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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, 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 June 30, 2001

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 000-22743

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VISTA MEDICAL TECHNOLOGIES, INC.(Exact name of Registrant as Specified in Its Charter)

DELAWARE(State or other jurisdiction of incorporation or organization)

94-3184035(I.R.S. Employer Identification No.)5451 AVENIDA ENCINAS, SUITE A CARLSBAD, CA 92008(Address of principal executive offices, including zip code)(760) 603-9120(Registrant's telephone number, including area code)


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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 July 31, 2001, there were 19,636,007 shares of $.01 par value common 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, 2001 and December 31, 2000                                                                    |  | 3 
|                           |  | Consolidated Statements of Operations for the three months ended June 30, 2001 and 2000, and the six months ended June 30, 2001 and 2000 |  | 4 
|                           |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000                                                    |  | 5 
|                           |  | Notes to Consolidated Financial Statements                                                                                               |  | 6 
|Item 2.                    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                    |  | 7 
|Item 3.                    |  | Quantitative and Qualitative Disclosures About Market Risk                                                                               |  | 10
|Risks and Uncertainties    |  | 10                                                                                                                                      
|PART II. OTHER INFORMATION |  |                                                                                                                                         
|Item 1.                    |  | Legal Proceedings                                                                                                                        |  | 19
|Item 2.                    |  | Changes in Securities and Use of Proceeds                                                                                                |  | 19
|Item 3.                    |  | Defaults Upon Senior Securities                                                                                                          |  | 19
|Item 4.                    |  | Submission of Matters to a Vote of Security Holders                                                                                      |  | 19
|Item 5.                    |  | Other Information                                                                                                                        |  | 20
|Item 6.                    |  | Exhibits and Reports on Form 8-K                                                                                                         |  | 20
|SIGNATURES                 |  | 21                                                                                                                                      

2

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PART 1. FINANCIAL INFORMATION  Item 1. Financial Statements (unaudited)

Vista Medical Technologies, Inc.
Consolidated Balance Sheets

|                                           |                                                        | June 30, 2001                                                                                   |           | December 31, 2000 |            
|------------------------------------------ | ------------------------------------------------------ | ----------------------------------------------------------------------------------------------- | --------- | ----------------- | -----------
|
|ASSETS                                     |                                                        |                                                                                                 |           |                   |            
|Current assets:                            |                                                        |                                                                                                 |           |                   |            
|                                           | Cash and cash equivalents                              |                                                                                                 | $         | 1,318,983         |            
|                                           | Short-term investments & securities available for sale |                                                                                                 |           | 315,145           |            
|                                           | Accounts receivable, net                               |                                                                                                 |           | 1,663,229         |            
|                                           | Inventories, net                                       |                                                                                                 |           | 1,375,105         |            
|                                           | Other current assets                                   |                                                                                                 |           | 49,619            |            
|                                           |                                                        |                                                                                                 |           |                   |            
|Total current assets                       |                                                        |                                                                                                 | 4,722,081 |                   |            
|Property and equipment, net                |                                                        |                                                                                                 | 638,423   |                   |            
|Patents and other assets                   |                                                        |                                                                                                 | 60,531    |                   |            
|                                           |                                                        |                                                                                                 |           |                   |            
|TOTAL ASSETS                               |                                                        | $                                                                                               | 5,421,035 |                   | $          
|                                           |                                                        |                                                                                                 |           |                   |            
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                        |                                                                                                 |           |                   |            
|Current liabilities:                       |                                                        |                                                                                                 |           |                   |            
|                                           | Accounts payable                                       |                                                                                                 | $         | 406,625           |            
|                                           | Accrued compensation                                   |                                                                                                 |           | 212,637           |            
|                                           | Deferred Revenue Payments                              |                                                                                                 |           | 416,667           |            
|                                           | Accrued liabilities                                    |                                                                                                 |           | 310,358           |            
|                                           |                                                        |                                                                                                 |           |                   |            
|Total current liabilities                  |                                                        |                                                                                                 | 1,346,287 |                   |            
|Commitments                                |                                                        |                                                                                                 |           |                   |            
|Stockholders' equity:                      |                                                        |                                                                                                 |           |                   |            
|                                           | Convertible preferred stock, $01 par value:            |                                                                                                 |           |                   |            
|                                           |                                                        | Authorized shares  5,000,000;                                                                  |           |                   |            
|                                           |                                                        | Issued and outstanding shares  none on December 31, 2000 or June 30, 2001                      |           |                   |           
|                                           | Common stock, $01 par value:                           |                                                                                                 |           |                   |            
|                                           |                                                        | Authorized shares  35,000,000;                                                                 |           |                   |            
|                                           |                                                        | Issued and outstanding shares  19,589,386 on December 31, 2000 and 19,623,257 on June 30, 2001 |           |                   | 196,233    
|                                           |                                                        | Additional paid-in capital                                                                      |           |                   | 67,873,047 
|                                           |                                                        | Notes receivable from stockholders                                                              |           |                   | (78,375    
|                                           |                                                        | Deferred compensation                                                                           |           |                   | (149,228   
|                                           |                                                        | Accumulated deficit                                                                             |           |                   | (63,766,929
|                                           |                                                        |                                                                                                 |           |                   |            
|Total stockholders' equity                 |                                                        |                                                                                                 | 4,074,748 |                   |            
|                                           |                                                        |                                                                                                 |           |                   |            
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                                        | $                                                                                               | 5,421,035 |                   | $          

