanagement, necessary for a fair presentation of the financial position,results of operations and cash flows for all periods presented.  The interim financial information containedherein is not necessarily indicative of results for any future interim periodsor for the full fiscal year ending December 31, 2003.

 

2.       Inventories

 

Inventories arestated at lower of cost (determined on a first-in, first-out basis) or market.

 
|                 |   | **June 30,  2003** |      | **December  31, 2002** |   |
|----------------------|--------|--------------------|-----------|------------------------|--------|
|                 |   | **(Unaudited)**    |      |                   |   |
|                 |   |               |      |                   |   |
| Parts and  materials |   | $                  | 1,455,351 |                   | $      | 1,243,304 |   |
| Work in process      |   | 233,863            |      | 375,414                |   |
| Finished goods       |   | 894,516            |      | 919,344                |   |
|                 |   | 2,583,730          |      | 2,538,062              |   |
| Less: reserves       |   | (993,666           | )         | (1,044,784             | )      |
| Inventories, net     |   | $                  | 1,590,064 |                   | $      | 1,493,278 |   |

 

6

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3.       Loss PerShare

 

Basic net loss per share is calculated based on the weightedaverage number of common shares outstanding during the period. Diluted net lossper share incorporates the dilutive effect of common stock equivalents,including stock options, warrants and other convertible securities.  Common stock equivalents have been excludedfrom the calculation of weighted average number of diluted common shares, astheir effect would be antidilutive for all periods presented.

 

4.       OtherComprehensive Income

 

Other comprehensive income/(loss) includes certainchanges in equity that are excluded from net loss. The Company had no items ofcomprehensive income (loss) other than its net loss.

 

5.       Stock-BasedCompensation

 

The Company applies the principles of AccountingPrinciples Board Opinion No. 25, “*Accountingfor Stock Issued to Employees*,” and related interpretations inaccounting for its employee stock option compensation plans. Under APB No. 25,compensation expense is measured as the difference, if any, between the optionexercise price and the fair value of the Company’s common stock at the date ofgrant.  The Company has historicallygranted options to employees and directors at exercise prices equal to the fairvalue of the Company’s common stock. Accordingly, no compensation expense hasbeen recognized for its employee stock-based compensation plans.

 

SFAS No. 123, “*Accountingfor Stock-Based Compensation*,” establishes a fair value basedapproach for valuing stock options.  TheCompany follows the disclosure-only alternative afforded by SFAS No. 123.  Had compensation costs for stock optionsissued to employees and directors been determined based on the estimated fairvalue at the grant dates as calculated in accordance with SFAS No. 123, theCompany’s reported net loss and basic and diluted net loss per common share forthe periods ended June 30, 2003 and 2002 would have been adjusted to the proforma amounts indicated below:

 

7

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|                                  |   | **For three months ended  June 30,****** |     |
|---------------------------------------|--------|------------------------------------------|----------|
|                                  |   | **2003******                             |     | **2002****** |   |
|                                  |   |                                     |     |   |   |
| Net Loss                              |   |                                     |     |   |   |
| As reported                           |   | $                                        | (458,304 | ) | $ | (374,532 | ) |
| Pro forma  compensation expense       |   | (56,664                                  | )        | (78,997 | ) |
| Pro forma SFAS  No. 123 net loss      |   | $                                        | (514,968 | ) | $ | (453,529 | ) |
|                                  |   |                                     |     |   |   |
| Basic and  diluted net loss per share |   |                                     |     |   |   |
| As reported                           |   | $                                        | (0.10    | ) | $ | (0.08 | ) |
| Pro forma                             |   | $                                        | (0.10    | ) | $ | (0.09 | ) |

 
|                                  |   | **For six months ended June  30,** |     |
|---------------------------------------|--------|------------------------------------|----------|
|                                  |   | **2003**                           |     | **2002** |   |
|                                  |   |                               |     |   |   |
| Net Loss                              |   |                               |     |   |   |
| As reported                           |   | $                                  | (504,045 | ) | $ | (750,607 | ) |
| Pro forma  compensation expense       |   | (114,729                           | )        | (151,461 | ) |
| Pro forma SFAS  No. 123 net loss      |   | $                                  | (618,774 | ) | $ | (902,068 | ) |
|                                  |   |                               |     |   |   |
| Basic and diluted  net loss per share |   |                               |     |   |   |
| As reported                           |   | $                                  | (0.11    | ) | $ | (0.15 | ) |
| Pro forma                             |   | $                                  | (0.12    | ) | $ | (0.18 | ) |

 

6.       Segmentand Geographic Information

 

*SegmentInformation:* Prior to 2002, the Company operated in onebusiness segment, the Visualization Technology business.  Beginning in 2002, the Company reportsrevenue and certain operating expense information to the chief operatingdecision maker for its two operating segments, which are determined on the typeof customer or product. These segments consist of (1) the Obesity SurgeryManagement Services business and (2) Visualization Technology business.

 

The Company’s chief operating decision maker evaluatesthe performance of the two segments based on segment revenues and certainsegment costs and expenses, including cost of revenues and research anddevelopment expenses.  Other operatingexpenses, including sales and marketing expenses and general and administrativeexpenses, are not allocated or evaluated on an individual segment basis, butrather on an enterprise-wide basis.  Asummary of the Company’s

 

8

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profitability by segment for the three and six monthperiods ended June 30, 2003 and 2002 is as follows: 

 
|                                                       |   | **Obesity  Surgery  Management** |    | **Visualization  Technology** |   | **Total** |     |
|------------------------------------------------------------|--------|----------------------------------|---------|-------------------------------|--------|-----------|----------|
| **Three  Months ended June 30, 2003:**                     |   |                             |    |                          |   |      |     |
| Revenues                                                   |   | $                                | 637,279 |                          | $      | 1,641,211 |     | $ | 2,278,490 |   |
| Cost of revenues                                           |   | 130,571                          |    | 1,164,758                     |   | 1,295,329 |     |
| Research and  development                                  |   | —                           |    | 295,021                       |   | 295,021   |     |
| Segment  contribution                                      |   | $                                | 506,708 |                          | $      | 181,432   |     | $ | 688,140 |   |
|                                                       |   |                             |    |                          |   |      |     |
| Reconciliation  of segment contribution to total net loss: |   |                             |    |                          |   |      |     |
| Sales and marketing                                        |   |                             |    |                          |   | 645,150   |     |
| General and  administrative                                |   |                             |    |                          |   | 533,750   |     |
| Interest income                                            |   |                             |    |                          |   | 34,510    |     |
| Interest expense                                           |   |                             |    |                          |   | 2,054     |     |
| Net loss                                                   |   |                             |    |                          |   | $         | (458,304 | ) |

 
|                                                       |   | **Obesity  Surgery  Management** |    | **Visualization  Technology** |   | **Total** |     |
|------------------------------------------------------------|--------|----------------------------------|---------|-------------------------------|--------|-----------|----------|
| **Three  Months ended June 30, 2002:**                     |   |                             |    |                          |   |      |     |
| Revenues                                                   |   | $                                | 947,357 |                          | $      | 1,862,220 |     | $ | 2,809,577 |   |
| Cost of revenues                                           |   | 204,777                          |    | 1,303,111                     |   | 1,507,888 |     |
| Research and  development                                  |   | —                           |    | 473,844                       |   | 473,844   |     |
| Segment  contribution                                      |   | $                                | 742,580 |                          | $      | 85,265    |     | $ | 827,845 |   |
|                                                       |   |                             |    |                          |   |      |     |
| Reconciliation  of segment contribution to total net loss: |   |                             |    |                          |   |      |     |
| Sales and  marketing                                       |   |                             |    |                          |   | 735,837   |     |
| General and  administrative                                |   |                             |    |                          |   | 471,515   |     |
| Interest income                                            |   |                             |    |                          |   | 4,975     |     |
| Interest expense                                           |   |                             |    |                          |   | —    |     |
| Net loss                                                   |   |                             |    |                          |   | $         | (374,532 | ) |

 

