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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

                /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

                     For fiscal year ended December 31, 1999

                                       OR

/ /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                    EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
               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, California 92008
                    (Address of principal executive offices)
                                 (760) 603-9120
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None

       Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock, par value $.01 per share

         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. Yes X No___

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of January 31, 2000 was approximately $13,013,000. For the
purposes of this calculation, shares owned by officers, directors and 10%
stockholders known to the registrant have been deemed to be owned by affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.

         The number of shares outstanding of the registrant's Common Stock as of
March 23, 2000 was 13,805,493.

         Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on June 9, 2000, to be filed on or about April
28, 2000 and referred to herein as the "Proxy Statement", are incorporated as
provided in Part III.

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                                     PART I

Item 1. BUSINESS

         THE DISCUSSION OF THE COMPANY'S BUSINESS CONTAINED IN THIS ANNUAL
REPORT ON FORM 10-K MAY CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF FACTORS WHICH MAY AFFECT THE OUTCOME PROJECTED IN SUCH STATEMENTS,
PLEASE SEE "RISKS AND UNCERTAINTIES" AT PAGES 20 THROUGH 28 OF THIS REPORT.

OVERVIEW OF OUR BUSINESS

         We develop, manufacture and market products that provide information to
doctors performing minimally invasive general surgical, heart, head, neck and
spine and other selected microsurgical procedures. Our products combine a
head-mounted display with video cameras to provide surgeons with critical visual
information during these microsurgical procedures. Our product lines include the
ORPC Visualization and Information System for general surgery and other complex
endoscopic procedures, the Series 8000 Advanced Visualization and Information
System, for use in heart surgery and the StereoSite System, for use in
microscopic and endoscopic procedures in head, neck and spine surgery. In
general terms, endoscopic surgery involves a telescopic viewing device which is
inserted into an incision in the body and which allows the surgeon to better
view the internal part of the body being repaired.

BACKGROUND

     MINIMALLY INVASIVE SURGERY

         The development and subsequent widespread adoption of minimally
invasive surgical procedures have revolutionized many surgical fields, including
general surgery, orthopedics, gynecology and urology. Minimally invasive
surgical procedures are performed through strategically placed ports or
mini-incisions as opposed to using large incisions to gain surgical access.
These procedures are designed to be as safe and effective as conventional
surgery. The goal in using a minimally invasive procedure is to substantially
reduce trauma, and pain and suffering, speed recovery, shorten the length of
hospital stays and decrease many of the costs associated with patient care.

         A minimally invasive procedure is most advantageous in cases in which
significant trauma would otherwise result from gaining surgical access to an
affected organ or site through the use of a large incision. This movement toward
minimally invasive surgery has been driven by advances in both device technology
and surgical technique, as well as patient demand.

     MINIMALLY INVASIVE MICROSURGERY

         Minimally invasive microsurgery is an extension of minimally invasive
surgery, characterized by greater complexity and precision. Minimally invasive
microsurgery procedures have been made possible primarily by recent advances in
medical technology. These procedures are usually performed in very confined
areas of the body, involve critical parts of the body, and often require
dissection, reconstruction and removal of body parts. As a result of the
inherent complexity involved in these procedures, we believe that for surgeons
to adopt the procedures, they must have access to specialized instruments and
technology, including that which will provide better visualization of the
procedure being performed. Examples of minimally invasive microsurgery are
emerging in general surgery, heart, head, neck and spine surgery, as well as in
the fields of gynecology and urology.

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APPLICATION OF OUR PRODUCTS TO DIFFERENT SURGICAL PROCEDURES

     GENERAL SURGERY/GYNECOLOGY/UROLOGY

         CONVENTIONAL TREATMENTS.

         Minimally invasive procedures are well accepted in general surgery,
gynecology and urology. For less complex procedures such as gallbladder removal
or tubal ligation, minimally invasive endoscopic techniques have become the
standard of care, being used in approximately 90% of cases. For more complex
procedures, however, the penetration rate of minimally invasive techniques has
been considerably lower, principally because the instruments available make
performance of the procedure difficult and uncomfortable. We estimate that the
total potential market for complex procedures in the United States in 1996 was
approximately 7.5 million procedures.

         MINIMALLY INVASIVE MICROSURGERY.

         Complex minimally invasive procedures in general surgery, gynecology
and urology have evolved relatively slowly over the past few years, slowing
considerably by 1995. According to the journal INVIVO, "Though the benefits
of MIS (Minimally Invasive Surgery) - shorter recovery times and less pain
and trauma for the patient, lower costs and less time lost from work for
employers -are widely applicable across a range of procedures, realizing
those benefits beyond gallbladder removal proved tricky. Worse, for more
complex procedures, MIS actually proved problematic for surgeons,
notwithstanding its other benefits- longer procedure times, more difficult
manipulation of instruments, more torturous ergonomics."

         THE VISTA MEDICAL SOLUTION.