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Note: The balance sheet at December 31, 2000 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

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Vista Medical Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)

|                                                          |                            | Three Months Ended June 30, |            | Six Months Ended June 30, |  
|--------------------------------------------------------- | -------------------------- | --------------------------- | ---------- | ------------------------- | -
|
|Sales                                                     |                            | $                           | 2,072,069  |                           | $
|Cost and expenses:                                        |                            |                             |            |                           |  
|                                                          | Cost of sales              |                             |            | 1,731,686                 |  
|                                                          | Research and development   |                             |            | 479,533                   |  
|                                                          | Sales and marketing        |                             |            | 595,676                   |  
|                                                          | General and administrative |                             |            | 554,747                   |  
|                                                          | Restructuring              |                             |            |                          |  
|                                                          |                            |                             |            |                           |  
|Total cost and expenses                                   |                            |                             | 3,361,642  |                           |  
|                                                          |                            |                             |            |                           |  
|Loss from operations                                      |                            |                             | (1,289,573 | )                         |  
|Interest income                                           |                            |                             | 17,879     |                           |  
|Net loss                                                  |                            | $                           | (1,271,694 | )                         | $
|                                                          |                            |                             |            |                           |  
|Basic and diluted loss per share                          |                            | $                           | (0.06      | )                         | $
|                                                          |                            |                             |            |                           |  
|Shares used in computing basic and diluted loss per share |                            |                             | 19,622,575 |                           |  

See
accompanying notes

4

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Vista Medical Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

|                                                                             |                                              | Six Months Ended June 30, |        
|---------------------------------------------------------------------------- | -------------------------------------------- | ------------------------- | -------
|
|OPERATING ACTIVITIES                                                         |                                              |                           |        
|Net loss                                                                     |                                              | (2,211,909                | )      
|Adjustments to reconcile net loss to net cash used for operating activities: |                                              |                           |        
|                                                                             | Depreciation and amortization                |                           | 360,989
|                                                                             | Amortization of deferred compensation        |                           | 118,723
|                                                                             | Changes in operating assets and liabilities, |                           |        
|                                                                             |                                              | Accounts receivable       |        
|                                                                             |                                              | Inventories               |        
|                                                                             |                                              | Other current assets      |        
|                                                                             |                                              | Accounts payable          |        
|                                                                             |                                              | Accrued compensation      |        
|                                                                             |                                              | Deferred revenue          |        
|                                                                             |                                              | Accrued liabilities       |        
|                                                                             |                                              |                           |        
|Net cash flows used for operating activities                                 |                                              | (1,294,761                | )      
|INVESTING ACTIVITIES                                                         |                                              |                           |        
|Purchases of short-term investments                                          |                                              | 30,079                    |        
|Purchase of property and equipment                                           |                                              | (22,113                   | )      
|                                                                             |                                              |                           |        
|Net cash flows provided by (used for) investing activities                   |                                              | 7,966                     |        
|FINANCING ACTIVITIES                                                         |                                              |                           |        
|Issuance of common stock                                                     |                                              | 16,772                    |        
|                                                                             |                                              |                           |        
|Net cash flows provided by financing activities                              |                                              | 16,772                    |        
|Net (decrease) increase in cash and cash equivalents                         |                                              | (1,270,023                | )      
|Cash and cash equivalents at beginning of period                             |                                              | 2,589,006                 |        
|                                                                             |                                              |                           |        
|Cash and cash equivalents at end of period                                   |                                              | 1,318,983                 |        
|                                                                             |                                              |                           |        

See
accompanying notes.

