**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**COMMISSIONFILE NUMBER 000-22743**

 

**VISTAMEDICAL TECHNOLOGIES, INC.**

(Exact name of Registrant as Specified in ItsCharter)

 

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

 

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

 

**(1)      Yes****ý       No****o**

**(2)      Yes****ý       No****o**

 

**Indicate by checkmark whether the registrant is an accelerated filer (as defined in rule 12b-2of the Exchange Act)     Yes****o    No****ý**

 

As of October 31, 2003, there were 5,006,585 shares of $.01 parvalue common stock outstanding.

 

 

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**VISTAMEDICAL TECHNOLOGIES, INC.**

**FORM10-Q**

**TABLEOF CONTENTS**

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

 

II

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PART 1.                           FINANCIALINFORMATION

 

Item 1.                                     FinancialStatements

 

Vista Medical Technologies, Inc.

Consolidated Balance Sheets

 

 
|                                                                                                                                                               |   | **September 30,  2003** |      | **December 31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|-----------------------------|--------|
|                                                                                                                                                               |   | **(Unaudited)**              |      |                        |   |
| ASSETS                                                                                                                                                             |   |                         |      |                        |   |
| Current assets:                                                                                                                                                    |   |                         |      |                        |   |
| Cash and cash equivalents                                                                                                                                          |   | $                            | 400,037   |                        | $      | 457,052 |   |
| Marketable securities                                                                                                                                              |   | 187,606                      |      | 372,320                     |   |
| Accounts receivable, net                                                                                                                                           |   | 904,320                      |      | 1,670,480                   |   |
| Inventories, net                                                                                                                                                   |   | 1,701,574                    |      | 1,493,278                   |   |
| Other current assets                                                                                                                                               |   | 207,954                      |      | 108,536                     |   |
| Total current assets                                                                                                                                               |   | 3,401,491                    |      | 4,101,666                   |   |
| Property and equipment, net                                                                                                                                        |   | 67,488                       |      | 77,431                      |   |
| Patents and other assets, net                                                                                                                                      |   | 942                          |      | 3,061                       |   |
| TOTAL ASSETS                                                                                                                                                       |   | $                            | 3,469,921 |                        | $      | 4,182,158 |   |
|                                                                                                                                                               |   |                         |      |                        |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                          |   |                         |      |                        |   |
| Current liabilities:                                                                                                                                               |   |                         |      |                        |   |
| Accounts payable                                                                                                                                                   |   | $                            | 641,320   |                        | $      | 955,961 |   |
| Accrued compensation                                                                                                                                               |   | 280,830                      |      | 262,225                     |   |
| Deferred revenue                                                                                                                                                   |   | 416,417                      |      | 499,167                     |   |
| Accrued liabilities                                                                                                                                                |   | 162,919                      |      | 383,848                     |   |
| Total current liabilities                                                                                                                                          |   | 1,501,486                    |      | 2,101,201                   |   |
|                                                                                                                                                               |   |                         |      |                        |   |
| Total long term lease obligations                                                                                                                                  |   | 22,333                       |      | 0                           |   |
|                                                                                                                                                               |   |                         |      |                        |   |
| TOTAL LIABILITIES                                                                                                                                                  |   | 1,523,819                    |      | 2,101,201                   |   |
|                                                                                                                                                               |   |                         |      |                        |   |
| Stockholders’ equity:                                                                                                                                         |   |                         |      |                        |   |
| Preferred stock, $.01 par value:                                                                                                                                   |   |                         |      |                        |   |
| Authorized shares - 5,000,000 Issued and  outstanding shares - none at December 31, 2002 1,000,000 at  September 30, 2003 (Liquidation Value $3,800,000) |   | 1,032,767                    |      |                        |   |
| Common stock, $.01 par value:                                                                                                                                      |   |                         |      |                        |   |
| Authorized shares - 35,000,000 Issued and  outstanding shares - 5,001,749 at December 31, 2002 and 5,006,585 at  September 30, 2003                      |   | 50,065                       |      | 50,017                      |   |
| Additional paid-in capital                                                                                                                                         |   | 68,086,259                   |      | 68,079,862                  |   |
| Notes receivable from stockholders                                                                                                                                 |   | 0                            |      | (78,375                     | )      |
| Deferred compensation                                                                                                                                              |   | (14,001                      | )         | (45,947                     | )      |
| Accumulated deficit                                                                                                                                                |   | (67,208,988                  | )         | (65,924,600                 | )      |
| Total stockholders’ equity                                                                                                                                    |   | 1,946,102                    |      | 2,080,957                   |   |
|                                                                                                                                                               |   |                         |      |                        |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                    |   | $                            | 3,469,921 |                        | $      | 4,182,158 |   |

 

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

 

See accompanying notes.

 

3

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Vista Medical Technologies, Inc.

Consolidated Statements of Operations

(Unaudited)

 
|                                                       |   | **Three  Months Ended September 30,** |      | **Nine  Months Ended September 30,** |   |
|------------------------------------------------------------|--------|--------------------------------------------|-----------|-------------------------------------------|--------|
|                                                       |   | **2003**                                   |      | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                       |   |                                       |      |                                      |   |   |   |   |   |
| Sales                                                      |   | $                                          | 1,680,343 |                                      | $      | 2,868,365 |   | $ | 6,808,418 |   | $ | 8,350,853 |   |
|                                                       |   |                                       |      |                                      |   |   |   |   |   |
| Cost of sales                                              |   | 983,356                                    |      | 1,631,155                                 |   | 3,853,861 |   | 4,502,184 |   |
| Research and development                                   |   | 397,740                                    |      | 407,579                                   |   | 949,921 |   | 1,305,649 |   |
| Sales and marketing                                        |   | 616,545                                    |      | 670,201                                   |   | 1,810,452 |   | 2,129,471 |   |
| General and administrative                                 |   | 380,523                                    |      | 447,094                                   |   | 1,430,588 |   | 1,462,045 |   |
| Total cost and expenses                                    |   | 2,378,164                                  |      | 3,156,029                                 |   | 8,044,822 |   | 9,399,349 |   |
|                                                       |   |                                       |      |                                      |   |   |   |   |   |
| Loss from operations                                       |   | (697,821                                   | )         | (287,664                                  | )      | (1,236,404 | ) | (1,048,496 | ) |
|                                                       |   |                                       |      |                                      |   |   |   |   |   |
| Interest income                                            |   | 1,593                                      |      | 4,292                                     |   | 38,186 |   | 14,517 |   |
| Interest expense                                           |   | (1,348                                     | )         | —                                    |   | (3,403 | ) | — |   |
|                                                       |   |                                       |      |                                      |   |   |   |   |   |
| Net loss                                                   |   | $                                          | (697,576  | )                                         | $      | (283,372 | ) | $ | (1,201,621 | ) | $ | (1,033,979 | ) |
|                                                       |   |                                       |      |                                      |   |   |   |   |   |
| Less: Accretion of dividends on preferred  stock           |   | 35,918                                     |      | —                                    |   | 82,767 |   | — |   |
|                                                       |   |                                       |      |                                      |   |   |   |   |   |
| Net loss applicable to common stockholders                 |   | (733,494                                   | )         | (283,372                                  | )      | (1,284,388 | ) | (1,033,979 | ) |
|                                                       |   |                                       |      |                                      |   |   |   |   |   |
| Basic and diluted loss per share                           |   | $                                          | (0.14     | )                                         | $      | (0.06 | ) | $ | (0.26 | ) | $ | (0.21 | ) |
|                                                       |   |                                       |      |                                      |   |   |   |   |   |
| Shares used in computing basic and diluted  loss per share |   | 5,003,471                                  |      | 4,988,797                                 |   | 5,002,620 |   | 4,957,280 |   |

 

See accompanying notes.