         We believe that the general technology required to drive renewed growth
in complex minimally invasive procedures for general surgery is now being
undertaken by many companies in fields complementary to ours, for example in
surgical robotics, electrosurgery and surgical instrument design. We believe
that our advanced visualization and information technology will contribute to
this renewed growth by providing the surgeon with enhanced depth perception when
performing complicated, physically intricate tasks, and will provide the surgeon
with the ability to view additional information in a voice-controlled,
picture-in-picture format, to facilitate real-time decision making during a
procedure. We believe that conventional two dimensional visualization systems
compromise the ability of a surgeon to maneuver, especially in complex
reconstructive surgery, and that our natural three-dimensional picture will
provide the surgeon with an advantage in these cases.

      HEART SURGERY

         CONVENTIONAL TREATMENTS

         Heart disease, the leading cause of death in the United States, is
typically treated with drugs, surgical procedures or both. Methods of accessing
the heart for treatment include surgically opening the chest, threading a
balloon-tipped catheter through a major artery, or, most recently, gaining
surgical access via a small incision in the chest. Although procedures involving
the insertion of a catheter are less invasive than the conventional method of
opening the chest, a major drawback is the high rate of renarrowing of the blood
vessel at the treatment site. Traditional open-heart surgical procedures,
including coronary artery bypass graft and valve replacement or repair
procedures typically involve the surgeon making a 12 to 18 inch incision in the
patient's chest, cutting the sternum in half with a bone saw, and then spreading
the rib cage open with a steel retractor to perform the grafting procedures or
to replace or repair the heart valves. Although relatively effective in treating
the heart condition, these procedures result in severe trauma to the patient.
According to the results of a recent study, approximately one-third of all
angioplasties experience restenosis or renarrowing of the blood vessel at the
treatment site within seven months while most traditional CABG procedures remain
effective for more than a decade.

         According to data published by the American Heart Association, there
were


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approximately 759,000 open heart surgical procedures performed in the United
States in 1996. Worldwide we believe that there are more than 1.05 million of
these procedures performed each year.

         MINIMALLY INVASIVE HEART MICROSURGERY

         The application of minimally invasive techniques to heart surgery is
regarded as a potentially revolutionary development in modern surgery. Minimally
invasive heart bypass and heart valve replacement or repair procedures avoid the
trauma caused by cracking the chest open and promise to significantly decrease
pain and trauma and shorten recovery times. The minimally invasive approaches
may also be performed on either a beating or non-beating heart giving the
surgeon more flexibility to treat a patient's condition. While there is still
professional debate on the ultimate form or standard of care and techniques and
practices are still under development, nearly all of those involved believe that
minimally invasive procedures will change the future practice of heart surgery,
just as laparoscopy has revolutionized general surgery. However, minimally
invasive heart microsurgery requires the surgeon to perform technically
challenging procedures, including working on tiny delicate structures, such as a
one millimeter heart vessel with highly restricted access through small
incisions. We believe that one of the current limitations to widespread adoption
of minimally invasive heart microsurgery is the restricted visibility through
the small incisions currently used. While new retractor systems are being
introduced to open the incision and therefore improve the surgeon's access and
ability to visualize the anatomy directly, restricted visibility, particularly
for more complex cases, remains an issue. However, the goal of truly minimizing
the incision to reduce trauma, can only be achieved effectively with products
and technology that enhance visualization of the affected area through the
smallest access.

         THE VISTA MEDICAL SOLUTION.

         We believe that our visualization technology which provides the heart
surgeon with an intuitive and ergonomically designed product to solve the
inherent vision restrictions of the minimally invasive heart microsurgical
procedure, will enable the use of minimally invasive microsurgery techniques
with the required level of safety, efficacy and precision. Our technologies are
equally effective whether the surgeon elects to use either a beating or arrested
heart approach, giving the surgeon increased flexibility in treatment options.
We believe that the enhanced visualization provided by our products will enable
a significant number of surgeons, who otherwise might be reluctant to perform
minimally invasive heart microsurgery, to adopt the procedures. There is also
continuing evidence of patient interest and demand for these procedures.

     HEAD, NECK AND SPINE SURGERY

         CONVENTIONAL HEAD, NECK AND SPINE SURGICAL TREATMENTS.

         Conventional head, neck and spine procedures are often invasive and
involve a lengthy and painful recovery. Procedures involving the brain and
spinal cord have traditionally been performed under a microscope in order for
the surgeon to ensure extreme precision with the delicate tasks required. More
recently, surgeons have used neuroendoscopes, or scopes which are inserted into
the body, in combination with microscopes. We estimate that there were
approximately 317,000 brain and skull base procedures, 432,000 surgical sinus
procedures and


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651,000 spinal procedures performed in the United States in 1998.

         HEAD, NECK AND SPINE MINIMALLY INVASIVE MICROSURGERY.

         We believe that there are significant opportunities to advance
minimally invasive microsurgical techniques in head, neck and spine surgical
procedures. The visualization techniques currently available for these
procedures are limited. For example, some existing techniques using fiber optic
neuroendoscopes have inferior picture resolution, do not provide depth
perception and require a surgeon to view the procedure on a video monitor. With
this technique, the position required for both the principal and assistant
surgeon to use a surgical microscope is both awkward and physically demanding.
In addition, the assistant surgeon is not able to see the procedure in 3-D when
using the teaching attachment of a microscope. Many of the procedures that are
currently used also require the simultaneous monitoring of multiple information
sources, such as magnetic resonance imaging.

         THE VISTA MEDICAL SOLUTION.

