<PAGE>
                                UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549
                                       
                                  FORM 10-Q

(Mark One)

[ X ]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                   THE SECURITIES EXCHANGE ACT OF 1934
               FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998

                                      OR

[   ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF 
                      THE SECURITIES EXCHANGE ACT OF 1934
     FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________.

                          COMMISSION FILE NUMBER  0-22743 

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

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

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

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

                    (1)  Yes [X]   No [ ]
                    (2)  Yes [X]   No [ ]

As of May 8, 1998 there were 13,457,367 shares of $.01 par value common stock
outstanding.

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


                                       1

<PAGE>

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


<TABLE>
<CAPTION>

<C>       <S>                                                   <C>
PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements

          Consolidated Balance Sheets. . . . . . . . . . . .     3
          Consolidated Statements of Operations. . . . . . .     4
          Consolidated Statements of Cash Flows. . . . . . .     5
          Notes to Consolidated Financial Statements . . . .     6

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

PART II   OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K . . . . . . . . .    26

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . .    27

</TABLE>


                                      2



<PAGE>

PART 1.   FINANCIAL INFORMATION

Item 1.   Financial Statements

                          Vista Medical Technologies, Inc.
                            Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                              March 31, 1998    December 31, 1997
                                                              --------------   -----------------
                                                                (Unaudited)                   

<S>                                                          <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents . . . . . . . . . . . . . . . .   $  5,998,284      $  7,328,502
   Short-term investments & securities available for sale. .     14,249,326        16,784,345
   Accounts receivable . . . . . . . . . . . . . . . . . . .      1,778,349           521,616
   Inventories . . . . . . . . . . . . . . . . . . . . . . .      3,985,918         3,344,967
   Other current assets. . . . . . . . . . . . . . . . . . .        208,848           261,864
                                                               ------------      ------------
Total current assets . . . . . . . . . . . . . . . . . . . .     26,220,725        28,241,294
Property and equipment, net. . . . . . . . . . . . . . . . .      2,974,933         3,327,283
Patents and other assets . . . . . . . . . . . . . . . . . .        439,288           561,873
                                                               ------------      ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . .   $ 29,635,006      $ 32,130,450
                                                               ------------      ------------
                                                               ------------      ------------
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
   Accounts payable. . . . . . . . . . . . . . . . . . . . .   $  1,802,297      $  1,217,110
   Accrued compensation. . . . . . . . . . . . . . . . . . .        398,203           516,743
   Accrued liabilities . . . . . . . . . . . . . . . . . . .      1,474,405           665,285
                                                               ------------      ------------
Total current liabilities. . . . . . . . . . . . . . . . . .      3,674,905         2,399,138

Commitments
Stockholders' equity:. . . . . . . . . . . . . . . . . . . .               
   Convertible preferred stock, $.01 par value:
      Authorized shares - 5,000,000. . . . . . . . . . . . .
      Issued and outstanding shares - no shares outstanding
      on December 31, 1997 or March 31, 1998 . . . . . . . .             --                --
   Common stock, $.01 par value:
      Authorized shares - 35,000,000 . . . . . . . . . . . .               
      Issued and outstanding shares - 13,407,038 on
        December 31, 1997 and 13,447,567 on March 31, 1998 .        134,476           134,071
   Additional paid-in capital. . . . . . . . . . . . . . . .     62,891,085        62,531,513
   Notes receivable from stockholders. . . . . . . . . . . .        (78,375)          (78,375)
   Deferred compensation . . . . . . . . . . . . . . . . . .     (1,800,116)       (1,942,074)
   Unrealized gains/loss on investments. . . . . . . . . . .       (522,253)         (416,313)
   Accumulated deficit . . . . . . . . . . . . . . . . . . .    (34,664,716)      (30,497,510)
                                                               ------------      ------------
Total stockholders' equity . . . . . . . . . . . . . . . . .     25,960,101        29,731,312
                                                               ------------      ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
 EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . .   $ 29,635,006      $ 32,130,450
                                                               ------------      ------------
                                                               ------------      ------------