9

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|                                                       |   | **Obesity  Surgery  Management** |      | **Visualization   Technology** |   | **Total** |     |
|------------------------------------------------------------|--------|----------------------------------|-----------|--------------------------------|--------|-----------|----------|
| **Six  Months ended June 30, 2003:**                       |   |                             |      |                           |   |      |     |
| Revenues                                                   |   | $                                | 1,305,553 |                           | $      | 3,822,522 |     | $ | 5,128,075 |   |
| Cost of revenues                                           |   | 297,917                          |      | 2,572,590                      |   | 2,870,507 |     |
| Research and  development                                  |   | —                           |      | 552,181                        |   | 552,181   |     |
| Segment  contribution                                      |   | $                                | 1,007,636 |                           | $      | 697,751   |     | $ | 1,705,387 |   |
|                                                       |   |                             |      |                           |   |      |     |
| Reconciliation  of segment contribution to total net loss: |   |                             |      |                           |   |      |     |
| Sales and marketing                                        |   |                             |      |                           |   | 1,193,907 |     |
| General and  administrative                                |   |                             |      |                           |   | 1,050,064 |     |
| Interest income                                            |   |                             |      |                           |   | 36,593    |     |
| Interest expense                                           |   |                             |      |                           |   | 2,054     |     |
| Net loss                                                   |   |                             |      |                           |   | $         | (504,045 | ) |

 
|                                                       |   | **Obesity  Surgery  Management** |      | **Visualization  Technology** |   | **Total** |     |
|------------------------------------------------------------|--------|----------------------------------|-----------|-------------------------------|--------|-----------|----------|
| **Six  Months ended June 30, 2002:**                       |   |                             |      |                          |   |      |     |
| Revenues                                                   |   | $                                | 1,870,965 |                          | $      | 3,611,521 |     | $ | 5,482,486 |   |
| Cost of revenues                                           |   | 466,517                          |      | 2,404,511                     |   | 2,871,028 |     |
| Research and  development                                  |   | —                           |      | 898,068                       |   | 898,068   |     |
| Segment  contribution                                      |   | $                                | 1,404,448 |                          | $      | 308,942   |     | $ | 1,713,390 |   |
|                                                       |   |                             |      |                          |   |      |     |
| Reconciliation  of segment contribution to total net loss: |   |                             |      |                          |   |      |     |
| Sales and marketing                                        |   |                             |      |                          |   | 1,459,271 |     |
| General and  administrative                                |   |                             |      |                          |   | 1,014,951 |     |
| Interest income                                            |   |                             |      |                          |   | 10,225    |     |
| Interest expense                                           |   |                             |      |                          |   | —    |     |
| Net loss                                                   |   |                             |      |                          |   | $         | (750,607 | ) |

 

The Company reportsassets on a consolidated basis to the chief operating decision maker, and allthe assets are located within the United States.

 

*Geographic information:* Net sales by majorgeographical area, determined on the basis of destination of the goods, are asfollows: 

 

10

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|          |   | **Three  months ended June 30,** |      |
|---------------|--------|----------------------------------|-----------|
|          |   | **2003**                         |      | **2002** |   |
| United States |   | $                                | 1,487,799 |   | $ | 1,881,922 |   |
| Europe        |   | 790,691                          |      | 927,655 |   |
| Total         |   | $                                | 2,278,490 |   | $ | 2,809,577 |   |

 
|          |   | **Six months  ended June 30,** |      |
|---------------|--------|--------------------------------|-----------|
|          |   | **2003**                       |      | **2002** |   |
| United States |   | $                              | 3,361,366 |   | $ | 3,875,544 |   |
| Europe        |   | 1,766,709                      |      | 1,606,942 |   |
| Total         |   | $                              | 5,128,075 |   | $ | 5,482,486 |   |

 

7.       Stockholders Equity

 

In March, 2003,the Company authorized and issued 1,000,000 shares of Series A Convertible PreferredStock (the “Series A Shares”), which were created pursuant to the terms of aCertificate of Designations, for an aggregate of $950,000 in cash.  In connection with this financing, thepurchasers of Series A Shares were granted several significant rights senior tothe rights of holders of our common stock. Among other rights, in the event of a liquidation, dissolution orwinding up of our Company (including consolidations, mergers or other sales),holders of Series A Shares will be entitled to receive $3.80 per share, inpreference to any distribution to the holders of common stock.  Also, pursuant to the Certificate ofDesignations, the Company must obtain the consent of the holders of at leasttwo-thirds of the outstanding Series A Shares in order to undertake certainactions, including capital expenditures and the issuance of equitysecurities.  Additionally, for so longas Series A Shares remain outstanding more than three hundred ninety (390) daysfollowing the initial issuance of the Series A Shares, the holders of Series AShares will be entitled to elect the greater of (i) two members of theCompany’s Board of Directors or (ii) twenty-five percent (25%) of the totalmembers of the Company’s Board of Directors.

 

The Series A Shares maybe redeemed by the Company upon certain events, including a Major Transactionwhich is defined as a sale, transfer or other disposition of substantially allof the Company’s assets related to both its OEM endoscopic business and its 3Dbusiness in a single transaction or a series of related transactions.  The per share redemption price could bebetween $2.67 and $2.93.

 

The holders of theoutstanding Series A Shares have the right to one vote for each share of CommonStock into which such Series A Series could then be converted, and with respectto such vote, such holder shall have full voting rights and powers equal to thevoting rights and powers of the holders of Common Stock.

 

The holders of Series AShares are entitled to receive dividends, out of any assets legally availabletherefore, prior and in preference to any declaration or payment of any cashdividend on the Common Stock, at the rate of $0.1425 per share per annum.

 

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8.       New Accounting Standards

 

In December 2002,the FASB issued Statement of Financial Accounting Standards No. 148, “*Accountingfor Stock-Based Compensation—Transition and Disclosure*,”(“FAS 148”). FAS 148 amends FAS 123 and Accounting PrinciplesBoard Opinion No. 28, “*Interim Financial Reporting*” to presentalternative methods of transition for an entity that voluntarily adopts thefair value based method of accounting for stock-based employee compensation,and provides modifications to the disclosure provisions to require prominentdisclosure about the effects on reported net income of an entity’s accountingpolicy decisions with respect to stock-based employee compensation in quarterlyand annual financial statements. At this time, the Company has not voluntarilyadopted the fair value method of accounting under FAS 123. However,appropriate disclosures about the effects on reported net loss of the Company’saccounting policy with respect to stock-based employee compensation areprovided above.

 

In January, 2003,the FASB issued Interpretation No. 46, Consolidation of Variable InterestEntities, (FIN 46) to clarify the conditions under which assets, liabilitiesand activities of another entity should be consolidated into the financialstatements of a company.  FIN 46requires the consolidation of a variable interest entity by a company thatbears the majority of the risk of loss from the variable-interest entity’sactivities, is entitled to receive a majority of the variable-interest entity’sresidual returns or both.  Theprovisions of FIN 46 are required to be adopted by the Company in fiscal2003.  The Company does not believe theadoption of FIN 46 will have a material impact on its overall financialposition or results of operations.

 

In June 2003, theFASB issued SFAS No. 150, *Accounting forCertain Financial Instruments with Characteristics of Both Liabilities andEquity*.  The statement iseffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  TheCompany does not believe the adoption of this statement will have a materialeffect on the results of operations or financial position of the Company.

