<PAGE>


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


                                     FORM 10-Q  

(Mark One)  

[ X ]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
        THE SECURITIES EXCHANGE ACT OF 1934
        FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998  


                                      OR  

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

        FOR THE  TRANSITION PERIOD FROM _______________ TO _________________.   


                          COMMISSION FILE NUMBER  0-22743   

                          VISTA MEDICAL TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)    

          DELAWARE                                      94-3184035
(State or other jurisdiction of                      (I.R.S. Employer
 incorporation or organization)                      Identification No.)  

                           5451 AVENIDA ENCINAS, SUITE A
                                  CARLSBAD, CA  92008
                        (Address of principal executive offices)
                                     (760) 603-9120
                    (Registrant's phone number, including area code)  

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS 
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS:    

(1)      YES [X]        NO [   ] (2)      YES [X]        NO [   ]   

As of November 13, 1998 there were 13,572,101 shares of $.01 par value common
stock outstanding.  
 

                                       -1-



<PAGE>


                          VISTA MEDICAL TECHNOLOGIES, INC.
                                    FORM 10-Q
                                TABLE OF CONTENTS  


<TABLE>

<S>       <C>                                                               <C>
PART I.   FINANCIAL INFORMATION    
   
Item 1.   Financial Statements    
   
              Consolidated Balance Sheets  . . . . . . . . . . . . . . . .  3
              Consolidated Statements of Operations. . . . . . . . . . . .  4
              Consolidated Statements of Cash Flows  . . . . . . . . . . .  5
              Notes to Consolidated Financial Statements . . . . . . . . .  6
   
Item 2.   Management's Discussion and Analysis    
              of Financial Condition and Results of Operations . . . . . .  7
   
PART II.  OTHER INFORMATION   
   
Item 2.   Changes in Securities and Use of Proceeds. . . . . . . . . . . . 21
 
Item 6.   Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 21
   
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>


                                      -2-

<PAGE>




PART 1.   FINANCIAL INFORMATION  

Item 1.   Financial Statements  

VISTA MEDICAL TECHNOLOGIES, INC. Consolidated Balance Sheets
 

<TABLE>
<CAPTION>
                                                            September 30, 1998   December 31, 1997   
                                                            ------------------   -----------------   
                                                                (Unaudited)   
<S>                                                         <C>                  <C>
ASSETS
Current assets:      
   Cash and cash equivalents . . . . . . . . . . . . . . . .   $  5,691,054      $  7,328,502   
   Short-term investments & securities available for sale. .      5,452,870        16,784,345   
   Accounts receivable . . . . . . . . . . . . . . . . . . .      1,615,539           521,616   
   Inventories . . . . . . . . . . . . . . . . . . . . . . .      4,737,680         3,344,967   
   Other current assets. . . . . . . . . . . . . . . . . . .        201,153           261,864   
                                                                -----------      ------------   
Total current assets . . . . . . . . . . . . . . . . . . . .     17,698,296        28,241,294   
Property and equipment, net. . . . . . . . . . . . . . . . .      2,373,794         3,327,283   
Patents and other assets . . . . . . . . . . . . . . . . . .        240,932           561,873   
                                                                -----------      ------------   
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . .   $ 20,313,022      $ 32,130,450   
                                                                -----------      ------------   
                                                                -----------      ------------   
   
LIABILITIES AND STOCKHOLDERS' EQUITY       
Current liabilities:      
   Accounts payable. . . . . . . . . . . . . . . . . . . . .   $    677,607      $  1,217,110   
   Accrued compensation. . . . . . . . . . . . . . . . . . .        382,282           516,743   
   Accrued liabilities . . . . . . . . . . . . . . . . . . .      1,195,318           665,285   
                                                                -----------      ------------   
Total current liabilities. . . . . . . . . . . . . . . . . .      2,255,207         2,399,138   
      
Commitments      
Stockholders' equity:. . . . . . . . . . . . . . . . . . . .                     
   Convertible preferred stock, $.01 par value:      
      Authorized shares - 5,000,000. . . . . . . . . . . . .      
      Issued and outstanding shares - no shares outstanding      
      on December 31, 1997 or September 30, 1998 . . . . . .             --                --   
   Common stock, $.01 par value:      
      Authorized shares - 35,000,000 . . . . . . . . . . . .                     
      Issued and outstanding shares - 13,407,038 on      
      December 31, 1997 and 13,565,538 on September 30, 1998        135,655           134,071   
   Additional paid-in capital. . . . . . . . . . . . . . . .     62,823,755        62,531,513   
   Notes receivable from stockholders. . . . . . . . . . . .        (78,375)          (78,375)   
   Deferred compensation . . . . . . . . . . . . . . . . . .     (1,161,545)       (1,942,074)   
   Unrealized gains/loss on investments. . . . . . . . . . .          3,449          (416,313)   
   Accumulated deficit . . . . . . . . . . . . . . . . . . .    (43,665,124)      (30,497,510)   
                                                                -----------      ------------   
Total stockholders' equity . . . . . . . . . . . . . . . . .     18,057,815        29,731,312   
                                                                -----------      ------------   
TOTAL LIABILITIES AND STOCKHOLDERS'      
 EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . .   $ 20,313,022      $ 32,130,450   
                                                                -----------      ------------   
                                                                -----------      ------------   
</TABLE>

Note: The balance sheet at December 31, 1997 has been derived from the  
audited financial statements at that date but does not include all of the 
information  and footnotes required by generally accepted accounting 
principles for complete financial statements.  

                              See accompanying notes  



                                      -3-


<PAGE>



 VISTA MEDICAL TECHNOLOGIES, INC.
   Consolidated Statements of Operations
                (Unaudited)


<TABLE>
<CAPTION>
                                        Three Months Ended September 30,     Nine Months Ended September 30,
                                        -------------------------------      ------------------------------   
                                              1998          1997                  1998            1997   
                                        --------------   --------------      -------------    -------------   
<S>                                     <C>              <C>                 <C>              <C> 
                                                                                                              
 Sales................................. $   1,324,639    $   1,228,666       $   5,638,880    $   2,563,328   
 Costs and expenses:   
    Cost of sales......................     1,388,977        1,547,175           4,997,012        3,138,103   
    Research and development...........     1,173,766        1,793,068           4,361,091        4,860,991   
    Sales and marketing................     1,242,488        1,493,546           4,688,272        3,195,445   
    General and administrative.........     1,062,779        1,327,471           3,922,412        3,671,971   
    Restructuring expense..............            --               --             939,919               --   
                                        -------------    -------------       -------------    -------------   
Total cost and expenses................     4,868,010        6,161,260          18,908,706       14,866,510   
                                        -------------    -------------       -------------    -------------   
Loss from operations...................    (3,543,371)      (4,932,594)        (13,269,826)     (12,303,182)   
 
License expense........................            --         (249,993)                 --         (249,993)
 
Interest income........................       181,256          416,615             764,302          560,375
   
Other losses...........................       (24,090)              --            (662,090)              --   
   
Net loss............................... $  (3,386,205)   $  (4,765,972)      $ (13,167,614)   $ (11,992,800)   
                                        -------------    -------------       -------------    -------------   
                                        -------------    -------------       -------------    -------------   
   
Basic and diluted loss per share....... $       (0.25)   $       (0.37)      $       (0.99)   $       (2.63)   
                                        -------------    -------------       -------------    -------------   
                                        -------------    -------------       -------------    -------------   
   
 Shares used in computing basic and   
   diluted loss per share..............    13,342,758       12,953,565          13,283,583        4,557,660   
</TABLE>




                               See accompanying notes 


                                       -4-

<PAGE>



VISTA MEDICAL TECHNOLOGIES, INC.
    Consolidated Statements of Cash Flows
                (Unaudited)  