5

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s

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

1. Basis of Presentation

The audited consolidated financial statements of Vista Medical Technologies, Inc. (the "Company") and the notes thereto for the year ended
December 31, 2000 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. The unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions on Form 10-Q, Article 10
of Regulation S-K. Accordingly, certain information and footnote disclosures normally contained in financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

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, 2001.

2. Inventories

|                    |  | June 30, 2001 |             | December 31, 2000
|------------------- |  | ------------- | ----------- | -----------------
|
|Parts and materials |  | $             | 2,212,628   |                  
|Work in process     |  |               | 256,722     |                  
|Finished goods      |  |               | 1,111,741   |                  
|                    |  |               |             |                  
|                    |  |               | 3,581,091   |                  
|Less: reserves      |  |               | (2,205,986) |                  
|                    |  |               |             |                  
|Inventories, net    |  | $             | 1,375,105   |                  
|                    |  |               |             |                  

3.  In
June 2001, the Company entered into a Supply and Promotion Agreement with Ethicon Endo-Surgery, Inc. (EES). Under the agreement, the Company
will receive payments in return for the Company's commitment to require use of EES equipment in certain training programs sponsored by the Company for the benefit of its customers. The Company is also
required to provide limited compensation to EES sales representatives. The agreement grants EES with the right of first negotiation to acquire certain Company technology. EES may terminate the
agreement upon 90 days notice. The Company will recognize revenue ratably over the term of the agreement. At June 30, 2001, the Company has received $500,000 under the agreement and
deferred $416,667 of such payment.

4.  At
our Annual Meeting held on June 7, 2001, we ratified an increase of 750,000 shares of common stock to our 1997 Stock Option/Stock Issuance Plan. As of
June 30, 2001, we had a total of 3,570,000 shares reserved for issuance under our 1997 Stock Option/Stock Issuance Plan.

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5. Loss Per Share

|                                                |  | Three Months Ended June 30, |           
|----------------------------------------------- |  | --------------------------- | ----------
|
|Net income (loss)                               |  | $                           | (1,271,695
|Weighted average common shares outstanding      |  |                             | 19,622,575
|                                                |  |                             |           
|Shares used in basic and diluted loss per share |  |                             | 19,622,575
|                                                |  |                             |           
|Basic and diluted loss per share                |  | $                           | (0.06     
|                                                |  |                             |           

6. New Accounting Standards

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," as
amended in June 2000 by SFAS 138, "ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES," which requires companies to recognize all derivatives as either assets
or liabilities in the balance sheet and measure such instruments at fair value. As amended by SFAS 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIESDEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMANT NO. 133," the provisions of SFAS 133 required adoption no later than the beginning of the Company's fiscal year ending December 31, 2001. We adopted
SFAS 133 effective January 1, 2001. As we do not engage in any hedging or derivative activities,
the adoption of SFAS 133, as amended by SFAS 138, did not have a material impact on the Company's financial statements.

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 OUR CURRENT JUDGMENT ON THE FUTURE DIRECTION OF OUR BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED BELOW. WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES ARISING AFTER THE DATE OF THIS QUARTERLY REPORT. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM
1 OF THIS QUARTERLY REPORT ON FORM 10-Q AND OUR 2000 ANNUAL REPORT ON FORM 10-K, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

Overview of our business

We develop, manufacture and market products that provide information to doctors performing minimally invasive general surgical, cardiac surgical and other
selected microsurgical procedures. We

7

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also develop and sponsor training and support programs for medical personnel which enhance the adoption of procedures incorporating use of our visualization technology. Our products combine a head
mounted display with video cameras to provide surgeons with critical visual information during these microsurgical procedures, combined with the ability to view new additional information in a voice-
controlled, picture-in-picture format, to facilitate real-time decision making during surgery. Our product lines include the ORPC Advanced Visualization and
Information System for general surgery and other complex endoscopic procedures and the Series 8000 Advanced Visualization and Information System, for use in cardiac surgery. In general terms,
endoscopic surgery involves a telescopic viewing device which is inserted into a small incision in the body and which allows the surgeon an adequate view of the internal part of the body being
repaired.