 

9.       Warranty Accrual

 

The Companyprovides for an estimated amount of product warranty at the time revenue isrecognized. This estimated amount is provided by product and based onhistorical warranty experience.  Arollforward of the customer warranty accrual is as follows:

 
| Balance at December 31, 2002 |   | $       | 45,261 |   |
|------------------------------|--------|---------|--------|--------|
|                         |   |    |   |   |
| Warranty expense             |   | 27,500  |   |
|                         |   |    |   |
| Deductions and other         |   | (27,500 | )      |
|                         |   |    |   |
| Balance at June 30, 2003     |   | $       | 45,261 |   |

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition andResults of Operations

 

THIS QUARTERLY REPORT MAY CONTAIN PREDICTIONS, ESTIMATES AND OTHERFORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES,INCLUDING THOSE DISCUSSED BELOW AT “RISKS AND UNCERTAINTIES.”  WHILE THIS OUTLOOK REPRESENTS OUR CURRENT JUDGMENTON THE FUTURE DIRECTION OF OUR BUSINESS, SUCH RISKS AND UNCERTAINTIES COULDCAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTEDBELOW.  WE UNDERTAKE NO OBLIGATION TORELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKINGSTATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER THE DATE OF THISQUARTERLY REPORT.  THE FOLLOWINGDISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIALSTATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT ONFORM 10-Q AND OUR 2002 ANNUAL REPORT ON FORM 10-K, FILED WITH THE SECURITIESAND EXCHANGE COMMISSION.

 

**Overviewof our business**

 

Over the course of the past year, we have defined our business into twoseparate units.  The Obesity SurgeryManagement Services business, based in Carlsbad, CA, provides services tophysicians and hospitals involved in the surgical treatment of morbidobesity.  Our services includemanagement of the Laparoscopic Bariatric Surgery Preceptorship, a comprehensiveintroduction to starting a minimally invasive gastric bypass surgicalprogram.  Additionally, we offer systemsand consulting services which enable the efficient operation of obesity surgeryprograms.

 

The Visualization Technology business, based in Westborough, MA,develops, manufactures and markets products that provide information tophysicians performing minimally invasive general surgical, cardiac surgical andother selected endoscopic and interventional procedures.  Our technology products combine a headmounted display with video cameras to provide surgeons with critical visualinformation during complex minimally invasive procedures, and also incorporatethe benefit of viewing complementary information in a voice-controlled,picture-in-picture format, to facilitate real-time decision making duringsurgery.  The Visualization Technologybusiness also manufactures compact, high resolution endoscopic cameras fororiginal equipment manufacturer customers and strategic partners.   In general terms, endoscopic surgeryinvolves a telescopic viewing device which is inserted into a small incision inthe body and which allows the surgeon an adequate view of the internal part ofthe body being repaired.

 

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**Critical Accounting Policies**

 

The preparation of financial statements andrelated disclosures in conformity with accounting principles generally acceptedin the United States of America requires management to make judgments,assumptions and estimates that affect the amounts reported in our consolidatedfinancial statements and the accompanying notes.  The amounts of assets and liabilities reported in our balancesheets and the amounts of revenues and expenses reported for each of our fiscalperiods are affected by estimates and assumptions which are used for, but notlimited to, accounting for product returns**,**allowance for doubtful accounts, warrantyand****technicalservice costs, inventory and income taxes. Actual results could differ from these estimates.  The following critical accounting policiesare significantly affected by judgments, assumptions and estimates used in thepreparation of the consolidated financial statements.

 

Revenue Recognition

 

Revenue generatedfrom Laparoscopic Bariatric Surgical (LBS) Preceptorship program sales isrecognized (i) with regard to equipment sales, upon shipment of equipment andmarketing materials and (ii) with regard to training services, upon completionof the related training component, provided that a purchase order has beenreceived, there are no uncertainties regarding customer acceptance, the salesprice is fixed or determinable and collectibility is deemed probable.  Sales of all other products are similarlyrecognized upon shipment provided that a purchase order has been received,there are no uncertainties regarding customer acceptance, the sales price isfixed or determinable and collectibility is deemed probable.

 

The Companyreceives semiannual payments as a result of fulfilling certain obligationsrelated to its strategic alliance agreement with Ethicon Endo-Surgery, Inc.(EES).  These payments are recognized asrevenue on a straight-line basis over the related contract term, provided thatthe Company has complied with all contractual obligations.

 

Inventory

 

Inventory isaccounted for on a first-in first-out basis and is valued at the lower of costor market. The Company regularly evaluates inventory for obsolescence andreserves for 100% of inventory considered to be obsolete.  At June 30, 2003 such inventory reservesapproximated $994,000.  The Companybelieves it is adequately reserved for obsolescence of current inventory.  However, future product introductions andrelated inventories may require additional reserves based upon changes inmarket demand or introduction of competing technologies.

 

**Our results of operations forthree-months and six-months ended June 30, 2003 versus three-months andsix-months ended June 30, 2002**

** **

Revenues.  We had revenue fromproduct sales and contract revenue of $2,278,000 and

 

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$5,128,000 for thethree-and six months ended June 30, 2003, respectively, compared to revenuesfrom product sales and contract revenue of $2,810,000 and $5,482,000 for thethree- and six-months ended June 30, 2002, respectively.  The decrease in revenue for both thethree-and six-month periods was due primarily to lower sales from our ObesitySurgery Management Services Business along with slightly lower unit sales fromour Visualization Technology Business.

 

Cost of Revenues.  Our cost ofrevenues were $1,295,000 and $2,871,000 for the three- and six-months endedJune 30, 2003, respectively, and $1,508,000 and $2,871,000 for the three-andsix-months ended June 30, 2002, respectively. Our gross margins were 43% and 44% for the three- and six-months endedJune 30, 2003, respectively, and 46% and 47% for the three-and six-months endedJune 30, 2002, respectively.  Thedecrease in gross margin was primarily due to lower sales of our higher marginObesity Surgery Management Services Business.

 

Research and Development Expenses. Our research and development expenses were $295,000 and $552,000 for thethree-and six-months ended June 30, 2003, respectively, and $474,000 and$898,000 for the three-and six-months ended June 30, 2002, respectively.  The decrease in research and developmentexpenses was primarily attributable to a reduction in next generation productdevelopment.  We expect our research anddevelopment expenses to remain at or near current levels in the next severalquarters as we finalize our next generation of products for the general surgerymarket.

 

Sales and Marketing Expenses. Sales and marketing expenses were $645,000 and $1,194,000 for thethree-and six-months ended June 30, 2003, respectively, and $736,000 and$1,459,000 for the three-and six-months ended June 30, 2002, respectively. Thedecrease in sales and marketing expense reflects a reduction in consulting andpromotional activities for the obesity surgery market.   We expect our sales and marketing expensesto increase proportionately during the next several quarters as we begin toincrease our field activities for the obesity surgery market.

 

General and Administrative Expenses. General and administrative expenses were $534,000 and $1,050,000 for thethree-and six-months ended June 30, 2003, respectively, and $472,000 and$1,015,000 for the three-and six-months ended June 30, 2002, respectively.  We expect our general and administrative expensesto remain at or near current levels for the next several quarters.

 

Interest Income.  Our netinterest income was $34,000 and $36,000 for the three-and six-months ended June30, 2003, respectively, and $5,000 and $10,000 for the three-and six-monthsended June 30, 2002, respectively.  Theincrease in net interest income during the 2003 period was due primarily tointerest income recognized from notes receivable from stockholders partiallyoffset by decreasing cash balances. 

 

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**Liquidity and capital resources**

 

Net cash used for operating activities for the six-months ended June30, 2003 was $702,000 compared to net cash used of $503,000 for thecorresponding six-month period in 2002. The increase in net cash used in operating activities during the 2003period primarily attributable to increased accounts payable payments along withhigher inventory purchases, offset by a decrease in the net loss.

 

Net cash provided by investing activities was $44,000 for thesix-months ended June 30, 2003 compared to $99,000 of net cash used in the sameperiod in 2002.  The decrease in netcash provided by investing activities during the 2003 period was primarilyattributable to increasing purchases of property and equipment.

 

Net cash provided by financing activities was $952,000 for thesix-months ended June 30, 2003, compared to $588,000 for the same period in2002.  The increase in net cash providedby financing activities during the 2003 period was primarily attributable tothe closing of a private placement of shares of our Series A ConvertiblePreferred Stock for total proceeds of $950,000.  During the six months ended June 30, 2003, we had no advancesfrom our credit facility.