         In head, neck and spine minimally invasive microsurgery, our technology
will allow the surgeon to view a three-dimensional image from a small diameter
endoscope during a procedure. Our technology provides the critical element of
depth perception during the procedure which we believe does not exist in the
presently available video technology. Our head-mounted display enables the image
seen by the assistant surgeon who is operating directly across from the
principal surgeon to be electronically reversed in order to align the
assistant's movements with those of the principal surgeon. Our visualization
technology, which is also compatible with the majority of operating room
microscopes, also gives the surgeon hands-free, voice activated control of
multiple video images to assist in precise and rapid decision-making. With our
technology, both the principal surgeon and assistants can view the case
simultaneously on their head-mounted displays in 3-D, with superior comfort and
ergonomic positioning.

OUR BUSINESS STRATEGY

         Our business strategy is to become the leading developer and marketer
of advanced visualization and information systems for complex minimally invasive
applications in general surgery, heart, head, neck and spine surgery and other
selected surgical specialties. Key elements of our strategy include:

     DEVELOP APPLICATIONS FOR OUR TECHNOLOGY WHICH ARE SPECIFIC TO EACH SURGICAL
     OR MEDICAL SPECIALTY WHICH WE TARGET.

         We approach target market segments by configuring our modular
visualization system for the specific requirements of the surgical specialty and
procedure for which our product will be used. We seek to use dedicated clinical
evaluation programs, clinical advisory boards, and appropriate strategic
distribution partners for the introduction and support of our products. Our
strategy is to optimize our fundamental technology platform for each of our
target medical specialties and to develop partnership and distribution systems
both in the United States and international markets.


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     IDENTIFY SPECIFIC HIGH-VALUE PROCEDURES TO FACILITATE OUR ENTRY INTO THE
     GENERAL SURGERY MARKET

         Our strategy for entering the general surgery market involves
identification of high value procedures where our visualization technology
uniquely enhances procedure performance. The first of these is laparoscopic
gastric bypass, a surgical technique which addresses morbid (extreme) obesity.
Morbid obesity affects approximately 3% of adults in the United States. We have
been working closely with surgeons pioneering the approach and in January 2000
launched a program to establish a national network of centers to perform
minimally invasive gastric bypass surgery. The program is designed to provide
participating hospitals with the complete information, training and technology
necessary to perform this surgery, and will also include a national patient
referral campaign. We began signing up, training and delivering equipment to
hospitals interested in participating in the program in the first quarter of
2000. When our gastric bypass program is fully established in the second quarter
of 2000, we plan to use it as a model for the second procedure we have
identified, the abdominal laparoscopic approach for minimally invasive spinal
surgery.

     ESTABLISH ADVANCED VISUALIZATION TECHNOLOGIES AS STANDARD PRACTICE IN
     MINIMALLY INVASIVE HEART SURGERY.

         We believe that we have the only visualization system specifically
designed for minimally invasive heart surgery. We are currently working with
members of our clinical advisory boards and other leading surgeons to develop
operating protocols which incorporate advanced visualization technologies as
standard practice. We intend to participate in providing training in these
procedures, which include the use of our visualization system, to other heart
surgeons to accelerate the general rate of conversion to minimally invasive
microsurgery procedures, whether performed on a beating or non-beating heart.

     PROMOTE OUR VISUALIZATION SOLUTION FOR USE IN ALL TYPES OF HEART SURGERY.

         We believe that our technology is applicable to all types of heart
surgery, whether minimally invasive or conventional open heart, where
enhancement of the surgeon's view is particularly critical, such as in pediatric
heart surgery. We believe that the eventual use of our advanced visualization
product in open heart surgeries will enhance visualization, improve the quality
of procedures and result in shorter operating times and reduced costs.

     INCREASE THE SURGEON'S REAL-TIME ACCESS TO CRITICAL DATA.

         The surgeon's access to operative data, on demand, in real time and
integrated with the anatomical image, enhances procedure performance. Our
head-mounted display, incorporating picture-in-picture capability and voice
control, is designed to give the surgeon this real-time access to critical
information integrated with the anatomical images generated by our camera
systems.

     DEVELOP ORIGINAL EQUIPMENT MANUFACTURE CUSTOMERS WITH VOLUME SALES
     POTENTIAL FOR ENDOSCOPIC CAMERAS.

         We presently have two original equipment manufacture customers for our
design of


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conventional, two dimensional single and three-chip endoscopic cameras. These
products have accounted for a substantial amount of our revenues and assist in
building relationships with prospective partners for our core technology.

     ENTER INTO STRATEGIC RELATIONSHIPS WHICH ENSURE DISTRIBUTION OR COMPLEMENT
     TECHNOLOGY RESOURCES.

         We intend to leverage our position in both technology and distribution
by forming strategic alliances with appropriate partners. For a description of
our current partners and our strategic alliances, see "--Strategic Alliances."

ADVANCED VISUALIZATION PRINCIPLES AND OUR PRODUCT PLATFORM

         Our technology provides a 3-D visualization solution to the inherent
vision restrictions and demands of minimally invasive microsurgery. With our
technology, information is brought together from a variety of sources into a
format that provides the surgeon with a clear view of the anatomy and the data
necessary to make better decisions during the procedure.