Our results of operations for three-months and six-months ended June 30, 2001 versus three-months and six-months ended June 30, 2000

Sales.We had revenue from product sales of $2,072,000 and $4,005,000 for the three-and six months ended
June 30, 2001, respectively, compared to revenues from product sales of $1,522,000 and $3,319,000 for the three- and six-months ended June 30, 2000, respectively. The
increase in revenue for both the three-and six-month periods was due to increased unit sales from our Laparascopic Bariatric Surgery Programs.

Cost of Sales.Our cost of sales were $1,732,000 and $3,264,000 for the three- and six-months ended
June 30, 2001, respectively, and $1,448,000 and $2,988,000 for the three-and six-months ended June 30, 2000, respectively. Our gross margins were 16% and 19% for
the three- and six-months ended June 30, 2001, respectively, and 5% and 10% for the three-and six-months ended June 30, 2000, respectively. The
increase in gross margin was primarily due to increased unit sales of our higher margin Laparascopic Bariatric Surgery Program.

Research and Development Expenses.Our research and development expenses were $480,000 and $869,000 for the
three-and six-months ended June 30, 2001, respectively, and $431,000 and $862,000 for the three-and six-months ended June 30, 2000,
respectively. The increase in research and development expenses was primarily attributable to next generation product development. We expect our research and development expenses to increase
moderately over current levels in the next several quarters as we finalize our next generation of products for the general surgery market.

Sales and Marketing Expenses.Sales and marketing expenses were $596,000 and $1,083,000 for the three-and
six-months ended June 30, 2001, respectively, and $416,000 and $829,000 for the three-and six-months ended June 30, 2000, respectively. The increase
in sales and marketing expense reflects a ramp up of field activities for the obesity surgery market. We expect our sales and marketing expenses to increase proportionately during the next several
quarters as we continue to ramp up our field activities for the obesity surgery market.

General and Administrative Expenses.General and administrative expenses were $555,000 and $1,051,000 for the
three-and six-months ended June 30, 2001, respectively, and $546,000 and $974,000 for the three-and six-months ended June 30, 2000,
respectively. The slight increase in general and administrative expenses during the 2001 period reflects higher professional and legal fees. We expect

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our general and administrative expenses to remain at or near current levels for the next several quarters.

Restructuring Expenses.We had no charges associated with restructuring expenses for both the three-and
six-months ended June 30, 2001, and credits of $279,000 for both the three-and six-months ended June 30, 2000. The credits in 2000 related to the
subletting of part of our facility in Westborough, MA. The partial recovery reported in the 2000 period represents the subletting of approximately one half of the
facility space for which a $690,000 restructuring charge had been incurred in the three-months ended September 30, 1999.

Interest Income.Our net interest income was $18,000 and $51,000 for the three-and six-months
ended June 30, 2001, respectively, and $73,000 and $92,000 for the three-and six-months ended June 30, 2000, respectively. This decrease was due primarily to a
decrease in the investment balances of $4,800,000, resulting from a completed sale of common stock to three of our stockholders in April, 2000.

Liquidity and capital resources

Net cash used for operating activities for the six-months ended June 30, 2001 was $1,296,000 compared to net cash used of $1,988,000 for the
corresponding six-month period in 2000. The decrease in net cash used in operating activities was primarily attributable to lower inventory purchases during the 2001 period and the receipt
of $500,000 of deferred revenue from an agreement with Ethicon Endo-Surgery.

Net
cash provided by investing activities was $8,000 for the six-months ended June 30, 2001 compared to $52,000 of net cash used in the same period in 2000. The
increase in net cash provided by investing activities during the 2001 period was primarily attributable to increasing balances of short term investments reaching maturity offset by decreasing
purchases of property and equipment.

Net
cash provided by financing activities was $17,000 for the six-months ended June 30, 2001 compared to $4,672,000 for the same period in 2000. The decrease in net
cash provided by financing activities during the 2001 period was primarily attributable to the closing of a Securities Purchase Agreement in April, 2000 with three of our stockholders netting proceeds
of approximately $4,591,000, partially offset by a reduction in purchases of stock by employees through our employee stock purchase plan and a lower level of stock option exercises.

