<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 SEPTEMBER 30, 1997
                                           
                                         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 November 10, 1997 there were 13,389,663 shares of $.01 par value
common stock outstanding.
-----------------------------------------------------------------------

                                       1
<PAGE>

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


PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

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

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

PART II  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K ..............................  25

SIGNATURES .............................................................  26

                                       2
<PAGE>

PART 1. FINANCIAL INFORMATION
Item 1.  Financial Statements

                        Vista Medical Technologies, Inc.
                          Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                      September 30, 1997   December 31, 1996
                                                      ------------------   -----------------
                                                         (Unaudited)

ASSETS
<S>                                                      <C>                 <C>
Current assets:
   Cash and cash equivalents . . . . . . . . . . . . .   $  6,690,458        $ 10,119,529

   Short-term investments & securities 
   available for sale. . . . . . . . . . . . . . . . .     22,040,577             165,000

   Accounts receivable . . . . . . . . . . . . . . . .      1,114,718             526,119

   Inventories . . . . . . . . . . . . . . . . . . . .      3,832,790           1,212,825

   Other current assets. . . . . . . . . . . . . . . .        330,044             136,400
                                                         ------------        ------------
                                                           34,008,587          12,159,873
Total current assets
Property and equipment, net. . . . . . . . . . . . . .      2,769,634           1,082,103

Patents and other assets . . . . . . . . . . . . . . .        999,334           1,073,741
                                                         ------------        ------------

TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . .   $ 37,777,555        $ 14,315,717
                                                         ------------        ------------
                                                         ------------        ------------


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:

   Accounts payable. . . . . . . . . . . . . . . . . .   $  1,606,465        $    607,639

   Accrued compensation. . . . . . . . . . . . . . . .        433,624             226,543

   Accrued liabilities . . . . . . . . . . . . . . . .      1,081,220             520,584
                                                         ------------        ------------

Total current liabilities. . . . . . . . . . . . . . .      3,121,309           1,354,766

Commitments

Stockholders' equity:

 Convertible preferred stock, $.01 par value:

   Authorized shares - 18,000,000

   Issued and outstanding shares -

   11,574,252 in 1996, no shares outstanding 
     September 1997. . . . . . . . . . . . . . . . . .                            115,742

   Common stock, $.01 par value:

      Authorized shares - 25,000,000

      Issued and outstanding shares - 538,224 in 1996  

         and 13,339,555 in September 1997. . . . . . .        133,396               5,382

   Additional paid-in capital. . . . . . . . . . . . .     62,186,392          28,615,223

   Unrealized gain/(loss) on investments . . . . . . .          2,352

   Notes receivable from stockholders. . . . . . . . .        (93,375)            (93,375)

   Deferred compensation . . . . . . . . . . . . . . .     (1,959,248)         (2,061,549)

   Accumulated deficit . . . . . . . . . . . . . . . .    (25,613,271)        (13,620,472)
                                                         ------------        ------------

Total stockholders' equity . . . . . . . . . . . . . .     34,656,246          12,960,951
                                                         ------------        ------------

TOTAL LIABILITIES AND STOCKHOLDERS'

 EQUITY. . . . . . . . . . . . . . . . . . . . . . . .   $ 37,777,555        $ 14,315,717
                                                         ------------        ------------
                                                         ------------        ------------

</TABLE>


Note:    The balance sheet at December 31, 1996 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 September 30,    Nine Months Ended September 30,
                                               --------------------------------    -------------------------------
                                                    1997            1996               1997             1996
                                                -----------    -----------         ------------     -----------
<S>                                             <C>            <C>                 <C>              <C>
Sales. . . . . . . . . . . . . . . . . . . .    $ 1,228,666    $   573,336         $  2,563,328     $ 1,512,913

Costs and expenses:

    Cost of sales. . . . . . . . . . . . . .      1,547,175        595,753            3,138,103       1,269,469

    Research and development . . . . . . . .      1,793,068      1,129,779            4,860,991       2,334,432

    Sales and marketing. . . . . . . . . . .      1,493,546        483,892            3,195,445       1,273,067

