<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 JUNE 30, 1998  
                                          
                                        OR 
                                          
[   ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                        THE SECURITIES EXCHANGE ACT OF 1934 
                   
     FOR THE  TRANSITION PERIOD FROM _______________ TO _________________.  
                                          
                         COMMISSION FILE NUMBER  0-22743  
                                          
                                          
                            VISTA MEDICAL TECHNOLOGIES, INC. 
                (Exact name of registrant as specified in its charter)  
                                          
                                          
          DELAWARE                                      94-3184035 
(State or other jurisdiction of                      (I.R.S. Employer 
 incorporation or organization)                      Identification No.)

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

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

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


As of August 10, 1998 there were 13,486,944 shares of $.01 par value common 
stock outstanding.


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

<TABLE>

<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 4.   Submission of Matters to a Vote of Security Holders. . . . . . . 27

Item 5.   Other Information. . . . . . . . . . . . . . . . . . . . . . . . 27

Item 6.   Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 27

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>


                                         2

<PAGE>

PART 1.   FINANCIAL INFORMATION 

Item 1.   Financial Statements 

                          VISTA MEDICAL TECHNOLOGIES, INC.
                            Consolidated Balance Sheets 
  
<TABLE>
<CAPTION>

                                                              June 30, 1998      December 31, 1997
                                                              -------------      -----------------
                                                               (Unaudited)
<S>                                                            <C>               <C> 
ASSETS   
Current assets:   
   Cash and cash equivalents . . . . . . . . . . . . . . . .   $  6,925,342      $  7,328,502
   Short-term investments & securities available for sale. .      8,344,874        16,784,345
   Accounts receivable . . . . . . . . . . . . . . . . . . .      1,267,945           521,616
   Inventories . . . . . . . . . . . . . . . . . . . . . . .      4,702,135         3,344,967
   Other current assets. . . . . . . . . . . . . . . . . . .        153,151           261,864
                                                                -----------      ------------
Total current assets . . . . . . . . . . . . . . . . . . . .     21,393,447        28,241,294
Property and equipment, net. . . . . . . . . . . . . . . . .      2,466,576         3,327,283
Patents and other assets . . . . . . . . . . . . . . . . . .        274,360           561,873
                                                                -----------      ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . .   $ 24,134,383      $ 32,130,450
                                                                -----------      ------------
                                                                -----------      ------------

LIABILITIES AND STOCKHOLDERS' EQUITY    
Current liabilities:   
   Accounts payable. . . . . . . . . . . . . . . . . . . . .   $  1,308,539      $  1,217,110
   Accrued compensation. . . . . . . . . . . . . . . . . . .        744,740           516,743
   Accrued liabilities . . . . . . . . . . . . . . . . . . .        870,029           665,285
                                                                -----------      ------------
Total current liabilities. . . . . . . . . . . . . . . . . .      2,923,208         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 June 30, 1998  . . . . . . . .             --                --
   Common stock, $.01 par value:   
      Authorized shares - 35,000,000 . . . . . . . . . . . .                  
      Issued and outstanding shares - 13,407,038 on   
        December 31, 1997 and 13,467,569 on June 30, 1998. .        134,676           134,071
   Additional paid-in capital. . . . . . . . . . . . . . . .     62,745,820        62,531,513
   Notes receivable from stockholders. . . . . . . . . . . .        (78,375)          (78,375)
   Deferred compensation . . . . . . . . . . . . . . . . . .     (1,319,978)       (1,942,074)
   Unrealized gains/loss on investments. . . . . . . . . . .          7,850          (416,313)
   Accumulated deficit . . . . . . . . . . . . . . . . . . .    (40,278,918)      (30,497,510)
                                                                -----------      ------------
Total stockholders' equity . . . . . . . . . . . . . . . . .     21,211,075        29,731,312
                                                                -----------      ------------
TOTAL LIABILITIES AND STOCKHOLDERS'   
 EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . .   $ 24,134,383      $ 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 June 30,                Six Months Ended June 30, 
                                                         ---------------------------------       ----------------------------------
                                                             1998                 1997               1998                 1997
                                                         ------------         ------------       ------------         -------------
<S>                                                      <C>                  <C>                 <C>                  <C>
 Sales.......................................            $ 1,881,159          $   505,444         $  4,314,241          $ 1,334,662
 Costs and expenses:
    Cost of sales............................              1,818,427              764,901            3,608,035            1,590,927
    Research and development.................              1,631,628            1,554,055            3,187,325            3,067,923
    Sales and marketing......................              1,566,863              957,238            3,445,784            1,701,899
    General and administrative...............              1,155,378            1,180,278            2,859,633            2,344,500
    Restructuring expense....................                939,919                   --              939,919                   --
                                                          ----------          -----------          -----------          ------------
 Total cost and expenses.....................              7,112,215            4,456,472           14,040,696            8,705,249
                                                          ----------          -----------          -----------          ------------
 Loss from operations........................             (5,231,056)          (3,951,028)          (9,726,455)          (7,370,587)