We
recently announced that we are working on a strategic initiative to extend our business to become more involved in the medical treatment of severe obesity. If we decide to pursue
this initiative, we will be required to raise additional funds to support our operations. In addition, even if we do not pursue this initiative, if we are unable to sustain our cash flow under our
current business plan, we will be required to raise additional funds. If we are unable to raise additional funds from an offering of securities or otherwise, we may be unable to continue operations at
their current level and may be unable to pursue this new objective. Even if we are successful in raising additional funds, a slow rate of market acceptance of our products or our inability to scale up
manufacturing would accelerate our use of proceeds and require us to seek additional funds to support our operating requirements. We expect

9

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to continue to incur substantial losses for at least the next 6 - 9 months. As of June 30, 2001, our accumulated deficit was approximately $63,767,000.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At June 30, 2001, our investment portfolio included fixed-income securities of $1.1 million. These securities are subject to interest rate risk
and will decline in value if interest rates increase. These investments are not held for trading or other speculative purposes. Due to the short duration of our investment portfolio, an immediate
10 percent increase in interest rates would have no material impact on our financial condition or results of operations.

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

RISKS AND UNCERTAINTIES

You should consider the following risk factors carefully in evaluating an investment in our common stock in addition to the other information in this report.
If any of these or other risks actually occurs, the trading price of our common stock could decline, and you may lose all or part of your investment. You are cautioned that the statements in this
quarterly report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. Our actual results could differ materially from those
currently anticipated due to a number of factors, including those identified in this section and elsewhere in this quarterly report. We undertake no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto.

We may not be able to maintain the listing of our common stock on the Nasdaq SmallCap market.

On
February 10, 2000, our common stock ceased to be quoted on the Nasdaq National Market and began to be quoted on the Nasdaq SmallCap Market as a result of Nasdaq's concern
about our ability to maintain continued compliance with some of the Nasdaq National Market requirements for continued quotation. In addition, since that time, Nasdaq has placed us on probation twice
for failing to maintain a minimum bid price of $1.00 per share of our common stock. Although we have successfully complied with the terms of these probations, our common stock has recently failed to
maintain a consistent bid price above $1.00 per share and we cannot assure you that we will be able to remain compliant with the continued listing requirements of Nasdaq. If we are unable to remain
compliant, Nasdaq may delist our common stock from the Nasdaq SmallCap Market, which would force us to to seek to have our shares listed on the OTC Bulletin Board or some other quotation medium. If we
are unable to maintain our status on the Nasdaq SmallCap Market, there may not continue to be an active trading market for our common stock. If this occurs, you may not be able to sell your shares
quickly or at the market price. As a result, an investor might find it more difficult to dispose of, or to obtain accurate price quotations for, our shares. Delisting might also reduce the visibility,
liquidity, and price of our common stock. If our common stock was delisted from the Nasdaq

10

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SmallCap Market and was not traded on another national securities exchange, we could become subject to penny stock regulations that impose additional sales practice disclosure and market making
requirements on broker/dealers who sell or make a market in our stock. The rules of the SEC generally define "penny stock" to be common stock that has a market price of less than $5.00 per share which
is not traded on a national exchange. If our stock became subject to penny stock regulations, it would adversely affect the ability and willingness of broker/dealers who sell or make a market in our
common stock and of investors to purchase or sell our stock in the secondary market.

We may need additional funds to support our currently proposed operations. If we are unable to obtain them, we may have to significantly scale back our operations or forego
opportunities in new market segments.

We recently announced that we are working on a strategic initiative extending our business to become more involved in the medical treatment of severe obesity.
We have not yet decided to pursue this initiative, but, if we do, we will be required to raise additional funds to support our operations. In addition, if we are unable to sustain our cash flow under
our current business plan, we will be required to raise additional funds. If we are unable to raise sufficient funds from an offering of securities or otherwise, we may be unable to continue
operations at their current level and may be unable to pursue this new objective. Moreover, our liquidity and capital requirements will depend upon other numerous factors, including the following:



11

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Even if we are successful in raising additional funds, a slow rate of market acceptance of our products or our inability to scale up manufacturing would accelerate our use of proceeds
and require us to seek additional funds to support our operating requirements.

We have a history of losses and may not become profitable.

Since our formation in July 1993, and as of June 30, 2001, we had incurred cumulative net losses of $63.8 million. We expect to incur
substantial losses for at least the next 6-9 months. We may never achieve or sustain profitability in the future. Even if we achieve profitability, we may not be able to sustain it
on an ongoing basis.