</TABLE>

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


                                          3

<PAGE>

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

<TABLE>
<CAPTION>

                                                                Three Months Ended March 31, 
                                                                ----------------------------
                                                                    1998            1997    
                                                                -----------    ------------- 
<S>                                                            <C>           <C>
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .    $ 2,433,082    $   829,218
Costs and expenses:
   Cost of sales . . . . . . . . . . . . . . . . . . . . . .      1,789,608        826,027
   Research and development. . . . . . . . . . . . . . . . .      1,555,698      1,513,868
   Sales and marketing . . . . . . . . . . . . . . . . . . .      1,878,921        744,661
   General and administrative. . . . . . . . . . . . . . . .      1,704,254      1,164,221
                                                                -----------    -----------
Total cost and expenses. . . . . . . . . . . . . . . . . . .      6,928,481      4,248,777
                                                                -----------    -----------

Loss from operations . . . . . . . . . . . . . . . . . . . .     (4,495,399)    (3,419,559)

Interest income. . . . . . . . . . . . . . . . . . . . . . .        328,193        101,488
                                                                -----------    -----------

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . .    $(4,167,206)   $(3,318,071)
                                                                -----------    -----------
                                                                -----------    -----------

Basic and diluted loss per share . . . . . . . . . . . . . .    $     (0.31)   $     (0.37)
                                                                -----------    -----------
                                                                -----------    -----------

Shares used in computing basic and
    diluted loss per share . . . . . . . . . . . . . . . . .     13,248,379      9,016,522

</TABLE>
                                          
                               See accompanying notes



                                       4
<PAGE>

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

<TABLE>
<CAPTION>

                                                                Three Months Ended March 31,    
                                                                ----------------------------
                                                                    1998            1997     
                                                                ------------    ------------
<S>                                                           <C>             <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . .    $(4,167,206)    $(3,318,071)
Adjustments to reconcile net loss to net cash used for                          
   operating activities:
      Depreciation and amortization. . . . . . . . . . . . .        631,896         107,747
      Amortization of premium on short term investments. . .         59,618              --
      Stock issued for services rendered . . . . . . . . . .             --          20,010
      Amortization of deferred compensation. . . . . . . . .        194,290         256,055
      Changes in operating assets and liabilities,                              
        net of effect of acquisitions:
               Accounts receivable . . . . . . . . . . . . .     (1,256,733)       (244,225)
               Inventories . . . . . . . . . . . . . . . . .       (640,950)       (517,067)
               Other current assets. . . . . . . . . . . . .        159,578        (343,363)
               Accounts payable. . . . . . . . . . . . . . .        585,187          66,544
               Accrued compensation. . . . . . . . . . . . .       (118,541)        (42,880)
               Accrued liabilities . . . . . . . . . . . . .        943,954        (107,505)
                                                                -----------      ----------
Net cash flows used for operating activities . . . . . . . .     (3,608,907)     (4,122,755)
                                                                                
INVESTING ACTIVITIES                                                            
Purchases of short-term investments. . . . . . . . . . . . .        (80,640)             --
Maturities of short-term investments . . . . . . . . . . . .      2,450,000              --
Purchase of property and equipment . . . . . . . . . . . . .       (263,585)       (353,151)
                                                                -----------      ----------
Net cash flows provided by (used for) investing activities .      2,105,775        (353,151)
                                                                                
FINANCING ACTIVITIES                                                            
Issuance of common stock . . . . . . . . . . . . . . . . . .        172,913          35,854
                                                                -----------      ----------
Net cash flows provided by financing activities. . . . . . .        172,913          35,854
Net (decrease) increase in cash and cash equivalents . . . .     (1,330,219)     (4,440,052)
Cash and cash equivalents at beginning of period . . . . . .      7,328,502      10,119,529
                                                                -----------      ----------
Cash and cash equivalents at end of period . . . . . . . . .     $5,998,284      $5,679,477
                                                                -----------      ----------
                                                                -----------      ----------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                               
Cash paid for interest . . . . . . . . . . . . . . . . . . .     $        0      $       70
                                                                -----------      ----------
                                                                -----------      ----------

</TABLE>

                             See accompanying notes


                                       5
<PAGE>

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


1.   Basis of Presentation

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

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

2.   Computation of Net Loss Per Share

     In 1997, the Financial Accounting Standards Board issued Statement No. 
128, "Earnings per Share," (SFAS 128) which replaced the calculation of 
primary and fully diluted earnings per share with basic and diluted earnings 
per share. Unlike primary earnings per share, basic earnings per share 
excludes any dilutive effects of options, warrants and convertible 
securities, except that, for the periods prior to the Company's initial 
public offering (July 2, 1997), preferred shares are included on an as-if 
converted basis in the basic computation.  Diluted earnings per share is very 
similar to the previously reported fully diluted earnings per share.  All 
earnings per share amounts for all periods have been restated to conform to 
SFAS 128 and the requirements of the recently effective Staff Accounting 
Bulletin No. 98.
     