         Our technology is based on the following principles which we believe
are essential in advancing the techniques of minimally invasive microsurgery. We
believe these principles offer several key advantages over other visualization
approaches:

         3-D VIEW. The surgeon's ability to view the principal image of the
anatomy in 3-D provides the accurate depth perception necessary so that vital
anatomical structures are accurately identified and located. This improves
safety, precision and speed of the procedure. Also, a secondary video image is
available in picture-in-picture format, when the procedure will benefit from two
different views of the anatomy.

         HIGH RESOLUTION IMAGES. The availability of a high resolution image
which can be electronically managed by the surgeon significantly enhances the
surgeon's ability to differentiate critical tissues in a confined setting and
perform intricate dissection, reconstruction and removal.

         ACCESS. The surgeon benefits from technology which allows for the
direct insertion of a camera into the body cavities or organs and provides high
quality images that are easy to see and understand.

         ERGONOMICS. Due to the complex and time consuming nature of minimally
invasive microsurgery procedures, the surgeon requires an ergonomic display
system which allows comfortable operating posture and maximizes hand-eye
coordination without strain.

         INFORMATION INTEGRATION. The surgeon's access to critical monitoring
and diagnostic data, on demand, in real time and integrated with the anatomical
image within the surgeon's visual field, enhances procedure performance.


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     HEAD-MOUNTED DISPLAY

         The head-mounted display device was originally developed for critical
applications in military aerospace by Kaiser Aerospace. We determined that the
head-mounted display was the optimal solution to the challenge of displaying
information during minimally invasive microsurgery. The fundamental technology
and human factors experience incorporated in our head-mounted display is the
result of substantial investment by Kaiser Aerospace and incorporates extensive
human factors experience. This human factors knowledge, derived from many years
of analysis of the display characteristics which enable pilots performing
critical physical tasks to simultaneously absorb and react to crucial
information, is a key element in our head mounted display design. Kaiser's
original know-how and technical knowledge have been transferred to us under our
development agreement with Kaiser Electro-Optics, Inc., a subsidiary of Kaiser
Aerospace. We have performed significant additional development work, and have
proprietary rights, in the surgical head mounted display design. Our head
mounted display, which we believe is the first specifically designed for
surgical use, provides 3-D visualization of small delicate body structures, has
the capability of integrating relevant data and presents the image seen by the
surgeon in the most correct, intuitive and ergonomic way. Wearing the head
mounted display, the surgeon can also perform surgery "in-line"--meaning with
the eyes, hands, instruments and subject in line. In-line surgery cannot be
performed when the surgeon is observing the anatomy on a remotely-positioned
video monitor.

         Our head mounted display is a proprietary, lightweight, high resolution
display designed to allow the surgeon to view information on demand, whether
such information is generated from attached endoscopes, microscopes or
monitoring equipment in the operating room. Further enhancements to the head
mounted display allow for voice-activated control and information display from
other diagnostic equipment in the hospital or from remote locations via
information networks. The video display in our head mounted display is fixed in
relation to the surgeon's eyes, but his or her head may move into any position
necessary for comfort. Our head mounted display design allows the surgeon to
have a constant view of the surgical anatomy required for the procedure as well
as full awareness of the surroundings in the operating room. Our head mounted
display is designed to provide a true 3-D image by replicating the way the human
visual system works--left and right acquired images are delivered directly to
left and right liquid crystal displays. Our head mounted display is also
designed so that it can be worn with conventional surgical loupes.

     THREE-DIMENSIONAL IMAGE ACQUISITION

         We believe that three-dimension visualization capability is critical in
minimally invasive microsurgery procedures such as heart and brain surgery and
complex procedures in general surgery, gynecology and urology. Our technology
for stereo visualization consists of the following proprietary elements: the
optical system, the stereo camera and the stereo processor. The first 3-D
endoscopic optical system we employed was originally developed and patented by a
noted optical designer, Mr. H. McKinley, and is licensed exclusively to us for
medical applications. We have also acquired rights to the stereo endoscope
technology of Carl Zeiss. Both McKinley and Zeiss systems are designed to
replicate the view that the surgeon would have if the procedures were being
performed open and he or she had direct sight of the anatomy. We believe that
the McKinley and Zeiss optical systems will provide us with a significant and
enduring competitive advantage because they provide natural depth perception,
and can be


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packaged with twin cameras in a very compact design. The twin cameras acquire
the image in a manner analogous to a human's two eyes.

         Our technology packages the twin cameras in two ways. In the first
method, a micro-camera is attached to the end of a flexible or rigid guide which
can then be inserted directly into the body cavity and organs. The image is
directly captured by the camera chips without being transmitted through multiple
rod lenses as in a conventional design. The elimination of optical surfaces
produces several important advantages, including increased image quality,
improved contrast, better reliability and improved ability to sterilize the
instrument. Alternatively, for applications where a standard optical endoscope
remains preferable, a stereo micro-camera can be mounted externally on a stereo
endoscope. The image acquired by either approach is then processed for display
by control electronics which we have developed. The controller also includes
image management features which contribute significantly to procedure
performance, such as dual image presentation and picture-in-picture.

