<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, 1999

                           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 12, 1999 there were 13,695,684 shares of $.01 par value common
stock outstanding.

                                       1


<PAGE>


                        VISTA MEDICAL TECHNOLOGIES, INC.
                                    FORM 10-Q
                                 TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>                                                                                <C>
PART 1.   FINANCIAL INFORMATION

Item 1.   Financial Statements

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

Item 2.   Management's Discussion and Analysis
              of Financial Condition and Results of Operations ....................7

PART II.  OTHER INFORMATION

Item 3.   Quantitative and Qualitative Disclosures About Market Risk ..............27

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

Item 5.   Other Information .......................................................28

Item 6.   Exhibits and Reports on Form 8-K.........................................28

SIGNATURES.........................................................................29

</TABLE>
                                       2


<PAGE>


PART 1.   FINANCIAL INFORMATION

Item 1.   Financial Statements

                        Vista Medical Technologies, Inc.
                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                      JUNE 30, 1999     DECEMBER 31, 1998
                                                                      -------------     -----------------
                                                                      (Unaudited)
<S>                                                                   <C>               <C>
ASSETS
Current assets:
    Cash and cash equivalents..................................        $ 3,777,521          $ 7,625,804
    Short-term investments & securities available for sale.....            439,372            1,176,800
    Accounts receivable........................................            953,053              752,233
    Inventories................................................          4,060,216            4,354,338
    Other current assets.......................................             89,975              157,443
                                                                       -----------          -----------
Total current assets...........................................          9,320,137           14,066,618
Property and equipment, net....................................          1,709,119            2,056,535
Patents and other assets.......................................            370,830              481,594
                                                                       -----------          -----------
TOTAL ASSETS...................................................        $11,400,086          $16,604,747
                                                                       -----------          -----------
                                                                       -----------          -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable...........................................        $ 1,054,410           $  552,441
    Accrued compensation.......................................            425,726              300,807
    Accrued liabilities........................................            896,124            1,085,009
                                                                       -----------          -----------
Total current liabilities                                                2,376,260            1,938,257

Commitments
Stockholders' equity:
    Convertible preferred stock, $.01 par value:
        Authorized shares - 5,000,000
        Issued and outstanding shares - no shares outstanding
           on December 31, 1998 or June 30, 1999...............                --                   --
    Common stock, $.01 par value:
        Authorized shares - 35,000,000
        Issued and outstanding shares - 13,572,101 on
            December 31, 1998 and 13,694,434 on June 30, 1999..            136,944              135,721
        Additional paid-in capital.............................         62,919,318           62,856,201
        Notes receivable from stockholders.....................            (78,375)             (78,375)
        Deferred compensation..................................           (777,742)          (1,030,420)
        Unrealized gain/(loss) on investments..................                  0                1,211
        Accumulated deficit....................................        (53,176,319)         (47,217,848)
                                                                       -----------          -----------
Total stockholders' equity ....................................          9,023,826           14,666,490
                                                                       -----------          -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
    EQUITY.....................................................        $11,400,086          $16,604,747
                                                                       -----------          -----------
                                                                       -----------          -----------
</TABLE>

Note: The balance sheet at December 31, 1998 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,
                                                     -------------------------------    -----------------------------
                                                           1999             1998             1999            1998
                                                     ------------       ------------    ------------      -----------
<S>                                                  <C>                <C>             <C>               <C>
Sales.......................................         $ 1,328,623        $ 1,881,159     $ 2,190,664       $ 4,314,241
Cost and expenses:
    Cost of sales ..........................           2,166,525          1,818,427       3,232,868         3,608,035
    Research and development................           1,020,092          1,631,628       1,997,003         3,187,325
    Sales and marketing.....................             855,990          1,566,863       1,892,731         3,445,784
    General and administrative..............             640,317          1,155,378       1,234,975         2,859,633
    Restructuring expense  .................                  --            939,919              --           939,919
                                                     ------------       ------------    ------------      ------------
Total cost and expenses.....................           4,682,924          7,112,215       8,357,577        14,040,696
                                                     ------------       ------------    ------------      ------------
Loss from operations........................          (3,354,301)        (5,231,056)     (6,166,913)       (9,726,455)

Interest income.............................              65,162            254,854         157,818           583,047

Other gains/(losses)........................                  --           (638,000)         50,625          (638,000)
                                                     ------------       ------------    ------------      ------------
Net loss ...................................         $(3,289,139)       $(5,614,202)    $(5,958,470)      $(9,781,408)
                                                     ------------       ------------    ------------      ------------
                                                     ------------       ------------    ------------      ------------
Basic and diluted loss per share............         $     (0.24)       $     (0.42)    $     (0.44)      $     (0.74)
                                                     ------------       ------------    ------------      ------------
                                                     ------------       ------------    ------------      ------------
Shares used in computing basic and
    diluted loss per share .................          13,605,782         13,289,121      13,537,059        13,265,196