<TABLE>
<CAPTION>
                                                               Nine Months Ended September 30,   
                                                               ------------------------------   
                                                                   1998             1997   
                                                               -------------    -------------   
<S>                                                            <C>              <C>          
OPERATING ACTIVITIES      
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . .    $(13,167,614)   $(11,992,800)   
Adjustments to reconcile net loss to net cash used for                                
   operating activities:      
      Depreciation and amortization. . . . . . . . . . . . .       1,490,747         689,060      
      Amortization of premium on short term investments. . .         124,320              --      
      Stock issued for services rendered . . . . . . . . . .              --          20,010      
      Amortization of deferred compensation. . . . . . . . .         675,914         773,399      
      Loss on disposal of fixed assets . . . . . . . . . . .         290,410              --   
      Write down for impairment on available for sale   
        securities . . . . . . . . . . . . . . . . . . . . .         662,090              --   
      Common stock issued in exchange for license agreement.              --         249,993
      Changes in operating assets and liabilities,                                    
        net of effect of acquisitions:      
               Accounts receivable . . . . . . . . . . . . .      (1,093,923)       (588,598)  
               Inventories . . . . . . . . . . . . . . . . .      (1,392,713)     (2,619,965)   
               Other current assets. . . . . . . . . . . . .         301,363        (207,771)   
               Accounts payable. . . . . . . . . . . . . . .        (539,503)        998,827   
               Accrued compensation. . . . . . . . . . . . .        (134,461)        207,081   
               Accrued liabilities . . . . . . . . . . . . .         665,505         560,637   
                                                                  ----------      ----------   
Net cash flows used for operating activities . . . . . . . .     (12,117,865)    (11,910,127)   
   
INVESTING ACTIVITIES   
Purchases of short-term investments. . . . . . . . . . . . .      (2,140,526)    (21,859,097)   
Maturities of short-term investments . . . . . . . . . . . .      13,200,196              --   
Purchase of property and equipment . . . . . . . . . . . . .        (842,861)     (2,302,185)   
                                                                  ----------      ----------   
Net cash flows provided by (used for) investing activities .      10,216,809     (24,161,282)   
                                                                                      
FINANCING ACTIVITIES                                                                  
Issuance of common stock . . . . . . . . . . . . . . . . . .         263,608      32,642,338   
                                                                  ----------      ----------   
Net cash flows provided by (used in) financing activities. .         263,608      32,642,338    

Net (decrease) increase in cash and cash equivalents . . . .      (1,637,448)     (3,429,071)   
Cash and cash equivalents at beginning of period . . . . . .       7,328,502      10,119,529   
                                                                  ----------      ----------   
Cash and cash equivalents at end of period . . . . . . . . .      $5,691,054      $6,690,458   
                                                                  ----------      ----------   
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                     
Cash paid for interest . . . . . . . . . . . . . . . . . . .      $      769      $      196   
                                                                  ----------      ----------   
                                                                  ----------      ----------   
</TABLE>

                                See accompanying notes 



                                      -5-

<PAGE>


                           VISTA MEDICAL TECHNOLOGIES, INC. 
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                     (UNAUDITED)  

1.   Basis of Presentation  

     The Audited Financial Statements of Vista Medical Technologies, Inc. (the
"Company") and the notes thereto for the year ended December 31, 1997 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission, contain additional information about the Company, its
operations, and its financial statements and accounting practices, and should be
read in conjunction with this quarterly report on Form 10-Q.  These unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and with the instructions on Form 10-Q
except that certain information and footnote disclosures normally contained in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted.   

     The accompanying unaudited consolidated financial statements of the Company
reflect all adjustments of a normal recurring nature which are, in the opinion
of management, necessary for a fair presentation of the financial position,
results of operations and cash flows for all periods presented.  The interim
financial information contained herein is not necessarily  indicative of results
for any future interim periods or for the full fiscal year ending  December 31,
1998.    

2.   Computation of Net Loss Per Share  

     In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share," (SFAS 128) which replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share. 
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.  Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share.  All earnings per share amounts for all periods have been
restated to conform to SFAS 128 and the requirements of the recently effective
Staff Accounting Bulletin No. 98.  

     Recent interpretations by the Securities and Exchange Commission have
altered the treatment of preferred stock previously included in computing
certain earnings per share data.  The Company previously considered preferred
stock as outstanding in pre-IPO periods from the date of original issuance in
computing earnings per share.  To conform with the recent interpretations, the
Company has revised its calculation of earnings per share for all pre-IPO
periods to exclude the impact of preferred shares.  

3.   New Accounting Standard  

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Segment  Information." 
Both of these standards are effective for fiscal years  beginning after December
15, 1997.  SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized.  Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources.  Net income and other comprehensive income, including foreign
currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income.   The Company believes that comprehensive income or loss
will not be materially different than net income or loss.  SFAS No. 131 amends
the requirements for public enterprises to report financial and descriptive
information about its reportable operating segments.  Operating segments, as
defined by 


                                       -6-


<PAGE>

SFAS No. 131, are components of an enterprise for which financial information 
is available and evaluated regularly by the Company in deciding how to 
allocate resources and in assessing performance.  This financial information 
is required to be reported on the basis that it is used internally for 
evaluating the segment performance.  The Company believes it operates in one 
business and operating segment and that adoption of SFAS No. 131 will not 
have a material impact on the Company's financial statements.    

4.   Inventories     

  
          <TABLE>
          <CAPTION>
                                     September 30, 1998     December 31, 1997 
                                     ------------------     ----------------- 
                                         (Unaudited)   
          <S>                        <C>                    <C>
          Parts and materials........   $ 3,041,707             $ 1,977,878    
          Work in process............       721,652                 662,237    
          Finished goods.............       974,321                 704,852    
                                         -----------            -----------
                                         $ 4,737,680            $ 3,344,967 
                                         -----------            -----------
                                         -----------            -----------
          </TABLE>

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

     THIS QUARTERLY REPORT MAY CONTAIN PREDICTIONS, ESTIMATES AND OTHER 
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, 
INCLUDING THOSE DISCUSSED BELOW AT "RISKS AND UNCERTAINTIES."  WHILE THIS 
OUTLOOK REPRESENTS MANAGEMENT'S CURRENT JUDGMENT ON THE FUTURE DIRECTION OF 
THE BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO 
DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED BELOW.  THE COMPANY 
UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO 
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING 
AFTER THE DATE HEREOF.  THE FOLLOWING DISCUSSION SHOULD BE READ IN 
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO 
INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q AND THE COMPANY'S 
1997 ANNUAL REPORT ON FORM 10-K, FILED WITH THE SECURITIES AND EXCHANGE 
COMMISSION. 

Overview 

     The Company develops, manufactures and markets proprietary visualization
and information systems that enable minimally invasive surgical solutions in
cardiothoracic, head, neck and spine ("HNS") and other selected microsurgical
procedures.  The Company also markets endoscopic cameras and related surgical
instruments and accessories and has generated minimal revenues from the sales of
these products since its formation in July 1993.  The Company expects to
continue to incur substantial losses for at least the next 12 months.  As of
September 30, 1998, the Company's accumulated deficit was approximately $43.7
million.   

Results of Operations  

     Sales.  The Company had revenues of $1,325,000 and $5,639,000 for the
three- and nine-months ended September 30, 1998, respectively, compared to
$1,229,000 and $2,563,000 for the same periods in 1997.  The increase in revenue
for the three-month period was due to (i) sales of new and existing Series 8000
Advanced Visualization and Information Systems for minimally invasive cardiac
surgery to Medtronic, Inc. ("Medtronic") the Company's strategic partner and
exclusive distributor in cardiac in all of the worlds major markets and (ii)
sales of StereoSite systems to Sofamor Danek, L.P. ("Sofamor Danek"), the
Company's strategic partner and exclusive distributor for the HNS market offset
by (iii) lower sales of the Company's OEM products and discontinuation of
distribution of several non-core instrument and suture product lines announced
at the end of the second quarter. The 


                                       -7-

<PAGE>


increase in revenue for the nine-month period was due to increased volume 
of (i) sales of StereoSite systems and associated distribution fees paid by 
Sofamor Danek and (ii) sales of Series 8000's for minimally invasive cardiac 
surgery.  

     Cost of Sales.  The Company's cost of sales were $1,389,000 and 
$4,997,000 for the three- and nine-months ended September 30, 1998, 
respectively, and $1,547,000 and $3,138,000 for the three- and nine-months 
ended September 30, 1997, respectively. The decrease for the three-month 
period was primarily due to completion of manufacturing scale-up offset by 
costs corresponding to the growth in revenues from product sales   The 
increase for the nine-month period was primarily due to costs corresponding 
to the growth in revenues from product sales. Such costs were partially 
offset by completion of manufacturing scale-up.