    General and administrative . . . . . . .      1,327,471        573,748            3,671,971       1,519,933
                                                -----------    -----------         ------------     -----------
Total cost and expenses. . . . . . . . . . .      6,161,260      2,783,172           14,866,510       6,396,901
                                                -----------    -----------         ------------     -----------


Loss from operations . . . . . . . . . . . .     (4,932,594)    (2,209,836)         (12,303,182)     (4,883,988)

 
License income/(expense) . . . . . . . . . .       (249,993)                           (249,993)

Interest income. . . . . . . . . . . . . . .        416,615         26,979              560,375          64,835
                                                -----------    -----------         ------------     -----------

Net loss . . . . . . . . . . . . . . . . . .    $(4,765,972)   $(2,182,857)        $(11,992,800)    $(4,819,153)
                                                -----------    -----------         ------------     -----------
                                                -----------    -----------         ------------     -----------

Net loss per share . . . . . . . .              $     (0.36)   $     (0.25)        $      (1.18)    $     (0.56)
                                                -----------    -----------         ------------     -----------
                                                -----------    -----------         ------------     -----------

Shares used in computing 
 net loss per share. . . . . . . . . . . . .     13,286,890      8,626,898           10,197,491       8,626,898

</TABLE>



                                See accompanying notes
                                           
                                       4
<PAGE>

                        VISTA MEDICAL TECHNOLOGIES, INC.
                     Consolidated Statements of Cash Flows
                                  (Unaudited)
                                           
<TABLE>
<CAPTION>

                                                                Nine Months  Ended September 30     
                                                              -----------------------------------
                                                                   1997                  1996
                                                              -------------          -------------
<S>                                                           <C>                   <C>
OPERATING ACTIVITIES

Net loss . . . . . . . . . . . . . . . . . . . . . . .        $(11,992,800)         $(4,819,153)
                                                                  
Adjustments to reconcile net loss to net cash 
 used for operating activities:

   Depreciation and amortization . . . . . . . . . . .             689,060              251,700

   Issuance of stock for services rendered . . . . . .              20,010

   Amortization of deferred compensation . . . . . . .             773,399

   Acquired in-process research and development. . . . 

   Write-off of non recoverable patent costs. . . . . .

   Minority interest in partnership. . . . . . . . . . 

   Common stock issued in exchange for 
     license agreement . . . . . . . . . . . . . . . .             249,993

   Changes in operating assets and liabilities, 
     net of effect of acquisitions:

       Accounts receivable . . . . . . . . . . . . . .            (588,598)             277,709

       Inventories . . . . . . . . . . . . . . . . . .          (2,619,965)            (634,548)

       Other current assets. . . . . . . . . . . . . .            (207,771)            (126,700)

       Accounts payable. . . . . . . . . . . . . . . .             998,827             (244,634)

       Accrued compensation. . . . . . . . . . . . . .             207,081             
   
       Accrued liabilities . . . . . . . . . . . . . .             560,637              158,863
                                                              --------------         -------------
                                                               (11,910,127)          (5,136,763)

Net cash flows used for operating activities

INVESTING ACTIVITIES

Purchase of short-term investments . . . . . . . . . .         (21,859,097)

Purchase of property and equipment . . . . . . . . . .          (2,302,185)            (590,493)
                                                              ---------------        -------------
Net cash flows used for investing activities. . . . .          (24,161,282)            (590,493)

FINANCING ACTIVITIES

Issuance of common stock . . . . . . . . . . . . . . .          32,642,338               13,313

Issuance of convertible preferred stock, net . . . . .                                5,080,538                              
                                                              --------------         -------------

Net cash flows provided by financing activities . . .           32,642,338            5,093,851

Net (decrease) increase in cash and cash equivalents .          (3,429,071)            (633,405)