</TABLE>

                             See accompanying notes

                                       4

<PAGE>


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

<TABLE>
<CAPTION>
                                                                                       SIX MONTHS ENDED JUNE 30,
                                                                                 ----------------------------------
                                                                                       1999                1998
                                                                                 -------------        -------------
<S>                                                                              <C>                  <C>
OPERATING ACTIVITIES
Net loss ..................................................................      $ (5,958,470)        $ (9,781,408)
Adjustments to reconcile net loss to net cash used for
    operating activities:
        Depreciation and amortization......................................           516,613            1,031,569
        Amortization of premium on short term investments..................              (301)              97,124
        Amortization of deferred compensation..............................           252,678              517,481
        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 .......................................          (200,820)            (746,329)
                Inventories.......  .......................................           294,122           (1,357,168)
                Other current assets.......................................           158,378              325,275
                Accounts payable...........................................           501,969               91,429
                Accrued compensation.......................................           124,919              227,996
                Accrued liabilities .......................................          (188,885)             339,578
                                                                                 -------------        -------------

Net cash flows used for operating activities...............................        (4,499,797)          (8,326,043)

INVESTING ACTIVITIES
Purchases of short-term investments .......................................          (263,482)            (724,366)
Maturities of short-term investments.......................................         1,000,000            8,950,000
Purchase of property and equipment  .......................................          (149,343)            (487,445)
                                                                                 -------------        -------------
Net cash flows provided by (used for) investing activities.................           587,175            7,738,189

FINANCING ACTIVITIES
Issuance of common stock...................................................            64,339              184,694
                                                                                 -------------        -------------
Net cash flows provided by (used in) financing activities..................            64,339              184,694
Net (decrease) increase in cash and cash equivalents ......................        (3,848,283)            (403,160)
Cash and cash equivalents at beginning of period...........................         7,625,804            7,328,502
                                                                                 -------------        -------------
Cash and cash equivalents at end of period.................................       $ 3,777,521         $  6,925,342
                                                                                 -------------        -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.....................................................       $         0         $          0
                                                                                 -------------        -------------
                                                                                 -------------        -------------
</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, 1998
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, 1999.

2.   Inventories

<TABLE>
<CAPTION>
                                                 JUNE 30, 1999     DECEMBER 31, 1998
                                                ----------------   ----------------
                                                 (Unaudited)
         <S>                                     <C>                  <C>
         Parts and materials................     $ 3,219,664          $ 3,913,529
         Work in process....................       1,157,870              334,812
         Finished goods.....................       1,357,021            1,039,997
                                                 ------------         ------------
                                                   5,734,555            5,288,338
         Less: reserves                           (1,674,341)            (934,000)
                                                 ------------         ------------
                                                 $ 4,060,216          $ 4,354,338
                                                 ------------         ------------
                                                 ------------         ------------
</TABLE>

                                       6

<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 OUR CURRENT JUDGMENT ON THE FUTURE DIRECTION OF OUR
BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED BELOW. WE UNDERTAKE NO
OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER
THE DATE OF THIS QUARTERLY REPORT. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO
INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q AND OUR 1998 ANNUAL
REPORT ON FORM 10-K, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

OVERVIEW OF OUR BUSINESS

         We develop, manufacture and market proprietary 3-D visualization and
information systems that enable minimally invasive surgical solutions in
cardiothoracic, head, neck and spine ("HNS") and other selected microsurgical
procedures. We also market endoscopic cameras and have generated minimal
revenues from the sales of these products since our formation in July 1993.
We expect to continue to incur substantial losses for at least the next 12
months. As of June 30, 1999, our accumulated deficit was approximately
$53,176,000. There can be no assurance that our development efforts will
result in commercially available products, that we will be successful in
introducing the products under development, or that required regulatory
approval of products will continue to be obtained in a timely manner, if at
all.

OUR RESULTS OF OPERATIONS

         Sales. We had revenue from product sales of $1,329,000 and
$2,191,000 for the three-and six- months ended June 30, 1999, respectively,
compared to revenues from product sales and distribution fees of $1,881,000
and $4,314,000 for the same periods in 1998. The decrease in revenues for
both the three- and six-month periods was due to a reduction in sales of
StereoSite systems and associated distribution fees paid by Sofamor Danek,
our distributor for the HNS market, and a reduction in sales of our Series
8000 Advanced Visualization and Information System ("Series 8000") for
minimally invasive cardiac surgery during the 1999 periods compared to the
corresponding periods of 1998. These were partially offset by higher sales of
OEM products including initial deliveries to a second OEM customer during the
second quarter of 1999, by product deliveries to a second distributor for the
HNS market during the second quarter of 1999, and by product sales to OEC
Medical for the medical imaging market during the 1999 periods.

                                       7

<PAGE>


         Cost of Sales. Our cost of sales were $2,167,000 and $3,233,000 for
the three- and six-months ended June 30, 1999, respectively, and $1,818,000
and $3,608,000 for the three- and six-months ended June 30, 1998,
respectively. The increase for the three-month period ended June 30, 1999 was
primarily due to significant inventory reserves we added during the second
quarter of 1999 compared to the corresponding period of 1998, partially
offset by lower product sales levels during the 1999 period as compared to
1998. The decrease for the six-month period was primarily due to lower
product sales levels during the 1999 period and no costs related to the
launch of the StereoSite product in 1999 as compared to 1998, partially
offset by the inventory reserves added during the second quarter of 1999.