We are, to a significant extent, dependent on distribution partners to sell our products.

We only have a small direct sales force and, in the past, we were primarily dependent on agreements with third parties for sales of the majority of products
derived from our core three-dimensional technology. Two of our primary distribution agreements were terminated in 2000 and we just recently entered into an arrangement with Jomed N.V. to transition
distribution in cardiac surgery and to continue supporting our cardiac customer base. However, this transition may not be achieved without operational disruption and unplanned cost, or at all. If we
are unable to make this transition, we may be unsuccessful in distributing our cardiac surgery products and may lose revenues.

In
addition, during the last year, we changed our strategic emphasis for our core three-dimensional technology for applications in general surgery, gynecology and urology. We cannot
assure you that we will be successful in these areas of sales. Even if we are successful, we cannot assure you that the revenue achieved in these areas of emphasis will be sufficient to compensate for
any loss of sales revenue from the termination of our previous distribution agreements for cardiac products. Either of these results could have an adverse affect on our financial condition and results
of operations.

Our profitability is dependent upon the successful development and commercialization of our products based on our core three-dimensional technology.

Products
derived from our core technologythe ORPC for general surgery and the Series 8000 for minimally invasive cardiac surgeryare expected to
account for the majority of our revenues over the next several years. The demand for these products may not be sufficient to allow us to achieve profitable operations.

Our
development efforts for improvements to these products may not be successful. In addition, other products under development may not 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.

Our success is dependent upon acceptance of a minimally invasive approach to complex procedures as a reliable, safe and cost effective alternative to existing treatments.

Complex
minimally invasive procedures are only performed on a very limited basis by a relatively small number of highly skilled surgeons. We are unable to predict how quickly, if at
all, minimally invasive procedures will be adopted by the medical community or, if they are adopted, the number of procedures that will be performed.

Even
if the clinical safety and effectiveness of complex minimally invasive procedures is established in general surgery, cardiac and other specialties, surgeons, specialists and
other physicians may choose not to recommend the procedures for any number of other reasons. Adoption of these procedures by doctors will depend, for example, upon our ability to facilitate and
sponsor training of surgeons to

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perform complex minimally invasive procedures and the willingness of such surgeons to perform such procedures. Doctors may also elect not to recommend the minimally invasive procedures based on
possible unavailability of acceptable reimbursement from health care payors. Health care payor acceptance may require evidence of the cost effectiveness of minimally invasive procedures as compared to
other currently available treatments. We believe that physician endorsements will be essential for clinical adoption of minimally invasive procedures and these endorsements may not be obtained.
Patient acceptance of new procedures will depend upon doctor 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.

Widespread use of our products will require sponsoring the training of a large number of surgeons, and the time required to institute a training program and to train such
surgeons could adversely affect near term market acceptance.

Evaluations
of visualization technology such as ours 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, we cannot assure you that visualization and information system enhancements
incorporated, or to be incorporated, in our products will prove suitable for use by a substantial number of surgeons. If they prove unsuitable for a large number of surgeons to use, the potential
markets and applications for our products would be significantly limited.

There are significant risks associated with any scale-up of manufacturing which may be required to meet market demand and become profitable.

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



We
have 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 processes. Our manufacturing yields or costs may increase as a result of the transition to in-house production or to new production processes when such
efforts are undertaken. In addition, costs in complying with FDA good manufacturing practices or changes in such practices may exceed our expectations.

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We may face component shortages and are dependent in some instances on single sources of supply.

Any
significant supply interruption, or inventory shortage or overage, would negatively impact our ability to manufacture our products. We use and rely on specific components and
services used in our systems for which we have only a single source of supply. The manufacture of our 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 specified 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 our products.

We
expect to manufacture our products based on forecasted product orders and intend to purchase subassemblies and components prior to receipt of purchase orders from customers. Lead
times for ordered materials and components 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. Some components used in our products have long lead times. As a result, there is a risk of excess or inadequate inventory if orders do not match forecasts.

We are subject to significant domestic and international regulation and may not be able to obtain necessary regulatory clearances to sell our products.

The
manufacture and sale of medical devices intended for commercial distribution are subject to extensive governmental regulation. Our failure to comply with regulatory requirements
would jeopardize our ability to market our products. Noncompliance with applicable requirements can result in failure of the regulatory agency 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.