 Interest income.............................                254,854               42,271              583,047              143,759

 Other losses................................               (638,000)                  --             (638,000)                  --

 Net loss....................................            $(5,614,202)         $(3,908,757)        $ (9,781,408)         $(7,226,828)
                                                         -----------          -----------          -----------          ------------
                                                         -----------          -----------          -----------          ------------

 Basic and diluted loss per share............            $     (0.42)      $       (12.16)    $          (0.74)         $    (21.61)
                                                         -----------          -----------          -----------          ------------
                                                         -----------          -----------          -----------          ------------

 Shares used in computing basic and
   diluted loss per share....................             13,289,121              321,448           13,265,196              334,361

</TABLE>

                               See accompanying notes

                                          4

<PAGE>

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

<TABLE>
<CAPTION>
                                                                 Six Months Ended June 30,
                                                                ----------------------------
                                                                    1998            1997
                                                                ------------    ------------
<S>                                                             <C>             <C>
OPERATING ACTIVITIES   
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . .    $(9,781,408)    $(7,226,828)
Adjustments to reconcile net loss to net cash used for                             
   operating activities:   
      Depreciation and amortization. . . . . . . . . . . . .      1,031,569         261,293   
      Amortization of premium on short term investments. . .         97,124              --   
      Stock issued for services rendered . . . . . . . . . .             --          20,010   
      Amortization of deferred compensation. . . . . . . . .        517,481         517,664   
      Loss on disposal of fixed assets . . . . . . . . . . .        290,410              --
      Write down for impairment on available for sale
        securities . . . . . . . . . . . . . . . . . . . . .        638,000              --
      Changes in operating assets and liabilities,                                 
        net of effect of acquisitions:   
               Accounts receivable . . . . . . . . . . . . .       (746,329)        266,128
               Inventories . . . . . . . . . . . . . . . . .     (1,357,168)     (1,122,654)
               Other current assets. . . . . . . . . . . . .        325,275         (38,288)
               Accounts payable. . . . . . . . . . . . . . .         91,429         104,532
               Accrued compensation. . . . . . . . . . . . .        227,996         112,921
               Accrued liabilities . . . . . . . . . . . . .        339,578         741,984
                                                                 ----------      ----------
Net cash flows used for operating activities . . . . . . . .     (8,326,043)     (6,363,238)

INVESTING ACTIVITIES
Purchases of short-term investments. . . . . . . . . . . . .       (724,366)        (83,000)
Maturities of short-term investments . . . . . . . . . . . .      8,950,000              --
Purchase of property and equipment . . . . . . . . . . . . .       (487,445)     (1,747,856)
                                                                 ----------      ----------
Net cash flows provided by (used for) investing activities .      7,738,189      (1,830,856)
                                                                                   
FINANCING ACTIVITIES                                                               
Issuance of common stock . . . . . . . . . . . . . . . . . .        184,694          39,905
Deferred Public Offering costs . . . . . . . . . . . . . . .            --         (689,295)
                                                                 ----------      ----------

Net cash flows provided by (used in) financing activities. .        184,694        (649,390)
Net (decrease) increase in cash and cash equivalents . . . .       (403,160)     (8,843,484)
Cash and cash equivalents at beginning of period . . . . . .      7,328,502      10,119,529
                                                                 ----------      ----------
Cash and cash equivalents at end of period . . . . . . . . .     $6,925,342      $1,276,045
                                                                 ----------      ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                  
Cash paid for interest . . . . . . . . . . . . . . . . . . .     $        0      $      196
                                                                 ----------      ----------
                                                                 ----------      ----------
</TABLE>