 

4

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Vista Medical Technologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 
|                                                                          |   | **Nine  Months Ended September 30,** |       |
|-------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                          |   | **2003**                                  |       | **2002** |   |
| OPERATING ACTIVITIES                                                          |   |                                      |       |   |   |
| Net loss                                                                      |   | $                                         | (1,201,621 | ) | $ | (1,033,979 | ) |
| Adjustments to reconcile net loss to net  cash used for operating activities: |   |                                      |       |   |   |
| Noncash compensation expense                                                  |   | 78,375                                    |       | — |   |
| Depreciation and amortization                                                 |   | 137,095                                   |       | 356,615 |   |
| Amortization of deferred compensation                                         |   | 31,946                                    |       | 54,952 |   |
| Changes in operating assets and  liabilities:                                 |   |                                      |       |   |   |
| Accounts receivable                                                           |   | 766,160                                   |       | 502,553 |   |
| Inventories                                                                   |   | (208,296                                  | )          | (336,673 | ) |
| Other current assets                                                          |   | (99,418                                   | )          | 11,687 |   |
| Accounts payable                                                              |   | (314,641                                  | )          | 71,504 |   |
| Accrued compensation                                                          |   | 18,605                                    |       | 67,192 |   |
| Deferred revenue                                                              |   | (82,750                                   | )          | (162,500 | ) |
| Accrued liabilities                                                           |   | (220,928                                  | )          | 273,983 |   |
| Net cash flows used for operating  activities                                 |   | (1,095,473                                | )          | (194,666 | ) |
|                                                                          |   |                                      |       |   |   |
| INVESTING ACTIVITIES                                                          |   |                                      |       |   |   |
| Purchases of short-term investments                                           |   | 184,714                                   |       | 144,013 |   |
| Purchases of property and equipment                                           |   | (125,033                                  | )          | (115,941 | ) |
| Net cash flows provided by investing  activities                              |   | 59,681                                    |       | 28,072 |   |
|                                                                          |   |                                      |       |   |   |
| FINANCING ACTIVITIES                                                          |   |                                      |       |   |   |
| Issuance of common stock                                                      |   | 6,444                                     |       | 70,662 |   |
| Issuance of preferred stock                                                   |   | 950,000                                   |       | — |   |
| Long term lease obligations                                                   |   | 22,333                                    |       | — |   |
| Net cash flows provided by financing  activities                              |   | 978,777                                   |       | 70,662 |   |
| Net decrease in cash and cash equivalents                                     |   | (57,015                                   | )          | (95,932 | ) |
| Cash and cash equivalents at beginning of  period                             |   | 457,052                                   |       | 800,547 |   |
| Cash and cash equivalents at end of period                                    |   | $                                         | 400,037    |   | $ | 704,615 |   |

 

See accompanying notes.

 

5

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VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2003

(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, 2002included in the Company’s Annual Report on Form 10-K filed with the Securitiesand Exchange Commission, contain additional information about the Company, itsoperations, and its financial statements and accounting  practices, and should be read in conjunctionwith this quarterly report on Form 10-Q. These unaudited consolidated financial statements have been prepared inaccordance with generally accepted accounting principles and with theinstructions on Form 10-Q except that certain information and footnotedisclosures normally contained in financial statements prepared in accordancewith generally accepted accounting principles have been condensed or omitted.

 

The accompanying unaudited consolidated financial statements of theCompany reflect all adjustments of a normal recurring nature which are, in theopinion of management, necessary for a fair presentation of the financialposition, results of operations and cash flows for all periods presented.  The interim financial information containedherein is not necessarily indicative of results for any future interim periodsor for the full fiscal year ending December 31, 2003.

 

At September 30, 2003,the Company had an accumulated deficit of $67.2 million.  The accompanying consolidated financialstatements have been prepared assuming that the Company will continue as agoing concern.  This basis of accountingcontemplates the recovery of the Company’s assets and the satisfaction of itsliabilities in the normal course of conducting business.  Management does not believe that theCompany’s existing capital resources will enable the Company to fund operationsfor the next twelve months. Our existing capital resources are insufficient toenable us to continue operations as currently conducted.  The cash requirement is very serious.  We need additional funding to meet currentcommitments and continue development of our business. We currently have thecash resources to continue our business at its current levels only for ourimmediate needs.  If we do not receiveadditional  funding,  our ability to continue as a going concerncannot be assured. See “Liquidity and Capital Resources.”

 

Management’s plans are tomanage costs in all operational areas until sufficient capital is raised tosupport growth and more substantial revenues materialize. The Company hasimplemented various cost savings plans and continues to manage costs.  However, even with the focus on managingcosts, the Company needs to raise additional funding to continue operationsbeyond 2003. In the event the Company does not receive additional funding, theCompany’s plans include, but are not necessarily limited to: 1) furtherreducing costs and focusing on selling existing products and services; 2)selling certain of the Company’s assets through a merger or

 

6

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acquisition.  Without additionalfinancing, the Company will be required to further delay, reduce the scope of,or eliminate one or more of its research and development projects andsignificantly reduce its expenditures on product deployment, and may not beable to continue as a going concern.

 

2.               Inventories

 

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

 

|                |   | **September 30,  2003** |      | **December 31,  2002** |   |
|---------------------|--------|------------------------------|-----------|-----------------------------|--------|
|                |   | **(Unaudited)**              |      |                        |   |
|                |   |                         |      |                        |   |
| Parts and materials |   | $                            | 1,452,824 |                        | $      | 1,243,304 |   |
| Work in process     |   | 343,707                      |      | 375,414                     |   |
| Finished goods      |   | 947,564                      |      | 919,344                     |   |
|                |   | 2,744,095                    |      | 2,538,062                   |   |
| Less: reserves      |   | (1,042,521                   | )         | (1,044,784                  | )      |
| Inventories, net    |   | $                            | 1,701,574 |                        | $      | 1,493,278 |   |

 

3.   Loss Per Share

 

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

 

4.  Other Comprehensive Income

 

Other comprehensive income/(loss) includes certain changes in equitythat are excluded from net loss. The Company had no items of comprehensiveincome (loss) other than its net loss.

 

7

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5.  Stock-Based Compensation

 

The Company applies the principles of Accounting Principles BoardOpinion No. 25, “*Accounting for Stock Issuedto Employees*,” and related interpretations in accounting for itsemployee stock option compensation plans. Under APB No. 25, compensationexpense is measured as the difference, if any, between the option exerciseprice and the fair value of the Company’s common stock at the date ofgrant.  The Company has historicallygranted options to employees and directors at exercise prices equal to the fairvalue of the Company’s common stock. Accordingly, no compensation expense hasbeen recognized for its employee stock-based compensation plans.

 

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

 

|                                 |   | **For three months ended  September 30,** |     |
|--------------------------------------|--------|------------------------------------------------|----------|
|                                 |   | **2003**                                       |     | **2002** |   |
|                                 |   |                                           |     |   |   |
| Net Loss                             |   |                                           |     |   |   |
| As reported                          |   | $                                              | (697,576 | ) | $ | (283,372 | ) |
| Pro forma compensation expense       |   | (52,372                                        | )        | (67,841 | ) |
| Pro forma SFAS No. 123 net loss      |   | $                                              | (749,948 | ) | $ | (351,213 | ) |
|                                 |   |                                           |     |   |   |
| Basic and diluted net loss per share |   |                                           |     |   |   |
| As reported                          |   | $                                              | (0.14    | ) | $ | (0.06 | ) |
| Pro forma                            |   | $                                              | (0.15    | ) | $ | (0.07 | ) |

 

8

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|                                 |   | **For nine months ended  September 30,** |       |
|--------------------------------------|--------|-----------------------------------------------|------------|
|                                 |   | **2003**                                      |       | **2002** |   |
|                                 |   |                                          |       |   |   |
| Net Loss                             |   |                                          |       |   |   |
| As reported                          |   | $                                             | (1,201,621 | ) | $ | (1,033,979 | ) |
| Pro forma compensation expense       |   | (167,101                                      | )          | (219,302 | ) |
| Pro forma SFAS No. 123 net loss      |   | $                                             | (1,368,722 | ) | $ | (1,253,281 | ) |
|                                 |   |                                          |       |   |   |
| Basic and diluted net loss per share |   |                                          |       |   |   |
| As reported                          |   | $                                             | (0.24      | ) | $ | (0.21 | ) |
| Pro forma                            |   | $                                             | (0.27      | ) | $ | (0.25 | ) |

 

6.  Segment and GeographicInformation

 

*Segment Information:*Prior to 2002, the Company operated in one business segment, the VisualizationTechnology business.  Beginning in 2002,the Company reports revenue and certain operating expense information to thechief operating decision maker for its two operating segments, which aredetermined on the type of customer or product. These segments consist of (1)the Obesity Surgery Management Services business and (2) VisualizationTechnology business.