         Research and Development Expenses. Our research and development
expenses were $1,020,000 and $1,997,000 for the three- and six-months ended
June 30, 1999, respectively, compared to $1,632,000 and $3,187,000 for the
corresponding periods in 1998. The decrease in research and development
expenses was primarily attributable to decreases in staffing and related
supply and occupancy costs and a decrease in contract services related to
development efforts. We anticipate our spending in research and development
will decline over the next several quarters as we near completion of our
product for the general surgery market and as a result of our need to
conserve cash.

         Sales and Marketing Expenses. Our sales and marketing expenses were
$856,000 and $1,893,000 for the three- and six-months ended June 30, 1999,
respectively, and $1,567,000 and $3,446,000 for the three- and six-months
ended June 30, 1998, respectively. The decrease in sales and marketing
expenses for both the three-and six-month periods reflects the transition of
all sales, marketing and distribution efforts associated with our Series 8000
for minimally invasive cardiac surgery in the United States to Medtronic
following an agreement announced at the end of June 1998. We expect our sales
and marketing expenses to decline over the next several quarters as we seek
to conserve cash.

         General and Administrative Expenses. Our general and administrative
expenses were $640,000 and $1,235,000 for the three- and six-months ended
June 30, 1999, respectively, compared to $1,155,000 and $2,860,000 for the
corresponding periods in 1998. The decrease for both the three- and six-month
periods was primarily due to a reduction in staffing and related expenses
following a restructuring at the end of the second quarter of 1998, a
reduction in deferred compensation expense and lower professional, legal and
consulting service fees. We expect our general and administrative expenses to
remain at or near current levels for the next several quarters.

         Restructuring Expenses. We had no restructuring charges in either
the three- or six-month period ended June 30, 1999 and charges associated
with restructuring expenses of $940,000 for both the three- and six-month
periods ended June 30, 1998. The restructuring expenses in the 1998 periods
related primarily to termination and

                                       8

<PAGE>

severance payments to employees in connection with transfer of sales and
marketing responsibility in the U.S. for our Series 8000 System for 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 instruments and
sutures earlier than previously planned.

         Interest Income. Our net interest income was $65,000 and $158,000
for the three- and six-month periods ended June 30, 1999, respectively,
compared to $255,000 and $583,000 for the corresponding periods in 1998. This
decrease for both the three- and six-month periods was due primarily to
decreasing average investment balances of our excess cash.

         Other Gains. We had no other gains for the three-month period ended
June 30, 1999, and other gains of $51,000 for the six-month period ended June
30, 1999 and had no such gains for the three- and six-months ended June 30,
1998. The gains for the six-month period ended June 30, 1999 relate to sale
of securities we received in connection with an earlier license agreement
signed in 1996 with Imagyn Medical Technologies, Inc. (formerly Urohealth
Systems, Inc.).

LIQUIDITY AND CAPITAL RESOURCES

         We anticipate that our existing cash, cash equivalents and
short-term investments, and product revenues, will be sufficient to fund our
operations through October 1999. Substantial additional capital resources
will be required to fund continuing expenditures related to our research,
development, manufacturing and commercialization of new products beyond that
point, and we estimate $1,000,000 in additional financing will be required to
fund operations through December 31, 1999, after recently announced staffing
and expense reductions. There can be no assurance that the requisite fundings
will be consummated in the necessary time frame or on terms acceptable to us.
Should we be unable to raise sufficient funds, we may be required to curtail
our operating plans and possibly relinquish rights to portions of our
technology or products.

         Net cash used in operating activities for the six-months ended June
30, 1999 was $4,500,000 compared to net cash used of $8,326,000 for the
corresponding six-month period in 1998. The decrease in net cash used in
operating activities was primarily attributable to decreasing net losses and
lower accounts receivable balances and inventory purchases during the 1999
period partially offset by lower non-cash expense for depreciation and
amortization and no customer advance payments in 1999 compared to 1998.

         Net cash provided by investing activities was $587,000 for the
six-months ended June 30, 1999 compared to $7,738,000 of net cash provided in
the same period in 1998. The decrease in net cash provided by investing
activities in 1999 was primarily attributable to declining balances of short
term investments reaching maturity partially offset by decreasing purchases
of property and equipment.

         Net cash provided by financing activities was $64,000 for the
six-months ended June 30, 1999 compared to $185,000 for the same period in
1998. The decrease in net cash provided by

                                       9

<PAGE>

financing activities during the 1999 period was primarily attributable to a
reduction in purchases of stock by employees through our employee stock
purchase plan and a lower level of stock option exercises.

YEAR 2000

         We recognize the need to ensure our operations will not be adversely
impacted by the inability of our 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. We are currently addressing the risk, with respect to the
availability and integrity of our financial systems and the reliability of
our operating systems, and are in the process of communicating with
suppliers, customers, financial institutions and others with whom we conduct
business transactions to assess whether they are Year 2000 compliant.

         We established a Year 2000 Compliance Team in 1998 made up of
members of all of our company's functional organizations and our
implementation of a full Year 2000 Compliance Program is ongoing. Our Chief
Financial Officer is the officer responsible for the Year 2000 Compliance
Program and the individual who leads the Year 2000 Compliance Team reports
directly to the Chief Financial Officer.