                                          
                                See accompanying notes

                                          5
<PAGE>

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


1.   Basis of Presentation 

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

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

2.   Computation of Net Loss Per Share 

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

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


                                        6
<PAGE>

3.   New Accounting Standard 

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 
130, "Reporting Comprehensive Income," and SFAS No. 131, "Segment 
Information."  Both of these standards are effective for fiscal years 
beginning after December 15, 1997.  SFAS No. 130 requires that all components 
of comprehensive income, including net income, be reported in the financial 
statements in the period in which they are recognized.  Comprehensive income 
is defined as the change in equity during a period from transactions and 
other events and   circumstances from non-owner sources.  Net income and 
other comprehensive income, including foreign currency translation 
adjustments, and unrealized gains and losses on investments, shall be 
reported, net of their related tax effect, to arrive at comprehensive income. 
The Company believes that comprehensive income or loss will not be 
materially different than net income or loss.  SFAS No. 131 amends the 
requirements for public enterprises to report financial and descriptive 
information about its reportable operating segments.  Operating segments, as 
defined by 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>
                                        June 30, 1998     December 31, 1997
                                        -------------     -----------------
                                         (Unaudited)
          <S>                            <C>                  <C>
          Parts and materials.........   $ 2,295,900          $ 1,977,878   
          Work in process.............       874,413              662,237   
          Finished goods..............     1,531,822              704,852   
                                         -----------          -----------
                                         $ 4,702,135          $ 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 
June 30, 1998, the Company's accumulated deficit was approximately $40.3 
million. 

Results of Operations 

     Sales.  The Company had revenues of $1,881,000 and $4,314,000 for the
three- and six-months ended June 30, 1998, respectively, compared to $505,000
and $1,335,000 for the same periods in 1997.  The increase in revenue for the
three-month period was due to (i) unit sales of StereoSite systems, which were
commercially launched during the second quarter, to Sofamor Danek, the Company's
strategic partner and exclusive distributor for the HNS market and (ii) unit
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.  The increase in revenue for the six-month period was due to
increased volume of (i) sales of StereoSite systems and associated distribution
fees paid by Sofamor Danek and (ii) sales of Series 8000's for minimally
invasive cardiac surgery.


                                       8
<PAGE>

     Cost of Sales.  The Company's cost of sales were $1,818,000 and 
$3,608,000 for the three- and six-months ended June 30, 1998, respectively, 
and $765,000 and $1,591,000 for the three- and six-months ended June 30, 
1997, respectively. The increase for both the three- and six-month periods 
was primarily due to costs corresponding to the growth in revenues from 
product sales partially offset by completion of manufacturing scale-up in 
1997 which contributed to 1997 cost of sales but not to 1998 expenses.

     Research and Development Expenses.  Research and development expenses 
were $1,632,000 and $3,187,000 for the three- and six-months ended June 30, 
1998, respectively, compared to $1,554,000 and $3,068,000 for the 
corresponding periods in 1997.  The increase in research and development 
expenses for both the three- and six-month periods was primarily attributable 
to 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 in the near term. 

     Sales and Marketing Expenses.  Sales and marketing expenses were 
$1,567,000 and $3,446,000 for the three- and six-months ended June 30, 1998, 
respectively, compared to $957,000 and $1,702,000 for the corresponding 
periods in 1997. The increase in sales and marketing expense for both the 
three- and six-month periods 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.  At the end 
of the quarter the Company announced an agreement with Medtronic, Inc. for 
U.S. distribution of its Series 8000 System for minimally invasive cardiac 
surgery which includes sales and marketing efforts associated with the 
product. The Company therefore expects that such expenses will decrease on an 
absolute dollar basis in the future as it transitions its sales and marketing 
efforts in connection with this product in the U.S. to Medtronic.  

     General and Administrative Expenses.  The Company's general and 
administrative expenses were $1,155,000 and $2,860,000 for the three- and 
six-months ended June 30, 1998, respectively, compared to $1,180,000 and 
$2,345,000 for the corresponding periods in 1997.  The expenses were 
relatively flat in the three-month period compared to the prior year due to 
increases in staffing and related expenses and costs associated with being a 
public company which were offset by a reduction in deferred compensation and 
lower professional and legal services fees.  The increase in expenses for the 
six-month period was primarily due to increases in staffing and related 
expenses and costs associated with being a public company.  The Company 
expects its general and administrative expenses to be relatively flat in the 
near term as the impact of a restructuring takes effect and offsets increased 
costs associated with being a public company.