 

We incurred operating losses in 2000, 2001 and 2002, and at June 30,2003, had an accumulated deficit of $66.5 million.  At June 30, 2003, we had cash and short-term investments of$954,000.  In March 2003, we sold$950,000 of preferred stock in a private placement to two accreditedinvestors.  In addition, we have amountsavailable under a $2.0 million bank line of credit facility, which expires inOctober 2003 and is subject to annual renewals.  We believe that these sources of liquidity, together withanticipated 2003 product revenues and interest income, will be sufficient to meetour anticipated capital requirements through January 2004.  However, certain circumstances, includingslow rate of market acceptance of our products or inability to scale upmanufacturing, would accelerate use of these funds and require us to seek additionalfunds to support operating requirements.  There can be no assurance that the requisite funding will be consummatedin the necessary time frame or on terms acceptable to us.  Should we be unable to raise sufficientfunds, we may be required to curtail our operating plans and possiblyrelinquish rights to portions of our technology or products.  In addition, increases in expenses or delaysin product development may adversely impact our cash position and requirefurther cost reductions.  No assurancecan be given that we will be able to operate profitably on a consistent basis,or at all, in the future.

 

We have a $2,000,000 credit facility with a financial institution.  Interest on this facility was prime plus 2%at June 30, 2003.  At June 30, 2003, wehad no advances outstanding under this credit facility.  If we were to draw under this facility,changes in interest rates would affect the interest expense we would pay andcould impact our cash flows and results of operations.

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

 

At June 30, 2003, our investment portfolio included fixed-incomesecurities of $0.7 million.  Thesesecurities are subject to interest rate risk and will decline in value ifinterest rates

 

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increase.  These investments are not held for tradingor other speculative purposes. Due to the short duration of our investmentportfolio, an immediate 10 percent increase in interest rates would have nomaterial impact on our financial condition or results of operations.

 

We generally conduct business, including sales to foreign customers, inU.S. dollars and as a result have limited foreign currency exchange raterisk.  The effect of an immediate 10percent change in foreign exchange rates would not have a material impact onour financial condition or results of operations.

 

RISKS AND UNCERTAINTIES

 

You should consider the following factors carefully in evaluating aninvestment in Vista Medical in addition to the other information in thisreport.  You are cautioned that thestatements in this quarterly report that are not descriptions of historicalfacts may be forward-looking statements that are subject to risks anduncertainties.  Our actual results coulddiffer materially from those currently anticipated due to a number of factors,including those identified in this section and elsewhere in this annualreport.  We undertake no obligation torelease publicly the results of any revisions to these forward-looking statementsto reflect events or circumstances arising after the date of this quarterlyreport.  The following discussion shouldbe read in conjunction with our consolidated financial statements and notesthereto.

 

**We may needadditional funds to support our currently proposed operations.  If we are unable to obtain them, we may haveto significantly scale back our operations or forgo opportunities in new marketsegments.**

** **

At June 30, 2003, we had cash, cashequivalents and short-term investments of $954,000. We believe that these cashresources, together with cash from operations will be sufficient resources forthe next six months.

 

We are working on initiatives to extend ourbusiness, most immediately in the surgical obesity****market, by****addingnew products and services. For our business to be successful, we believe wemust establish and grow our Obesity Surgery Management Services business,including establishing programs which we will manage directly, in partnershipwith surgeons and hospitals (Vista Obesity and Wellness Institute.).  As a result, we may be required to raiseadditional funds to support our planned operations.  In addition, if we are unable to sustain our cash flow under ourcurrent business plan, we will be required to raise additional funds.  If we are unable to raise sufficient fundsfrom an offering of securities or otherwise, we may be unable to continueoperations at their current level and may be unable to pursue our newobjectives.  Moreover, our liquidity andcapital requirements will depend upon other numerous factors, including thefollowing:

 

•              The extent to which our productsand services gain market acceptance;  

 

•              Costs associated with establishingmarketing, and operating our Obesity Surgery Management Services Business andother related programs;

 

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**•****             **The progress and scope of productevaluations;

 

•              The timing and costs of filingfuture regulatory submissions;  

 

•              The timing and costs required toreceive both domestic and international governmental approvals;

 

•              The timing and costs of productand services introductions;

 

•              The extent of our ongoing researchand development programs;

 

•              The costs of sponsorship trainingof the physicians to become proficient in the use of our products andprocedures;

 

•              The costs of developing marketingand distribution capabilities.

 

Even if we are successful in raisingadditional funds, circumstances, including slow rate of market acceptance ofour products or our inability to scale up manufacturing, would accelerate ouruse of proceeds from any offering we might do and require us to seek additionalfunds to support our operating requirements.

 

**Our failure to maintaincompliance with the continued listing requirements of the Nasdaq SmallCapMarket may result in the de-listing of our common stock.**

** **

We have recently satisfied the requirements for continued listing ofour common stock on the Nasdaq SmallCap Market outlined for us by the NasdaqListing Qualifications Panel on February 21, 2003.  We accomplished this by raising additional equity capital suchthat we achieved a shareholders’ equity balance of at least $2,800,000.  The Nasdaq SmallCap Market has notified usthat our exception to the continued listing requirements shall be extendeduntil March 31, 2003, when our shareholders’ equity balance was$2,997,000.  Although we expect tomaintain the minimum required shareholder’s’ equity balance, we have verylittle cushion to protect against an unexpected decline.  Failure to maintain the minimum requiredshareholders’ equity balance could cause our common stock to be de-listed fromthe Nasdaq SmallCap Market.  We cannotassure you that we will be able to remain in compliance.

 

**We have ahistory of losses and may not become profitable.**

** **

Since our formation in July 1993, and as ofJune 30, 2003, we have incurred cumulative net losses of $66.5 million.  We expect to incur losses for at least thenext 9 months.  We may never achieve orsustain profitability in the future. Even if we achieve profitability, we may not be able to sustain it on anongoing basis.

 

**As acompany, we do not have experience in the ownership and management of healthcare service businesses**.

 

As a company we do not have extensiveexperience in providing management services and have no direct experience inthe management of bariatric surgical programs. We have been

 

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involved in the development of bariatric surgical programs since 2000,but have never directly managed these programs.  As such, we have only a limited and indirect operating historyupon which an evaluation of our prospects in this business sector can bebased.  Our prospects therefore, must beconsidered in light of the risks, expenses and difficulties frequently encounteredby companies in their early stages of development, particularly when involvedin new and rapidly evolving markets.  Toaddress these risks, we must, among other things, respond to competitivedevelopments and attract, retain and motivate qualified staff.  There can be no assurance that we will besuccessful in addressing such risks or in implementing our businessstrategy.  There can be no assurancethat we will be able to achieve or sustain revenue growth or profitability.

 

**The terms of our recent preferredstock financing confer senior rights to the holders of Series A ConvertiblePreferred Stock, and these rights may impair the interests of our commonstockholders or impact our results of operations.**

** **

We recently issued 1,000,000 shares of ourSeries A Convertible Preferred Stock (the “Series A Shares”), which werecreated pursuant to the terms of a Certificate of Designations, for anaggregate of $950,000 in cash.  Inconnection with this financing, the purchasers of Series A Shares were grantedseveral significant rights senior to the rights of holders of our commonstock.  Among other rights, in the eventof a liquidation, dissolution or winding up of our company (includingconsolidations, mergers or other sales), holders of Series A Shares will be entitledto receive up to $3.80 per share held by them, in preference to anydistribution to the holders of common stock. Also, pursuant to the Certificate of Designations, we must obtain theconsent of the holders of at least two-thirds of the outstanding Series AShares in order to undertake certain actions, including capital expendituresand the issuance of securities. Additionally, for so long as any Series A Shares remain outstandingafter three hundred ninety (390) days following the initial issuance of anySeries A Shares, the holders of Series A Shares will be entitled to elect thegreater of (i) two members of our Board of Directors or (ii) twenty-fivepercent (25%) of the total members of our Board of Directors.  As a result, in the event we do not achievethe criteria necessary for us to redeem some or all of the Series A Shares(e.g., a sale of all or a portion of our visualization technology business),the holders of Series A Shares will have the right to control at leastone-fourth of the seats on our Board of Directors.