Medical
devices are regulated in the United States primarily by the FDA and, to a lesser extent, by state agencies. Sales of medical device products outside the United States are
subject to foreign regulatory requirements that vary from country to country. Generally, medical devices require pre-market clearance or pre-market approval prior to commercial
distribution. A determination that information available on the medical device is not sufficient to grant the needed clearance or approval will delay market introduction of the product. In addition,
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. 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. The current regulatory environment in Europe for medical devices differs significantly from that in the United States.

We expect to encounter rapid technological change and significant competition.

The medical device market in which we compete is characterized by intensive development efforts and rapidly advancing technology. Our future success will
depend, in large part, upon our ability to anticipate and keep pace with advancing technology and competing innovations. We may not be successful in identifying, developing and marketing new products
or enhancing our existing products.

We
believe that a number of large companies, with significantly greater financial, manufacturing, marketing, distribution and technical resources and experience than ours, are
focusing on the development of visualization products for minimally invasive microsurgery. Several companies are

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currently developing and marketing visualization products for minimally invasive microsurgery which could be applied to heart surgery, to general surgery or to head, neck and spine microsurgery.

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 minimally invasive microsurgery procedures and could render minimally invasive microsurgery obsolete.

We expect fluctuations in our operating results.

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



Our profitability is directly related to the level of reimbursements for surgical procedures using our products.

Our
profitability is directly related to the level of payments for the surgical procedures in which our products are involved, either by Medicare or private insurance companies. We
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 our
products are intended to be used. It is a continuing trend in U.S. health care for such payments to be under continual scrutiny and downward pressure. We believe that reimbursement in the future will
be subject to increased restrictions, both in the United States and in foreign markets and 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 which we offer.

We
expect that our 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. 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
pre determined fixed amount for the costs associated with an in-patient hospitalization based on the patient's discharge

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diagnosis and compensates physicians at a pre 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. We are unable to predict what changes will be made in the reimbursement methods utilized by such third-party payors.

If
we obtain the necessary foreign regulatory registrations or approvals, market acceptance of our 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. There can be no assurance that these financing systems will endorse the use of our products.

We have limited experience directly marketing our products overseas and may not be successful in expanding into international markets without experienced partners.

We
have limited experience in marketing our products overseas. Changes in overseas economic conditions, currency exchange rates, foreign tax laws or tariffs or other trade regulations
could negatively impact our business. The anticipated international nature of our business is also expected to subject our representatives, agents and distributors to laws and regulations of the
foreign jurisdictions in which they operate or in which our products are sold, including laws regulating manufacture and sale of medical devices. In addition, the laws of some foreign countries do not
protect our intellectual property rights to the same extent as do the laws of the United States.

We may be subject to product liability claims and have limited insurance coverage.

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

If we are unable to protect our intellectual property, we may be unable to prevent other companies from using our technology in competitive products.

Our
future success will depend, in part, on our ability to continue to develop patentable products, enforce our patents and obtain patent protection for our products both in the
United States and in other countries. The patent positions of medical device companies, however, are generally uncertain and involve complex legal and factual questions. Patents may never issue from
any patent applications owned by or licensed to us. Even if patents do issue, the claims allowed may not be sufficiently broad to protect our technology. In addition, issued patents owned by or
licensed to us may be challenged, invalidated or circumvented, or the rights granted thereunder may not provide us with competitive advantages.

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The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. Litigation, which would result in substantial
expense, may be necessary to enforce any patents issued or licensed to us and/or to determine the scope and validity of proprietary rights of third parties or whether our products, processes or
procedures infringe any such third-party proprietary rights. We may also have to participate in interference proceedings declared by the United States Patent and Trademark Office, which could result
in substantial expense, to determine the priority of inventions covered by our issued United States patents or pending patent applications. Furthermore, we may have to participate at substantial cost
in International Trade Commission proceedings to enjoin importation of products which would compete unfairly with our products. Any adverse outcome of any patent litigation, including interference
proceedings, could subject us to significant liabilities to third parties, require disputed rights to be licensed from or to third parties or require us to cease using the technology in dispute. Any
such licenses may not be available on acceptable terms, if at all. Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief that could effectively block our
ability to make, use, sell or otherwise practice our intellectual property, whether or not patented or described in pending patent applications, or to further develop or commercialize our 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 damage our business.