     Restructuring Expenses.  The Company recorded charges associated with 
restructuring expenses of $940,000 for both the three- and six-month periods 
ended June 30, 1998 and had no such expenses for the corresponding periods of 
1997.  The restructuring expenses related primarily to termination and 
severance payments to employees in connection with transfer of sales and 
marketing responsibility in the U.S. for the Company's Series 8000 System for 


                                       9
<PAGE>

minimally invasive cardiac surgery to Medtronic, Inc., termination and 
severance payments to employees in connection with a general Company 
restructuring and work force reduction, and write down of assets related to a 
strategic decision to discontinue distribution of a line of cardiac 
instrument and sutures earlier than previously planned.

     Interest Income.  The Company had net interest income of $255,000 and 
$583,000 for the three- and six-month periods ended June 30, 1998, 
respectively, compared to $42,000 and $144,000 for the corresponding periods 
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").  

     Other Losses.  The Company recorded other losses of $638,000 for both 
the three- and six-month periods ended June 30, 1998 and had no such losses 
for the corresponding periods in 1997.  The losses for both the three- and 
six-month periods relate to recognition of a permanent reduction in value of 
securities the Company received in connection with an earlier license 
agreement with Imagyn Medical Technologies, Inc. (formerly Urohealth Systems, 
Inc.).

Liquidity and Capital Resources 

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

     Net cash used in operating activities for the six-months ended June 30, 
1998 was $8,326,000 compared to net cash used of $6,363,000 for the 
corresponding six-month period in 1997.  The increase in net cash used in 
operating activities was primarily attributable to the increasing net losses 
during the 1998 period with the overall effect of changes in operating 
assets, liabilities, depreciation and amortization having little impact 
between the periods.

     Net cash provided by investing activities was $7,738,000 for the 
six-months ended June 30, 1998 compared to $1,831,000 of net cash used in the 
same period in 1997.  The net cash provided by investing activities in 1998 
was primarily attributable to maturities of short-term investments and the 
net cash used in 1997 was primarily attributable to the purchase of property  
and equipment related to increased staffing, expansion of manufacturing 
capabilities, and marketing demonstrations.  

     Net cash provided by financing activities was $185,000 for the 
six-months ended June 30, 1998 compared to net cash used in financing 
activities of $649,000 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 used in the 1997 period 
was associated with expenses related to the Company's IPO which was completed 
in July 1997.  


                                      10
<PAGE>

     As of June 30, 1998, the Company's strategic partners, Sofamor Danek and 
Medtronic accounted for approximately 47% and 18%, respectively, of the 
outstanding receivables and Aesculap AG accounted for approximately 10%.

     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 June 30, 1998 there were no outstanding 
balances under the agreement.  On June 29, 1998, the Company announced a new 
distribution agreement with Medtronic, Inc. whereby Medtronic will distribute 
the Series 8000 for the Company in the United States.  The terms of that 
agreement call for Medtronic to pay Vista for units placed with the companies 
then sharing in the gross margins generated by procedure fees.  The Company 
believes that this agreement effectively replaces the Loan Agreement, which 
expires in September 1998, and that the Company will not draw down on the 
loan.  If the Company were to borrow funds pursuant to the Loan Agreement, it 
could borrow up $10.0 million at one time with an interest rate of prime plus 
one and one half percent.

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

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 June 30, 1998, 
the Company had incurred cumulative net losses of approximately $40.3 million 
since its formation.  The Company expects to incur substantial additional 
operating losses before it will reach profitability, if at all.  There can be 
no assurance that the Company will achieve or sustain profitability in the 
future.  Failure to achieve significant commercial revenues or profitability 
would have a material adverse effect on the Company's business, financial 
condition and results of operations.  

     The Company's future liquidity and capital requirements will depend upon
numerous factors, including the following: the extent to which the Company's
products gain market acceptance; the 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


                                       11
<PAGE>

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 existing cash, cash equivalents and short-term investments, and 
product revenues, will be sufficient to fund its operations through at least 
the first quarter of 1999. 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 AND STEREOSITE.  The Series 8000 for minimally invasive cardiac surgery 
and StereoSite Systems for head, neck and spine microsurgery are the 
Company's primary near-term product focuses and are expected to account for 
the majority of the Company's revenues over the next several years.  There 
can be no assurance that demand for the Series 8000 and StereoSite will be 
sufficient to achieve profitable operations.  