     Research and Development Expenses.  Research and development expenses 
were $1,174,000 and $4,361,000 for the three- and nine-months ended September 
30, 1998, respectively, compared to $1,793,000 and $4,861,000 for the 
corresponding periods in 1997.  The decrease in research and development 
expenses for both the three- and nine-month periods was primarily 
attributable to decreases in staffing and related supply and occupancy costs 
as well as a decrease in contract services related to development efforts.  
The Company believes that a significant level of investment for product 
development and evaluation is necessary to remain technologically competitive 
and anticipates that it will continue its spending in research and 
development at or above current levels in the near term.   

     Sales and Marketing Expenses.  Sales and marketing expenses were 
$1,242,000 and $4,688,000 for the three- and nine-months ended September 30, 
1998, respectively, compared to $1,494,000 and $3,195,000 for the 
corresponding periods in 1997.  The decrease in sales and marketing expense 
for the three-month period reflects the transition of all sales, marketing 
and distribution efforts associated with the Company's Series 8000 for 
minimally invasisve cardiac surgery in the United States to Medtronic 
following an agreement announced at the end of June 1998.  The increase in 
sales and marketing expense for the nine-month period was attributable to the 
Company's  expansion of its sales force and increased marketing efforts 
associated with commercialization of new products and physician training 
costs incurred prior to the announcement of the agreement with Medtronic at 
the end of the second quarter.  The Company expects that its sales and 
marketing expenses will remain near current levels in the near term 
as it completes the transition of its sales and marketing efforts in 
connection with the Series 8000 in the United States to Medtronic.  

     General and Administrative Expenses.  The Company's general and 
administrative expenses were $1,063,000 and $3,922,000 for the three- and 
nine-months ended September 30, 1998, respectively, compared to $1,327,000 
and $3,672,000 for the corresponding periods in 1997.  The decrease in 
expenses in the three-month period compared to the prior year was primarily 
due to a reduction in deferred compensation, lower professional, legal and 
consulting service fees, and a reduction in staffing and related expenses and 
costs following a second quarter restructuring.  The increase in expenses for 
the nine-month period was primarily due to increases in staffing and related 
expenses prior to the restructuring at the end of the second quarter of 1998, 
and increased costs associated with being a public company.  The Company 
expects its general and administrative expenses to be relatively flat in the 
near term as the impact of the restructuring takes effect and offsets 
increased costs associated with being a public company.  

     Restructuring Expenses.  The Company recorded restructuring charges 
during the second calendar quarter of 1998 of $940,000 which are included in 
the expenses for the nine-months ended September 30, 1998, and had no such 
expenses for the corresponding period of 1997.  The restructuring expenses 
related primarily to termination and severance payments to employees in 
connection with transfer of sales and marketing responsibility in the United 
States for the Company's Series 8000 System for minimally invasive cardiac 
surgery to Medtronic, termination and severance payments to employees in 
connection with a general Company restructuring and work force reduction, and 
write down of assets related to a strategic decision to discontinue 
distribution of a line of cardiac instrument and sutures earlier than 
previously planned.  


                                       -8-


<PAGE>


     Interest Income.  The Company had net interest income of $181,000 and
$764,000 for the three- and nine-month periods ended September 30, 1998,
respectively, compared to $417,000 and $560,000 for the corresponding periods in
1997.  The decrease during the three-month period was due to decreasing average
investment balances and lower average returns on the investments than the year
earlier period while the increase for the nine-month period was due primarily to
increasing average investment balances of the Company's excess cash following
the Company's initial public offering ("IPO").  

     Other Losses.  The Company recorded other losses of $24,000 and $662,000
for the three- and nine-month periods ended September 30, 1998 and had no such
losses for the corresponding periods in 1997.  The losses for both the three-
and nine-month periods relate to recognition of a permanent reduction in value
of securities the Company received in connection with an earlier license
agreement with Imagyn Medical Technologies, Inc. (formerly Urohealth Systems,
Inc.).  

Liquidity and Capital Resources  

     The Company completed its IPO in July 1997, raising approximately $32.8
million net of offering costs.  Prior to the IPO, the Company satisfied its
liquidity requirements from the private sale of common and preferred stock,
through advances from a related party, and from the proceeds from licensing
certain of the Company's technology.  

     Net cash used in operating activities for the nine-months ended 
September 30, 1998 was $12,118,000 compared to net cash used of $11,910,000 
for the corresponding nine-month period in 1997.  The increase in net cash 
used in operating activities was primarily attributable to the increasing net 
losses during the 1998 period and increasing payments on accounts payable 
offset by lower inventory purchases and higher non-cash expenses for 
depreciation and amortization and asset write-downs during the 1998 period.  

     Net cash provided by investing activities was $10,217,000 for the 
nine-months ended September 30, 1998 compared to $24,161,000 of net cash used 
in the same period in 1997.  The net cash provided by investing activities in 
1998 was primarily attributable to maturities of short-term investments and 
the net cash used in 1997 was primarily attributable to the purchase of short 
term investments and the purchase of property and equipment related to 
increased staffing, expansion of manufacturing capabilities, and marketing 
demonstrations. 
  

     Net cash provided by financing activities was $264,000 for the 
nine-months ended September 30, 1998 compared to net cash provided by 
financing activities of $32,642,000 for the same period in 1997.  The net 
cash provided by financing activities in 1998 was primarily attributable to 
proceeds from the purchase of stock by employees through the Company's 
employee stock purchase plan and the exercise of stock options while the net 
cash provided in the 1997 period was primarily attributable to proceeds from 
the Company's IPO.    

     As of September 30, 1998, the Company's strategic partner, Medtronic,
accounted for approximately 55% of the outstanding receivables and Aesculap AG
and Heartport, Inc. accounted for approximately 24% and 6%, respectively.  

     In October 1997, the Company completed a $10.0 million Loan and Security 
Agreement ("Loan Agreement") to finance the placement with customers of its 
Series 8000 product on a pay per procedure basis rather than through an 
upfront capital payment.  As of September 30, 1998 there were no outstanding 
balances under the agreement.  On June 29, 1998, the Company announced a new 
distribution agreement with Medtronic, whereby Medtronic will distribute the 
Series 8000 for the Company in the United States.  The terms of that 
agreement call for Medtronic to pay Vista for units placed with the companies 
then sharing in the gross margins generated by procedure fees.  The Company 
believes that this agreement effectively replaces the Loan Agreement, which 
expires in October 1998, and that the Company will not draw down on the loan. 
If the Company were to borrow funds pursuant to the Loan Agreement, it could 
borrow up to $10.0 million at one time with an interest rate of prime plus 
one and one half percent.  


                                       -9-


<PAGE>


     The Company anticipates that the net proceeds from the IPO completed in
July 1997 and the interest income thereon, together with existing cash, cash
equivalents and short-term investments, and product revenues, will be sufficient
to fund its operations through at least the first quarter of 1999.  

     The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's systems to process data
having dates on or after January 1, 2000 (the "Year 2000" issues).  Processing
errors due to software failure arising from calculations using the Year 2000
date are a recognized risk.  The Company is currently addressing the risk, with
respect to the availability and integrity of its financial systems and the
reliability of its operating systems, and is in the process of communicating
with suppliers, customers, financial institutions and others with whom it
conducts business transactions to assess  whether they are Year 2000 compliant.

     The Company has an established Year 2000 Compliance Team made up of members
of all of the Company's functional organizations and management and is currently
implementing a full Year 2000 Compliance Program.  The Company is nearing
completion of the assessment phase of all of its operations and business
activities and is in the conversion and testing phase of certain of those
operations and business activities at this time.  As a result of the assessment
completed to date, the Company believes that adequate remediation exists for
those systems and processes which have been identified as currently non-Year
2000 compliant.  Furthermore, the Company currently estimates that the cost of
the Year 2000 initiative to be executed by the Company will not exceed the
$100,000 to $150,000 range, a significant portion of which was scheduled for
upgrade irrespective of the Year 2000 issue, and is therefore not expected to be
material to the Company's results of operations or financial position. 

Risks and Uncertainties  

     THE FOLLOWING ARE AMONG THE FACTORS THAT SHOULD ALSO BE CONSIDERED
CAREFULLY IN EVALUATING VISTA MEDICAL TECHNOLOGIES AND ITS BUSINESS.    