3.   New Accounting Standard

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 
130, "Reporting Comprehensive Income," and SFAS No. 131, "Segment 
Information."  Both of these standards are effective for fiscal years 
beginning after December 15, 1997.  SFAS No. 130 requires that all components 
of comprehensive income, including net income, be reported in the financial 
statements in the period in which they are recognized.  Comprehensive income 
is defined as the change in equity during a period from transactions and 
other events and 

                                       6
<PAGE>

circumstances from non-owner sources.  Net income and other comprehensive 
income, including foreign currency translation adjustments, and unrealized 
gains and losses on investments, shall be reported, net of their related tax 
effect, to arrive at comprehensive income.  The Company believes that 
comprehensive income or loss will not be materially different than net income 
or loss.  SFAS No. 131 amends the requirements for public enterprises to 
report financial and descriptive information about its reportable operating 
segments.  Operating segments, as defined by SFAS No. 131, are components of 
an enterprise for which financial information is available and evaluated 
regularly by the Company in deciding how to allocate resources and in 
assessing performance.  This financial information is required to be reported 
on the basis that it is used internally for evaluating the segment 
performance.  The Company believes it operates in one business and operating 
segment and that adoption of SFAS No. 131 will not have a material impact on 
the Company's financial statements.

4.   Inventories

<TABLE>
<CAPTION>

                                       March 31, 1998     December 31, 1997
                                       --------------     -----------------
                                         (Unaudited)

        <S>                            <C>                 <C>
          Parts and materials.........   $ 1,761,831         $  1,977,878
          Work in process.............     1,151,232              662,237
          Finished goods..............     1,072,855              704,852
                                       --------------     -----------------
                                         $ 3,985,918         $  3,344,967
                                       --------------     -----------------
                                       --------------     -----------------

</TABLE>


                                       7
<PAGE>

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

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

Overview

     The Company develops, manufactures and markets proprietary visualization 
and information systems that enable minimally invasive surgical solutions in 
cardiothoracic, head, neck and spine ("HNS") and other selected microsurgical 
procedures.  The Company also markets endoscopic cameras and related surgical 
instruments and accessories and has generated minimal revenues from the sales 
of these products since its formation in July 1993.  The Company expects to 
continue to incur substantial losses for at least the next 12 months.  As of 
March 31, 1998, the Company's accumulated deficit was approximately $34.7 
million.

Results of Operations

     Sales.  The Company had revenue from product sales and distribution fees 
of $2,433,000 for the three-months ended March 31, 1998, compared to $829,000 
for the same period in 1997.  The increase in revenues was due to initial 
sales of StereoSite systems and associated distribution fees paid by Sofamor 
Danek, the Company's strategic partner and exclusive distributor for the HNS 
market and sales of the Company's Series 8000 Advanced Visualization and 
Information System ("Series 8000") for minimally invasive cardiac surgery 
launched during the third quarter of 1997.

     Cost of Sales.  The Company's cost of sales were $1,790,000 and $826,000 
for the three- months ended March 31, 1998 and 1997, respectively, an 
increase of $964,000.  The increase was primarily due to costs corresponding 
to the growth in revenues from product sales and costs incurred to launch the 
Company's StereoSite product for the HNS market.

     Research and Development Expenses.  Research and development expenses 
increased to $1,556,000 for the three-months ended March 31, 1998, from 
$1,514,000 for the corresponding period in 1997.  The increase in research 
and development expenses was attributable to continued development and 
expansion of the Company's research and development organization 

                                       8
<PAGE>

focused on development, prototyping and evaluation of new products and 
consisted primarily of increases in staffing and related supply and occupancy 
costs.  The Company believes that a significant level of investment for 
product development and evaluation is necessary to remain  technologically 
competitive and anticipates that it will continue its spending in research 
and development at or near current levels.

     Sales and Marketing Expenses.  Sales and marketing expenses were 
$1,879,000 and $745,000 for the three-months ended March 31, 1998 and 1997, 
respectively. The increase in sales and marketing expense was attributable to 
the Company's development and expansion of its sales force, increased 
marketing efforts associated with commercialization of new products and 
physician training costs. The Company expects that such expenses will 
continue to increase on an absolute dollar basis in the future as it expands 
its sales and marketing efforts in connection with commercialization of new 
products.