         Central to our Year 2000 Compliance Program is a matrix we have
developed of all of our operations and business activities. This matrix which
is constantly updated provides the status of all of our Year 2000 Compliance
efforts in terms of level of assessment, conversion, testing, and completion
and identifies responsibility for each item. In this way, we are able to
prioritize our efforts and provide visibility of the Compliance Program to
all Compliance Team members and management.

         Thus far we have completed the assessment phase of all of our
operations and business activities. We have determined that our products are
Year 2000 compliant and during the second quarter of 1999 completed
conversion, testing and implementation of all remaining non compliant mission
critical business systems. During the first quarter of 1999 we installed a
year 2000 compliant version of our business enterprise software and completed
the majority of the testing required of the system. During the second quarter
of 1999 we completed testing of the system and were fully operational on it
by the end of the quarter.

         Furthermore, as a result of our assessment of other, less critical
systems, we believe we have identified adequate remedies for those which have
been identified as currently non-Year 2000 compliant. Specific examples of
non compliant systems would include certain desktop personal computers and
applications software where compliant versions are readily available from the
current suppliers as well as others. We currently have no contingency plans
in place. We expect to develop contingency plans during the third quarter of
1999 and have those plans in place by the end of the third quarter of 1999.

                                       10

<PAGE>

         We currently estimate that the cost of the Year 2000 initiative will
not exceed $150,000, a portion of which, such as the business enterprise
software, was scheduled for upgrade irrespective of the Year 2000 issue and
approximately $45,000 of which was expended in 1998. Additionally,
approximately $25,000 was expended in each of the first two quarters of 1999
for a total of approximately $95,000 expended to-date. We do not, therefore,
expect the Year 2000 initiative to be material to our results of operations
or financial position.

RISKS AND UNCERTAINTIES

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

         WE ARE A DEVELOPMENT STAGE COMPANY AND MAY HAVE SUBSTANTIAL FUTURE
LOSSES AND FUTURE CAPITAL REQUIREMENTS

         Since our formation in July 1993, we have been engaged in the
development of visualization and information systems that enable minimally
invasive microsurgery ("MIM") solutions for applications in cardiothoracic
and other selected microsurgical procedures. In addition we have been engaged
in manufacturing and marketing limited quantities of camera systems to
customers as an OEM. As of June 30, 1999, we had incurred cumulative net
losses of $53.2 million since our formation. We expect to incur substantial
losses for at least the next 12 months. There can be no assurance that we
will achieve or sustain profitability in the future. Failure to achieve
significant commercial revenues or profitability would have a material
adverse effect on our business, financial condition and results of operations.

         Our future liquidity and capital requirements will depend upon
numerous factors, including the following: the extent to which our 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 our
ongoing research and development programs; the costs of training physicians
to become proficient in the use of our products and procedures; and the costs
of developing marketing and distribution capabilities.

         We anticipate that our existing cash, cash equivalents and
short-term investments, and product revenues, will be sufficient to fund our
operations through October 1999. Substantial additional capital resources
will be required to fund continuing expenditures related to our

                                       11

<PAGE>

research, development, manufacturing and commercialization of new products
beyond that point, and we estimate $1,000,000 in additional financing will be
required to fund operations through December 31, 1999, after recently
announced staffing and expense reductions. There can be no assurance that the
requisite fundings will be consummated in the necessary time frame or on
terms acceptable to us. Should we be unable to raise sufficient funds, we may
be required to curtail our operating plans and possibly relinquish rights to
portions of our technology or products.

         WE ARE DEPENDENT UPON THE SUCCESSFUL COMMERCIALIZATION OF OUR CORE
3D TECHNOLOGY PLATFORM

         Products derived from our core technology, (the Series 8000 for
minimally invasive cardiac surgery, StereoSite systems for head, neck and
spine microsurgery and the yet to be introduced ORPC for general surgery) are
expected to account for the majority of our revenues over the next several
years. We are uncertain as to whether the demand for these products will be
sufficient to allow us to achieve profitable operations.

         Development of certain additional components of the Series 8000 has
not yet been completed, additional versions of StereoSite have yet to be
finalized and the ORPC is in pre-production phase. There can be no assurance
that our development efforts for these products will be successful, or that
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 3D endoscopic visualization technology 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,
StereoSite and ORPC will prove suitable for use by a substantial number of
surgeons. If they prove unsuitable for a large number of surgeons to use, the
potential markets and applications for our products would be significantly
limited. Widespread use of the Series 8000, StereoSite and ORPC 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 near term
market acceptance. Our failure to successfully commercialize the Series 8000,
StereoSite and ORPC would jeopardize our ability to achieve or sustain
profitability.

         WE ARE UNCERTAIN AS TO WHETHER PHYSICIANS WILL ADOPT MINIMALLY
INVASIVE MICROSURGICAL PROCEDURES

         Our near-term products are being developed in order to enable
cardiothoracic, HNS and general surgeons to perform MIM surgical procedures
using their existing skills coupled with training and complementary equipment
being developed by other companies. Accordingly, our

                                       12

<PAGE>

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. We are
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 safe, effective and
technically viable 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 safety and effectiveness 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 our ability to
facilitate training of surgeons to perform MIM surgery and the willingness of
such surgeons to perform such procedures. Physicians may 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. We believe 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 the near future,
if at all. Patient acceptance of the procedure will depend upon 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 will jeopardize our ability to achieve or sustain profitability.