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

     Evaluations of the Series 8000 and StereoSite conducted to date have 
shown that there is a learning process involved for surgeons and other 
members of the surgery team to become proficient with the use of the systems. 
Based on the clinical and laboratory procedures performed to date, there can 
be no assurance that visualization and information system enhancements 
incorporated, or to be incorporated, in the Series 8000 and StereoSite will 
prove suitable for use by a substantial number of surgeons.  If the Series 
8000 and StereoSite prove unsuitable for a number of surgeons to use, the 
potential markets and applications for the Company's products would be 
significantly limited. Widespread use of the Series 8000 and StereoSite will 
require training of a large number of surgeons, and the time required to 
institute a training program and to train such surgeons could adversely 
affect market acceptance.  Failure to successfully commercialize the Series 
8000 and StereoSite would have a material adverse effect on the Company's 
business, financial condition and results of operations.
  
     UNCERTAINTY OF CLINICAL ADOPTION OF MINIMALLY INVASIVE MICROSURGICAL
PROCEDURES. The Company's near-term products are being developed in order to  
enable cardiothoracic and HNS surgeons to perform Minimally Invasive  
Microsurgical ("MIM") surgical procedures using their existing skills coupled
with training and 


                                       12
<PAGE>

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.  

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


                                       13
<PAGE>

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

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

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

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

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


                                       14
<PAGE>

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, effectiveness, 
labeling, storage, record keeping, promotion and distribution of medical 
devices in the United States and the export of unapproved medical 


                                       15
<PAGE>

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   further 
information, including clinical data, to make a determination  regarding 
substantial 


                                      16
<PAGE>

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.     


                                       17

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

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

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

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


                                       18
<PAGE>

premature termination of a collaborative agreement or failure by a partner to 
devote sufficient resources to the development and commercialization of the 
Company's products would have a material adverse effect on the Company's 
business, financial condition and results of operations.  The Company 
believes that its strategic partners currently have the right to terminate 
their respective agreements only in the event of a material breach by the 
Company. There can be no assurance that the Company will be successful in 
establishing or maintaining any such strategic relationships in the future or 
that any such relationship will be successful.   

     FLUCTUATIONS IN OPERATING RESULTS.  Results of operations of the Company 
may vary significantly from quarter to quarter depending upon numerous 
factors, including the following: timing and results of product evaluations; 
delays associated with the FDA and other regulatory approval processes; 
demand for and utilization of the Company's products; changes in  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 
the majority of its sales and the prices of those sales will be directly or 
indirectly affected by the profitability to, or cost-effectiveness for, 
hospitals of the procedures in which the Company's products are involved.  
While the cost of using one of the Company's products may not be specifically 
reimbursable, its cost will form part of the global cost of the procedure to 
the institution.  Such attention to the relationship between procedure cost 
and potential reimbursement is an increasing element in purchasing decisions 
by hospitals, particularly in the United States and, increasingly, in other 
important foreign markets.  In the U.S. profitability levels are directly 
related to the level of payments for surgical procedures, either by Medicare 
or private insurance companies, and it is a continuing trend in U.S. health 
care for such payments to be under continual scrutiny and downward pressure.  
The Company expects that the majority of its products typically will be used 
by hospitals and surgical centers, which bill various third-party payors, 
such as governmental programs and private insurance plans, for the health 
care services provided to their patients.  If such hospitals and surgical 
centers are unable to be reimbursed for procedures using the Company's 
equipment, this could have a material adverse effect on the sales of the 
Company's products.  Third-party payors carefully review and  increasingly 
challenge the prices charged for medical products and services or negotiate a 
flat rate fee in advance.  Payment rates from private companies also vary 
depending on the procedure performed, the third-party payor, the insurance 
plan and other factors.  Medicare compensates hospitals at a prospectively 
determined fixed amount for the costs associated with an in-patient 
hospitalization based on the patient's discharge diagnosis and compensates 
physicians at a prospectively determined fixed amount based on the procedure 
performed, regardless of the actual costs incurred by the hospital or 
physician in furnishing the care and unrelated to the specific devices or 
systems used in that procedure.  Medicare and other third-party payors are 
increasingly scrutinizing whether to cover 


                                      19
<PAGE>

new products and the level of payment for new procedures.  The flat fee 
reimbursement trend is causing hospitals to control costs strictly in the  
context of a managed care system in which health care providers contract to 
provide comprehensive health care for a fixed cost per person.  The Company 
is unable to predict what changes will be made in the reimbursement methods 
utilized by third-party health care payors.  The Company could be adversely 
affected by changes in payment policies of government or private health care 
payors, particularly to the extent any such changes affect payment for the 
procedure in which the Company's products are intended to be used.     