     General and Administrative Expenses.  The Company's general and 
administrative expenses increased to $1,704,000 for the three-months ended 
March 31, 1998, from $1,164,000 for the corresponding period in 1997.  This 
increase was primarily due to increases in staffing and related expenses 
associated with the continued development of the Company's administrative 
infrastructure, increases in legal and professional fees and costs associated 
with being a public company.  The Company expects its general and 
administrative expenses to continue to increase in the future as it increases 
its administrative staff and systems to manage the growth of the Company and 
as a result of increases in expenses associated with being a public company.

     Interest Income.  The Company had net interest income of $328,000 for 
the three-month period ended March 31, 1998 compared to $101,000 for the 
corresponding period in 1997.  This increase was due primarily to increasing 
average investment balances of the Company's excess cash following the 
Company's Initial Public Offering ("IPO").

Liquidity and Capital Resources

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

     Net cash used in operating activities for the three-months ended March 
31, 1998 was $3,609,000 compared to net cash used of $4,123,000 for the 
corresponding three-month period in 1997.  The decrease in net cash used in 
operating activities was primarily attributable to higher revenues, customer 
advances and prepaid royalties received during the 1998 period which offset 
higher net losses over the 1997 period.


                                       9
<PAGE>

     Net cash provided by investing activities was $2,106,000 for the 
three-months ended March 31, 1998 compared to $353,000 of net cash used in 
the same period in 1997.  The net cash provided by investing activities in 
1998 was primarily attributable to maturities of short-term investments and 
the net cash used in 1997 was primarily attributable to purchase of property 
and equipment related to increased staffing, expansion of manufacturing 
capabilities, and marketing demonstrations.

     Net cash provided by financing activities was $173,000 for the three 
months ended March 31, 1998 compared to $36,000 for the same period in 1997.  
The net cash provided by financing activities in 1998 was primarily 
attributable to proceeds from the purchase of stock by employees through the 
Company's employee stock purchase plan and the exercise of stock options 
while the cash provided in 1997 was from exercise of stock options.

      In October 1997, the Company completed a $10.0 million Loan and 
Security Agreement ("Loan Agreement") to finance the placement with customers 
of its Series 8000 product on a pay per procedure basis rather than through 
an upfront capital payment.  As of March 31, 1998 there were no outstanding 
balances under the agreement.

     The Company anticipates that the net proceeds from the IPO completed in 
July 1997 and the interest income thereon, together with borrowings available 
under the $10.0 million Loan Agreement, existing cash, cash equivalents and 
short-term investments, and product revenues, will be sufficient to fund its 
operations through 1998.

Risks and Uncertainties

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

     DEVELOPMENT STAGE COMPANY; SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL 
REQUIREMENTS.  Since its formation in July 1993, the Company has been engaged 
in the development of visualization and information systems and related 
surgical instruments and accessories that enable minimally invasive 
microsurgery ("MIM") solutions for applications in cardiothoracic and other 
selected microsurgical procedures and in manufacturing and marketing limited 
quantities of camera systems to customers as an OEM.  As of March 31, 1998, 
the Company had incurred cumulative net losses of approximately $34.7 million 
since its formation.  The Company expects to incur substantial and increasing 
operating losses before it will reach profitability, if at all.  Furthermore, 
the Company expects its expenses in all categories to increase as its 
marketing and other business activities expand.  There can be no assurance 
that the Company will achieve or sustain profitability in the future.  
Failure to achieve significant commercial revenues or profitability would 
have a material adverse effect on the Company's business, financial condition 
and results of operations.


                                       10
<PAGE>

     The Company's future liquidity and capital requirements will depend upon 
numerous factors, including the following: the extent to which the Company's 
products gain market acceptance; the progress and scope of product 
evaluations; the timing and costs of filing future regulatory submissions; 
the timing and costs required to receive both domestic and international  
governmental approvals; the timing and costs of product introductions; the 
extent of the Company's ongoing research and development programs; the costs 
of training physicians to become proficient in the use of the Company's 
products and procedures; and the costs of developing marketing and 
distribution capabilities. The Company anticipates that the net proceeds from 
the Initial Public Offering completed in July 1997 and the interest income  
thereon, together with borrowings available under the $10.0 million Loan and 
Security Agreement entered into in October 1997, existing cash, cash 
equivalents and short-term investments, and product revenues, will be 
sufficient to fund its operations through 1998.  If, at or prior to such 
time, the net proceeds of the Initial Public Offering, together with 
available funds and cash generated from operations, are insufficient to 
satisfy the Company's cash needs, the Company may require additional 
financing.  There can be no assurance that such additional financing will be 
available on terms acceptable to the Company, if at all. The Company's  
inability to fund its capital and operational requirements would have a 
material adverse effect on the Company's business, financial condition and 
results of operations.