         WE ARE DEPENDENT ON MEDTRONIC, SOFAMOR DANEK AND OTHER DISTRIBUTION
PARTNERS

         We have organized our sales and marketing efforts through our
CardioThoracic Surgery and HNS Microsurgery business units. Pursuant to a
sales agreement in June 1998, our Cardiothoracic product line is sold by
Medtronic's sales force in most of the world's significant markets, including
the United States. The products of our HNS Microsurgery division are sold
worldwide via Sofamor Danek's sales force, and other distributors in
international markets.

                                       13

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         We are primarily dependent on our agreements with Medtronic and
Sofamor Danek for sales of the majority of products derived from our core 3D
technology. The termination of these relationships would jeopardize our
ability to achieve or sustain profitability.

         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 our company, we appointed Medtronic as
our exclusive distributor for current and future visualization and
information systems for cardiothoracic surgery in the United States, Europe,
Japan and several other significant geographical regions. There can be no
assurance that Medtronic will commit significant resources to market our
Series 8000 System or that its marketing efforts will be effective. If they
are not effective, it will jeopardize our ability to achieve or sustain
profitability until they can be replaced by an equivalent distributor.

         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 our company, we appointed Sofamor Danek as our
exclusive worldwide distributor for our current and future visualization and
information systems for neurosurgery, spinal surgery, radiation delivery,
otolaryngology and maxillofacial surgery (the "StereoSite Systems"). This
agreement was modified in April 1999 to non-exclusive status. There can be no
assurance that Sofamor Danek will commit significant resources to market
StereoSite Systems or that its marketing activities will be effective. If
they are not effective, it will jeopardize our ability to achieve or sustain
profitability.

         We 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.

         In January 1999, Sofamor Danek was acquired by Medtronic, Vista
Medical's other principal strategic distribution partner. We do not
anticipate that this acquisition will have any negative effects on the
performance of our distribution agreement with either company.

         WE LACK COMMERCIAL MANUFACTURING EXPERIENCE AND THERE ARE
SIGNIFICANT RISKS ASSOCIATED WITH OUR SCALE-UP OF MANUFACTURING

         We lack long term experience in manufacturing our products,
including the Series 8000 and StereoSite systems, in the quantities that
would be necessary for us to achieve significant commercial sales. The
manufacture of our products primarily involves the assembly of a number

                                       14

<PAGE>

of sub-assemblies and components. Companies such as ours 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 we can establish or maintain reliable,
high-volume manufacturing at commercially reasonable costs. We 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 our business,
financial condition and results of operation.

         We have considered and will continue to consider as appropriate, the
internal manufacture of sub-assemblies currently provided by third party
subcontractors, as well as the implementation of new production processes.
Our manufacturing yields or costs may increase as a result of the transition
to in-house production or to new production processes when such efforts are
undertaken. In addition, costs in complying with FDA Good Manufacturing
Practices ("GMP") or changes in such practices may exceed our expectations.

         WE MAY FACE COMPONENT SHORTAGES AND ARE DEPENDENT IN SOME INSTANCES
ON SINGLE SOURCES OF SUPPLY

         We use and rely on certain components and services used in our
systems for which we have only a single source of supply. The manufacture of
our products in larger commercial quantities will require a substantial
increase in component supplies and will likely necessitate the replacement of
current suppliers or the addition of new suppliers. The qualification of
additional or replacement vendors for 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 our
products.

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

         Any significant supply interruption, or inventory shortage or
overage, would negatively impact our ability to manufacture our products.

         WE ARE SUBJECT TO SIGNIFICANT DOMESTIC AND INTERNATIONAL REGULATION
AND MAY NOT BE ABLE TO OBTAIN NECESSARY REGULATORY CLEARANCES

         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

                                       15

<PAGE>

in the United States primarily by the FDA and, to a lesser extent, by certain
state agencies. Generally, medical devices require pre-market clearance or
pre-market approval prior to commercial distribution. In addition, certain
material changes or modifications to, and changes in intended use of, medical
devices also are subject to FDA review and clearance or approval. The FDA
regulates the research, testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, promotion and distribution of medical
devices in the United States and the export of unapproved medical devices
from the United States to other countries. Noncompliance with applicable
requirements can result in failure of the government to grant pre-market
clearance or approval for devices, withdrawal or suspension of approval,
total or partial suspension of production, fines, injunctions, civil
penalties, refunds, recall or seizure of products and criminal prosecution.

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

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

         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.

                                       16

<PAGE>

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

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

         Any products which we manufacture or distribute 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. Our failure to comply with
regulatory requirements would jeopardize our ability to market our products.
The current regulatory environment in Europe for medical devices differs
significantly from that in the United States. Since 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

                                       17

<PAGE>

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.

         WE EXPECT TO ENCOUNTER RAPID TECHNOLOGICAL CHANGE AND SIGNIFICANT
COMPETITION

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

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

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

         There can be no assurance that physicians will use minimally
invasive microsurgery procedures to replace or supplement established
treatments, or that cardiac surgery minimally invasive microsurgery or HNS
minimally invasive microsurgery will be competitive with current or future
technologies. There can be no assurance that we will be able to compete
successfully against current and future competitors.