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

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

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


                                       20
<PAGE>

protect the Company's intellectual property rights to the same extent as do 
the laws of the United States.    

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

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

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


                                       21
<PAGE>

     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 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 


                                       22
<PAGE>

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

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


                                       23
<PAGE>

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

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

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


                                       24
<PAGE>

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 and expansion of operations, the Company may 
require additional financing and will evaluate various strategies and sources 
of funds at that time.  There can be no assurance that such additional 
financing will be available on terms acceptable to the Company, if at all, 
and any failure to finance, implement and improve the Company's operational, 
financial and management systems or to expand, train, motivate or manage 
employees could have a material adverse effect on the Company's business, 
financial condition and results of operations. 

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

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


                                       25
<PAGE>

     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.  The Company 
believes it is currently in compliance with all Federal, State and local 
environmental laws.

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

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

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

Item 3.   Not Applicable
 
                                       26
<PAGE>

PART II.  OTHER INFORMATION 

Item 1.   Not Applicable 

Item 2.   Not Applicable 

Item 3.   Not Applicable 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  I. 1998 Annual Meeting of Stockholders held on June 9, 1998

     a.   The 1998 Annual Meeting of Stockholders of Vista Medical
     Technologies, Inc.(the "Annual Meeting") was held on June 9, 1998.  The
     holders of 10,718,911 of the 13,450,567 shares of the Company's Common
     Stock outstanding on April 15, 1998, the record date for the Annual
     Meeting (approximately 79.691%), were present at the Annual Meeting in
     person or by proxy.
   
     b.   At the Annual Meeting, the seven individuals listed below were duly
     nominated and properly elected as Directors of the Company. Nicholas B.
     Binkley and Larry M. Osterink were elected to serve until the 1999 annual
     meeting of stockholders or until their successors are elected and have
     qualified.  Olav. B. Bergheim and Daniel J. Holland were elected to serve
     until the 2000 annual meeting of stockholders or until their successors
     are elected and have qualified.  James C. Blair, Ph.D. and John R. Lyon
     were elected to serve until the 2001 annual meeting of stockholders or
     until their successors are elected and have qualified. The number of votes
     cast for and withheld with respect to each nominee for office, as well as
     broker non-votes are indicated below:

<TABLE>
<CAPTION>
                                           AGAINST/      BROKER
                                FOR        WITHHELD      NON-VOTES
                              ----------   --------      ---------
         <S>                  <C>           <C>          <C>
         James C. Blair       10,702,896    16,015          0
         Olav B. Bergheim     10,702,996    15,915          0
         Nicholas B. Binkley  10,702,896    16,015          0
         Daniel J. Holland    10,702,996    15,915          0
         John R. Lyon         10,702,996    15,915          0
         Larry M. Osterink    10,702,996    15,915          0
</TABLE>

At the Annual Meeting, a proposal to ratify the appointment of Ernst & Young
LLP as the Company's independent auditors for fiscal 1998 was approved. The
number of votes cast for, against and to abstain on the proposal, as well as
broker non-votes, are indicated below:

<TABLE>
<CAPTION>
                                                         BROKER
             FOR         AGAINST      ABSTENTIONS       NON-VOTES
         ----------      -------      -----------       ---------
         <S>             <C>          <C>               <C>
         10,695,399      12,700         10,812              0

</TABLE>

Item 5.   Not Applicable
   
Item 6.   Exhibits and Reports on Form 8-K   
          
A)       Exhibits   



                                       27
<PAGE>

   * 10.1     Amended and Restated Sales Agreement between the Company and 
              Medtronic, Inc., dated June 26, 1998

     11.1     Statement Regarding Computation of Per Share Earnings   
   




                                        28
<PAGE>

     27.1     Financial Data Schedule

*    Certain confidential portions of this Exhibit were omitted by means of
     redacting a portion  of the text (the "Mark").  This Exhibit has been filed
     separately with the Secretary of the Commission without the Mark pursuant
     to the Company's Application Requesting Confidential Treatment under Rule
     406 under the Securities Act.

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


                                       29



<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: August 13, 1998              /s/ John R. Lyon                        
      -------------------          --------------------------------------
                                   John R. Lyon
                                   President, Chief Executive Officer and
                                   Director

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







                        
                                       30