      DEPENDENCE UPON AND UNCERTAINTY REGARDING COMMERCIALIZATION OF SERIES 
8000.  The Series 8000 for minimally invasive cardiac surgery is the 
Company's primary near-term product focus and is expected to account for the 
majority of the Company's revenues over the next several years.  In 
international markets regulatory clearance or approval is also required 
before the system can be widely marketed.  There can be no assurance that 
demand for the Series 8000 will be sufficient to achieve profitable 
operations.

     Development of certain additional peripheral components of the Series 
8000 has not yet been finalized, and final prototypes have not yet been 
completed. There can be no assurance that the Company's development efforts 
for these components will be successful, or that the Company's products under 
development will be shown to be safe or effective, capable of being 
manufactured  in commercial quantities at acceptable costs, or successfully 
marketed.

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

                                       11

<PAGE>

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

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

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

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

                                       12
<PAGE>

     LIMITED SALES, MARKETING, DISTRIBUTION AND TECHNICAL SUPPORT EXPERIENCE; 
DEPENDENCE ON SOFAMOR DANEK.  The Company has organized its sales and 
marketing efforts through the Company's CardioThoracic Surgery and HNS 
Microsurgery divisions.  The Company  currently markets its cardiothoracic 
products in North America through six direct (Company employee) sales 
representatives and eight independent sales representatives.  The products of 
the Company's HNS Microsurgery division will be sold via Sofamor Danek's 
sales force. Establishment of a sales force capable of effectively 
commercializing the Company's cardiothoracic products will require 
substantial efforts and significant management and financial resources.  
There can be no assurance that the Company will be able to establish such a 
sales capability on a timely basis or at all.

     The Company believes that a critical element of its sales efforts in 
North America will be the provision of technical support, including training 
and clinical validation efforts, to its customers.  Provision of an adequate 
level of such support on a timely basis requires significant financial 
resources.  There can be no assurance that the Company will be able to 
provide an adequate level of technical support on a timely basis, or at all.

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

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

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

















     The Company has considered and will continue to consider as appropriate, 
the internal manufacture of sub-assemblies currently provided by third party 
subcontractors, as well as the implementation of new production processes. 
There can be no assurance that manufacturing yields or costs will not be 
adversely affected by the transition to in-house production or to new 
production processes when such efforts are undertaken, or that FDA Good 
Manufacturing Practices ("GMP") requirements can be met and that such a 
transition would not materially adversely affect the Company's business, 
financial condition and results of operations.

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

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

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

     NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC 
AND INTERNATIONAL REGULATION.  The manufacture and sale of medical devices 
intended for commercial distribution are subject to extensive governmental 
regulation in the United States.  Medical devices are regulated in the United 
States primarily by the FDA and, to a lesser extent, by certain state 
agencies.  Generally, medical devices require pre-market clearance or 
pre-market approval prior to commercial distribution.  In addition, certain 
material changes or modifications to, and changes in intended use of, medical 
devices also are subject to FDA review and  clearance or approval.  The FDA 
regulates the research, testing, manufacture, safety, 

                                       14

<PAGE>

effectiveness, labeling, storage, record keeping, promotion and distribution 
of medical devices in the United States and the export of unapproved medical 
devices from the United States to other countries.  Noncompliance with 
applicable requirements can result in failure of the government to grant 
pre-market clearance or approval for devices, withdrawal or suspension of 
approval, total or partial suspension of production, fines, injunctions, 
civil penalties, refunds, recall or seizure of products and criminal 
prosecution.  

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

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

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

     Following submission of the 510(k) notification, the manufacturer or 
distributor may not place the device into commercial distribution until an 
FDA substantial equivalence order permitting the marketing of a device is 
received by the person who submitted the 510(k) notification.  At this time, 
the FDA typically responds to the submission of a 510(k) notification within 
90 to 200 days.  An FDA letter may declare that the device is substantially 
equivalent to a legally marketed device and allow the proposed device to be 
marketed in the United States.  The FDA, however, may determine that the 
proposed device is not substantially equivalent or require 



                                       15
<PAGE>

further information, including clinical data, to make a determination 
regarding substantial equivalence.  Such determination or request for 
additional information will delay market introduction of the product that is 
the subject of the 510(k) notification.  