         WE ARE EXTREMELY RELIANT ON CERTAIN STRATEGIC RELATIONSHIPS

         We intend to pursue strategic relationships with corporations and
research institutions with respect to the research, development, regulatory
approval and marketing of certain of our products. Our future success may
depend, in part, on our relationships with such partners, including, for
example, our relationship with Medtronic and Sofamor Danek. We will have
limited or no control over the resources that any partner may devote to our
products, or over our partners' development and marketing efforts. We cannot
guarantee that our present or future collaborative partners will perform
their obligations as expected or will devote sufficient

                                       18

<PAGE>

resources to the development or marketing of our potential products. Any of
the following actions by a partner could damage our business: parallel
development of alternate technologies; preclusion from entering into
competitive arrangements; failure to obtain timely regulatory approvals;
premature termination of a collaborative agreement or failure to devote
sufficient resources to the development and commercialization of our
products. We anticipate that our partners may have the unilateral right to
terminate our relationships without significant penalty. We may not be
successful in establishing or maintaining any strategic relationships in the
future.

          WE EXPECT FLUCTUATIONS IN OUR OPERATING RESULTS

         Our results of operations of 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 our pricing policies or those of our competitors;
changes in third-party payment guidelines; the number, timing and
significance of product enhancements and new product announcements by us or
our competitors; our ability to develop, introduce and market new and
enhanced versions of our products on a timely basis; customer order deferrals
in anticipation of enhancements or of new product introductions by us or our
competitors; product quality problems; personnel changes; and the level of
international sales.

         WE ARE EXPERIENCING UNCERTAINTY RELATING TO THIRD-PARTY PAYMENTS

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

                                       19

<PAGE>

affected by changes in payment policies of government or private health care
payors, particularly to the extent any such changes affect payment for the
procedure in which our products are intended to be used.

         If we obtain the necessary foreign regulatory registrations or
approvals, market acceptance of our products in international markets would
be dependent, in part, upon the acceptance by the prevailing health care
financing system in each country. Health care financing systems in
international markets vary significantly by country and include both
government sponsored health care programs and private insurance. There can be
no assurance that these financing systems will endorse the use of our
technology.

         We believe 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 and that the overall escalating cost of medical
products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce
the cost of products and services, including products which we offer. 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 our products or our ability to sell our products on a
profitable basis, particularly if our systems are more expensive than
competing surgical procedures. The unavailability or inadequacy of
third-party payor coverage or reimbursement would have a negative impact on
our business.

         THERE ARE SIGNIFICANT RISKS RELATING TO OUR INTERNATIONAL OPERATIONS

         We plan to market our products in international markets, either on
our own or with our strategic partners. We have limited experience in
marketing our products overseas. Changes in overseas economic conditions,
currency exchange rates, foreign tax laws or tariffs or other trade
regulations could negatively impact our business. The anticipated
international nature of our business is also expected to subject our
representatives, agents and distributors to laws and regulations of the
foreign jurisdictions in which they operate or in which our products are
sold. The regulation of medical devices in a number of such jurisdictions,
particularly in the European Union, continues to develop and new laws or
regulations may negatively impact our business. In addition, the laws of
certain foreign countries do not protect our intellectual property rights to
the same extent as do the laws of the United States.

         WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS AND HAVE LIMITED
INSURANCE COVERAGE

         We face an inherent and significant business risk of exposure to
product liability claims in the event that the use of our products results in
personal injury or death. Also, in the event that any of our products proves
to be defective, we may be required to recall or redesign such products. Our
current product liability insurance coverage limit is $10.0 million per
occurrence and in the aggregate. Our coverage limits may not be adequate to
protect us from any liabilities

                                       20

<PAGE>

we might incur in connection with the development, manufacture and sale of
our products. In addition, increased product liability coverage may be
required 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 us on acceptable terms, if at all. A successful
product liability claim or series of claims brought against us in excess of
our insurance coverage or a product recall would negatively impact our
business.

         THERE IS SIGNIFICANT UNCERTAINTY REGARDING OUR PATENTS AND
PROTECTION OF OUR PROPRIETARY TECHNOLOGY

         We rely on a combination of technical leadership, patent, trade
secret, copyright and trademark protection and nondisclosure agreements to
protect our proprietary rights. As of June 30, 1999, we had exclusive
ownership rights to 15 issued United States patents, 12 pending United States
patent applications and 28 pending foreign applications covering various
aspects of our devices and systems. Furthermore, as of the same date, we had
exclusive rights in the medical field to five issued United States patents,
one pending United States patent application, 11 issued foreign patents and
10 pending foreign applications covering various aspects of our devices and
systems. In 1998 we additionally obtained from Carl Zeiss Inc. non-exclusive
rights to three issued United States patents and four pending foreign
applications. We intend to file additional patent applications in the future.
The failure of such patents to issue could damage our ability to protect our
proprietary information.