     INFORMATION MANAGEMENT

         Medicine is an information rich discipline, but the ability of a
surgeon to obtain relevant information in real-time during a procedure has not
been developed to the levels attained, for example, in military aviation. The
head mounted display is designed to give the surgeon real-time access on demand
to critical information integrated with the anatomical images generated by our
camera systems. In addition to real-time display, the information can be stored
or transmitted within the hospital or transmitted to remote locations for
training, advisory or administrative purposes. The applications software to
control this flow of information is a key element in our long-term product
strategy which positions visualization within the context of a total information
management system for the surgeon.

         The data integration capability of our products has been enhanced
through a perpetual, exclusive license from GDE which has added high speed
image-based information processing and networking software to the our technology
platform. We believe that our technology will demonstrate that real-time access
to relevant information, along with enhanced visualization, is a critical
requirement of performing minimally invasive microsurgery and other surgical
procedures. We anticipate incorporating appropriate elements of this software
package into future products.

PRODUCT LINES

         We develop products based on our core technology and product platform
described above, that are customized for the specific general surgical, heart,
head, neck and spine surgical and other procedures to which they are directed.
Our product lines are as follows:

     ORPC:  3-D VISUALIZATION AND INFORMATION SYSTEM FOR GENERAL SURGERY AND
     OTHER COMPLEX ENDOSCOPIC PROCEDURES

         The most recent application of our platform technology is complex
procedures in general surgery. Our first public demonstration of this platform
was in October 1999, principally targeted at two emerging procedures-minimally
invasive gastric bypass to control obesity and the abdominal approach to
facilitate minimally invasive spinal surgery. Our general surgical system is
designed on modular principles and consists of the following major components:


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         COMPONENT                        DESCRIPTION

Head mounted               Head-mounted display and operating room personal
display/ORPC               computer which integrates multiple video images in a
                           picture-in-picture format using voice commands from
                           the head mounted display. Up to three head mounted
                           displays can be used per system.

Stereo laparoscopes        Ten millimeter diameter stereo laparoscopes in both
                           0DEG. and 30DEG. angles of view.

StereoScope                Three-dimensional camera head for attachment to our
                           stereo laparoscopes.

Stereo Camera              High resolution stereo image processor.
Controller

Xenon Lightsource          High intensity 300 watt xenon light to illuminate the
                           Stereo Laparoscopes.

Endoscopy Cart             Cart which holds the Advanced System for Laparoscopy.

         All necessary 510(k) clearances to market the components of the ORPC
have been received.


     SERIES 8000 ADVANCED VISUALIZATION AND INFORMATION SYSTEM FOR HEART SURGERY

         We have developed the Series 8000 for minimally invasive and other
procedures in heart surgery. The components of the Series 8000 are individual
modules, rack mounted in a custom console, and supplied as an integrated,
upgradeable system.

      COMPONENT                         DESCRIPTION

CardioView                 Head-mounted display and information processing
                           computer which integrates three-dimensional
                           visualization of surgical anatomy and related
                           diagnostic and monitoring data. Up to four head
                           mounted displays may be used simultaneously with each
                           Series 8000. We expect to introduce a voice-activated
                           control feature for CardioView in future versions of
                           the Series 8000.

CardioCamera               Three-dimensional miniature high resolution digital
                           cameras. Cameras can be delivered directly into the
                           surgical field by CardioGuide or externally by
                           attachment to retractor systems.

StereoScope                Three-dimensional camera head for attachment to our
                           stereo endoscopes.

2D Endoscope Camera        Camera for attachment to conventional two-dimensional
                           endoscopes.

CardioController           High resolution stereo image processor which drives
                           all the CardioCameras in the heart operating room.

CardioLight                High power xenon light source incorporating
                           micro-illuminated light delivery technology.

CardioConsole              Console for rack mounting of all Series 8000 modules.

         All necessary 510(k) clearances to market the components of the Series
8000 have been


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received.

     STEREOSITE SYSTEMS FOR MICROSCOPY AND ENDOSCOPY

         We have developed a system designed specifically for microscopic
procedures in head, neck and spine microsurgery, and plan to develop a similar
system for endoscopic procedures. These systems will be marketed under the brand
name of StereoSite.

       COMPONENT                               DESCRIPTION

Head mounted               Head-mounted display and information processing
display/Processor          computer which provides three-dimensional
                           visualization of surgical anatomy and related
                           diagnostic and monitoring data. Up to four head
                           mounted displays may be used simultaneously with each
                           StereoSite system.

3-D Scope                  Small diameter, angled, rotatable 3-D endoscope.

MSVA                       Micro-stereo video adapter which retrofits to the
                           surgical microscope to produce a 3-D video image to
                           be displayed on the head mounted display. The
                           micro-stereo video adapter incorporates twin
                           endoscopic cameras.

Light Source               High power xenon light source incorporating
                           micro-illuminated light delivery technology.

         In the same manner as the Series 8000 and ORPC, the StereoSite systems
incorporate advanced visualization principles and our platform technology in
application specific packages. The StereoSite system targeted at microscopy
incorporates the head mounted display and MSVA and the StereoSite system
targeted at microendoscopy, when launched will incorporate the head mounted
display, the 3-D Scope and the light source.

         All of the 510(k) clearances we require to market our StereoSite
systems have been received. The StereoSite system for microscopy was first
shipped in the first quarter of 1998. We expect to introduce the StereoSite
system for endoscopy in 2000.