     DEVELOPMENT STAGE COMPANY; SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL 
REQUIREMENTS.  Since its formation in July 1993, the Company has been engaged in
the development of visualization and information systems and related surgical
instruments and accessories that enable minimally invasive microsurgery ("MIM")
solutions for applications in cardiothoracic and other selected microsurgical
procedures and in manufacturing and marketing limited quantities of camera
systems to customers as an OEM.  As of September 30, 1998, the Company had
incurred cumulative net losses of approximately $43.7 million since its
formation.  The Company expects to incur substantial additional operating losses
before it will reach profitability, if at all.  There can be no assurance that
the Company will achieve or sustain profitability in the future.  Failure to
achieve significant commercial revenues or profitability would have a material
adverse effect on the Company's business, financial condition and results of
operations.  

     The Company's future liquidity and capital requirements will depend upon
numerous factors, including the following: the extent to which the Company's
products gain market acceptance; the efforts of the Company's distribution
partners; the progress and scope of product evaluations;  the timing and costs
of filing future regulatory submissions; the timing and costs required to
receive both domestic and international governmental approvals; the timing and
costs of product introductions; the extent of the Company's ongoing research and
development programs; the costs of training physicians to become proficient in
the use of the Company's products and procedures; and the costs of developing
marketing and distribution capabilities. The Company anticipates that the net
proceeds from the IPO completed in July 1997 and the interest income  thereon,
together with existing cash, cash equivalents and short-term investments, and
product revenues, will be sufficient to fund its operations through at least the
first quarter of 1999.  The Company will likely require additional financing. 
There can be no assurance that such additional financing will be available on
terms acceptable to the Company, if at all. The Company's inability to fund its
capital and operational requirements would have a material adverse effect on the
Company's business, financial condition and results of operations.  


                                       -10-


<PAGE>



     DEPENDENCE UPON AND UNCERTAINTY REGARDING COMMERCIALIZATION OF SERIES 8000
AND STEREOSITE.  The Series 8000 for minimally invasive cardiac surgery and
StereoSite systems for head, neck and spine microsurgery are expected to account
for the majority of the Company's revenues over the next several years.  There
can be no assurance that demand for the Series 8000 and StereoSite will be
sufficient to achieve profitable operations.  

     Development of certain additional components of the Series 8000 has not yet
been completed and additional versions of StereoSite have yet to be finally
developed. There can be no assurance that the Company's development efforts for
these products will be successful, or that the Company's other products under
development will be shown to be safe or effective, capable of being manufactured
in commercial quantities at acceptable costs, acquire appropriate regulatory
clearances or be successfully marketed.  

     Evaluations of the Series 8000 and StereoSite conducted to date have shown
that there is a learning process involved for surgeons and other members of the
surgery team to become proficient with the use of the systems.  Based on the
clinical and laboratory procedures performed to date, there can be no assurance
that visualization and information system enhancements incorporated, or to be
incorporated, in the Series 8000 and StereoSite will prove suitable for use by a
substantial number of surgeons.  If the Series 8000 and StereoSite prove
unsuitable for a number of surgeons to use, the potential markets and
applications for the Company's products would be significantly limited.
Widespread use of the Series 8000 and StereoSite will require training of a
large number of surgeons, and the time required to institute a training program
and to train such surgeons could adversely affect market acceptance.  Failure to
successfully commercialize the Series 8000 and StereoSite would have a material
adverse effect on the Company's business, financial condition and results of
operations.  

     UNCERTAINTY OF CLINICAL ADOPTION OF MINIMALLY INVASIVE MICROSURGICAL
PROCEDURES. The Company's near-term products are being developed in order to
enable cardiothoracic and HNS surgeons to perform Minimally Invasive
Microsurgical ("MIM") surgical procedures using their existing skills coupled
with training and complementary equipment being developed by other companies.
Accordingly, the Company's success is dependent upon acceptance of these
procedures by the medical community as a reliable, safe and cost effective
alternative to existing treatments.  To date, MIM surgical procedures have only
been performed on a very limited basis by a small number of highly skilled
surgeons.  The Company is unable to predict how quickly, if at all, MIM surgical
procedures will be adopted by the medical community or, if they are adopted, the
number of procedures that will be performed.  

     Most patients with cardiovascular disease first consult with a 
cardiologist, who then may treat the patient with pharmaceuticals or 
non-surgical interventions, such as angioplasty and intravascular stents, or 
refer the patient to a cardiac surgeon for open-chest coronary artery bypass 
graft ("CABG") surgery.  Cardiologists may not recommend MIM procedures until 
such time, if at all, as such procedures can successfully be demonstrated to 
be as safe and cost-effective as other accepted treatments.  In addition, 
cardiac surgeons may choose not to recommend MIM procedures until such time, 
if at all, as such procedures are proven to be as efficacious as 
conventional, open-chest surgery methods, which have become widely adopted by 
cardiac surgeons since the initial use of such surgery in the mid-1950s.  

     Even if the clinical efficacy of MIM procedures is established in 
cardiac and other specialties, surgeons, specialists and other physicians may 
choose not to recommend the procedures for any number of other reasons.  
Clinical adoption will depend, for example, upon the Company's ability to 
facilitate training of surgeons to perform MIM surgery and the willingness of 
such surgeons to perform such procedures.  Physicians may similarly elect not 
to recommend the MIM procedure based on possible unavailability of acceptable 
reimbursement from health care payors.  Health care payor acceptance may 
require evidence of the cost effectiveness of MIM procedures as compared to 
other currently available treatments.  The Company believes that physician 
endorsements will be essential for clinical adoption of MIM procedures, and 
there can be no assurance that any such endorsements will be obtained in a 
timely manner, if at all.  Patient acceptance of the procedure will depend 
upon such physician recommendations, as well as other factors, including the 
effectiveness of, and the rate and severity of complications associated with, 
the procedure as compared to other treatments.

                                       -11-


<PAGE>


     There can be no assurance that MIM procedures will gain clinical adoption.
Failure of these procedures to achieve significant clinical adoption would have
a material adverse effect on the Company's business, financial condition and
results of operations.  

     DEPENDENCE ON MEDTRONIC AND SOFAMOR DANEK.  The Company has organized its
sales and marketing efforts through the Company's CardioThoracic Surgery and HNS
Microsurgery divisions.  Pursuant to a recently announced sales agreement, the
products of the Company's Cardiothoracic Surgery division will be sold by
Medtronic's sales force in most of the world's significant markets, including
the United States. The products of the Company's HNS Microsurgery division will
be sold worldwide via Sofamor Danek's sales force.  

     The Company is directly dependent on its agreements with Medtronic and
Sofamor Danek for sales of the majority of its products.  The termination of
these relationships could have a material adverse effect on the Company. 

     Medtronic is the world's leading medical technology company specializing in
implantable and interventional therapies.  Medtronic manufactures products in
the United States, Europe and Asia and sells its products to hospitals and
surgeons worldwide.  Pursuant to a June 29, 1998 sales agreement between
Medtronic and the Company, the Company appointed Medtronic as its exclusive
distributor for current and future visualization and information systems for
cardiothoracic surgery in the United States, Europe, Japan and several other
significant geographical regions.  There can be no assurance that Medtronic will
commit significant resources to market the Company's Series 8000 System or that
its marketing efforts will be effective.  

     Sofamor Danek is engaged in the worldwide development, manufacturing and
distribution of systems for spinal surgery.  Sofamor Danek manufactures products
in the United States and Europe and sells its products to surgeons and hospitals
worldwide. Pursuant to an exclusive distribution agreement between Sofamor Danek
and the Company, the Company appointed Sofamor Danek as its exclusive worldwide
distributor for the Company's current and future visualization and information
systems for neurosurgery, spinal surgery, radiation delivery, otolaryngology and
maxillofacial surgery (the "StereoSite Systems").  There can be no assurance
that Sofamor Danek will commit significant resources to market StereoSite
Systems or that its marketing activities will be effective.  

     The Company and Sofamor Danek also entered into a cooperative technology
agreement, pursuant to which the parties have agreed to work exclusively
together in performing research and development specifically designed to enhance
StereoSite Systems or integrate StereoSite Systems with Sofamor Danek's image
guidance systems and certain other products, including systems and instruments
for spinal surgery.  There can be no assurance that such improvement and
integration of products will be successfully completed.  