 

The Company’s chief operating decision maker evaluates the performanceof the two segments based on segment revenues and certain segment costs andexpenses, including cost of revenues and research and developmentexpenses.  Other operating expenses,including sales and marketing expenses and general and administrative expenses,are not allocated or evaluated on an individual segment basis, but rather on anenterprise-wide basis.  A summary of theCompany’s profitability by segment for the three and nine month periods endedSeptember 30, 2003 and 2002 is as follows:

 
|                                                       |   | **Obesity  Surgery  Management** |    | **Visualization  Technology** |   | **Total** |     |
|------------------------------------------------------------|--------|----------------------------------|---------|-------------------------------|--------|-----------|----------|
| **Three Months ended  September 30, 2003:**           |   |                             |    |                          |   |      |     |
| Revenues                                                   |   | $                                | 750,635 |                          | $      | 929,708   |     | $ | 1,680,343 |   |
| Cost of revenues                                           |   | 224,584                          |    | 758,772                       |   | 983,356   |     |
| Research and development                                   |   | —                           |    | 397,740                       |   | 397,740   |     |
| Segment contribution                                       |   | $                                | 526,051 |                          | $      | (226,804  | )        | $ | 299,247 |   |
|                                                       |   |                             |    |                          |   |      |     |
| Reconciliation of segment contribution to  total net loss: |   |                             |    |                          |   |      |     |
| Sales and marketing                                        |   |                             |    |                          |   | 616,545   |     |
| General and administrative                                 |   |                             |    |                          |   | 380,523   |     |
| Interest income                                            |   |                             |    |                          |   | 1,593     |     |
| Interest expense                                           |   |                             |    |                          |   | 1,348     |     |
| Net loss                                                   |   |                             |    |                          |   | $         | (697,576 | ) |

 

9

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|                                                       |   | **Obesity  Surgery  Management** |    | **Visualization  Technology** |   | **Total** |     |
|------------------------------------------------------------|--------|----------------------------------|---------|-------------------------------|--------|-----------|----------|
| **Three Months ended  September 30, 2002:**           |   |                             |    |                          |   |      |     |
| Revenues                                                   |   | $                                | 738,976 |                          | $      | 2,129,389 |     | $ | 2,868,365 |   |
| Cost of revenues                                           |   | 211,591                          |    | 1,419,564                     |   | 1,631,155 |     |
| Research and development                                   |   | —                           |    | 407,579                       |   | 407,579   |     |
| Segment contribution                                       |   | $                                | 527,385 |                          | $      | 302,246   |     | $ | 829,631 |   |
|                                                       |   |                             |    |                          |   |      |     |
| Reconciliation of segment contribution to  total net loss: |   |                             |    |                          |   |      |     |
| Sales and marketing                                        |   |                             |    |                          |   | 670,201   |     |
| General and administrative                                 |   |                             |    |                          |   | 447,094   |     |
| Interest income                                            |   |                             |    |                          |   | 4,292     |     |
| Interest expense                                           |   |                             |    |                          |   | —    |     |
| Net loss                                                   |   |                             |    |                          |   | $         | (283,372 | ) |

 
|                                                       |   | **Obesity  Surgery  Management** |      | **Visualization  Technology** |   | **Total** |       |
|------------------------------------------------------------|--------|----------------------------------|-----------|-------------------------------|--------|-----------|------------|
| **Nine Months ended  September 30, 2003:**            |   |                             |      |                          |   |      |       |
| Revenues                                                   |   | $                                | 2,056,188 |                          | $      | 4,752,230 |       | $ | 6,808,418 |   |
| Cost of revenues                                           |   | 522,501                          |      | 3,331,360                     |   | 3,853,861 |       |
| Research and development                                   |   | —                           |      | 949,921                       |   | 949,921   |       |
| Segment contribution                                       |   | $                                | 1,533,687 |                          | $      | 470,949   |       | $ | 2,004,636 |   |
|                                                       |   |                             |      |                          |   |      |       |
| Reconciliation of segment contribution to  total net loss: |   |                             |      |                          |   |      |       |
| Sales and marketing                                        |   |                             |      |                          |   | 1,810,452 |       |
| General and administrative                                 |   |                             |      |                          |   | 1,430,588 |       |
| Interest income                                            |   |                             |      |                          |   | 38,186    |       |
| Interest expense                                           |   |                             |      |                          |   | 3,403     |       |
| Net loss                                                   |   |                             |      |                          |   | $         | (1,201,621 | ) |

 

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|                                                       |   | **Obesity  Surgery  Management** |      | **Visualization  Technology** |   | **Total** |       |
|------------------------------------------------------------|--------|----------------------------------|-----------|-------------------------------|--------|-----------|------------|
| **Nine Months ended  September 30, 2002:**            |   |                             |      |                          |   |      |       |
| Revenues                                                   |   | $                                | 2,609,944 |                          | $      | 5,740,909 |       | $ | 8,350,853 |   |
| Cost of revenues                                           |   | 678,108                          |      | 3,824,076                     |   | 4,502,184 |       |
| Research and development                                   |   | —                           |      | 1,305,649                     |   | 1,305,649 |       |
| Segment contribution                                       |   | $                                | 1,931,836 |                          | $      | 611,184   |       | $ | 2,543,020 |   |
|                                                       |   |                             |      |                          |   |      |       |
| Reconciliation of segment contribution to  total net loss: |   |                             |      |                          |   |      |       |
| Sales and marketing                                        |   |                             |      |                          |   | 2,129,471 |       |
| General and administrative                                 |   |                             |      |                          |   | 1,462,045 |       |
| Interest income                                            |   |                             |      |                          |   | 14,517    |       |
| Interest expense                                           |   |                             |      |                          |   | —    |       |
| Net loss                                                   |   |                             |      |                          |   | $         | (1,033,979 | ) |

 

The Company reports assets on a consolidated basis to the chiefoperating decision maker, and all the assets are located within the UnitedStates.

 

*Geographicinformation:* Net sales by major geographical area,determined on the basis of destination of the goods, are as follows:

 
|          |   | **Three  months ended September 30,** |      |
|---------------|--------|--------------------------------------------|-----------|
|          |   | **2003**                                   |      | **2002** |   |
| United States |   | $                                          | 1,164,637 |   | $ | 1,845,015 |   |
| Europe        |   | 515,706                                    |      | 1,023,352 |   |
| Total         |   | $                                          | 1,680,343 |   | $ | 2,868,367 |   |

 
|          |   | **Nine  months ended September 30,** |      |
|---------------|--------|-------------------------------------------|-----------|
|          |   | **2003**                                  |      | **2002** |   |
| United States |   | $                                         | 4,526,003 |   | $ | 5,720,559 |   |
| Europe        |   | 2,282,415                                 |      | 2,630,294 |   |
| Total         |   | $                                         | 6,808,418 |   | $ | 8,350,853 |   |

 

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7.  Stockholders’ Equity

 

In March, 2003, the Company authorized and issued 1,000,000 shares ofSeries A Convertible Preferred Stock (the “Series A Shares”), which werecreated pursuant to the terms of a Certificate of Designations, for anaggregate of $950,000 in cash.  Inconnection with this financing, the purchasers of Series A Shares were grantedseveral significant rights senior to the rights of holders of our commonstock.  Among other rights, in the eventof a liquidation, dissolution or winding up of our Company (includingconsolidations, mergers or other sales), holders of Series A Shares will beentitled to receive $3.80 per share, in preference to any distribution to theholders of common stock.  Also, pursuantto the Certificate of Designations, the Company must obtain the consent of theholders of at least two-thirds of the outstanding Series A Shares in order toundertake certain actions, including capital expenditures and the issuance ofequity securities.  Additionally, for solong as Series A Shares remain outstanding more than three hundred ninety (390)days following the initial issuance of the Series A Shares, the holders ofSeries A Shares will be entitled to elect the greater of (i) two members of theCompany’s Board of Directors or (ii) twenty-five percent (25%) of the totalmembers of the Company’s Board of Directors.

 

The Series A Shares may be redeemed by the Company upon certain events,including a Major Transaction which is defined as a sale, transfer or otherdisposition of substantially all of the Company’s assets related to both itsOEM endoscopic business and its 3D business in a single transaction or a seriesof related transactions.  The per shareredemption price could be between $2.67 and $2.93.

 

The holders of the outstanding Series A Shares have the right to onevote for each share of Common Stock into which such Series A Series could thenbe converted, and with respect to such vote, such holder shall have full votingrights and powers equal to the voting rights and powers of the holders ofCommon Stock.

 

The holders of Series A Shares are entitled to receive dividends, outof any assets legally available therefore, prior and in preference to anydeclaration or payment of any cash dividend on the Common Stock, at the rate of$0.1425 per share per annum.

 

8.  New Accounting Standards

 

In December 2002, the FASB issuedStatement of Financial Accounting Standards No. 148, “*Accounting for Stock-BasedCompensation—Transition and Disclosure*,” (“FAS 148”).FAS 148 amends FAS 123 and Accounting Principles Board OpinionNo. 28, “*Interim Financial Reporting*” to present alternative methodsof transition for an entity that voluntarily adopts the fair value based methodof accounting for stock-based employee compensation, and provides modificationsto the disclosure provisions to require prominent disclosure about the effectson reported net income of an entity’s accounting policy decisions with respectto stock-based employee compensation in quarterly and annual financialstatements. At this time, the Company has not voluntarily adopted the fairvalue method of accounting under FAS 123. However,

 

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appropriate disclosures about the effects onreported net loss of the Company’s accounting policy with respect tostock-based employee compensation are provided above.