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

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

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

                                       16
<PAGE>

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

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

     The Company believes that a number of large companies, with 
significantly greater financial, manufacturing, marketing, distribution and  
technical resources and experience than that of the Company, are focusing on 
the development of visualization products for MIM.  Several companies are 
currently developing and marketing visualization products for MIM which could 
be applied to cardiac surgery or to HNS microsurgery.  There can be no 
assurance that the Company will be successful in competing with any such 
companies.   

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

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

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



                                       17
<PAGE>

relationship without significant penalty. There can be no assurance that the 
Company will be successful in establishing or maintaining any such strategic 
relationships in the future or that any such relationship will be successful. 

        FLUCTUATIONS IN OPERATING RESULTS.  Results of operations of the 
Company may vary significantly from quarter to quarter depending upon 
numerous factors, including the following: timing and results of product 
evaluations; delays associated with the FDA and other regulatory approval 
processes; demand for and utilization of the Company's products; changes in 
pricing policies by the Company or its competitors; changes in third-party 
payment guidelines; the number, timing and significance of product 
enhancements and new product announcements by the Company and its 
competitors; the ability of the Company to develop, introduce and market new 
and enhanced versions of the Company's products on a timely basis; customer 
order  deferrals in anticipation of enhancements or new products offered by 
the Company or its competitors; product quality problems; personnel changes; 
and the level of international sales.  

        UNCERTAINTY RELATING TO THIRD-PARTY PAYMENTS.  The Company expects 
that sales volumes and prices of the Company's products will be directly 
influenced by the profitability to, or cost-effectiveness for, hospitals of 
the procedures in which the Company's products are involved.  Profitability 
levels are directly related to the level of payments for these procedures, 
either by Medicare or private insurance companies, and it is a continuing 
trend in U.S. health care for such payments to be under continual scrutiny 
and downward pressure.  The Company expects that its products typically will 
be used by hospitals and surgical centers, which bill various third-party 
payors, such as governmental programs and private insurance plans, for the 
health care services provided to their patients.  Third-party payors 
carefully review and  increasingly challenge the prices charged for medical 
products and services or negotiate a flat rate fee in advance.  Payment rates 
from private companies also vary depending on the procedure performed, the 
third-party payor, the insurance plan and other factors.  Medicare 
compensates hospitals at a prospectively determined fixed amount for the 
costs associated with an in-patient hospitalization based on the patient's 
discharge diagnosis and compensates physicians at a prospectively determined 
fixed amount based on the procedure performed, regardless of the actual costs 
incurred by the hospital or physician in furnishing the care and unrelated to 
the specific devices or systems used in that procedure.  Medicare and other 
third-party payors are increasingly scrutinizing whether to cover new 
products and the level of payment for new procedures.  The flat fee 
reimbursement trend is causing hospitals to control costs strictly in the 
context of a managed care system in which health care providers contract to 
provide comprehensive health care for a fixed cost per person.  The Company 
is unable to predict what changes will be made in the reimbursement methods 
utilized by third-party health care payors.  The Company could be adversely 
affected by changes in payment policies of government or private health care 
payors, particularly to the extent any such changes affect payment for the 
procedure in which the Company's products are intended to be used.   

     If the Company obtains the necessary foreign regulatory registrations or 
approvals, market acceptance of the Company's products in international 
markets would be dependent, in 



                                       18
<PAGE>

part, upon the acceptance by the prevailing health care financing system in 
each country.  Health care financing systems in international markets vary 
significantly by country and include both government sponsored health care 
programs and private insurance.  There can be no assurance that these 
financing systems will endorse use of the Company's technology.  

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

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

        PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE.  The Company 
faces an inherent and significant business risk of exposure to product 
liability claims in the event that the use of its products results in 
personal injury or death and there can be no assurance that the Company will 
not  experience any material product liability losses in the future.  Also, 
in the event that any of the Company's products prove to be defective, the 
Company may be required to recall or redesign such products.  The Company's 
current product liability insurance coverage limit is $10.0 million per 
occurrence and in the aggregate. There can be no assurance that such coverage 
limits are adequate to protect the Company from any liabilities it might 
incur in connection with the development, manufacture and sale of its 
products.  In addition, the Company may require 



                                       19
<PAGE>

increased product liability coverage if any products are used in clinical 
evaluations or successfully commercialized.  Product liability insurance is 
expensive and in the future may not be available to the Company on acceptable 
terms, if at all.  A successful product liability claim or series of claims 
brought against the Company in excess of its insurance coverage or a product 
recall could have a material adverse effect on the Company's business, 
financial condition and results of operations.

     UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY; 
RISKS OF FUTURE LITIGATION.  Vista Medical relies on a combination of 
technical leadership, patent, trade secret, copyright and trademark 
protection and nondisclosure agreements to protect its proprietary rights.  
As of March 31, 1998, the Company had exclusive ownership rights to seven 
issued United States patents, 10 pending United States patent applications 
and 16 pending foreign applications covering various aspects of its devices 
and systems.  Furthermore, as of the same date, the Company had exclusive 
rights in the medical field to four issued United States patents, one pending 
United States patent application, three issued foreign patents and nine 
pending foreign applications covering various aspects of its devices and 
systems.  The Company intends to file additional patent applications in the 
future.  The failure of such patents to issue could have a material adverse 
effect on the Company's business, financial condition and results of 
operations.   

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

     The medical device industry has been characterized by extensive 
litigation regarding patents and other intellectual property rights.  
Litigation, which would result in substantial expense to the Company, may be 
necessary to enforce any patents issued or licensed to the Company and/or to 
determine the scope and validity of proprietary rights of third parties or  
whether the Company's products, processes or procedures infringe any such 
third-party proprietary rights.  The Company may also have to participate in 
interference proceedings declared by the United States Patent and Trademark 
Office, which could result in substantial expense to the Company, to 
determine the priority of inventions covered by the Company's issued United 
States patents or pending patent applications.  Furthermore, the Company may  
have to participate at substantial cost in International Trade Commission 
proceedings to enjoin importation of products which would compete unfairly 
with products of the Company.  Any adverse outcome of any patent litigation 
(including interference proceedings) could subject the 



                                       20
<PAGE>

Company to significant liabilities to third parties, require disputed rights 
to be licensed from or  to third parties or require the Company to cease 
using the technology in dispute.

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

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

     The Company relies on unpatented trade secrets to protect its 
proprietary technology, and no assurance can be given that others will not 
independently develop or otherwise acquire the same or substantially 
equivalent technologies or otherwise gain access to the Company's proprietary 
technology or disclose such technology or that the Company can ultimately 
protect its rights to such unpatented proprietary technology.  No assurance 
can be given that third parties will not obtain patent rights to such 
unpatented trade secrets, which patent rights could be used to assert 
infringement claims against the Company. The Company also relies on 
confidentiality agreements with its collaborators, employees, advisors, 
vendors and consultants to protect its proprietary technology.  There can be 
no assurance that these agreements will not be breached, that the Company 
would have adequate remedies for any breach or that the Company's trade 
secrets will not otherwise become known or be independently developed by 
competitors.  In addition, the Company's agreements with its employees and 
consultants require disclosure to the Company of ideas, developments, 
discoveries or inventions conceived during employment or consulting, as the 
case may be, and assignment to the Company of proprietary rights to such 



                                       21
<PAGE>

matters related to the business and technology of the Company. The extent to 
which efforts by others will result in patents and the effect on the Company 
of the issuance of such patents is unknown.  Failure to obtain or maintain 
patent and trade secret protection, for any reason, could have a material 
adverse effect on the Company's business, financial condition and results of 
operations.

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

     In June 1996, Fuji Film Co. and Fuji Photo Optical Co., Ltd. 
(collectively, "Fuji") granted to the Company a non-exclusive license to 
certain optical zoom technology for use in endoscopes.  Vista Medical is 
obligated to pay royalties on net sales of products in the United States 
which incorporate Fuji's technology.  Fuji may terminate the agreement if 
Vista Medical does not cure any violation of the agreement within a limited 
period of time.  Failure of the Company to retain rights to these 
technologies could have a material, adverse effect on the Company's business, 
financial condition and results of operations.
  