Cash and cash equivalents at beginning of period . . .          10,119,529            3,234,175
                                                              --------------         -------------
Cash and cash equivalents at end of period . . . . . .          $6,690,458           $2,600,770
                                                              --------------         ------------- 
                                                              --------------         ------------- 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest . . . . . . . . . . . . . . . .          $      196           $      183
                                                              --------------         ------------- 
                                                              --------------         ------------- 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND 
 FINANCING ACTIVITIES:

Exercise of stock options for stockholder 
 notes receivable. . . . . . . . . . . . . . . . . . .          $                    $   63,750
                                                              --------------         ------------
                                                              --------------         ------------

</TABLE>


                             See accompanying notes

                                       5
<PAGE>
                                           
                           VISTA MEDICAL TECHNOLOGIES, INC.
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                     (Unaudited)
                                           

1.  Basis of Presentation

    The Consolidated Financial Statements of Vista Medical Technologies, Inc.
(the "Company") included in the Company's Registration Statement on Form S-1
(No. 333-22985), including the related Prospectus dated July 2, 1997 (the
"Registration Statement"), 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
and, therefore, 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,
1997.

2.  Initial Public Offering

    In July 1997, the Company completed an initial public offering ("IPO") of
4,000,000 shares of the Company's common stock, par value $.01 per share (the
"Common Stock") at a price of $9.00 per share, raising gross proceeds of $36.0
million before underwriters' commissions and expenses.  In connection with the
IPO, an aggregate of 11,574,252 of the Company's previously issued Convertible
Preferred Stock, par value $.01 per share, was converted on a four-for-three
basis into an aggregate of 8,680,679 shares of Common Stock, par value $.01 per
share.

3.  Computation of Net Loss Per Share

    Net loss per share is computed using the weighted average number of common
shares and common stock equivalents outstanding.  Common equivalent shares from
stock options and warrants are excluded from the computation when their effect
is antidilutive except that the Securities and Exchange Commission requires
common shares and common share equivalents issued during the twelve months prior
to the initial filing of a proposed public offering to be included in the
calculation as outstanding for all periods prior to the Company's IPO (using the
treasury stock method).  The calculation also gives effect to the conversion of
all convertible preferred shares (using the if-converted method), which
automatically converted into common 

                                       6
<PAGE>

shares immediately prior to the completion of the Company's IPO.

4.  New Accounting Standard

    In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
("Statement No. 128"), which supersedes APB Opinion No. 15.  Statement No. 128
replaces the presentation of primary Earnings Per Share ("EPS") with "Basic EPS"
which includes no dilution and is based on weighted-average common shares
outstanding for the period.  Companies with complex capital structures will also
be required to present "Diluted EPS" that reflects the potential dilution of
securities like employee stock options.  Statement No. 128 is effective for
financial statements issued for periods ending after December 15, 1997.  The
Company does not anticipate any impact on the calculation of EPS from the
adoption of Statement No. 128.

5.  Inventories

                                       September 30, 1997     December 31, 1996
                                       ------------------     -----------------
                                           (Unaudited)

         Parts and supplies. . . . . .      $1,228,528           $  567,707
         Work in process . . . . . . .       1,817,683              286,099
         Finished goods. . . . . . . .         786,579              359,019
                                            ----------           ----------
                                            $3,832,790           $1,212,825
                                            ----------           ----------
                                            ----------           ----------












                                       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 REGISTRATION 
STATEMENT.

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 15 months.  As of 
September 30, 1997, the Company's accumulated deficit was approximately $25.6 
million.

Results of Operations

    Sales.  The Company had revenues from product sales of $1,229,000 and 
$2,563,000 for the three- and nine-months ended September 30, 1997, 
respectively, compared to $573,000 and $1,513,000 for the same periods in 
1996. The increase in sales for the three- and nine-month periods was 
primarily due to sales of the Company's Series 8000 Advanced Visualization 
and Information ("Series 8000") product for minimally invasive cardiac 
surgery launched during the third quarter, revenues associated with a line of 
cardiac instruments and sutures for which the Company acquired distribution 
rights in the second half of 1996, and increased original equipment 
manufacturer ("OEM") sales of the Company's endoscopic cameras compared to 
the year-earlier period.