 

In January, 2003, the FASB issuedInterpretation No. 46, Consolidation of Variable Interest Entities, (FIN 46) toclarify the conditions under which assets, liabilities and activities ofanother entity should be consolidated into the financial statements of acompany.  FIN 46 requires theconsolidation of a variable interest entity by a company that bears themajority of the risk of loss from the variable-interest entity’s activities, isentitled to receive a majority of the variable-interest entity’s residualreturns or both.  The provisions of FIN46 are required to be adopted by the Company in fiscal 2003.  The Company does not believe the adoption ofFIN 46 will have a material impact on its overall financial position or resultsof operations.

 

In June 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristicsof Both Liabilities and Equity*. The statement is effective for financial instruments entered into ormodified after May 31, 2003, and otherwise is effective at the beginningof the first interim period beginning after June 15, 2003.  The adoption of this statement did not havea material effect on the results of operations or financial position of theCompany.

 

9.  Warranty Accrual

 

The Company provides for an estimated amountof product warranty at the time revenue is recognized. This estimated amount isprovided by product and based on historical warranty experience.  A rollforward of the customer warrantyaccrual is as follows:

 

| Balance at  December 31, 2002  |   | $       | 45,261 |   |
|-------------------------------------|--------|---------|--------|--------|
|                                |   |    |   |
| Warranty expense                    |   | 30,423  |   |
|                                |   |    |   |
| Deductions and  other               |   | (27,500 | )      |
|                                |   |    |   |
| Balance at  September 30, 2003 |   | $       | 48,184 |   |

 

Item 2.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

THIS QUARTERLY REPORT MAY CONTAIN PREDICTIONS, ESTIMATES AND OTHERFORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES,INCLUDING THOSE DISCUSSED BELOW AT “RISKS AND UNCERTAINTIES.”  WHILE THIS OUTLOOK REPRESENTS OUR CURRENTJUDGMENT ON THE FUTURE DIRECTION OF OUR BUSINESS, SUCH RISKS AND UNCERTAINTIESCOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM

 

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ANY FUTURE PERFORMANCE SUGGESTED BELOW.  WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANYREVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCESARISING AFTER THE DATE OF THIS QUARTERLY REPORT.  THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OURCONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 1 OFTHIS QUARTERLY REPORT ON FORM 10-Q AND OUR 2002 ANNUAL REPORT ON FORM 10-K,FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

**Overview of our business**

 

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

 

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

 

**Critical AccountingPolicies**

 

The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesof America requires management to make judgments, assumptions and estimatesthat affect the amounts reported in our consolidated financial statements andthe accompanying notes.  The amounts ofassets and liabilities reported in our balance sheets and the amounts ofrevenues and expenses reported for each of our fiscal periods are affected byestimates and assumptions which are used for, but not limited to, accountingfor product returns**,**allowance for doubtful accounts, warrantyand****technicalservice costs, inventory and income taxes. Actual results could differ from these estimates.  The following critical accounting policiesare significantly affected by judgments, assumptions and estimates used in thepreparation of the consolidated financial statements.

 

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Revenue Recognition

 

Revenue generated from Laparoscopic Bariatric Surgical (LBS)Preceptorship program sales is recognized (i) with regard to equipment sales,upon shipment of equipment and marketing materials and (ii) with regard totraining services, upon completion of the related training component, providedthat a purchase order has been received, there are no uncertainties regardingcustomer acceptance, the sales price is fixed or determinable andcollectibility is deemed probable. Sales of all other products are similarly recognized upon shipmentprovided that a purchase order has been received, there are no uncertaintiesregarding customer acceptance, the sales price is fixed or determinable andcollectibility is deemed probable.

 

The Company receives semiannual payments as a result of fulfillingcertain obligations related to its strategic alliance agreement with EthiconEndo-Surgery, Inc. (EES).  Thesepayments are recognized as revenue on a straight-line basis over the relatedcontract term, provided that the Company has complied with all contractualobligations.

 

Inventory

 

Inventory is accounted for on a first-in first-out basis and is valuedat the lower of cost or market. The Company regularly evaluates inventory forobsolescence and reserves for 100% of inventory considered to be obsolete.  At September 30, 2003 such inventoryreserves approximated $1,043,000.  TheCompany believes it is adequately reserved for obsolescence of currentinventory.  However, future productintroductions and related inventories may require additional reserves basedupon changes in market demand or introduction of competing technologies.

 

**Our results ofoperations for three-months and nine-months ended September 30, 2003versus three-months and nine-months ended September 30, 2002**

 

Revenues.  We had revenue fromproduct sales and contract revenue of $1,680,000 and $6,808,000 for thethree-and nine months ended September 30, 2003, respectively, compared torevenues from product sales and contract revenue of $2,868,000 and $8,351,000for the three- and nine-months ended September 30, 2002,respectively.  The decrease in revenuefor both the three-and nine-month periods was due primarily to lower unit salesfrom our Visualization Technology Business.

 

Cost of Revenues.  Our cost ofrevenues were $983,000 and $3,854,000 for the three- and nine-months endedSeptember 30, 2003, respectively, and $1,631,000 and $4,502,000 for thethree-and nine-months ended September 30, 2002, respectively.  Our gross margins were 41% and 43% for thethree- and nine-months ended September 30, 2003, respectively, and 43% and46% for the three-and nine-months ended September 30, 2002,respectively.  The decrease in grossmargin was primarily due to lower sales of our higher margin Obesity SurgeryManagement Services Business.

 

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Research and Development Expenses. Our research and development expenses were $398,000 and $950,000 for thethree-and nine-months ended September 30, 2003, respectively, and $408,000and $1,306,000 for the three-and nine-months ended September 30, 2002,respectively.  The decrease in researchand development expenses was primarily attributable to a reduction in nextgeneration product development.  Weexpect our research and development expenses to remain at or near currentlevels in the next several quarters as we finalize our next generation ofproducts for the general surgery market.

 

Sales and Marketing Expenses. Sales and marketing expenses were $617,000 and $1,810,000 for thethree-and nine-months ended September 30, 2003, respectively, and $670,000and $2,129,000 for the three-and nine-months ended September 30, 2002,respectively. The decrease in sales and marketing expense reflects a reductionin consulting and promotional activities for the obesity surgery market. Weexpect our sales and marketing expenses to increase proportionately during thenext several quarters as we begin to increase our field activities for theobesity surgery market.

 

General and Administrative Expenses. General and administrative expenses were $381,000 and $1,431,000 for thethree-and nine-months ended September 30, 2003, respectively, and $447,000and $1,462,000 for the three-and nine-months ended September 30, 2002,respectively.  We expect our general andadministrative expenses to remain at or near current levels for the next severalquarters.

 

Interest Income.  Our net interestincome was $2,000 and $38,000 for the three-and nine-months endedSeptember 30, 2003, respectively, and $4,000 and $14,000 for the three-andnine-months ended September 30, 2002, respectively.  The increase in net interest income duringthe 2003 period was due primarily to interest income recognized from notesreceivable from stockholders partially offset by decreasing cash balances.

 

**Liquidity and capitalresources**

 

Net cash used for operating activities for the nine-months endedSeptember 30, 2003 was $1,703,000 compared to net cash used of $195,000for the corresponding nine-month period in 2002.  The increase in net cash used in operating activities during the2003 period primarily attributable to increased accounts payable payments alongwith higher inventory purchases, and an increase in the net loss.

 

Net cash provided by investing activities was $60,000 for thenine-months ended September 30, 2003 compared to $28,000 of net cash usedin the same period in 2002.  Theincrease in net cash provided by investing activities during the 2003 periodwas primarily attributable to increasing maturities of short term investments.

 

Net cash provided by financing activities was $956,000 for thenine-months ended September 30, 2003, compared to $71,000 for the sameperiod in 2002.  The increase in netcash provided by financing activities during the 2003 period was primarilyattributable to the closing of a private placement of shares of our Series AConvertible Preferred Stock for total proceeds of $950,000.  During the nine months endedSeptember 30, 2003, we had no advances from our

 

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credit facility.