     OEM ENDOSCOPIC CAMERAS

         Our endoscopic cameras are the state-of-the-art in two-dimensional
endoscopic imaging. We currently manufacture compact, high resolution endoscopic
cameras for original equipment manufacture customers and strategic partners.

STRATEGIC ALLIANCES

         Our strategy is to leverage our position in both technology and
distribution by forming strategic alliances with corporations and research
institutions with respect to the development, regulatory approval and marketing
of some of our products. We have entered into strategic partnering arrangements
as follows:


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    RICHARD WOLF, GMBH

         In December 1999, we entered into a three year agreement whereby
Richard Wolf, GmbH, a leading company in the worldwide endoscopic
instrumentation market, will exclusively distribute our 3D visualization and
integration platform for minimally invasive applications in general surgery,
gynecology and urology, in all markets outside the United States. We also have a
non-exclusive co-marketing arrangement with Richard Wolf within the United
States. In connection with the agreement, Richard Wolf placed an initial order
for systems of various configurations, with deliveries scheduled to begin in the
first quarter of 2000. This agreement is directly related to our change of
strategic emphasis to target the largest potential near-term market segments for
our 3D visualization technology - complex endoscopic procedures in general
surgery, gynecology and urology.

    MEDTRONIC

         In November 1996, we entered into a strategic alliance with Medtronic,
a leading heart company, providing for the distribution and co-promotion of our
current and future visualization and information systems for heart surgery,
including our Series 8000. At that time we also entered into a co-promotion
agreement with Medtronic for the United States and Canada under which Medtronic
was to promote these systems in conjunction with Medtronic's own proprietary
products for minimally invasive heart surgery. Under that agreement, we were to
be directly responsible for the sale and distribution of our products to
customers in the United States and Canada. During the term of the co-promotion
agreement, Medtronic agreed not to market or sell in the United States and
Canada visualization products which were competitive with us in heart surgical
procedures. This co-promotion agreement was replaced in June 1998 by an
exclusive distribution agreement by the terms of which Medtronic directly
distributed our visualization and information systems for heart surgery in the
United States and Canada. The new distribution agreement was to terminate on
April 30, 2003 unless Medtronic failed to meet some of the objectives described
in the agreement or we or Medtronic breached material obligations.

         By the terms of the November 1996 agreement, Medtronic also acted as
our exclusive distributor for our visualization and information systems for use
in heart surgical procedures in Europe, the Middle East and Africa. Medtronic
was responsible for obtaining all regulatory clearances other than the CE mark
required in Europe and provided training and installation at its expense.
Medtronic purchased the visualization and information systems for heart surgery
for a transfer price to be adjusted each year. In June 1998, we extended this
agreement on similar terms to cover direct distribution of the products by
Medtronic in Japan, India and Australia. Medtronic's exclusive distributorship
originally terminated on the third anniversary of the initial commercial release
of the products in Europe, subject to earlier termination for Medtronic's
failure to meet objectives outlined in the agreement or breach of material
obligations by either party. In June 1998 the termination date was extended to
April 30, 2003.

         Medtronic did not have the right to distribute products based upon the
technology incorporated in the visualization and information systems for use in
specialties other than heart surgery. Medtronic had the right of first refusal
to obtain distribution rights for these products in other areas of the world.


                                       12
<PAGE>


         In July 1999, Medtronic expressed concern about our ability to function
as a going concern. For a description of these concerns, please see "Risk
Factors--We are, to a significant extent, dependent on distribution partners to
sell our products."

         In March 2000, we agreed with Medtronic to terminate the sales
agreement. Under the terms of this termination agreement, we will retain the
responsibility to service our Series 8000 systems previously retained by
Medtronic; otherwise we and Medtronic mutually agreed to release each other from
any future obligations or claims. We also agreed to pay Medtronic up to
approximately $800,000 relating to reimbursable sales and marketing expenses.
Any payments made by us under the termination agreement will be made pursuant to
a sales transition plan, whereby Medtronic will provide us with sales leads,
introduce our sales representatives to current and potential Vista customers and
assist our sales representatives in the sales process. For each purchase order
received by us as a result of the sales transition plan, we have agreed to grant
Medtronic shares of our Common Stock equal in value to the gross margin on such
sales, to a maximum aggregate share value of $1,000,000. This sales transition
plan will be in force for a period of six months, after which our obligation to
pay any amount to Medtronic under the termination agreement will be released,
regardless of the value of any payments of our Common Stock made up to such
date. Furthermore, in connection with entering into the original agreement with
Medtronic, Medtronic purchased 2,000,000 shares of our Series C Preferred Stock
for $10.0 million. These shares were automatically converted into 1,500,000
shares of our common stock at our initial public offering of our common stock in
July 1997. As an additional condition of the termination agreement, Medtronic
has agreed that it will not sell any of our common stock in the open market
transition for a price of less than $1.75 per share, until at least December 31,
2000.

         We have agreed heads of terms, subject to a definitive agreement,
with an international cardiac products company with new technology in
development which we believe will not only allow us to transition
distribution of our visualization technology in heart surgery, but facilitate
adoption of truly endoscopic heart bypass surgery.