    Cost of Sales.  The Company's cost of sales were $1,547,000 and 
$3,138,000 for the three- and nine-months ended September 30, 1997, 
respectively, and $596,000 and $1,269,000 for the three- and nine-months 
ended September 30, 1996, respectively, an increase of $951,000 and 
$1,869,000, respectively.  The increase for both the three- and nine-month 
periods was primarily due to costs corresponding to the growth in revenues 
and manufacturing scale-up expenses the Company incurred to accommodate new 
product launches targeted at cardiothoracic and HNS markets, including the 
Series 8000 product.  The Company expects to incur additional expenses 
related to manufacturing scale-up associated with these product launches 
during the fourth quarter of 1997.

                                       8
<PAGE>

    Research and Development Expenses.  Research and development expenses 
increased to $1,793,000 and $4,861,000 for the three- and nine-months ended 
September 30, 1997, respectively, from $1,130,000 and $2,334,000 for the 
corresponding periods in 1996.  These increases in research and development 
expenses for both the three- and nine-month periods were attributable to 
continued development and expansion of the Company's research and development 
organization focused on development, prototyping and evaluation of new 
products and consisted primarily of increases in staffing and related supply 
and occupancy costs.  Contracted research and development effort also 
contributed to the increase.  The Company believes that a significant level 
of investment for product development and evaluation is necessary to maintain 
its technological advantage and, accordingly, anticipates that it will 
continue to increase its spending in research and development on an absolute 
dollar basis.

    Sales and Marketing Expenses.  Sales and marketing expenses were 
$1,494,000 and $3,195,000 for the three- and nine-months ended September 30, 
1997, respectively, and $484,000 and $1,273,000 for the same periods in 1996. 
These increases in sales and marketing expenses were attributable to the 
Company's development and expansion of its sales force, increased marketing 
efforts associated with commercialization of new products, and commissions 
and other expenses related to revenues associated with a line of cardiac 
instruments and sutures for which the Company acquired distribution rights in 
the second half of 1996.  The Company expects that such expenses will 
continue to increase on an absolute dollar basis in the future as it expands 
its sales and marketing efforts in connection with commercialization of new 
products.

    General and Administrative Expenses.  The Company's general and 
administrative expenses increased to $1,327,000 and $3,672,000 for three -and 
nine-months ended September 30, 1997, respectively from $574,000 and 
$1,520,000 for the corresponding periods in 1996.  These increases were 
primarily due to increases in staffing and related expenses associated with 
the continued development of the Company's administrative infrastructure, 
amortization of deferred compensation in connection with the grant of certain 
stock options in 1996 and early 1997, increases in legal and professional 
fees and costs associated with being a public company.  The Company expects 
its general and administrative expenses to continue to increase in the future 
as it increases its administrative staff and systems to manage the growth of 
the Company and as a result of increases in expenses associated with being a 
public company.

    License Expense.  The Company had license expense totaling $250,000 in 
both the three- and nine months ended September 30, 1997 and had no such 
charges for the corresponding periods in 1996.  These expenses related to 
software, documentation and trademarks the Company gained exclusive worldwide 
rights to from GDE Systems, Inc. in February 1997.  The Company is required 
to pay future minimum royalties of $250,000 payable by December 31, 1998.

                                       9
<PAGE>

    Interest Income.  The Company had net interest income of $417,000 and 
$560,000 for the three- and nine-month periods ended September 30, 1997, 
respectively, as compared to $27,000 and $65,000 for the corresponding 
periods in 1996.  These increases for both the three- and nine-month periods 
were due primarily to increasing average investment balances of the Company's 
excess cash following the Company's IPO.

Liquidity and Capital Resources

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

    Net cash used in operating activities for the nine months ended September 
30, 1997 was $11,910,000 compared to net cash used of $5,137,000 for the 
corresponding nine-month period in 1996.  The increase in net cash used in 
operating activities was primarily attributable to increasing net losses 
during the 1997 period.