 

The Series A Shares are subject to redemptionby us upon certain events.  If we chooseto redeem some or all of the Series A Shares pursuant to the terms of ourCertificate of Designations, we will use cash that would otherwise fund ourbusiness operations.  Although we maybelieve that such a redemption is the best available business option, valuablecash would nonetheless be consumed. This could impact our ability to fund operations or grow our business.

 

The holders of Series A Shares are alsoentitled to require us to register their shares.  We may be required to register their shares on Form S-3 within 30days after request, and in any event prior to four hundred (400) days followingthe initial issuance of Series A Shares. This registration will consume management time and effort as well assome cash resources.

 

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**Success ofthe Vista Obesity and Wellness (VOW) Institutes depends on our entering intoagreements with hospitals and surgeons; the time to conclude these agreementsmay be extended and thereby delay or prevent the implementation of ourstrategy.**

** **

We plan to set up our VOW Institutes inconjunction with hospitals and surgeons. There can be no assurance that negotiations for the establishment ofthese Institutes will not be protracted or impossible to negotiatesatisfactorily.  Because of our limitedexperience in negotiating and concluding these agreements, we cannot accuratelypredict the time and expense involved, and any unexpected delays could preventthe execution of our strategic plan.

 

**We expectto need additional funding if we are to fully develop the VOW Instituteconcept.**

** **

Any deviation in the timing or projected cashflow of our Obesity Surgery Strategy may cause us to require additionalinvestment capital.  There can be noassurance that such capital will be available to the extent required, or atall.  The amount of additional capitalwhich we may need to raise will depend on many factors, including:

 

•     the extent to which the Institutes and otherservices gain market acceptance,

•      the speed with which we can execute ourplan;

•      the levels of reimbursement for proceduresperformed;

•      the extent of competition.

 

**We will incur significantexpenses as we attempt to establish and grow our obesity surgery managementservices business**.

 

Establishing our new services business willbe expensive and time-consuming. Significant management time and energy will be diverted from ourexisting visualization technology business as we attempt to establishrelationships and partnerships with surgeons and entities willing toparticipate in the establishment of our obesity surgery centers.  These centers will also be financially costlyto establish and operate.  If we do notgenerate sufficient surgical procedures through these centers, the fees wereceive for the services we provide may be insufficient to sustain thebusiness.

 

**Our failure to maintaincompliance with the continued listing requirements of the Nasdaq SmallCapMarket may result in the de-listing of our common stock.**

 

We have recently satisfied the requirementsfor continued listing of our common stock on the Nasdaq SmallCap Marketoutlined for us by the Nasdaq Listing Qualifications Panel on February 21,2003.  Although we expect to remainlisted in the near term, we have very little cushion to protect againstdeclines in shareholders’ equity or the other quantitative listingstandards.  Failure to maintaincompliance with the listing standards could cause our common stock to bede-listed from the Nasdaq SmallCap Market. We cannot assure you that we will be able to remain in compliance.

 

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**Afterestablishing a VOW Institute, we must continue to prove our value proposition.**

** **

In order to successfully negotiate andcomplete agreements with doctors and hospitals to establish a VOW Institute, wewill present them with our projected revenues and operational metrics.  We cannot assure you that our projectionswill prove accurate or that we will be able to provide the anticipatedmetrics.  Our projections are based onlimited input and operational history and failure to meet such projections willnegatively impact our business.

 

**We operatein a competitive market; new technologies, procedures, or pharmaceuticals couldradically change the modality of treatment of morbid obesity and negativelyimpact our management services business and the projected VOW Institutes**.

 

The market for products and services thataddress obesity is competitive and new offerings and technologies are becomingavailable regularly.  We are aware ofseveral developments, primarily involving nerve stimulation or balloontechnology, which may come to the market in the next few years.  These devices would be implanted or placedin a relatively simple endoscopic procedure. If they prove to be more effective than gastric bypass surgery in curingmorbid obesity, then the economic structure of the business could be negativelyimpacted. Also, many pharmaceutical companies are researching drug therapiesfor combating obesity.  If they provesuccessful in finding a more effective solution for morbid obesity than gastricbypass surgery, then demand for surgery is likely to decline substantially.

 

We cannot guarantee that we will competesuccessfully against our current or potential competitors, especially thosewith significantly greater financial resources or brand name recognition.

 

**If we failto retain our key personnel and hire, train and retain additional qualified andexperienced employees, we may not be able to compete effectively.**

** **

Our future success will depend to a largeextent on retaining our core operating management team and recruitingsufficient qualified employees to manage and staff our services businesses.  There is likely to be a competitive labormarket for such staff and there is no assurance that we will be able to attractand retain an adequate number of suitable employees.

 

**We are, toa significant extent, dependent on distribution partners to sell ourvisualization technology products.**

** **

We only have a small direct sales force and,in the past, we were primarily dependent on agreements with third parties forsales of the majority of products derived from our core three-dimensionaltechnology.  Two of our primarydistribution agreements were terminated in 2000.  We entered into an arrangement with Jomed N.V. in May, 2000 totransition distribution in cardiac surgery and to continue supporting ourcardiac customer base.  However, thesuccess of this transition depends upon the concurrent development of newtechnology by Jomed N.V. and may not be achieved in a reasonable timeframe, orat all.  If we are unable to make thistransition, we may be unsuccessful in distributing our cardiac surgery productsand may lose revenues. Jomed applied for bankruptcy protection in theNetherlands in January, 2003.  We havenot yet elected to terminate our agreement pending clarification of Jomed’songoing status.

 

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In addition, during 2000, we changed ourstrategic emphasis for our core three-dimensional technology for applicationsin general surgery, gynecology and urology. We cannot assure you that we will be successful in these areas ofsales.  Even if we are successful, wecannot assure you that the revenue achieved in these areas of emphasis will besufficient to compensate for any loss of sales revenue from the termination ofour previous distribution agreements for cardiac products.  Either of these results could have anadverse affect on our financial condition and results of operations.

 

**Ourprofitability is dependent upon the successful commercialization of ourvisualization technology products and the establishment and growth of ourobesity surgery management services business.**

 

Products derived from our core visualizationtechnology – the Endosite for general surgery and the Series 8000 for minimallyinvasive cardiac surgery – are expected to account for the majority of ourvisualization technology revenues over the next several years.  The demand for these products may not besufficient to allow us to achieve profitable operations.  Our development efforts for improvements tothese products may not be successful. In addition, other products under development may not be shown to besafe or effective, capable of being manufactured in commercial quantities atacceptable costs, acquire appropriate regulatory clearances or be successfullymarketed.  Our obesity surgerymanagement services business is of relatively recent origin and it is difficultto predict its longer term success.

 

**Our successis dependent upon acceptance of a minimally invasive approach to complexprocedures as a reliable, safe and cost effective alternative to existingtreatments.**

** **

Complex minimally invasive procedures areonly performed on a very limited basis by a relatively small number of highlyskilled surgeons.  We are unable topredict how quickly, if at all, complex minimally invasive procedures will beadopted by the medical community or, if they are adopted, the number ofprocedures that will be performed.

 

Even if the clinical safety and effectivenessof complex minimally invasive procedures is established in general surgery,cardiac and other specialties, surgeons and other physicians may choose not torecommend the procedures for any number of other reasons.  Adoption of these procedures by doctors willdepend, for example, upon our ability to facilitate and sponsor training ofsurgeons to perform complex minimally invasive procedures and the willingnessof these surgeons to perform such procedures. Doctors may also elect not to recommend the minimally invasiveprocedures based on possible unavailability of acceptable reimbursement from healthcare payors.  Health care payor acceptancemay require evidence of the cost effectiveness of minimally invasive proceduresas compared to other currently available treatments.  We believe that physician endorsements will be essential forclinical adoption of minimally invasive procedures and these endorsements maynot be obtained.  Patient acceptance ofnew procedures will depend upon doctor recommendations, as well as otherfactors, including the effectiveness of, and the rate and severity of complicationsassociated with, the procedure as compared to other treatments.