     HEARTPORT

         In February 1997, we entered into a Supply and Services Agreement with
Heartport, a company developing minimally invasive technology for heart surgery.
We sold four Series 8000 systems to Heartport in September 1997, for use in the
Heartport Research and Training Center in Salt Lake City, Utah. Heartport agreed
to use the Series 8000 in its training centers, to promote in its training
courses the utilization of the Series 8000 and to endorse the Series 8000 as the
preferred three-dimensional video visualization and information solution for
minimally invasive heart surgery. Heartport has now closed its research and
training center and the supply and service agreement between us and Heartport
was cancelled on October 19, 1998 by mutual agreement. We forgave the last
scheduled payment of $100,000. Heartport returned the four systems to us and the
warrant to purchase up to 100,000 shares of our common stock originally granted
to Heartport has been canceled.

     SOFAMOR DANEK

         In January 1998, we entered into an exclusive distribution agreement
appointing Sofamor


                                       13
<PAGE>


Danek, a leading provider of systems for spinal surgery, as our exclusive
worldwide distributor for our current and future StereoSite systems, the
visualization and information systems for neurosurgery, spinal surgery,
radiation delivery, otolaryngology and maxillofacial surgery. Under the
agreement, we were responsible for obtaining all regulatory clearances in the
United States and all necessary CE mark clearances in Europe for the StereoSite
systems. Sofamor Danek was responsible for obtaining all other regulatory
clearances. Sofamor Danek acquired our StereoSite systems for a transfer price
that was to be adjusted each year, and in 1998 and 1999 Sofamor Danek was
required to make guaranteed minimum purchases of StereoSite systems as long as
conditions outlined in the agreement were fulfilled. Sofamor Danek's
distributorship would terminate if Sofamor Danek failed to meet various
performance objectives. The term of the distributorship expired on December 31,
2002, but were automatically extended for successive two-year periods if certain
performance criteria was to be met. Sofamor Danek had a right of first refusal
to obtain distribution rights for our StereoSite systems for orthopedic surgery,
other than arthroscopy.

         In January 1999, Sofamor Danek was acquired by Medtronic. In April 1999
our distribution agreement with Sofamor Danek was amended to become
non-exclusive to allow us to appoint additional distributors, in recognition of
a sales shortfall created when Sofamor Danek declined to purchase $1.6 million
of StereoSite systems within the contractual time period. For an in-depth
discussion of the implications if any of our strategy with respect to this
modification, please see "Risk Factors--We are, to a significant extent,
dependent on distribution partners to sell our products."

         Our distribution agreement with Medtronic Sofamor Danek has been
terminated by mutual agreement in March 2000, on terms described in the section
"Strategic Alliances - Medtronic."

         We had also entered into a cooperative technology agreement with
Sofamor Danek, under which we 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
various other products, including systems and instruments for spinal surgery.
This agreement has also been terminated by mutual agreement.

     OEC MEDICAL SYSTEMS

         In January 1999, we entered into a purchasing agreement with OEC
Medical Systems, Inc., which was subsequently acquired by General Electric,
under which our head mounted display systems were to be purchased by OEC and
sold to their customers in conjunction with their fluoroscopy equipment in the
medical imaging market. The agreement, which ran through August 1999, but
included provisions for renewal, calls for OEC to place purchase orders for head
mounted display systems with us which are to be governed by the terms of the
agreement. In conjunction with the signing of this agreement, OEC placed an
initial purchase order with us for a quantity of head mounted display systems
with deliveries extending through September 1999. Some technical difficulties
caused the delay of our delivery to OEC of the final portion of the original
purchase order and we have been informed by OEC that this final delivery is to
be cancelled. We do not anticipate further deliveries under the purchasing
agreement.

     GDE SYSTEMS

         In February 1997, GDE Systems, a leading military electronics and
information


                                       14
<PAGE>


management company, granted us an exclusive worldwide license to software,
documentation and trademarks of GDE for use in the medical field. Since 1993,
GDE's subsidiary, Healthcom, had been adapting the software licensed to us to
provide high-speed, image-based information processing and networking
capabilities specifically for medical applications. In connection with the
license, we issued to GDE shares of our common stock with a value based on the
initial public offering price, of $250,000 and will pay GDE a royalty on
revenues derived from any products based upon or derived from the GDE software.
We also made a non-refundable payment of $250,000 in December 1998 as a
combination of royalty payments earned through such date and a royalty advance
creditable against future royalties. Under this license agreement, we hired
three of GDE's software development engineers. GDE has a right of first refusal
to license our improvements to the software for use in non-medical markets,
subject to the payment of a royalty to us.

     COGENT LIGHT

         We formed a strategic alliance with Cogent Light in March 1996, under a
memorandum of understanding, to cooperate in the development of products for
minimally invasive heart surgery which incorporate Cogent Light's proprietary
light fiber delivery technology. Under the memorandum of understanding, Cogent
Light is currently providing its single fiber and MicroBundle technologies
exclusively for incorporation into our Series 8000 product, including our
products, CardioCamera and CardioLight. The memorandum of understanding
stipulates that we will incorporate only a Cogent Light source in our heart
surgical instrumentation provided such light source meets all of our performance
requirements. The CardioLight, incorporating Cogent Light single fiber
technology, is not suitable for use with our new StereoScope which we are now
supplying with the Series 8000 for heart surgery and has therefore been replaced
by a light source from another supplier.