 

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

 

Weincurred operating losses in 2000, 2001 and 2002, and at September 30,2003, had an accumulated deficit of $67.2 million.  At September 30, 2003, we had cash and short-terminvestments of $588,000.  InMarch 2003, we sold $950,000 of preferred stock in a private placement totwo accredited investors.  In addition,we have amounts available under a $2.0 million bank line of credit facility,which expires in October 2003 and has been renewed throughOctober 2004.  However, the amountsavailable under this line of credit facility are available only with respect toaccounts receivable, which totaled approximately $917,000 at September 30,2003.  We do not believe that thesesources of liquidity will be sufficient to meet our anticipated capitalrequirements.  This cash requirement isvery serious and we will require additional funds to continue our businessbeyond the end of 2003.  Certaincircumstances, including a continued slow rate of product orders or decliningrevenues in our Obesity Surgery Management Services business would accelerateuse of our remaining funds.   There canbe no assurance that the requisite funding will be consummated in the necessarytime frame or on terms acceptable to us. Should we be unable to raise sufficient funds, we may be required tocurtail our operating plans and possibly relinquish rights to portions of ourtechnology or products.  No assurancecan be given that we will be able to continue as a going concern.

 

Item 3.             Quantitative and Qualitative DisclosuresAbout Market Risk

 

At September 30, 2003, our investment portfolio includedfixed-income securities of $0.4 million. These securities are subject to interest rate risk and will decline invalue if interest rates increase.  Theseinvestments are not held for trading or other speculative purposes. Due to theshort duration of our investment portfolio, an immediate 10 percent increase ininterest rates would have no material impact on our financial condition orresults of operations.

 

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

 

RISKS ANDUNCERTAINTIES

 

You should consider the following factors carefully in evaluating aninvestment in Vista Medical in addition to the other information in thisreport.  You are cautioned that thestatements in this quarterly report that are not descriptions of historicalfacts may be forward-looking statements that are subject to risks anduncertainties.  Our actual results coulddiffer materially

 

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from those currently anticipated due to a number of factors, includingthose identified in this section and elsewhere in this annual report.  We undertake no obligation to releasepublicly the results of any revisions to these forward-looking statements toreflect events or circumstances arising after the date of this quarterlyreport.  The following discussion shouldbe read in conjunction with our consolidated financial statements and notesthereto.

 

**We are dependent uponadditional funding to meet current commitments, continue the development of ourbusiness and maintain our ability to continue as a going concern.**

 

At September 30, 2003, we had cash, cash equivalents andshort-term investments of $588,000. We believe that these cash resources,together with cash from operations will not be sufficient resources for thenext three months.  This cashrequirement is very serious.  We needadditional funding to meet current commitments and continue development of ourbusiness.  Our current cash resourceswill only allow us to continue our business at its current levels for ourimmediate needs.  If we do not receiveadditional funding, our ability to continue as a going concern cannot beassured.

 

**Our long-term successas a business is dependent on our ability to grow our Obesity SurgeryManagement Services business, which will require that we raise additionalfunds.**

 

We are working on initiatives to extend our business, most immediatelyin the surgical obesity****market, by****adding new products andservices. For our business to be successful, we believe we must establish andgrow our Obesity Surgery Management Services business, including establishingprograms which we will manage directly, in partnership with surgeons andhospitals (Vista Obesity and Wellness Institute.).  As a result, we may be required to raise additional funds tosupport our planned operations.  Inaddition, if we are unable to sustain our cash flow under our current businessplan, we will be required to raise additional funds.  If we are unable to raise sufficient funds from an offering ofsecurities or otherwise, we may be unable to continue operations at theircurrent level and may be unable to pursue our new objectives.

 

Establishing our newservices business will be expensive and time-consuming.  Significant management time and energy willbe diverted from our existing visualization technology business as we attemptto establish relationships and partnerships with surgeons and entities willingto participate in the establishment of our obesity surgery centers.  These centers will also be financiallycostly to establish and operate.  If wedo not generate sufficient surgical procedures through these centers, the feeswe receive for the services we provide may be insufficient to sustain thebusiness.

 

**We are not incompliance with the requirements to maintain the listing of our common stock onNasdaq SmallCap Market and may be subject to de-listing, which could negativelyaffect the liquidity of our stock and our ability to raise capital.**

** **

The quantitative standards for continued listing on the Nasdaq SmallCapMarket requires a company to have stockholders’ equity of at least $2,500,000(or satisfy alternative requirements). Failure to comply with these requirements subjects a company tode-listing proceedings.  As ofSeptember 30, 2003, we had stockholders’ equity of $1,946,102, below the

 

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required level.  If currenttrends in our business continue, our stockholders’ equity will drop quickly inthe near future.  We also do not complywith the alternative listing requirements. This may subject us to de-listing. The de-listing of our common stock from the Nasdaq SmallCap Market maymaterially impair our stockholders; ability to buy and sell shares of ourcommon stock and could have an adverse affect on the market price of, and theefficiency of the trading market for, our common stock.   In addition, the de-listing of our commonstock could significantly impair our ability to raise capital, which is crucialto the success of our business.

 

**We have a history of losses and may notbecome profitable.**

 

Since our formation in July 1993, and as of September 30,2003, we have incurred cumulative net losses of $67.2 million.  We expect to incur losses for the foreseeablefuture.  We may never achieve or sustainprofitability in the future.  Even if weachieve profitability, we may not be able to sustain it on an ongoing basis.

 

**As a company, we donot have experience in the ownership and management of health care servicebusinesses**.

 

As a company we do not have extensive experience in providingmanagement services and have no direct experience in the management ofbariatric surgical programs.  We havebeen involved in the development of bariatric surgical programs since 2000, buthave never directly managed these programs. As such, we have only a limited and indirect operating history uponwhich an evaluation of our prospects in this business sector can be based.  Our prospects therefore, must be consideredin light of the risks, expenses and difficulties frequently encountered bycompanies in their early stages of development, particularly when involved innew and rapidly evolving markets.  Toaddress these risks, we must, among other things, respond to competitivedevelopments and attract, retain and motivate qualified staff.  There can be no assurance that we will besuccessful in addressing such risks or in implementing our business strategy.  There can be no assurance that we will beable to achieve or sustain revenue growth or profitability.

 

**Theterms of our recent preferred stock financing confer senior rights to theholders of Series A Convertible Preferred Stock, and these rights may impairthe interests of our common stockholders or impact our results of operations.**

 

We recently issued 1,000,000shares of our Series A Convertible Preferred Stock (the “Series A Shares”),which were created pursuant to the terms of a Certificate of Designations, foran aggregate of $950,000 in cash.  Inconnection with this financing, the purchasers of Series A Shares were grantedseveral significant rights senior to the rights of holders of our commonstock.  Among other rights, in the eventof a liquidation, dissolution or winding up of our company (includingconsolidations, mergers or other sales), holders of Series A Shares will beentitled to receive up to $3.80 per share held by them, in preference to anydistribution to the holders of common stock. Also, pursuant to the Certificate of Designations, we must obtain theconsent of the holders of at least two-thirds of the outstanding Series AShares in order to undertake certain actions, including capital expendituresand the issuance of securities. Additionally, for so long as any Series A Shares remain outstandingafter three hundred ninety

 

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(390) days following the initial issuance of any Series A Shares, theholders of Series A Shares will be entitled to elect the greater of (i) twomembers of our Board of Directors or (ii) twenty-five percent (25%) of thetotal members of our Board of Directors. As a result, in the event we do not achieve the criteria necessary forus to redeem some or all of the Series A Shares (e.g., a sale of all or aportion of our visualization technology business), the holders of Series AShares will have the right to control at least one-fourth of the seats on ourBoard of Directors.

 

The Series A Shares aresubject to redemption by us upon certain events.  If we choose to redeem some or all of the Series A Sharespursuant to the terms of our Certificate of Designations, we will use cash thatwould otherwise fund our business operations. Although we may believe that such a redemption is the best availablebusiness option, valuable cash would nonetheless be consumed.  This could impact our ability to fundoperations or grow our business.

 

The holders of Series AShares are also entitled to require us to register their shares.  We may be required to register their shareson Form S-3 within 30 days after request, and in any event prior to fourhundred (400) days following the initial issuance of Series A Shares.  This registration will consume managementtime and effort as well as some cash resources.

 

**Success of the VistaObesity and Wellness (VOW) Centers depends on our entering into agreements withhospitals and surgeons; the time to conclude these agreements may be extendedand thereby delay or prevent the implementation of our strategy.**

 

We plan to set up our VOW Centers in conjunction with hospitals andsurgeons.  There can be no assurancethat negotiations for the establishment of these Institutes will not beprotracted or impossible to negotiate satisfactorily.  Because of our limited experience in negotiating and concludingthese agreements, we cannot accurately predict the time and expense involved,and any unexpected delays could prevent the execution of our strategic plan.