     LACK OF COMMERCIAL MANUFACTURING EXPERIENCE; SCALE-UP RISK.  The Company 
lacks experience in manufacturing the products under development, including its
Series 8000 systems for minimally invasive cardiac surgery and StereoSite
systems for HNS microsurgery, in the quantities that would be necessary for the
Company to achieve significant commercial sales.  The manufacture of the
Company's products primarily involves the assembly of a number of sub-assemblies
and components.  Such businesses often encounter difficulties in scaling up
manufacturing of products, which difficulties could include problems involving
quality control and assurance, component and service availability, adequacy of
control policies and procedures, lack of qualified personnel, compliance with
U.S. Food and Drug Administration ("FDA") regulations and the need for further
FDA approval of new manufacturing processes and facilities and other production
constraints.  There can be no assurance that reliable, high-volume manufacturing
can be established or maintained at commercially reasonable costs. The Company
will also require additional manufacturing facilities as production volumes
increase; acquisition of new manufacturing facilities will likely involve
relocation.  Any of these factors could have a material adverse effect on the
Company's business, financial condition and results of operation.  

     The Company has considered and will continue to consider as appropriate,
the internal manufacture of sub-assemblies currently provided by third party
subcontractors, as well as the implementation of new production 


                                       -12-


<PAGE>


processes. There can be no assurance that manufacturing yields or costs will 
not be adversely affected by the transition to in-house production or to new 
production processes when such efforts are undertaken, or that FDA Good 
Manufacturing Practices ("GMP") requirements can be met and that such a 
transition would not materially adversely affect the Company's business, 
financial condition and results of operations.  

     POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY.  The
Company uses or relies on certain components and services used in its systems
that are provided by sole source suppliers.  The manufacture of the Company's
products in larger commercial quantities will require a substantial increase in
component supplies and will likely necessitate the replacement of current
suppliers or the addition of new suppliers.  The qualification of additional or
replacement vendors for certain components or services is a  lengthy process. In
addition, the substitution of replacement vendors may entail re-engineering time
and cost and could delay the supply of the Company's products.    

     The Company expects to manufacture its products based on forecasted product
orders and intends to purchase subassemblies and components prior to receipt of
purchase orders from customers.  Lead times for materials and components ordered
by the Company vary significantly and depend on factors such as the business
practices of the specific supplier, contract terms and general demand for a
component at a given time.  Certain components used in the Company's products
have long lead times.  As a result, there is a risk of excess or inadequate
inventory if orders do not match forecasts.      

     Any significant supply interruption, or inventory shortage or overage,
would have a material adverse effect on the Company's ability to manufacture the
Company's products and, therefore, a material adverse effect on its business,
financial condition and results of operations.      

     NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC  AND
INTERNATIONAL REGULATION.  The manufacture and sale of medical devices intended
for commercial distribution are subject to extensive governmental regulation in
the United States.  Medical devices are regulated in the United States primarily
by the FDA and, to a lesser extent, by certain state agencies.  Generally,
medical devices require pre-market clearance or pre-market approval prior to
commercial distribution.  In addition, certain material changes or modifications
to, and changes in intended use of, medical devices also are subject to FDA
review and  clearance or approval.  The FDA regulates the research, testing,
manufacture, safety, effectiveness, labeling, storage, record keeping, promotion
and distribution of medical devices in the United States and the export of
unapproved medical devices from the United States to other countries. 
Noncompliance with applicable requirements can result in failure of the
government to grant pre-market clearance or approval for devices, withdrawal or
suspension of approval, total or partial suspension of production, fines,
injunctions, civil penalties, refunds, recall or seizure of products and
criminal prosecution.   

     In the United States, medical devices are classified into one of three
classes, Class I, II or III, on the basis of the controls deemed by the FDA to
be necessary to reasonably ensure their safety and effectiveness.  The Company's
products to date have either been classified as Class I or Class II devices.  

     Class I devices are subject to general controls (e.g., establishment 
registration and product listing, labeling, adulteration and misbranding 
provisions and medical device reporting requirements and, unless exempt, to 
pre-market notification and adherence to GMP standards).  Class II devices 
are subject to general controls and special controls (e.g., performance 
standards, post-market surveillance, patient registries and FDA guidelines).  
Generally, Class III devices are those that must receive pre-market approval 
by the FDA to ensure their safety and effectiveness (e.g., life-sustaining, 
life-supporting and implantable or new devices which have not been found to 
be substantially equivalent to legally marketed devices).  Class III devices 
ordinarily require clinical testing to ensure safety and effectiveness and 
FDA approval prior to marketing and distribution.  The FDA also has the 
authority to require clinical testing of Class I and Class II devices.  A 
pre-market approval ("PMA") application must be filed if a proposed device is 
not substantially equivalent to a legally marketed predicate device or if it 
is a Class III device for which the FDA has called for such application.  A 
PMA typically takes several years to be approved by the FDA.   


                                       -13-


<PAGE>


     Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) notification or submission and approval of a PMA application.  If a
medical device manufacturer or distributor can establish that a device is
"substantially equivalent" to a legally marketed Class I or Class II device, or
to a Class III device for which the FDA has not called for a PMA, the
manufacturer or distributor may market the device upon receipt of an FDA order
determining such a device substantially equivalent to a predicate device.  The
510(k) notification may need to be supported by appropriate performance,
clinical or testing data establishing the claim of substantial equivalence. The
FDA requires a rigorous demonstration of substantial equivalence.   

     Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an FDA
substantial equivalence order permitting the marketing of a device is received
by the person who submitted the 510(k) notification.  At this time, the FDA
typically responds to the submission of a 510(k) notification within 90 to 200
days.  An FDA letter may declare that the device is substantially equivalent to
a legally marketed device and allow the proposed device to be marketed in the
United States.  The FDA, however, may determine that the proposed device is not
substantially equivalent or require further information, including clinical
data, to make a determination regarding substantial equivalence.  Such
determination or request for additional information will delay market
introduction of the product that is the subject of the 510(k) notification.  

     All clinical investigations involving the use of an unapproved or uncleared
device on humans to determine the safety or effectiveness of the device must be
conducted in accordance with the FDA's investigational device exemption ("IDE")
regulations.  If the device presents a "significant risk," the manufacturer or
distributor of the device is required to file an IDE application with the FDA
prior to commencing human clinical trials.  The IDE application must be
supported by data, typically the result of animal and bench testing.  If the IDE
application is approved by the FDA, human clinical trials may begin at a
specific number of investigational sites with a maximum number of patients, as
approved by the FDA.  If the device presents a "non-significant risk," approval
by an Institutional Review Board prior to commencing human clinical trials is
required, as well as compliance with labeling, record keeping, monitoring and
other requirements.  However, the FDA can disagree with a non-significant risk
device finding.  

     Any products manufactured or distributed by the Company are subject to
continuing regulation by the FDA, which includes record keeping requirements,
reporting of adverse experience with the use of the device, GMP requirements and
post-market surveillance, and may include post-market registry and other actions
deemed necessary by the FDA.  A new 510(k), PMA or PMA supplement is also
required when a medical device manufacturer makes a change or modification to a
legally marketed device that could significantly affect the safety or
effectiveness of the device, or where there is a major change or  modification
in the intended use of the device or a new indication for use of the device. 
When any change or modification is made to a device or its intended use, the
manufacturer is expected to make the initial determination as to whether the
change or modification is of a kind that would necessitate the filing of a new
510(k), PMA or PMA supplement.       

     Sales of medical device products outside the United States are subject 
to foreign regulatory requirements that vary from country to country.  The 
time required to obtain approvals required by foreign countries may be longer 
or shorter than that required for FDA clearance, and requirements for 
licensing may differ from FDA requirements.  Failure to comply with 
regulatory requirements could have a material adverse effect on the Company's 
business, financial condition and results of operations.  The current 
regulatory environment in Europe for medical devices differs significantly 
from that in the United States. After June 1998, all medical devices sold in  
the European Union must bear the CE mark.  Devices are now classified by 
manufacturers according to the risks they represent with a classification 
system giving Class III as the highest risk devices and Class I as the 
lowest.  Once the device has been classified, the manufacturer can follow one 
of a series of conformity assessment routes, typically through a registered 
quality system, and demonstrate compliance to a European Notified Body.    
After that, the CE mark may be applied to the device. Maintenance of the 
system is ensured through annual on-site audits 

                                       -14-


<PAGE>


by the Notified Body and a post-market surveillance system requiring the 
manufacturer to submit serious complaints to the appropriate governmental 
authority.       

     Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.      

     RAPID TECHNOLOGICAL CHANGE; SIGNIFICANT COMPETITION.  The medical device
market is characterized by intensive development efforts and rapidly advancing
technology.  The future success of the Company will depend, in large part, upon
its ability to anticipate and keep pace with advancing technology and competing
innovations.  There can be no assurance, however, that the Company will be
successful in identifying, developing and marketing new products or enhancing 
its existing products.       

     The Company believes that a number of large companies, with significantly
greater financial, manufacturing, marketing, distribution and technical
resources and experience than that of the Company, already develop, manufacture
and market visualization products for minimally invasive surgery and would have
a natural interest in developing and marketing advanced technology for minimally
invasive microsurgical applications in general, which could also be applied to
cardiac or HNS surgery.  The Company estimates there are approximately ten
potential major competitors in the minimally invasive visualization market with
such companies as Stryker, Karl Storz, Olympus and Dyonics considered leaders,
and while they have not yet introduced products which compete directly with the
Company's technology, there can be no assurance that they will not do so in the
future.  

     Technological advances with other therapies such as drugs, interventional
procedures or future innovations in surgical techniques could make such other
therapies more effective or lower in cost than MIM surgical procedures and could
render MIM surgery obsolete.   

     There can be no assurance that physicians will use MIM surgical procedures
to replace or supplement established treatments, or that MIM cardiac surgery or
HNS microsurgery will be competitive with current or future technologies.  There
can be no assurance that the Company will be able to compete successfully
against current and future competitors.  Failure to do so would have a material
adverse effect upon the Company's business, financial condition and results of
operations.      

     RELIANCE ON STRATEGIC RELATIONSHIPS.  The Company intends to pursue
strategic relationships with corporations and research institutions with respect
to the research, development, regulatory approval and marketing of certain of
its products.  The Company's future success may depend, in part, on its
relationships with such partners, including, for example, the Company's
relationships with Medtronic and Sofamor Danek.  The Company will have limited
or no control over the resources that any partner may devote to the Company's
products, or over its partners' development and marketing efforts.  There can be
no assurance that any of the Company's present or future collaborative partners
will perform their obligations as expected or will devote sufficient resources
to the development or marketing of the Company's potential products.  Any
parallel development by a partner of   alternate technologies, preclusion from
entering into competitive arrangements, failure to obtain timely regulatory
approvals, premature termination of a collaborative agreement or failure by a
partner to devote sufficient resources to the development and commercialization
of the Company's products would have a material adverse effect on the Company's
business, financial condition and results of operations.  The Company believes
that its strategic partners currently have the right to terminate their
respective agreements only in the event of a material breach by the Company. 
There can be no assurance that the Company will be successful in establishing or
maintaining any such strategic relationships in the future or that any such
relationship will be successful.     

     FLUCTUATIONS IN OPERATING RESULTS.  Results of operations of the Company
may vary significantly from quarter to quarter depending upon numerous factors,
including the following: timing and results of product evaluations; delays
associated with the FDA and other regulatory approval processes; demand for and
utilization of the Company's products; changes in the financial stability of
international economies; changes in pricing policies by the Company or its
competitors; changes in third-party payment guidelines; the number, timing and
significance of product enhancements and new product announcements by the
Company and its competitors; 


                                       -15-


<PAGE>


the ability of the Company to develop, introduce and market new and enhanced 
versions of the Company's products on a timely basis; customer order 
deferrals in anticipation of enhancements or new products offered by the 
Company or its competitors; product quality problems; personnel changes; and 
the level of international sales.      

     UNCERTAINTY RELATING TO THIRD-PARTY PAYMENTS.  The Company expects that 
the majority of its sales and the prices of those sales will be directly or 
indirectly affected by the profitability to, or cost-effectiveness for, 
hospitals of the procedures in which the Company's products are involved.  
While the cost of using one of the Company's products may not be specifically 
reimbursable, its cost will form part of the global cost of the procedure to 
the institution.  Such attention to the relationship between procedure cost 
and potential reimbursement is an increasing element in purchasing decisions 
by hospitals, particularly in the United States and, increasingly, in other 
important foreign markets.  In the U.S. profitability levels are directly 
related to the level of payments for surgical procedures, either by Medicare 
or private insurance companies, and it is a continuing trend in U.S. health 
care for such payments to be under continual scrutiny and downward pressure.  
The Company expects that the majority of its products typically will be used 
by hospitals and surgical centers, which bill various third-party payors, 
such as governmental programs and private insurance plans, for the health 
care services provided to their patients.  If such hospitals and surgical 
centers are unable to be reimbursed for procedures using the Company's 
equipment, this could have a material adverse effect on the sales of the 
Company's products.  Third-party payors carefully review and increasingly 
challenge the prices charged for medical products and services or negotiate a 
flat rate fee in advance.  Payment rates from private companies also vary 
depending on the procedure performed, the third-party payor, the insurance 
plan and other factors.  Medicare compensates hospitals at a prospectively 
determined fixed amount for the costs associated with an in-patient 
hospitalization based on the patient's discharge diagnosis and compensates 
physicians at a prospectively determined fixed amount based on the procedure 
performed, regardless of the actual costs incurred by the hospital or 
physician in furnishing the care and unrelated to the specific devices or 
systems used in that procedure.  Medicare and other third-party payors are  
increasingly scrutinizing whether to cover new products and the level of 
payment for new procedures.  The flat fee reimbursement trend is causing 
hospitals to control costs strictly in the context of a managed care system 
in which health care providers contract to provide comprehensive health care 
for a fixed cost per person.  The Company is unable to predict what changes 
will be made in the reimbursement methods utilized by third-party health care 
payors.  The Company could be adversely affected by changes in payment 
policies of government or private health care payors, particularly to the 
extent any such changes affect payment for the procedure in which the 
Company's products are intended to be used.       

     If the Company obtains the necessary foreign regulatory registrations or 
approvals, market acceptance of the Company's products in international 
markets would be dependent, in part, upon the acceptance by the prevailing   
health care financing system in each country.  Health care financing systems 
in international markets vary significantly by country and include both 
government sponsored health care programs and private insurance.  These   
financing systems face the same cost containment pressures as the U.S. and 
there can be no assurance that they will endorse use of the Company's 
technology.      

     The Company believes that reimbursement in the future will be subject to 
increased restrictions such as those described above, both in the United 
States and in foreign markets.  The Company believes that the overall  
escalating cost of medical products and services has led to and will continue 
to lead to increased pressures on the health care industry, both foreign and 
domestic, to reduce the cost of products and services, including products  
offered by the Company.  There can be no assurance, as to either United 
States or foreign markets, that funding will be available or adequate, or  
that future legislation, regulation or reimbursement policies of third-party 
payors will not otherwise adversely affect the demand for the Company's 
products or its ability to sell its products on a profitable basis, 
particularly if the Company's systems are utilized in procedures which are 
more expensive than competing conventional surgical procedures.  The 
unavailability or inadequacy of third-party payor coverage or reimbursement 
would have a material adverse effect on the Company's business, financial 
condition and results of operations.       

     RISK RELATING TO INTERNATIONAL OPERATIONS.  In the event the Company is
successful in developing its products, manufacturing them in commercial
quantities and receiving necessary FDA and foreign 


                                       -16-


<PAGE>


regulatory registrations or approvals, the Company plans to market its 
products in international markets, either on its own or with its strategic 
partners.  The Company has limited experience in marketing its products 
overseas.  Changes in overseas economic conditions, currency exchange rates, 
foreign tax laws or tariffs or other trade regulations could have a material 
adverse effect on the Company's business, financial condition and results of 
operations.  The anticipated international nature of the Company's business 
is also expected to subject it and its representatives, agents and 
distributors to laws and regulations of the foreign jurisdictions in which 
they operate or in which the Company's products under development are sold.  
The regulation of medical devices in a number of such jurisdictions, 
particularly in the European Union, continues to develop and there can be no 
assurance that new laws or regulations will not have an adverse effect on the 
Company's business, financial condition and results of operations. In 
addition, the laws of certain foreign countries do not protect the Company's 
intellectual property rights to the same extent as do the laws of the United 
States.      

     PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE.  The Company faces an
inherent and significant business risk of exposure to product liability claims
in the event that the use of its products results in personal injury or death
and there can be no assurance that the Company will not experience any material
product liability losses in the future.  Also, in the event that any of the
Company's products prove to be defective, the Company may be required to recall
or redesign such products.  The Company's current product liability insurance
coverage limit is $10.0 million per occurrence and in the aggregate. There can
be no assurance that such coverage limits are adequate to protect the Company
from any liabilities it might incur in connection with the development,
manufacture and sale of its products.  In addition, the Company may require
increased product liability coverage if any products are used in clinical
evaluations or successfully commercialized.  Product liability insurance is
expensive and in the future may not be available to the Company on acceptable
terms, if at all.  A successful product liability claim or series of claims
brought against the Company in excess of its insurance coverage or a product
recall could have a material adverse effect on the Company's business, financial
condition and results of operations.    

     UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY; 
RISKS OF FUTURE LITIGATION.  Vista Medical relies on a combination of technical
leadership, patent, trade secret, copyright and trademark protection and
nondisclosure agreements to protect its proprietary rights.  As of September 30,
1998, the Company had exclusive ownership rights to seven issued United States
patents, 10 pending United States patent applications and 16 pending foreign
applications covering various aspects of its devices and systems.  Furthermore,
as of the same date, the Company had exclusive rights in the medical field to
four issued United States patents, one pending United States patent application,
three issued foreign patents and nine pending foreign applications covering
various aspects of its devices and systems.  The Company intends to file
additional patent applications in the future.  The failure of such patents to
issue could have a material adverse effect on the Company's business, financial
condition and results of operations.       

     The Company's future success will depend, in part, on its ability to
continue to develop patentable products, enforce its patents and obtain patent
protection for its products both in the United States and in other countries.
The patent positions of medical device companies, including the Company,
however, are generally uncertain and involve complex legal and factual
questions.  There can be no assurance that patents will issue from any patent
applications owned by or licensed to the Company or that, if patents do issue,
the claims allowed will be sufficiently broad to protect the Company's
technology.  In addition, there can be no assurance that any issued patents
owned by or licensed to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.    

     The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which
would result in substantial expense to the Company, may be necessary to
enforce any patents issued or licensed to the Company and/or to determine the
scope and validity of proprietary rights of third parties or whether the
Company's products, processes or procedures infringe any such third-party
proprietary rights. The Company may also have to participate in interference
proceedings declared by the United States Patent and Trademark Office, which
could result in substantial expense to the Company, to determine the priority
of inventions covered by the Company's issued United States patents or pending
patent 


                                       -17-


<PAGE>


applications.  Furthermore, the Company may have to participate at 
substantial cost in International Trade Commission proceedings to enjoin 
importation of products which would compete unfairly with products of the 
Company.  Any adverse outcome of any patent litigation (including 
interference proceedings) could subject the Company to significant 
liabilities to third parties, require disputed rights to be licensed from or 
to third parties or require the Company to cease using the technology in 
dispute.  

     Patent applications in the United States are maintained in secrecy until 
a patent issues, and patent applications in foreign countries are maintained 
in secrecy for a period of time after filing.  After such period of time, and 
usually before the grant of the patent, patent applications in foreign 
countries are published.  While publication of discoveries in the scientific 
or patent literature tends to lag behind actual discoveries and the filing of 
related patent applications, such publication may enable the Company's 
competitors to ascertain what areas of research or development the Company is 
engaged in prior to the Company's receipt of patent protection in the United 
States or foreign countries relating to such research or development.     

     In general, the development of visualization and information systems and 
related surgical instruments and accessories is intensely competitive.  
Patents issued and patent applications filed relating to medical devices are  
numerous and there can be no assurance that current and potential competitors 
and other third parties have not filed or in the future will not file 
applications for, or have not received or in the future will not receive, 
patents or obtain additional proprietary rights relating to products or 
processes used or proposed to be used by the Company.  There can also be no 
assurance that third parties will not assert infringement claims against the 
Company in the future or that any such assertions will not result in costly 
litigation or require the Company to obtain a license to intellectual  
property rights of such parties.  There can be no assurance that any such 
licenses would be available on terms acceptable to the Company, if at all.  
Furthermore, parties making such claims may be able to obtain injunctive or  
other equitable relief that could effectively block the Company's ability to 
make, use, sell or otherwise practice its intellectual property (whether or 
not patented or described in pending patent applications), or to further 
develop or commercialize its products in the United States and abroad and 
could result in the award of substantial damages.  Defense of any lawsuit or 
failure to obtain any such license could have a material adverse effect on 
the Company. 

     The Company relies on unpatented trade secrets to protect its 
proprietary technology, and no assurance can be given that others will not 
independently develop or otherwise acquire the same or substantially 
equivalent technologies or otherwise gain access to the Company's proprietary 
technology or disclose such technology or that the Company can ultimately 
protect its rights to such unpatented proprietary technology.  No assurance 
can be given that third parties will not obtain patent rights to such 
unpatented trade secrets, which patent rights could be used to assert 
infringement claims against the Company. The Company also relies on 
confidentiality agreements with its collaborators, employees, advisors, 
vendors and consultants to protect its proprietary technology.  There can be 
no assurance that these agreements will not be breached, that the Company 
would have adequate remedies for any breach or that the Company's trade 
secrets will not otherwise become known or be independently developed by 
competitors.  In addition, the Company's agreements with its employees and 
consultants require disclosure to the Company of ideas, developments, 
discoveries or inventions conceived during employment or consulting, as the  
case may be, and assignment to the Company of proprietary rights to such 
matters related to the business and technology of the Company. The extent to 
which efforts by others will result in patents and the effect on the Company 
of the issuance of such patents is unknown.  Failure to obtain or maintain 
patent and trade secret protection, for any reason, could have a material 
adverse effect on the Company's business, financial condition and results of 
operations.    

     The Company has in-licensed certain aspects of its technology.  In
September 1995, Mr. H. McKinley and McKinley Optics, Inc. (collectively,
"McKinley") granted to the Company a perpetual, exclusive, worldwide license in
the medical field to make, have made, modify, use, lease, market, sell and
otherwise distribute certain endoscopes and other medical products incorporating
a stereo objective lens and/or a relay lens configuration.   Under the terms of
this license agreement, Vista Medical is obligated to pay McKinley an annual
maintenance royalty, additional royalties upon the sale of certain numbers of
systems incorporating the McKinley technology and royalties on net sales of
products incorporating the McKinley technology.   The exclusive license granted
under this agreement becomes a non-exclusive license (or, under certain
circumstances, the license terminates) in the event Vista Medical


                                      -18-

<PAGE>


fails to pay any royalties following receipt of notice of such failure to 
pay.  In addition, Vista Medical has the right to terminate the agreement 
with limited notice.   

     In June 1996, Fuji Film Co. and Fuji Photo Optical Co., Ltd. 
(collectively, "Fuji") granted to the Company a non-exclusive license to 
certain optical zoom technology for use in endoscopes.  Vista Medical is 
obligated to pay royalties on net sales of products in the United States 
which incorporate Fuji's technology.  Fuji may terminate the agreement if 
Vista Medical does not cure any violation of the agreement within a limited 
period of time.  Failure of the Company to retain rights to these 
technologies could have a material, adverse effect on the Company's business, 
financial condition and results of operations. 

     DEPENDENCE ON KEY PERSONNEL AND ADVISORS.  The Company's future business
and operating results depend in significant part upon the continued
contributions of its key technical and senior management personnel, many of whom
would be difficult to replace and certain of whom perform important functions
for the Company beyond those functions suggested by their respective job titles
or descriptions.  The Company's business and future operating results also
depend in significant part upon its ability to attract and retain qualified
management, manufacturing, technical, marketing and sales and support personnel
for its operations.  The Company has not entered into any employment contracts
or arrangements with any of its employees.  Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel.  The loss of any key employee, the
failure of any key employee to perform in his or her current position or the
Company's inability to attract and retain skilled employees, as needed, could
materially adversely affect the Company's business, financial condition and
results of operations.     