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

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

                                       21

<PAGE>

require disputed rights to be licensed from or to third parties or require us
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 our
competitors to ascertain the areas of research or development in which we are
engaged prior to our 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
is intensely competitive. Patents issued and patent applications filed
relating to medical devices are numerous and current and potential
competitors and other third parties may have filed or in the future may 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 us. There can also be no assurance
that third parties will not assert infringement claims against us in the
future or that any such assertions will not result in costly litigation or
require us to obtain a license to intellectual property rights of such
parties. Any such licenses may not be available on acceptable terms, if at
all. Furthermore, parties making such claims may be able to obtain injunctive
or other equitable relief that could effectively block our ability to make,
use, sell or otherwise practice our intellectual property (whether or not
patented or described in pending patent applications), or to further develop
or commercialize our products in the United States and abroad and could
result in the award of substantial damages. Defense of any lawsuit or failure
to obtain any such license could damage our business.

         We rely on unpatented trade secrets to protect our proprietary
technology, and no assurance can be given that others will not independently
develop or otherwise acquire the same or substantially equivalent
technologies or otherwise gain access to our proprietary technology or
disclose such technology or that we can ultimately protect our rights to such
unpatented proprietary technology. Third parties may obtain patent rights to
such unpatented trade secrets, which patent rights could be used to assert
infringement claims against us. We also rely on confidentiality agreements
with our collaborators, employees, advisors, vendors and consultants to
protect our proprietary technology. These agreements may be breached, we may
not have adequate remedies for any breach and our trade secrets may otherwise
become known or be independently developed by competitors. In addition, our
agreements with employees and consultants require disclosure of ideas,
developments, discoveries or inventions conceived during employment or
consulting, as the case may be, and assignment to us of proprietary rights to
such matters related to our business and technology. The extent to which
efforts by others will result in patents and the effect on us of the issuance
of such patents is unknown. Failure to obtain or maintain patent and trade
secret protection, for any reason, could negatively impact our business.

                                       22

<PAGE>

         We have licensed certain aspects of our technology from third
parties. In September 1995, Mr. H. McKinley and McKinley Optics, Inc.
(collectively, "McKinley") granted to us 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, we are 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 we fail to
pay any royalties. In addition, we have 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 us a non-exclusive license to certain
optical zoom technology for use in endoscopes. We are obligated to pay
royalties on net sales of products in the United States which incorporate
Fuji's technology. Fuji may terminate the agreement if we do not cure any
violation of the agreement within a limited period of time. Our failure to
retain rights to these technologies could negatively impact our business.

         WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND ADVISORS

         Our future business and operating results depend in significant part
upon the continued contributions of our key technical and senior management
personnel, many of whom would be difficult to replace and certain of whom
perform important functions beyond those suggested by their respective job
titles or descriptions. Our business and future operating results also depend
in significant part upon our ability to attract and retain qualified
management, manufacturing, technical, marketing and sales and support
personnel for our operations. We have not entered into any employment
contracts or arrangements with any of our employees. Competition for such
personnel is intense, and we may not 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 our inability to attract and
retain skilled employees, as needed, could negatively impact our business.

         We have 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. We have also 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 us exclusively in the field of
visualization, but are free to consult with other non-competing
instrumentation companies and are employed elsewhere on a full-time basis. As
a result, they only spend a limited amount of time on our business. Although
we have entered into consulting agreements, with terms ranging from 12 months
to two years, including confidentiality provisions with each of the members
of the Clinical Advisory Boards, the

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<PAGE>

consulting and confidentiality agreements between us and each of the members
of the Clinical Advisory Boards may be terminated or breached. In addition,
such agreements may not be renewed upon termination.

         WE NEED TO EFFECTIVELY MANAGE OUR CHANGING BUSINESS

         In order to compete effectively against current and future
competitors, prepare additional products for potential commercialization and
develop future products, we believe that we must continue to expand our
operations, particularly in the areas of development. If we were to
experience significant growth in the future, such growth would likely result
in new and increased responsibilities for management personnel and place
significant strain upon our management, operating and financial systems and
resources. To accommodate such growth and compete effectively, we must
continue to implement and improve information systems, procedures and
controls, and to expand, train, motivate and manage our work force. Our
future success will depend to a significant extent on the ability of our
current and future management personnel to operate effectively, both
independently and as a group. Our personnel, systems, procedures and controls
may not be adequate to support our future operations. Any failure to
implement and improve our operational, financial and management systems or to
expand, train, motivate or manage employees could negatively impact our
business.

         WE ARE FACING YEAR 2000 ISSUES

         We recognize the need to ensure our operations will not be adversely
impacted by the inability of our 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. We are currently addressing the risk, with respect to the
availability and integrity of our financial systems and the reliability of
our operating systems, and are in the process of communicating with
suppliers, customers, financial institutions and others with whom we conduct
business transactions to assess whether they are Year 2000 compliant.

         We established a Year 2000 Compliance Team in 1998 made up of
members of all of our company's functional organizations and our
implementation of a full Year 2000 Compliance Program is ongoing. Our Chief
Financial Officer is the officer responsible for the Year 2000 Compliance
Program and the individual who leads the Year 2000 Compliance Team reports
directly to the Chief Financial Officer.