 

**We expect to needadditional funding if we are to fully develop the VOW Center concept.**

 

Any deviation in the timing or projected cash flow of our ObesitySurgery Strategy may cause us to require additional investment capital.  There can be no assurance that such capitalwill be available to the extent required, or at all.  The amount of additional capital which we may need to raise willdepend on many factors, including:

 

•                  the extent towhich the Centers and other services gain market acceptance,

•                  the speed withwhich we can execute our plan;

•                  the levels ofreimbursement for procedures performed;

•                  the extent ofcompetition.

 

**Our liquidity andcapital requirements will be difficult to predict.**

 

Moreover, our liquidity and capital requirements will depend upon othernumerous factors, including the following:

 

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•                                          Theextent to which our products and services gain market acceptance;

 

•                                          Costsassociated with establishing marketing, and operating our Obesity SurgeryManagement Services Business and other related programs;

 

•**                                         **Theprogress and scope of product evaluations;

 

•                                          Thetiming and costs of filing future regulatory submissions;

 

•                                          Thetiming and costs required to receive both domestic and internationalgovernmental approvals;

 

•                                          Thetiming and costs of product and services introductions;

 

•                                          Theextent of our ongoing research and development programs;

 

•                                          Thecosts of sponsorship training of the physicians to become proficient in the useof our products and procedures;

 

•                                          Thecosts of developing marketing and distribution capabilities.

 

Even if we are successful in raising additional funds, circumstances,including slow rate of market acceptance of our products or our inability toscale up manufacturing, would accelerate our use of proceeds from any offeringwe might do and require us to seek additional funds to support our operatingrequirements.

 

**After establishing aVOW Center, we must continue to prove our value proposition.**

 

In order to successfully negotiate and complete agreements with doctorsand hospitals to establish a VOW Center, we will present them with our projectedrevenues and operational metrics.  Wecannot assure you that our projections will prove accurate or that we will beable to provide the anticipated metrics. Our projections are based on limited input and operational history andfailure to meet such projections will negatively impact our business.

 

**We operate in acompetitive market; new technologies, procedures, or pharmaceuticals couldradically change the modality of treatment of morbid obesity and negativelyimpact our management services business and the projected VOW Centers**.

 

The market for products and services that address obesity iscompetitive and new offerings and technologies are becoming availableregularly.  We are aware of severaldevelopments, primarily involving nerve stimulation or balloon technology,which may come to the market in the next few years.  These devices would be implanted or placed in a relatively simpleendoscopic procedure.  If they prove tobe more effective than gastric bypass surgery in curing morbid obesity, then theeconomic structure of the business could be negatively impacted. Also, manypharmaceutical companies are researching drug therapies for combatingobesity.  If they prove successful infinding a more effective solution for morbid obesity than gastric bypasssurgery, then demand for surgery is likely to decline substantially.

 

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We cannot guarantee that we will compete successfully against ourcurrent or potential competitors, especially those with significantly greaterfinancial resources or brand name recognition.

 

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

 

Our future success will depend to a large extent on retaining our coreoperating management team and recruiting sufficient qualified employees tomanage and staff our services businesses. There is likely to be a competitive labor market for such staff andthere is no assurance that we will be able to attract and retain an adequatenumber of suitable employees.

 

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

 

We only have a small direct sales force and, in the past, we were primarilydependent on agreements with third parties for sales of the majority ofproducts derived from our core three-dimensional technology.  Two of our primary distribution agreementswere terminated in 2000.  We enteredinto an arrangement with Jomed N.V. in May, 2000 to transition distribution incardiac surgery and to continue supporting our cardiac customer base.  However, the success of this transitiondepends upon the concurrent development of new technology by Jomed N.V. and maynot be achieved in a reasonable timeframe, or at all.  If we are unable to make this transition, we may be unsuccessfulin distributing our cardiac surgery products and may lose revenues. Jomedapplied for bankruptcy protection in the Netherlands in January, 2003.  We have not yet elected to terminate ouragreement pending clarification of Jomed’s ongoing status.

 

In addition, during 2000, we changed our strategic emphasis for ourcore three-dimensional technology for applications in general surgery,gynecology and urology.  We cannotassure you that we will be successful in these areas of sales.  Even if we are successful, we cannot assureyou that the revenue achieved in these areas of emphasis will be sufficient tocompensate for any loss of sales revenue from the termination of our previousdistribution agreements for cardiac products. Either of these results could have an adverse affect on our financialcondition and results of operations.

 

**Our profitability isdependent upon the successful commercialization of our visualization technologyproducts and the establishment and growth of our obesity surgery managementservices business.**

 

Products derived from our core visualization technology – the Endositefor general surgery and the Series 8000 for minimally invasive cardiac surgery– are expected to account for the majority of our visualization technologyrevenues over the next several years. The demand for these products may not be sufficient to allow us toachieve profitable operations.  Ourdevelopment efforts for improvements to these products may not besuccessful.  In addition, other productsunder development may not be shown to be safe or effective, capable of beingmanufactured in commercial quantities at acceptable costs, acquire appropriateregulatory clearances or be successfully marketed.  Our obesity surgery management services business is of relativelyrecent origin and it is difficult to predict its longer term success.

 

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

 

Complex minimally invasive procedures are only performed on a verylimited basis by a relatively small number of highly skilled surgeons.  We are unable to predict how quickly, if atall, complex minimally invasive procedures will be adopted by the medicalcommunity or, if they are adopted, the number of procedures that will be performed.

 

Even if the clinical safetyand effectiveness of complex minimally invasive procedures is established ingeneral surgery, cardiac and other specialties, surgeons and other physiciansmay choose not to recommend the procedures for any number of other reasons.  Adoption of these procedures by doctors willdepend, for example, upon our ability to facilitate and sponsor training ofsurgeons to perform complex minimally invasive procedures and the willingnessof these surgeons to perform such procedures. Doctors may also elect not to recommend the minimally invasiveprocedures based on possible unavailability of acceptable reimbursement fromhealth care payors.  Health care payoracceptance may require evidence of the cost effectiveness of minimally invasiveprocedures as compared to other currently available treatments.  We believe that physician endorsements willbe essential for clinical adoption of minimally invasive procedures and theseendorsements 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 andseverity of complications associated with, the procedure as compared to othertreatments.

 

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

 

Evaluations of visualization technology, such as ours, which have beenconducted to date, have shown that there is a learning process involved forsurgeons and other members of the surgery team to become proficient with theuse of the systems.  Based on theclinical and laboratory procedures performed to date, we cannot assure you thatvisualization and information system enhancements incorporated, or to beincorporated, in our products will prove suitable for use by a substantialnumber of surgeons.  If they proveunsuitable for a large number of surgeons to use, the potential markets andapplications for our products would be significantly limited.

 

**There are significantrisks associated with any scale-up of manufacturing which may be required tomeet market demand and become profitable.**

 

We have never established high-volume manufacturing operations and ifwe are required to do so to meet market demand or to become profitable, we maynot be able to establish or maintain reliable operations at commerciallyreasonable costs.  We may also requireadditional manufacturing facilities if production volumes increase.  Acquisition of new manufacturing facilitieswould also likely involve relocation. Difficulties in scaling up manufacturing of products could result fromproblems involving:

 

•                                          qualitycontrol and assurance,

 

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•                                          componentand service availability,

 

•                                          adequacyof control policies and procedures,

 

•                                          lackof qualified personnel,

 

•                                          compliancewith FDA regulations and the need for further FDA approval of new manufacturingprocesses and facilities and

 

•                                          otherproduction constraints.

 

We have considered and will continue to consider as appropriate, theinternal manufacture of sub-assemblies currently provided by third-partysubcontractors, as well as the implementation of new production processes.  Our manufacturing yields or costs mayincrease as a result of the transition to in-house production or to newproduction processes when such efforts are undertaken.  In addition, costs to comply with FDA goodmanufacturing practices or changes in such practices may exceed ourexpectations.

 

**We may face componentshortages 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 andservices used in our systems for which we have only a single source ofsupply.  The manufacture of our productsin larger commercial quantities will require a substantial increase incomponent supplies and will likely necessitate the replacement of currentsuppliers or the addition of new suppliers. The qualification of additional or replacement vendors for specifiedcomponents or services is a lengthy process. In addition, the substitution of replacement vendors may entailre-engineering time and cost and could delay the supply of our products.

 

We expect to manufacture our products based on forecasted productorders and intend to purchase subassemblies and components prior to receipt ofpurchase orders from customers.  Leadtimes for ordered materials and components vary significantly and depend onfactors such as the business practices of the specific supplier, contract termsand 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 orinadequate inventory if orders do not match forecasts.