 

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**Widespreaduse of our products will require sponsoring the training of a large number ofsurgeons, and the time required to institute a training program and to trainsuch surgeons could adversely affect near term market acceptance.**

** **

Evaluations of visualization technology, suchas ours, which have been conducted to date, have shown that there is a learningprocess involved for surgeons and other members of the surgery team to becomeproficient with the use of the systems. Based on the clinical and laboratory procedures performed to date, wecannot assure you that visualization and information system enhancementsincorporated, or to be incorporated, in our products will prove suitable foruse by a substantial number of surgeons. If they prove unsuitable for a large number of surgeons to use, thepotential markets and applications for our products would be significantlylimited.

 

**There aresignificant risks associated with any scale-up of manufacturing which may berequired to meet market demand and become profitable.**

** **

We have never established high-volumemanufacturing operations and if we are required to do so to meet market demandor to become profitable, we may not be able to establish or maintain reliableoperations at commercially reasonable costs. We may also require additional manufacturing facilities if productionvolumes increase.  Acquisition of newmanufacturing facilities would also likely involve relocation.  Difficulties in scaling up manufacturing ofproducts could result from problems involving:

 
| • |   | quality  control and assurance,                                                                                           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                      |
| • |   | component  and service availability,                                                                                      |
|   |   |                                                                                                                      |
| • |   | adequacy  of control policies and procedures,                                                                             |
|   |   |                                                                                                                      |
| • |   | lack  of qualified personnel,                                                                                             |
|   |   |                                                                                                                      |
| • |   | compliance  with FDA regulations and the need for further FDA approval of new  manufacturing processes and facilities and |
|   |   |                                                                                                                      |
| • |   | other  production constraints.                                                                                            |

 

 

We have considered and will continue toconsider as appropriate, the internal manufacture of sub-assemblies currentlyprovided by third-party subcontractors, as well as the implementation of newproduction processes.  Our manufacturingyields or costs may increase as a result of the transition to in-houseproduction or to new production processes when such efforts areundertaken.  In addition, costs tocomply with FDA good manufacturing practices or changes in such practices mayexceed our expectations.

 

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**We may facecomponent shortages and are dependent in some instances on single sources ofsupply.**

** **

Any significant supply interruption, orinventory shortage or overage, would negatively impact our ability tomanufacture our products.  We use andrely on specific components and services used in our systems for which we haveonly a single source of supply.  Themanufacture of our products in larger commercial quantities will require asubstantial increase in component supplies and will likely necessitate thereplacement of current suppliers or the addition of new suppliers.  The qualification of additional orreplacement vendors for specified components or services is a lengthyprocess.  In addition, the substitutionof replacement vendors may entail re-engineering time and cost and could delay thesupply of our products.

 

We expect to manufacture our products basedon forecasted product orders and intend to purchase subassemblies andcomponents prior to receipt of purchase orders from customers.  Lead times for ordered materials and componentsvary significantly and depend on factors such as the business practices of thespecific supplier, contract terms and general demand for a component at a giventime.  Some components used in ourproducts have long lead times.  As aresult, there is a risk of excess or inadequate inventory if orders do notmatch forecasts.

 

**Theprovision of health care services is subject to considerable regulation bystate and federal agencies.**

 

The Institutes will need to comply with manylaws and regulations, both state and federal, which govern the provision ofhealth care services.  If they fail tocomply with any such laws and regulations, then the penalties involved could beserious, time-consuming for management and expensive.  Inexperience in health care services could contribute to aninadvertent breach of laws or regulations. (See Governmental Regulation.)

 

**We aresubject to significant domestic and international regulation and may not beable to obtain necessary regulatory clearances to sell our products.**

** **

The manufacture and sale of medical devicesintended for commercial distribution are subject to extensive governmentalregulation.  Our failure to comply withregulatory requirements would jeopardize our ability to market ourproducts.  Noncompliance with applicablerequirements can result in failure of the regulatory agency to grant pre-marketclearance or approval for devices, withdrawal or suspension of approval, totalor partial suspension of production, fines, injunctions, civil penalties,refunds, recall or seizure of products and criminal prosecution.

 

Medical devices are regulated in the UnitedStates primarily by the FDA and, to a lesser extent, by state agencies.  Sales of medical device products outside theUnited States are subject to foreign regulatory requirements that vary fromcountry to country.  Generally, medicaldevices require pre-market clearance or pre-market approval prior to commercialdistribution.  A determination thatinformation available on the medical device is not sufficient to grant theneeded clearance or approval will delay market introduction of theproduct.  In addition, material changesor modifications to, and changes in intended use of, medical devices also aresubject to

 

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FDA review and clearance or approval. The FDA regulates the research, testing, manufacture, safety,effectiveness, labeling, storage, record keeping, promotion and distribution ofmedical devices in the United States and the export of unapproved medical devicesfrom the United States to other countries. The time required to obtain approvals required by foreign countries maybe longer or shorter than that required for FDA clearance, and requirements forlicensing may differ from FDA requirements. The current regulatory environment in Europe for medical devices differssignificantly from that in the United States.

 

**We expectto encounter rapid technological change and significant competition.**

** **

The medical device market in which we competeis characterized by intensive development efforts and rapidly advancingtechnology.  Our future success willdepend, in large part, upon our ability to anticipate and keep pace withadvancing technology and competing innovations.  We may not be successful in identifying, developing and marketingnew products or enhancing our existing products.

 

We believe that a number of large companies,with significantly greater financial, manufacturing, marketing, distributionand technical resources and experience than ours, are focusing on thedevelopment of visualization products for minimally invasive microsurgery.  Several companies are currently developingand marketing visualization products for minimally invasive microsurgery whichcould be applied to general surgery or heart surgery.

 

Technological advances with other therapiessuch as drugs, interventional procedures or future innovations in surgicaltechniques could make such other therapies more effective or lower in cost thanminimally invasive microsurgery procedures and could diminish growth prospectsfor minimally invasive microsurgery.

 

**We expectfluctuations in our operating results.**

 

Our results of operations may varysignificantly from quarter to quarter depending upon numerous factors,including the following:

 

•              timing and results of productevaluations,

 

•              delays associated with the FDA andother regulatory approval processes,

 

•              demand for and utilization of ourproducts,

 

•              changes in our pricing policies orthose of our competitors,

 

•              changes in third-party payment guidelines,

 

•              the number, timing andsignificance of product enhancements and new product announcements by us or ourcompetitors,  

 

•              our ability to develop, introduceand market new and enhanced versions of our products on a timely basis,

 

•              customer order deferrals inanticipation of enhancements or of new product

 

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introductions by us or ourcompetitors,

 

•              product quality problems,

 

•              personnel changes and

 

•              the level of international sales.

 

**Our profitabilityin our visualization technology business is directly related to the level ofreimbursements for surgical procedures using our products.**

** **

Our profitability is directly related to thelevel of payments for the surgical procedures in which our products areinvolved, either by Medicare or private insurance companies.  We could be adversely affected by changes inpayment policies of government or private health care payors, particularly tothe extent any such changes affect payment for the procedure in which ourproducts are intended to be used.  It isa continuing trend in U.S. health care for such payments to be under continualscrutiny and downward pressure.  Webelieve that reimbursement in the future will be subject to increasedrestrictions, both in the United States and in foreign markets and that theoverall escalating cost of medical products and services has led to and willcontinue to lead to increased pressures on the health care industry, bothforeign and domestic, to reduce the cost of products and services, includingproducts which we offer.