We
rely on unpatented trade secrets to protect our proprietary technology. Others may independently develop or otherwise acquire the same or substantially equivalent technologies or
otherwise gain access to our proprietary technology or disclose such technology. It is difficult to protect rights to such unpatented proprietary technology. Third parties may obtain patent rights to
such unpatented trade secrets, which patent rights could be used to assert infringement claims against us. We also rely on confidentiality agreements with our collaborators, employees, advisors,
vendors and consultants to protect our proprietary technology. These agreements may be breached, we may not have adequate remedies for any breach and our trade secrets may otherwise become known or be
independently
developed by competitors. In addition, our agreements with employees and consultants require disclosure of ideas, developments, discoveries or inventions conceived during employment or consulting, as
the case may be, and assignment to us of proprietary rights to such matters related to our business and technology. The extent to which efforts by others will result in patents and the effect on us of
the issuance of such patents is unknown.

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We have licensed some aspects of our products from third parties and may lose the rights to these essential aspects under the agreements which govern those relationships.

We
have licensed some aspects of our technology from third parties. The rights under the governing agreements may be terminated if we breach our obligations or in other circumstances.
Our failure to retain rights to these licensed rights could negatively impact our business.

If we are not able to attract and retain key technical and senior management personnel and doctors to participate in our advisory boards, it may adversely affect our ability to
obtain financing or develop our products.

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

Members
of our clinical advisory boards consult with us 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 our business. Although we have entered into consulting agreements,
including confidentiality provisions with each of the members of our clinical advisory boards, the consulting and confidentiality agreements between us and each of the members of our clinical advisory
boards may be terminated or breached.

Our stock price could continue to be volatile and your investment in our common stock could suffer a decline in value, adversely affecting our ability to raise additional
capital.

The
market prices and trading volumes for securities of emerging companies, like ours, have historically been highly volatile and have experienced significant fluctuations unrelated
to the operating performance. The market price of our common stock has historically been highly volatile and may be significantly affected by factors such as:



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 our 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 us, could result in substantial costs and a diversion of management's attention and resources.

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Our use of hazardous materials may result in unexpected and substantial claims against us for which we do not have sufficient financial resources.

Our
research and development activities may involve the controlled use of hazardous materials and chemicals. The risk of accidental contamination or injury from these materials cannot
be completely eliminated. In the event of such an accident, we could be held liable for any resultant damages, and any such liability could exceed our resources. We may incur substantial cost to
comply with environmental regulations.

We do not anticipate paying any dividends and any gains from your investment in our stock will have to come from increases in the price of such stock.

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

Our charter documents may prevent us from participating in transactions that could be beneficial to you.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities and Use of Proceeds



Item 3. Defaults upon Senior Securities

None.

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

I. 2001 Annual Meeting of Stockholders held on June 7, 2001.



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For

Against/
Withheld

Broker
Non-VotesJames C. Blair

17,472,267

590,692

0John R. Lyon

17,467,667

595,292

0


Nicholas
B. Binkley and Larry M. Osterink, whose terms as Directors of our company expire at our 2002 Annual Meeting of Stockholders, and Daniel J. Holland, whose term as Director of
our company expires at our 2003 Annual Meeting of Stockholders, continue to serve as Directors of our company until their respective terms expire and were not voted upon at the Annual Meeting, Olav B.
Bergheim, a former Director of our company whose term was set to expire at our 2003 Annual Meeting of Stockholders, resigned from our Board of Directors effective June 7, 2001. This resignation
was amicable and the Board of Directors, in accordance with our Bylaws, appointed George B. DeHuff III to fill the vacancy created by Mr. Bergheim's resignation.



For

Against

Abstentions

Broker
Non-Votes13,605,312

4,443,602

14,045

0




For

Against

Abstentions

Broker
Non-Votes18,050,074

4,120

8,765

0


Item 5. Other Information

See Item 4Ib above.

Item 6. Exhibits and Reports on Form 8-K

A)  Exhibits



---

B)  Reports
on Form 8-K



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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: August 3, 2001 |  |  |  | /s/JOHN R. LYONJohn R. Lyon
President, Chief Executive Officer and Director                           
|Date: August 3, 2001 |  |  |  | /s/STEPHEN A. GORGOLStephen A. Gorgol
Vice President of Finance, Chief Financial Officer and Secretary

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