 

**The provision ofhealth care services is subject to considerable regulation by state and federalagencies.**

 

The Institutes will need to comply with many laws and regulations, bothstate and federal, which govern the provision of health care services.  If they fail to comply with any such lawsand regulations, then the penalties involved could be serious, time-consumingfor management and expensive. Inexperience in health care services could contribute to an inadvertentbreach of laws or regulations.  (SeeGovernmental Regulation.)

 

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**We are subject tosignificant domestic and international regulation and may not be able to obtainnecessary regulatory clearances to sell our products.**

 

The manufacture and sale of medical devices intended for commercialdistribution are subject to extensive governmental regulation.  Our failure to comply with regulatoryrequirements would jeopardize our ability to market our products.  Noncompliance with applicable requirementscan result in failure of the regulatory agency to grant pre-market clearance orapproval for devices, withdrawal or suspension of approval, total or partialsuspension of production, fines, injunctions, civil penalties, refunds, recallor seizure of products and criminal prosecution.

 

Medical devices are regulated in the United States primarily by the FDAand, to a lesser extent, by state agencies. Sales of medical device products outside the United States are subjectto foreign regulatory requirements that vary from country to country.  Generally, medical devices requirepre-market clearance or pre-market approval prior to commercialdistribution.  A determination thatinformation available on the medical device is not sufficient to grant theneeded clearance or approval will delay market introduction of the product.  In addition, material changes ormodifications to, and changes in intended use of, medical devices also aresubject to FDA review and clearance or approval.  The FDA regulates the research, testing, manufacture, safety,effectiveness, labeling, storage, record keeping, promotion and distribution ofmedical devices in the United States and the export of unapproved medicaldevices from the United States to other countries.  The time required to obtain approvals required by foreigncountries may be longer or shorter than that required for FDA clearance, andrequirements for licensing may differ from FDA requirements.  The current regulatory environment in Europefor medical devices differs significantly from that in the United States.

 

**We expect toencounter rapid technological change and significant competition.**

 

The medical device market in which we compete is characterized byintensive development efforts and rapidly advancing technology.  Our future success will depend, in largepart, upon our ability to anticipate and keep pace with advancing technologyand competing innovations.  We may notbe successful in identifying, developing and marketing new products orenhancing our existing products.

 

We believe that a number of large companies, with significantly greaterfinancial, manufacturing, marketing, distribution and technical resources andexperience than ours, are focusing on the development of visualization productsfor minimally invasive microsurgery. Several companies are currently developing and marketing visualizationproducts for minimally invasive microsurgery which could be applied to generalsurgery or heart surgery.

 

Technological advances with other therapies such as drugs,interventional procedures or future innovations in surgical techniques couldmake such other therapies more effective or lower in cost than minimallyinvasive microsurgery procedures and could diminish growth prospects forminimally invasive microsurgery.

 

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**We expectfluctuations in our operating results.**

 

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

 

•                                          timingand results of product evaluations,

 

•                                          delaysassociated with the FDA and other regulatory approval processes,

 

•                                          demandfor and utilization of our products,

 

•                                          changesin our pricing policies or those of our competitors,

 

•                                          changesin third-party payment guidelines,

 

•                                          thenumber, timing and significance of product enhancements and new productannouncements by us or our competitors,

 

•                                          ourability to develop, introduce and market new and enhanced versions of ourproducts on a timely basis,

 

•                                          customerorder deferrals in anticipation of enhancements or of new product introductionsby us or our competitors,

 

•                                          productquality problems,

 

•                                          personnelchanges and

 

•                                          thelevel of international sales.

 

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

 

Our profitability is directly related to the level of payments for thesurgical procedures in which our products are involved, either by Medicare orprivate insurance companies.  We couldbe adversely affected by changes in payment policies of government or privatehealth care payors, particularly to the extent any such changes affect paymentfor the procedure in which our products are intended to be used.  It is a continuing trend in U.S. health carefor such payments to be under continual scrutiny and downward pressure.  We believe that reimbursement in the futurewill be subject to increased restrictions, both in the United States and inforeign markets and that the overall escalating cost of medical products andservices has led to and will continue to lead to increased pressures on thehealth care industry, both foreign and domestic, to reduce the cost of productsand services, including products which we offer.

 

We expect that our products typically will be used by hospitals andsurgical centers, which bill various third-party payors, such as governmentalprograms and private insurance plans, for the health care services provided totheir patients.  Third-party payorscarefully review and increasingly challenge the prices charged for medicalproducts and services or negotiate a flat rate fee in advance.  Payment rates from private companies alsovary depending on the procedure performed, the third-party payor, the insuranceplan and other factors.  Medicarecompensates hospitals at a predetermined fixed amount for the costs associatedwith an in-patient

 

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hospitalization based on the patient’s discharge diagnosis andcompensates physicians at a pre-determined fixed amount based on the procedureperformed, regardless of the actual costs incurred by the hospital or physicianin furnishing the care and unrelated to the specific devices or systems used inthat procedure.  Medicare and otherthird-party payors are increasingly scrutinizing whether to cover new productsand the level of payment for new procedures. The flat fee reimbursement trend is causing hospitals to control costsstrictly in the context of a managed care system in which health care providerscontract to provide comprehensive health care for a fixed cost per person.  We are unable to predict what changes willbe made in the reimbursement methods utilized by such third-party payors.

 

If we obtain the necessary foreign regulatory registrations orapprovals, market acceptance of our products in international markets would bedependent, in part, upon the acceptance by the prevailing health care financingsystem in each country.  Health carefinancing systems in international markets vary significantly by country andinclude both government sponsored health care programs and privateinsurance.  We cannot assure you thatthese financing systems will endorse the use of our products.

 

**We have limitedexperience directly marketing our products overseas and may not be successfulin expanding into international markets without experienced partners.**

 

We have limited experience in directly marketing our productsoverseas.  Changes in overseas economicconditions, currency exchange rates, foreign tax laws or tariffs or other traderegulations could negatively impact our business.  The anticipated international nature of our business is alsoexpected to subject our representatives, agents and distributors to laws andregulations of the foreign jurisdictions in which they operate or in which ourproducts are sold, including laws regulating manufacture and sale of medicaldevices.  In addition, the laws of someforeign countries do not protect our intellectual property rights to the sameextent as do the laws of the United States.

 

**We may be subject toproduct liability claims and have limited insurance coverage.**

 

We face an inherent and significant business risk of exposure toproduct liability claims in the event that the use of our products results inpersonal injury or death.  Also, in theevent that any of our products proves to be defective, we may be required torecall or redesign such products.  Ourcurrent product liability insurance coverage limit is $10.0 million peroccurrence and in the aggregate.  Ourcoverage limits may not be adequate to protect us from any liabilities we mightincur in connection with the development, manufacture and sale of ourproducts.  In addition, increasedproduct liability coverage may be required if additional products are used inclinical evaluations or successfully commercialized.  Product liability insurance is expensive and in the future maynot be available to us on acceptable terms, if at all.  A successful product liability claim orseries of claims brought against us in excess of our insurance coverage or aproduct recall would negatively impact our business.

 

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**If we are unable toprotect our intellectual property, we may be unable to prevent other companiesfrom using our technology in competitive products.**

 

Our future success will depend, in part, on our ability to continuedeveloping patentable products, enforcing our patents and obtaining patentprotection for our products both in the United States and in othercountries.  The patent positions ofmedical device companies, however, are generally uncertain and involve complexlegal and factual questions.  Patentsmay never issue from any patent applications owned by or licensed to us.  Even if patents do issue, the claims allowedmay not be sufficiently broad to protect our technology.  In addition, issued patents owned by orlicensed to us may be challenged, invalidated or circumvented, or the rightsgranted thereunder may not provide us with competitive advantages.

 

The medical device industry has been characterized by extensivelitigation regarding patents and other intellectual property rights.  Litigation, which would result insubstantial expense, may be necessary to enforce any patents issued or licensedto us and/or to determine the scope and validity of proprietary rights of thirdparties or whether our products, processes or procedures infringe any suchthird-party proprietary rights.  We mayalso have to participate in interference proceedings declared by the UnitedStates Patent and Trademark Office, which could result in substantial expense,to determine the priority of inventions covered by our issued United Statespatents or pending patent applications. Furthermore, we may have to participate at substantial cost inInternational Trade Commission proceedings to enjoin importation of productswhich would compete unfairly with our products.  Any adverse outcome of any patent litigation, includinginterference proceedings, could subject us to significant liabilities to thirdparties, require disputed rights to be licensed from or to third parties orrequire us to cease using the technology in dispute.  Any such licenses may not be available on acceptable terms, if atall.  Furthermore, parties making suchclaims may be able to obtain injunctive or other equitable relief that couldeffectively block our ability to make, use, sell or otherwise practice ourintellectual property, whether or not patented or described in pending patentapplications, or to further develop or commercialize our products in the UnitedStates and abroad and could result in the award of substantial damages.  Defense of any lawsuit or failure to obtainany such license could damage our business.