 

We expect that our products typically will beused by hospitals and surgical centers, which bill various third-party payors,such as governmental programs and private insurance plans, for the health careservices provided to their patients. Third-party payors carefully review and increasingly challenge theprices charged for medical products and services or negotiate a flat rate feein advance.  Payment rates from privatecompanies also vary depending on the procedure performed, the third-partypayor, the insurance plan and other factors. Medicare compensates hospitals at a predetermined fixed amount for thecosts associated with an in-patient hospitalization based on the patient’sdischarge diagnosis and compensates physicians at a pre-determined fixed amountbased on the procedure performed, regardless of the actual costs incurred bythe hospital or physician in furnishing the care and unrelated to the specificdevices or systems used in that procedure. Medicare and other third-party payors are increasingly scrutinizingwhether to cover new products and the level of payment for new procedures.  The flat fee reimbursement trend is causinghospitals to control costs strictly in the context of a managed care system inwhich health care providers contract to provide comprehensive health care for afixed cost per person.  We are unable topredict what changes will be made in the reimbursement methods utilized by suchthird-party payors.

 

If we obtain the necessary foreign regulatoryregistrations or approvals, market acceptance of our products in internationalmarkets would be dependent, in part, upon the acceptance by the prevailinghealth care financing system in each country. Health care financing systems in international markets varysignificantly by country and include both government sponsored health careprograms and private insurance.  Wecannot assure you that these financing systems will endorse the use of ourproducts.

 

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**We havelimited experience directly marketing our products overseas and may not besuccessful in expanding into international markets without experiencedpartners.**

 

We have limited experience in directlymarketing our products overseas. Changes in overseas economic conditions, currency exchange rates,foreign tax laws or tariffs or other trade regulations could negatively impactour business.  The anticipatedinternational nature of our business is also expected to subject our representatives,agents and distributors to laws and regulations of the foreign jurisdictions inwhich they operate or in which our products are sold, including laws regulatingmanufacture and sale of medical devices. In addition, the laws of some foreign countries do not protect ourintellectual property rights to the same extent as do the laws of the UnitedStates.

 

**We may besubject to product liability claims and have limited insurance coverage.**

** **

We face an inherent and significant businessrisk of exposure to product liability claims in the event that the use of ourproducts results in personal injury or death. Also, in the event that any of our products proves to be defective, wemay be required to recall or redesign such products.  Our current product liability insurance coverage limit is $10.0million per occurrence and in the aggregate. Our coverage limits may not be adequate to protect us from anyliabilities we might incur in connection with the development, manufacture andsale of our products.  In addition,increased product liability coverage may be required if additional products areused in clinical evaluations or successfully commercialized.  Product liability insurance is expensive andin the future may not be available to us on acceptable terms, if at all.  A successful product liability claim orseries of claims brought against us in excess of our insurance coverage or aproduct recall would negatively impact our business.

 

**If we areunable to protect our intellectual property, we may be unable to prevent othercompanies from using our technology in competitive products.**

** **

Our future success will depend, in part, onour ability to continue developing patentable products, enforcing our patentsand obtaining patent protection for our products both in the United States andin other countries.  The patentpositions of medical device companies, however, are generally uncertain andinvolve complex legal and factual questions. Patents may never issue from any patent applications owned by orlicensed to us.  Even if patents doissue, the claims allowed may not be sufficiently broad to protect ourtechnology.  In addition, issued patentsowned by or licensed to us may be challenged, invalidated or circumvented, orthe rights granted thereunder may not provide us with competitive advantages.

 

The medical device industry has beencharacterized by extensive litigation regarding patents and other intellectualproperty rights.  Litigation, whichwould result in substantial expense, may be necessary to enforce any patentsissued or licensed to us and/or to determine the scope and validity ofproprietary rights of third parties or whether our products, processes orprocedures infringe any such third-party proprietary rights.  We may also have to participate in interferenceproceedings declared by the United States Patent and Trademark Office, whichcould result in substantial expense, to determine the priority of inventionscovered by our issued United States patents or pending patent applications.  Furthermore, we may have to participate at

 

27

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substantial cost in International Trade Commission proceedings toenjoin importation of products which would compete unfairly with ourproducts.  Any adverse outcome of any patentlitigation, including interference proceedings, could subject us to significantliabilities to third parties, require disputed rights to be licensed from or tothird parties or require us to cease using the technology in dispute.  Any such licenses may not be available onacceptable terms, if at all. Furthermore, parties making such claims may be able to obtain injunctiveor other equitable relief that could effectively block our ability to make,use, sell or otherwise practice our intellectual property, whether or notpatented or described in pending patent applications, or to further develop orcommercialize our products in the United States and abroad and could result inthe award of substantial damages.  Defenseof any lawsuit or failure to obtain any such license could damage our business.

 

In addition to patents,we rely on unpatentedtrade secrets to protect our proprietary technology.  Others may independently develop or otherwise acquire the same orsubstantially equivalent technologies or otherwise gain access to ourproprietary technology or disclose this technology.  It is difficult to protect rights to unpatented proprietarytechnology.  Third parties may obtainpatent rights to these unpatented trade secrets, which patent rights could be usedto assert infringement claims against us. We also rely on confidentiality agreements with our collaborators,employees, advisors, vendors and consultants to protect our proprietarytechnology.  These agreements may bebreached, we may not have adequate remedies for any breach and our tradesecrets may otherwise become known or be independently developed bycompetitors.  In addition, ouragreements with employees and consultants require disclosure of ideas, developments,discoveries or inventions conceived during employment or consulting, as thecase may be, and assignment to us of proprietary rights to such matters relatedto our business and technology.  Theextent to which efforts by others will result in patents and the effect on usof the issuance of such patents is unknown.

 

**We havelicensed some aspects of our products from third parties and may lose therights to these essential aspects under the agreements which govern thoserelationships.**

** **

We have licensed some aspects of ourtechnology from third parties.  Therights under the governing agreements may be terminated if we breach ourobligations or in other circumstances. Our failure to retain rights to theselicensed rights could negatively impact our business.  For additional information concerning the agreements which governthese relationships, please see “Business—Strategic Alliances” and “Business –Licenses.”

 

28

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**If we arenot able to attract and retain key technical and senior management personneland doctors to participate in our advisory boards, it may adversely affect ourability to obtain financing or develop our products.**

** **

Our future business and operating resultsdepend in significant part upon the continued contributions of our key technicaland senior management personnel, many of whom would be difficult to replace andsome of whom perform important functions beyond those suggested by their jobtitles or descriptions.  Our businessand future operating results also depend in significant part upon our abilityto attract and retain qualified management, manufacturing, technical, marketingand sales and support personnel for our operations.  Competition for such personnel is intense, and we may not besuccessful in attracting or retaining such personnel.

 

Members of our clinical advisory boardsconsult with us exclusively in the field of visualization, but are free toconsult with other non-competing instrumentation companies and are employedelsewhere on a full-time basis.  As aresult, they only spend a limited amount of time on our business.  Although we have entered into consultingagreements, including confidentiality provisions with each of the members ofour clinical advisory boards, the consulting and confidentiality agreementsbetween us and each of the members of our clinical advisory boards may beterminated or breached.

 

**Our stockprice could continue to be volatile and your investment in our common stockcould suffer a decline in value, adversely affecting our ability to raise additionalcapital.**

** **

The market prices and trading volumes forsecurities of emerging companies, like ours, have historically been highlyvolatile and have experienced significant fluctuations unrelated to theoperating performance.  The market priceof our common stock has historically been highly volatile and may besignificantly affected by factors such as:

 

•              actual or anticipated fluctuationsin our operating results,

 

•              changes in financial estimates bysecurities analysts,

 

•              announcements of technologicalinnovations,  

 

•              new products or new contracts byus or our competitors,

 

•              regulatory announcements,

 

•              developments with respect topatents or proprietary rights,

 

•              conditions and trends in themedical device and other technology industries,

 

•              adoption of new accountingstandards affecting the medical device industry, and

 

•              general market conditions.

 

In addition, the stock market has from timeto time experienced significant price and volume fluctuations that haveparticularly affected the market prices for shares of early stagecompanies.  These broad marketfluctuations may adversely affect the market price of our common stock.  In the past, following periods of volatilityin the market price of a particular company’s securities, securities classaction litigation has often been brought against that

 

29

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company.  Such litigation, ifbrought against us, could result in substantial costs and a diversion ofmanagement’s attention and resources.