    Net cash used in investing activities was $24,161,000 for the nine months 
ended September 30, 1997 compared to $590,000 for the same period in 1996.  
The increase is primarily attributable to the purchase of short-term 
investments and the purchase of property and equipment related to increased 
staffing, expansion of manufacturing capabilities, and marketing 
demonstrations.

    Net cash provided by financing activities was $32,642,000 for the nine 
months ended September 30, 1997 compared to $5,094,000 for the same period in 
1996.  The net cash provided by financing activities in 1997 was primarily 
attributable to proceeds from the Company's IPO, while the net cash provided 
in 1996 was primarily attributable to the private sale of preferred stock.

     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.

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

Risks and Uncertainties

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

                                       10
<PAGE>

    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 September 30, 
1997, the Company had incurred cumulative net losses of $25.6 million since 
its formation. The Company expects to incur substantial and increasing 
operating losses before it will reach profitability, if at all. Furthermore, 
the Company expects its expenses in all categories to increase as its 
marketing and other business activities expand. There can be no assurance 
that the Company will achieve or sustain profitability in the future. Failure 
to achieve significant commercial revenues or profitability would have a 
material adverse effect on the Company's business, financial condition and 
results of operations. 

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

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

    Development of certain peripheral components of the Series 8000 has not 
yet been finalized, and final prototypes have not yet been completed. There 
can be no assurance that the Company's development efforts for the Series 
8000 will be successful or that the Company's 


                                       11
<PAGE>

products under development will be shown to be safe or effective, capable of 
being manufactured in commercial quantities at acceptable costs, cleared or 
approved by regulatory authorities or successfully marketed. 

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

    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 MIM surgical procedures 
using their existing skills coupled with training and complementary equipment 
being developed by other companies. Accordingly, the Company's success is 
dependent upon acceptance of these procedures by the medical community as a 
reliable, safe and cost effective alternative to existing treatments. To 
date, MIM surgical procedures have only been performed on a very limited 
basis by a small number of highly skilled surgeons. The Company is unable to 
predict how quickly, if at all, MIM surgical procedures will be adopted by 
the medical community or, if they are adopted, the number of procedures that 
will be performed. 

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

    Even if the clinical efficacy of MIM procedures is established in cardiac 
and other specialties, surgeons, specialists and other physicians may choose 
not to recommend the procedures for any number of other reasons. Clinical 
adoption will depend, for example, upon the Company's ability to facilitate 
training of surgeons to perform MIM surgery and the willingness of such 
surgeons to perform such procedures. Physicians may similarly elect not to 
recommend the MIM procedure based on possible unavailability of acceptable 
reimbursement from health 


                                      12

<PAGE>

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.

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

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

    LIMITED SALES, MARKETING, DISTRIBUTION AND TECHNICAL SUPPORT EXPERIENCE. 
The Company has organized its sales and marketing efforts by the Company's 
CardioThoracic Surgery and HNS Microsurgery divisions. The Company currently 
markets its cardiothoracic products in North America through six direct 
(Company employee) sales representatives and 24 independent sales 
representatives. The Company is in the process of hiring up to six additional 
direct sales representatives to support the introduction of its Series 8000 
by the CardioThoracic Surgery division. A similar combination of direct and 
independent sales representatives will market the products of the Company's 
HNS Microsurgery division. Establishment of a sales force 


                                      13

<PAGE>

capable of effectively commercializing the Company's systems will require 
substantial efforts and significant management and financial resources. There 
can be no assurance that the Company will be able to establish such a sales 
capability on a timely basis or at all. 

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

    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 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 


                                      14

<PAGE>

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 equivalence. Such determination or request for additional 
information will delay market 


                                      15

<PAGE>

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. 

    Failure to comply with regulatory requirements could have a material
adverse effect on 


                                      16

<PAGE>

the Company's business, financial condition and results of operations.