 

In addition to patents,we rely on unpatented trade secrets to protectour proprietary technology.  Others mayindependently develop or otherwise acquire the same or substantially equivalenttechnologies or otherwise gain access to our proprietary technology or disclosethis technology.  It is difficult toprotect rights to unpatented proprietary technology.  Third parties may obtain patent rights to these unpatented tradesecrets, which patent rights could be used to assert infringement claimsagainst us.  We also rely onconfidentiality agreements with our collaborators, employees, advisors, vendorsand consultants to protect our proprietary technology.  These agreements may be breached, we may nothave adequate remedies for any breach and our trade secrets may otherwisebecome known or be independently developed by competitors.  In addition, our agreements with employeesand consultants require disclosure of ideas, developments, discoveries orinventions conceived during employment or consulting, as the case may be, andassignment to us of proprietary rights to such matters related to our businessand technology.  The extent to whichefforts by others will result in patents and the effect on us of the issuanceof such patents is unknown.

 

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**We have licensed someaspects of our products from third parties and may lose the rights to theseessential aspects under the agreements which govern those relationships.**

 

We have licensed some aspects of our technology from thirdparties.  The rights under the governingagreements may be terminated if we breach our obligations or in othercircumstances. Our failure to retain rights to these licensed rights couldnegatively impact our business.  Foradditional information concerning the agreements which govern theserelationships, please see “Business—Strategic Alliances” and “Business –Licenses.”

 

**If we are not able toattract and retain key technical and senior management personnel and doctors toparticipate in our advisory boards, it may adversely affect our ability toobtain financing or develop our products.**

 

Our future business and operating results depend in significant partupon the continued contributions of our key technical and senior managementpersonnel, many of whom would be difficult to replace and some of whom performimportant functions beyond those suggested by their job titles or descriptions.  Our business and future operating resultsalso depend in significant part upon our ability to attract and retainqualified management, manufacturing, technical, marketing and sales and supportpersonnel for our operations.  Competitionfor such personnel is intense, and we may not be successful in attracting orretaining such personnel.

 

Members of our clinical advisory boards consult with us exclusively inthe field of visualization, but are free to consult with other non-competinginstrumentation companies and are employed elsewhere on a full-time basis.  As a result, they only spend a limitedamount of time on our business. Although we have entered into consulting agreements, includingconfidentiality provisions with each of the members of our clinical advisory boards,the consulting and confidentiality agreements between us and each of themembers of our clinical advisory boards may be terminated or breached.

 

**Our stock price couldcontinue to be volatile and your investment in our common stock could suffer adecline in value, adversely affecting our ability to raise additional capital.**

 

The market prices and trading volumes for securities of emergingcompanies, like ours, have historically been highly volatile and haveexperienced significant fluctuations unrelated to the operatingperformance.  The market price of ourcommon stock has historically been highly volatile and may be significantlyaffected by factors such as:

 

•                                          actualor anticipated fluctuations in our operating results,

 

•                                          changesin financial estimates by securities analysts,

 

•                                          announcementsof technological innovations,

 

•                                          newproducts or new contracts by us or our competitors,

 

•                                          regulatoryannouncements,

 

•                                          developmentswith respect to patents or proprietary rights,

 

•                                          conditionsand trends in the medical device and other technology industries,

 

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•                                          adoptionof new accounting standards affecting the medical device industry, and

 

•                                          generalmarket conditions.

 

In addition, the stock market has from time to time experiencedsignificant price and volume fluctuations that have particularly affected themarket prices for shares of early stage companies.  These broad market fluctuations may adversely affect the marketprice of our common stock.  In the past,following periods of volatility in the market price of a particular company’ssecurities, securities class action litigation has often been brought againstthat company.  Such litigation, ifbrought against us, could result in substantial costs and a diversion ofmanagement’s attention and resources.

 

**Our use of hazardousmaterials may result in unexpected and substantial claims against us for whichwe do not have sufficient financial resources.**

 

Our research and development activities may involve the controlled useof hazardous materials and chemicals. The risk of accidental contamination or injury from these materialscannot be completely eliminated.  In theevent 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 environmentalregulations.

 

**We do not anticipatepaying any dividends and any gains from your investment in our stock will haveto come from increases in the price of such stock.**

 

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

 

**Our charter documentsmay prevent us from participating in transactions that could be beneficial to you.**

 

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

 

Item 4.  Controls and Procedures

 

(a)            Evaluation of disclosure controls and procedures

 

Based on their evaluation as of a date within ninety (90) days beforethe filing of this Form 10-Q, our Chief Executive officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures (as definedin  Rules 13a-14 and 15d—14 under theSecurities Exchange Act of 1934) are effective.

 

(b)           Changes in internal control

 

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

 

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PART II.  OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

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

 

Item 2.    Changes in Securities and Use of Proceeds

 

a.             Notapplicable

 

b.             Notapplicable

 

c.             Notapplicable

 

d.             Notapplicable

 

Item 3.    Defaults upon Senior Securities

 

None.

 

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

 

I.              None

 

Item 5.    Other Information

 

None.

 

Item 6.    Exhibits and Reports on Form 8-K

 

A)           Exhibits

 
| 3.1 (1) |   | Second Restated Certificate of Incorporation                                                                                                                          |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2 (2) |   | Certificate of Amendment of Second Restated Certificate of  Incorporation                                                                                             |
| 3.3 (3) |   | Certificate of Designations of Series A Convertible Preferred Stock                                                                                                   |
| 3.4 (4) |   | Restated Bylaws                                                                                                                                                       |
| 4.1 (4) |   | Form of Certificate for Common Stock                                                                                                                                  |
| 31.1 *  |   | Certification of the Chief Executive Officer pursuant to rules 13a-14  and 15d-14 (as adopted pursuant to Section 302 of the Sarbanes – Oxley  Act of 2002) |
| 31.2 *  |   | Certification of the Chief Financial Officer pursuant to rules 13a-14  and                                                                                            |

 

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|   |   | 15d-14 (as adopted pursuant to Section 302 of the Sarbanes –  Oxley Act of 2002)                                                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1 * |   | Certification of the Chief Executive Officer pursuant to 18 U.S.C  Section 1350 (as adopted pursuant to Section 906 of the Sarbanes –  Oxley Act of 2002)  |
| 32.2 * |   | Certification of the Chief Financial Officer pursuant to 18 U.S.C.  Section 1350 (as adopted pursuant to Section 3906of the Sarbanes –  Oxley Act of 2002) |

 

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*                                                                 Filedherewith.

 

(1)                                                          Incorporatedby reference to Company’s Registration Statement on Form S-1 (No. 333-22985),filed on March 7, 1997.

 

(2)                                                          Incorporatedby reference to our Form 10-Q filed on November 14, 2001.

 

(3)                                                          Incorporatedby reference to our Form 10-K filed on March 31, 2003.

 

(4)                                                          Incorporatedby reference to our Registration Statement on Form S-1, as amended, Filed onJuly 2, 1997.

 

 

B)                                    Reportson Form 8-K

 

We furnished, on Form 8-K, Item 12, during this fiscal quarter, a copyof an announcement of historical financial results.  Pursuant to SEC staff guidance, such furnished Form 8-Kinformation need not be listed in this Item 6 (b) of Form 10-Q.

 

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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 theundersigned thereunto duly authorized.

 

 
|   |                   | VISTA MEDICAL TECHNOLOGIES,INC.                                                                                 |
|--------|------------------------|-----------------------------------------------------------------------------------------------------------------|
|   |                   |                                                                                                            |
|   |                   |                                                                                                            |
| Date:  | November 13, 2003 |                                                                                                            |   | /s/ John R. Lyon |   |
|   |                   |                                                                                                            |   |
|   |                   | John R. Lyon                                                                                                    |
|   |                   | President, Chief Executive Officer and  Director                                                                |
|   |                   |                                                                                                            |   |
|   |                   |                                                                                                            |   |
| Date:  | November 13, 2003 |                                                                                                            |   | /s/ Stephen A. Gorgol |   |
|   |                   |                                                                                                            |
|   |                   | Stephen A. Gorgol                                                                                               |
|   |                   | Vice President of Finance, Chief Financial  Officer and Secretary  (Principal financial and accounting officer) |
|        |                        |                                                                                                                 |  |  |  |  |

 

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