 

**Our use ofhazardous materials may result in unexpected and substantial claims against usfor which we do not have sufficient financial resources.**

** **

Our research and development activities mayinvolve the controlled use of hazardous materials and chemicals.  The risk of accidental contamination orinjury from these materials cannot be completely eliminated.  In the event of such an accident, we couldbe held liable for any resultant damages, and any such liability could exceedour resources.  We may incur substantialcost to comply with environmental regulations.

 

**We do notanticipate paying any dividends and any gains from your investment in our stockwill have to come from increases in the price of such stock.**

** **

We currently intend to retain any futureearnings for use in our business and do not anticipate paying any cashdividends in the foreseeable future.

 

**Our charterdocuments may prevent us from participating in transactions that could bebeneficial to you.**

** **

Our charter documents contain provisions thatmay make it more difficult or discourage a change in control.  This may adversely affect the market priceof our common stock.

 

Item 4.  Controls and Procedures

 

(a)  Evaluation of disclosurecontrols and procedures

 

Based on their evaluation as of a date ninety (90) days of the filingof this Form 10-Q, Chief Executive officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures (as defined in  Rules 13a-14 and 15d—14 under the SecuritiesExchange Act of 1934) are effective.

 

(b)  Changes in internal control

 

There have been no significant changes in internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

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PART II.  OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

From time to time, we may be involved in litigation relating to claimsarising out of our operations in the normal course of business.  We are currently not a party to anylitigation that could have a material adverse effect on our results ofoperations or the financial position of our business.

 

Item 2.    Changes in Securities and Use ofProceeds

 

a.             Not applicable

 

b.             Not applicable

 

c.             Not applicable

 

d.             Not applicable

 

Item 3.    Defaults upon Senior Securities

 

None.

 

Item 4.    Submission of Matters to a Vote ofSecurity Holders

 

I.              2003 Annual Meetingof Stockholders held on June 4, 2003.

 

a.             The2003 Annual Meeting of Stockholders of Vista Medical Technologies, Inc.(the  “Annual Meeting”) was held on June4, 2003.  The holders of 4,570,628 ofthe 5,001,749 shares of our Common Stock outstanding on April 11, 2003, therecord date for the Annual Meeting (approximately 91.38%), were present at theAnnual Meeting in person or by proxy.

 

b.             Atthe Annual Meeting, George B. DeHuff and Daniel Holland were duly nominated andproperly elected as Directors of our company to serve until the 2006 AnnualMeeting of stockholders or until their respective successors are elected andqualified.  The number of votes cast forand withheld with respect to each nominee for office, as well as brokernon-votes are indicated below:

 
|             |   | **For**   |   | **Against/  Withheld** |   | **Broker  Non-Votes** |   |
|------------------|--------|-----------|--------|------------------------|--------|-----------------------|--------|
| George B. DeHuff |   | 4,432,722 |   | 137,906                |   | 0                     |   |
| Daniel Holland   |   | 4,432,762 |   | 137,866                |   | 0                     |   |

 

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James C. Blair and John R. Lyon, whose terms as Directors of ourcompany expire at our 2004 Annual Meeting of Stockholders, and Scott R.Pancoast and Larry M. Osterink, whose terms as Directors of our company expireat our 2005 Annual Meeting of Stockholders, continue to serve as Directors ofour company until their respective terms expire and were not voted upon at theAnnual Meeting.

 

c.             Atthe Annual Meeting, a proposal to amend the Company’s 1997 Stock Option/StockIssuance Plan (“The Plan”) to increase the number of shares of Common Stockreserved for issuance under the Plan by an additional 200,000 shares was approved.  The number of votes cast for and against, aswell as the number of abstentions and broker non-votes relating to such proposal, are indicated below:

 
| **For**   |   | **Against** |   | **Abstentions** |   | **Broker  Non-Votes** |   |
|-----------|--------|-------------|--------|-----------------|--------|-----------------------|--------|
| 3,450,441 |   | 1,119,088   |   | 1,099           |   | 0                     |   |

 

d.             Atthe Annual Meeting, a proposal to amend the Company’s 1997 Employee StockPurchase Plan (the “Purchase Plan”) which will increase the number of shares ofCommon Stock authorized for issuance over the term of the Purchase Plan by anadditional 50,000 shares was approved. The number of votes cast for and against, as well as the number ofabstentions and  broker non-votesrelating to such proposal, are indicated below:

 
| **For**   |   | **Against** |   | **Abstentions** |   | **Broker  Non-Votes** |   |
|-----------|--------|-------------|--------|-----------------|--------|-----------------------|--------|
| 4,551,952 |   | 17,639      |   | 1,037           |   | 0                     |   |

 

e.             Atthe Annual Meeting, a proposal to ratify the appointment of Ernst & YoungLLP as our independent auditors for fiscal 2003 was approved.  The number of votes cast for and against, aswell as the number of abstentions and broker non-votes relating to such proposal, are indicated below:

 
| **For**   |   | **Against** |   | **Abstentions** |   | **Broker  Non-Votes** |   |
|-----------|--------|-------------|--------|-----------------|--------|-----------------------|--------|
| 4,567,912 |   | 1,604       |   | 1,112           |   | 0                     |   |

 

Item 5.    Other Information

 

None.

 

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Item 6.    Exhibits and Reports on Form 8-K

 
| A)     | Exhibits |
|--------|----------|
|   |     |   |
|   | 3.1 (1)  | Second Restated  Certificate of Incorporation |
|   | 3.2 (2)  | Certificate of  Amendment of Second Restated Certificate of Incorporation |
|   | 3.3 (3)  | Restated Bylaws |
|   | 4.1 (3)  | Form of Certificate for  Common Stock |
|   | 31.1     | Certification of the  Chief Executive Officer pursuant to rules 13a-14 and 15d-14 (as adopted  pursuant to Section 302 of the Sarbanes – Oxley Act of 2002) |
|   | 31.2     | Certification of the  Chief Financial Officer pursuant to rules 13a-14 and 15d-14 (as adopted  pursuant to Section 302 of the Sarbanes – Oxley Act of 2002) |
|   | 32.1     | Certification of the  Chief Executive Officer pursuant to 18 U.S.C Section 1350 (as adopted  pursuant to Section 906 of the Sarbanes – Oxley Act of 2002) |
|   | 32.2     | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (as adopted  pursuant to Section 3906 of the Sarbanes – Oxley Act of 2002) |
|        |          |  |  |

 

----

|   | *      | Furnished herewith.                                                                                       |
|--------|--------|-----------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                      |
|   | (1)    | Incorporated by  reference to our Form 10-K/A filed on September 10, 1998                                 |
|   |   |                                                                                                      |
|   | (2)    | Incorporated by  reference to our Form 10-Q filed on November 14, 2001.                                   |
|   |   |                                                                                                      |
|   | (3)    | Incorporated by  reference to our Registration Statement on Form S-1, as amended, Filed on  July 2, 1997. |

 

B)      Reports on Form 8-K

 

A Form 8-K was filed by the Company on July 29, 2003, which attached apress release setting forth certain unaudited financial information withrespect to our quarter ended June 30, 2003.

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   |                                                           |   |             |                  | VISTA MEDICAL  TECHNOLOGIES, INC.                                                                                                  |
|--------|----------------------------------------------------------------|--------|------------------|-----------------------|------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                           |   |             |                  |                                                                                                                               |
|   |                                                           |   |             |                  |                                                                                                                               |
| Date:  | August 14, 2003                                                |   | /s/ John R. Lyon |                  |
|   | John R. Lyon  President, Chief Executive Officer and  Director |
|   |                                                           |   |             |                  |                                                                                                                               |   |   |
|   |                                                           |   |             |                  |                                                                                                                               |   |   |
| Date:  | August 14, 2003                                                |   |             | /s/ Stephen A. Gorgol |                                                                                                                               |
|   |                                                           |   |             |                  | Stephen A. Gorgol  Vice President of Finance, Chief Financial  Officer and Secretary  (Principal financial and accounting officer) |
|        |                                                                |        |                  |                       |                                                                                                                                    |  |  |  |  |  |

 

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