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

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

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

    There can be no assurance that physicians will use MIM surgical 
procedures to replace or supplement established treatments, such as 
conventional open-chest heart surgery, angioplasty or intravascular stents, 
or that MIM cardiac surgery 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 Inc. and Heartport, Inc. The Company will have 
limited or no control over the resources that any partner may devote to the 
Company's products, or over its partners' development and marketing efforts. 
There can be no assurance that any of the Company's present or future 
collaborative partners will perform their obligations as expected or will 
devote sufficient resources to the development or marketing of the Company's 
potential products. Any parallel development by a partner of alternate 
technologies, preclusion from entering into competitive arrangements, failure 
to obtain timely regulatory approvals, premature termination of a 
collaborative agreement or failure by a partner to devote sufficient 
resources to the development and commercialization of the Company's products 
would have a material adverse effect on the Company's business, financial 
condition and results of operations. The Company anticipates that these 
partners may have the unilateral right to terminate any such relationship 
without significant penalty. There can be no assurance that the Company will 
be 


                                      17


<PAGE>

successful in establishing or maintaining any such strategic relationships in 
the future or that any such relationship will be successful. 

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

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

    If the Company obtains the necessary foreign regulatory registrations or 
approvals, market acceptance of the Company's products in international 
markets would be dependent, in part, upon the acceptance by the prevailing 
health care financing system in each country. Health 


                                      18

<PAGE>

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

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

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

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


                                      19

<PAGE>

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

    UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY; 
RISKS OF FUTURE LITIGATION.  Vista Medical relies on a combination of 
technical leadership, patent, trade secret, copyright and trademark 
protection and nondisclosure agreements to protect its proprietary rights. As 
of October 30, 1997, the Company had exclusive ownership rights to seven 
issued United States patents, nine pending United States patent applications 
and eight pending foreign applications covering various aspects of its 
devices and systems. Furthermore, as of the same date, the Company had 
exclusive rights in the medical field to four issued United States patents, 
one pending United States patent application, three issued foreign patents 
and nine pending foreign applications covering various aspects of its devices 
and systems. The Company intends to file additional patent applications in 
the future. The failure of such patents to issue could have a material 
adverse effect on the Company's business, financial condition and results of 
operations. 

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

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


                                      20

<PAGE>

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

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

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

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


                                      21

<PAGE>

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 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 two Clinical Advisory Boards made up of leading


                                      22

<PAGE>

surgeons, one focused on minimally invasive cardiac surgery, the other 
focused on a number of HNS microsurgery and other specialties. Members of the 
Clinical Advisory Boards consult with the Company exclusively in the field of 
visualization, but are free to consult with other instrumentation companies 
and are employed elsewhere on a full-time basis. As a result, they only spend 
a limited amount of time on the Company's affairs. Although the Company has 
entered into consulting agreements, with terms ranging from 12 months to two 
years, including confidentiality provisions with each of the members of the 
Clinical Advisory Boards, there can be no assurance that the consulting and 
confidentiality agreements between the Company and each of the members of the 
Clinical Advisory Boards will not be terminated or breached. In addition, 
there can be no assurance that any of such agreements will be renewed upon 
termination.

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

    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 


                                      23

<PAGE>

other factors. In addition, the stock market has from time to time 
experienced significant price and volume fluctuations that have particularly 
affected the market prices for shares of early stage companies. These broad 
market fluctuations may adversely affect the market price of the Common 
Stock. In the past, following periods of volatility in the market price of a 
particular company's securities, securities class action litigation has often 
been brought against that company. Such litigation, if brought against the 
Company, could result in substantial costs and a diversion of management's 
attention and resources.

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

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

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

    
                                      24


<PAGE>

PART II. OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

A)       Exhibits

         10.1  Third Amendment to Lease between the Registrant and MAT Realty
               Trust dated September 1, 1997

         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 September 30, 1997.


                                      25

<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:  November 13, 1997            /s/ JOHN R. LYON  
                                    -------------------------------------
                                    John R. Lyon
                                    President, Chief Executive Officer and
                                    Director

Date:  November 13, 1997            /s/ ROBERT J. DE VAERE  
                                    --------------------------------------
                                    Robert J. De Vaere
                                    Vice President of Finance & Administration
                                    & Chief Financial Officer
                                    (Principal financial and accounting officer)


                                      26