        DEPENDENCE ON KEY PERSONNEL AND ADVISORS.  The Company's future 
business and operating results depend in significant part upon the continued 
contributions of its key technical and senior management personnel, many of 
whom would be difficult to replace and  certain of whom perform important 
functions for the Company beyond those functions suggested by their 
respective job titles or descriptions.  The Company's business and future 
operating results also depend in significant part upon its ability to attract 
and retain qualified management, manufacturing, technical, marketing and 
sales and support personnel for its operations.  The  Company has not entered 
into any employment contracts or arrangements with any  of its employees.  
Competition for such personnel is intense, and there can be  no assurance 
that the Company will be successful in attracting or retaining such  
personnel.  The loss of any key employee, the failure of any key employee to  
perform in his or her current position or the Company's inability to attract 
and  retain skilled employees, as needed, could materially adversely affect 
the  Company's business, financial condition and results of operations.  

     The Company has established three Clinical Advisory Boards made up of 
leading surgeons, one focused on minimally invasive cardiac surgery, another 
focused on HNS 



                                       22
<PAGE>

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

        NEED TO MANAGE A CHANGING BUSINESS.  In order to compete effectively 
against current and future competitors, prepare additional products for 
potential commercialization and develop future  products, the Company 
believes that it must continue to expand its operations,  particularly in the 
areas of development and manufacturing.  If the Company were to experience 
significant growth in the future, such growth would likely result in new and 
increased responsibilities for management personnel and place significant 
strain upon the Company's management, operating and financial  systems and 
resources.  To accommodate such growth and compete effectively, the Company 
must continue to implement and improve information systems, procedures and 
controls, and to expand, train, motivate and manage its work force.  All of 
the foregoing demands will require the addition of new management personnel.  
The Company's future success will depend to a significant extent on the 
ability of its current and future management personnel to operate 
effectively, both independently and as a group.  There can be no assurance 
that the Company's personnel, systems, procedures and controls will be 
adequate to support the Company's future operations.  Any failure to 
implement and improve the Company's operational, financial and management 
systems or to expand, train, motivate or  manage employees could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.  

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

     While the Company believes its planning efforts are adequate to address 
its Year 2000 concerns, there can be no guarantee that the systems of other 
companies on which the Company's systems and operations rely will be 
converted on a timely basis and will not have a material 




                                       23
<PAGE>

effect on the Company.  In addition, the potential impact of the Year 2000 
issues on significant suppliers, customers, financial institutions and others 
with whom the Company does business cannot be reasonably estimated at this 
time.  The cost of the Year 2000 initiatives to be executed by the Company is 
not expected to be material to the Company's results of operations or 
financial position.  

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

        HAZARDOUS MATERIALS.  The Company's research and development may 
involve the controlled use  of hazardous materials and chemicals.  Although 
the Company believes that its safety procedures for handling and disposing of 
such materials comply with the standards prescribed by state and federal 
regulations, the risk of accidental contamination or injury from these 
materials cannot be completely eliminated. In the event of such an accident, 
the Company could be held liable for any resultant damages, and any such 
liability could exceed the resources of the Company.  The Company may incur 
substantial cost to comply with environmental regulations.   

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

     EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF SECOND 
RESTATED CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW.  The 
Company's Board of Directors has the authority to issue up to 5,000,000 
shares of preferred stock and to determine the price, rights, preferences, 
privileges and restrictions,  including voting and conversion rights of such 
shares, without any further vote or action by the Company's stockholders.  
The rights of the holders of Common Stock are subject to, and may be 
adversely affected by, the rights of the 



                                       24
<PAGE>

holders of any preferred stock that may be issued in the future. The issuance 
of preferred stock   could have the effect of making it more difficult for a 
third party to acquire a majority of the outstanding voting stock of the 
Company.  

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



                                       25
<PAGE>

PART II.  OTHER INFORMATION

<TABLE>
<CAPTION>

Item 6.   Exhibits and Reports on Form 8-K

<C>       <S>
A)        Exhibits

          11.1 Statement Regarding Computation of Per Share Earnings

          27.1 Financial Data Schedule

B)        Reports on Form 8-K

          No reports on Form 8-K were filed by the Company during the three 
          months ended March 31, 1998.

</TABLE>


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<PAGE>


SIGNATURES


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


                                   VISTA MEDICAL TECHNOLOGIES, INC.


Date:     May 14, 1998                /s/ John R. Lyon                      
          ------------------       -----------------------------------------
                                   John R. Lyon
                                   President, Chief Executive Officer and
                                   Director

Date:     May 14, 1998                /s/ Robert J. De Vaere      
          ------------------       -----------------------------------------
                                   Robert J. De Vaere
                                   Vice President of Finance & Administration
                                   & Chief Financial Officer
                                   (Principal financial and accounting officer)



                                       27