         Central to our Year 2000 Compliance Program is a matrix we have
developed of all of our operations and business activities. This matrix which
is constantly updated provides the status of all of our Year 2000 Compliance
efforts in terms of level of assessment, conversion, testing, and completion
and identifies responsibility for each item. In this way, we are able to
prioritize our efforts and provide visibility of the Compliance Program to
all Compliance Team members and management.

                                       24

<PAGE>

         Thus far we have completed the assessment phase of all of our
operations and business activities. We have determined that our products are
Year 2000 compliant and during the second quarter of 1999 completed
conversion, testing and implementation of all remaining non compliant mission
critical business systems. During the first quarter of 1999 we installed a
year 2000 compliant version of our business enterprise software and completed
the majority of the testing required of the system. During the second quarter
of 1999 we completed testing of the system and were fully operational on it
by the end of the quarter.

         Furthermore, as a result of our assessment of other, less critical
systems, we believe we have identified adequate remedies for those which have
been identified as currently non-Year 2000 compliant. Specific examples of
non compliant systems would include certain desktop personal computers and
applications software where compliant versions are readily available from the
current suppliers as well as others. We currently have no contingency plans
in place. We expect to develop contingency plans during the third quarter of
1999 and have those plans in place by the end of the third quarter of 1999.

         We currently estimate that the cost of the Year 2000 initiative will
not exceed $150,000, a portion of which, such as the business enterprise
software, was scheduled for upgrade irrespective of the Year 2000 issue and
approximately $45,000 of which was expended in 1998. Additionally,
approximately $25,000 was expended in each of the first two quarters of 1999
for a total of approximately $95,000 expended to-date. We do not, therefore,
expect the Year 2000 initiative to be material to our results of operations
or financial position.

         POTENTIAL VOLATILITY OF OUR STOCK PRICE

         The market prices and trading volumes for securities of emerging
companies, like ours, have historically been highly volatile and have
experienced significant fluctuations unrelated to the operating performance
of such companies. The market price of the shares of our common stock is
likely to be highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in our operating results, changes
in financial estimates by securities analysts, announcements of technological
innovations, new products or new contracts by us or our 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 our common stock. In the past, following periods of
volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that
company. Such litigation, if brought against us, could result in substantial
costs and a diversion of management's attention and resources.

                                       25

<PAGE>

         WE MAY BE REQUIRED TO USE HAZARDOUS MATERIALS

         Our research and development activities may involve the controlled
use of hazardous materials and chemicals. Although we believe that our 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, we could be held liable for any resultant
damages, and any such liability could exceed our resources. We may incur
substantial cost to comply with environmental regulations.

         WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS

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

         WE HAVE ADOPTED CERTAIN MEASURES THAT MY DISCOURAGE A CHANGE OF
CONTROL THAT MAY NEGATIVELY IMPACT HOLDERS OF OUR COMMON STOCK

         Our 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 our stockholders. The
rights of the holders of our 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
our outstanding voting stock.

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

                                       26

<PAGE>

PART II.  OTHER INFORMATION

Item 1.   Not Applicable

Item 2.   Not Applicable

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

                  At June 30, 1999, our investment portfolio included
          fixed-income securities of $4.2 million. These securities are subject
          to interest rate risk and will decline in value if interest rates
          increase. Due to the short duration of our investment portfolio, an
          immediate 10 percent increase in interest rates would have no material
          impact on our financial condition or results of operations.

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

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

   I.     1999 Annual Meeting of Stockholders held on June 8, 1999

          a. The 1999 Annual Meeting of Stockholders of Vista Medical
          Technologies, Inc. (the "Annual Meeting") was held on June 8, 1999.
          The holders of 12,505,996 of the 13,694,239 shares of our Common Stock
          outstanding on April 15, 1999, the record date for the Annual Meeting
          (approximately 91.323%) were present at the Annual Meeting in person
          or by proxy.

          b. At the Annual Meeting, Nicholas B. Binkley and Larry M. Osterink
          were duly nominated and properly elected as Directors of our company
          to serve until the 2002 Annual Meeting of stockholders or until their
          respective successors are elected and 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>
         Nicholas B. Binkley        12,427,470                78,526               0
         Larry M. Osterink          12,420,970                85,026               0

</TABLE>

         c. At the Annual Meeting, a proposal to ratify the appointment of Ernst
         & Young LLP as our independent auditors for fiscal 1999 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>
           12,474,870             22,790                 8,336                0

</TABLE>

                                       27

<PAGE>

Item 5.   Not Applicable

Item 6.   Exhibits and Reports on Form 8-K

A)      Exhibits

        10.1 Fifth Amendment to Lease Dated April 30, 1999

        11.1 Statement Regarding Computation of Per Share Earnings

        27.1 Financial Data Schedule

B)      Reports on Form 8-K

        No reports on Form 8-K were filed by the Company during the three
        months ended June 30, 1999.


                                       28

<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, 1999            /S/ JOHN R. LYON
        -------------------        -------------------------
                                   John R. Lyon
                                   President, Chief Executive Officer and
                                   Director


Date:   AUGUST 13, 1999            /S/ ROBERT J. DE VAERE
        -------------------        -------------------------
                                   Robert J. De Vaere
                                   Vice President of Finance & Administration
                                   & Chief Financial Officer
                                   (Principal financial and accounting officer)

                                       29