     The Company has established three Clinical Advisory Boards made up of
leading surgeons, one focused on minimally invasive cardiac surgery, another
focused on HNS microsurgery and a third General Board focused on several
specialties.  The Company also has formed a Research Advisory Board to conduct
specific research in the development of techniques applicable to the use of
video assistance in minimally invasive cardiac surgery. Members of the Clinical
Advisory Boards consult with the Company exclusively in the field of
visualization, but are free to consult with other non-competing instrumentation
companies and are employed elsewhere on a full-time basis.  As a result, they
only spend a limited amount of time on the Company's affairs.  Although the
Company has entered into consulting agreements, with terms ranging from 12
months to two years, including confidentiality provisions with each of the
members of the Clinical Advisory Boards, there can be no assurance that the
consulting and confidentiality agreements between the Company and each of the
members of the Clinical Advisory Boards will not be terminated or breached.  In
addition, there can be no assurance that any of such agreements will be renewed
upon termination.   

     NEED TO FINANCE AND MANAGE AN EXPANDING AND CHANGING BUSINESS.  In order 
to compete effectively against current and future competitors, prepare 
additional products for potential commercialization and develop future 
products, the Company believes that it must be prepared to expand its 
operations, particularly in the areas of development and manufacturing.  If 
the Company were to experience significant growth in the future, such growth 
would likely result in additional demands for financing and new and increased 
responsibilities for management personnel and place significant strain upon 
the Company's management, operating and financial systems and resources.  To 
accommodate such growth and compete effectively, the Company must continue to 
implement and improve information systems, procedures and controls, and to 
expand, train, motivate and manage its work force.  All of the foregoing 
demands will require the addition of new management personnel.  The Company's 
future success will depend to a significant extent on the ability of its 
current and future management personnel to operate effectively, both 
independently and as a group.  There can be no assurance that the Company's 
personnel, systems, procedures and controls will be adequate to support the  
Company's future operations.  The Company anticipates that the net proceeds 
from the IPO completed in July 1997 and the interest income thereon, together 
with existing cash, cash equivalents and short-term investments, and product 
revenues, will be sufficient to fund and expand operations through at least 
the first quarter of 1999. The Company will likely require additional financing
and will evaluate various strategies and sources of funds at that time. There
can be no assurance 



                                       -19-


<PAGE>

that such additional financing will be available on terms acceptable to the 
Company, if at all, and any failure to finance, implement and improve the 
Company's operational, financial and management systems or to expand, train, 
motivate or manage employees could have a material adverse effect on the 
Company's business, financial condition and results of operations.  

     YEAR 2000 ISSUES.   The Company recognizes the need to ensure its
operations will not be adversely impacted by the inability of the Company's
systems to process data having dates on or after January 1, 2000 (the "Year
2000" issues).  Processing errors due to software failure arising from
calculations using the Year 2000 date are a recognized risk.  The Company is
currently addressing the risk, with respect to the availability and integrity of
its financial systems and the reliability of its operating systems, and is in
the process of communicating with suppliers, customers, financial  institutions
and others with whom it conducts business transactions to assess whether they
are Year 2000 compliant.   

     The Company has an established Year 2000 Compliance Team made up of members
of all of the Company's functional organizations and management and is currently
implementing a full Year 2000 Compliance Program.  The Company is nearing
completion of the assessment phase of all of its operations and business
activities and is in the conversion and testing phase of certain of those
operations and business activities at this time.  For example, the Company has
determined that its manufacturing, order entry and financial software will be
upgraded to a Year 2000 compliant version, currently available from the software
vendor, by the end of the first quarter of 1999 as part of a planned upgrade of
the system at minimal cost to the Company.

      As a result of the assessment completed to date, the Company believes that
adequate remediation exists for those systems and processes which have been
identified as currently non-Year 2000 compliant.  Furthermore, the Company
currently estimates that the cost of the Year 2000 initiative to be executed by
the Company will not exceed the $100,000 to $150,000 range, a significant
portion of which was scheduled for upgrade irrespective of the Year 2000 issue,
and is therefore not expected to be material to the Company's results of
operations or financial position.

     While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material effect on the Company.  In
addition, the potential impact of the Year 2000 issues on significant suppliers,
customers, financial institutions and others with whom the Company does business
cannot be reasonably estimated at this time.

     POTENTIAL VOLATILITY OF STOCK PRICE.  The market prices and trading 
volumes for securities of emerging companies, like the Company, have 
historically been highly volatile and have experienced significant  
fluctuations unrelated to the operating performance of such companies.  The 
market price of the shares of Common Stock is likely to be highly volatile 
and may be significantly affected by factors such as actual or anticipated 
fluctuations in the Company's operating results, changes in financial 
estimates by securities analysts, announcements of technological innovations, 
new products or new contracts by the Company or its competitors, regulatory 
announcements, developments with respect to patents or proprietary rights, 
conditions and trends in the medical device and other technology industries, 
adoption of new accounting standards affecting the medical device industry, 
general market conditions and other factors. In addition, the stock market 
has from time to time experienced significant price and volume fluctuations 
that have particularly affected the market prices for shares of early stage 
companies. These broad market fluctuations may adversely affect the market 
price of the Common Stock. In the past, following periods of volatility in 
the market price of a particular company's securities, securities class 
action litigation has often been brought against that company.  Such 
litigation, if brought against the Company, could result in substantial costs 
and a diversion of management's attention and resources.  

     HAZARDOUS MATERIALS.  The Company's research and development may involve
the controlled use of hazardous materials and chemicals.  Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated.  In the event of such an 


                                       -20-


<PAGE>


accident, the Company could be held liable for any resultant damages, and any 
such liability could exceed the resources of the Company.  The Company may 
incur substantial cost to comply with environmental regulations.  The Company 
believes it is currently in compliance with all Federal, State and local 
environmental laws.  

     NO DIVIDENDS.  The Company currently intends to retain any future earnings
for use in its business and does not anticipate paying any cash dividends in the
foreseeable future.      

     EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF SECOND 
RESTATED CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW.  The Company's
Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting and conversion rights of such shares, without any
further vote or action by the Company's stockholders.  The rights of the holders
of Common Stock are subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company.      

     In addition, the Company's Second Restated Certificate of Incorporation
provides for a classified Board of Directors such that approximately one-third
of the members of the Company's Board of Directors are elected at each annual
meeting of stockholders.  Such classification of the Company's Board of
Directors may have the effect of delaying, deferring or discouraging changes in
control of the Company.  Making more difficult or discouraging a change in
control of the Company may adversely affect the market price of the Common
Stock.       

Item 3.     Not Applicable 

PART II.    OTHER INFORMATION  

Item 1.     Not Applicable  

Item 2(d).  Changes in Securities and Use of Proceeds
          
       From the effective date of the Company's initial registration 
statement on Form S-1 on July 2, 1997 (Registration No. 333-28519) to 
September 30, 1998, the approximate amounts of the net offering proceeds used 
were $7.6 million for research and development, $7.4 million for sales and 
marketing activities, $7.4 million to fund product introductions, $5.1 
million for temporary investments in money markets, commercial paper and 
government backed securities, $2.3 million for the acquisition of capital 
equipment, and $3.0 million for working capital and general corporate 
purposes.  All of such payments were direct or indirect payments to others.
                
Item 3.     Not Applicable  

Item 4.     Not Applicable

Item 5.     Not Applicable 

Item 6.     Exhibits and Reports on Form 8-K    

A)          Exhibits    
     
   10.1     Vista Medical Technologies, Inc., Industrial Real Estate Lease 
            between the Company and Ocean Point Tech Centre dated July 7, 1998.

   11.1     Statement Regarding Computation of Per Share Earnings    

   27.1     Financial Data Schedule 

            
                                      -21-


<PAGE>


B)   Reports on Form 8-K    

     No reports on Form 8-K were filed by the Company during the three months
     ended June 30, 1998.     
     
SIGNATURES 

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.  


                            VISTA MEDICAL TECHNOLOGIES, INC. 
                                          
Date: November 13, 1998      /s/ John R. Lyon
                             John R. Lyon
                             President, Chief Executive Officer and Director

Date: November 13, 1998      /s/ Robert J. De Vaere   
                             Robert J. De Vaere
                             Vice President of Finance & Administration & Chief 
                             Financial Officer (Principal financial and 
                             accounting officer)  


                                      -22-