     KAISER AEROSPACE

         In July 1995, we entered into a Manufacturing Supply Agreement with
Kaiser Electro-Optics, a subsidiary of Kaiser Aerospace. This agreement was then
amended in December 1997. In December 1997, we entered into a Technology
Strategic Alliance: Memorandum of Understanding with Kaiser Aerospace, which
superseded a similar agreement entered into with Kaiser Electro-Optics in July
1995. The technology strategic alliance provides that Kaiser Aerospace will
cooperate with us in joint development programs related to the head mounted
display to be negotiated on an arms-length and project-by-project basis for a
five-year term. We will also contract with Kaiser Electro-Optics for development
and manufacturing services related to the head mounted display, including
initial production quantities. The manufacturing supply agreement with Kaiser
Electro-Optics provides that they will be our preferred supplier for a five-year
period for not less than 75% of our requirements for the optical subassembly of
the head mounted display, provided that pricing and other terms are competitive
and mutually agreed upon. Under the technology strategic alliance with Kaiser
Aerospace, they granted a right of first refusal to exclusively license
independently developed new technology or devices for medical applications.
Reciprocally, in December 1997, we entered into a License Agreement with Kaiser
Aerospace under which we exclusively licensed to Kaiser Aerospace the right to
manufacture and distribute industrial and professional versions of our head
mounted display in market segments


                                       15
<PAGE>


other than medicine in return for an up-front payment and royalties based on
sales.

     IMAGYN MEDICAL TECHNOLOGIES

         In December 1996, Urohealth Systems, Inc., which subsequently changed
its name to Imagyn Medical Technologies in 1997, entered into a license
agreement with us under which we exclusively licensed visual instrument
technology developed principally for the field of gynecology, which we call the
Newman technology, to Imagyn for use in gynecology, urology and general surgery
on a worldwide basis. Imagyn will pay us a sliding royalty based on sales of
products incorporating the Newman technology, subject to defined maximums and
minimums. The agreement may be terminated if there is an uncured material breach
or insolvency by either party. In connection with the license agreement, the
parties entered into a consulting agreement whereby we agreed to use our
reasonable efforts to provide the services of Allen Newman, one of our officers,
as a consultant to Imagyn on a limited basis. We previously licensed the
exclusive rights to the Newman technology from Mr. Newman in September 1994. Our
license agreement with Mr. Newman was amended in December 1996 to permit the
sublicense of the Newman technology to Imagyn. In connection with the amendment
of our license agreement with Mr. Newman, we paid Mr. Newman an additional sum
of money and agreed to pay him a percentage of the royalties received from
Imagyn for sales of disposable products manufactured under the sublicense. In
May 1999, Imagyn filed a petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code and in June 1999 filed a plan of reorganization in
connection with the petition. Imagyn has not yet commercialized products based
on the Newman technology, which we believe was related to their financial
condition. Imagyn has now emerged from Chapter 11, with new financing, and we
are communicating concerning revised standards of performance under the license
agreement and the prospects for commercialization of the products.

LICENSE AGREEMENTS

         We have licensed certain aspects of our technology from third parties.

     MCKINLEY OPTICS, INC.

         In September 1995, Mr. H. McKinley and McKinley Optics, Inc. 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.

     FUJI

         In June 1996, Fuji Film Co. and Fuji Photo Optical Co., Ltd. granted to
us a non-exclusive license to certain optical zoom technology for use in
endoscopes. We are obligated to


                                       16
<PAGE>

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.

     CARL ZEISS

         In August 1998, Carl Zeiss granted us non-exclusive rights in the
medical field to three issued United States patents and four pending foreign
applications. We are obligated to pay Zeiss royalties on sales of products
incorporating the licensed technology and to provide technical and applications
support, at our current rates for such services, to parties that previously
acquired Zeiss' Endo-Live Stereo Endoscope, now discontinued. Zeiss may
terminate the agreement in the event of a material breach by us which is not
cured within a limited period of time. Our failure to retain rights to the Zeiss
patents could negatively impact our business.

INTELLECTUAL PROPERTY PROTECTION

         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 December 31, 1999, we had exclusive ownership rights
to 15 issued United States patents, 9 pending United States patent applications
and 4 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 8 pending foreign applications
covering various aspects of our devices and systems. In 1998 we additionally
obtained from Carl Zeiss 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. We are not certain 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


                                       17
<PAGE>


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,
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


                                       18
<PAGE>


maintain patent and trade secret protection, for any reason, could negatively
impact our business.

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 partial suspension of production, fines,
injunctions, civil penalties, refunds, recall or seizure of products and
criminal prosecution.

     DEVICE CLASSES

         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. Our products
to date have either been classified as Class I or Class II devices.

         Class I devices are subject to general controls, such as 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 "good manufacturing practice"
standards. Class II devices are subject to general controls and special
controls, such as 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.
Examples of Class III products include, 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 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 pre-market approval application typically takes
several years to be approved by the FDA.

     DEVICE  APPROVAL

         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


                                       19
<PAGE>


and approval of a pre-market approval 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 premarket approval, 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
introduction of the product that is the subject of the 510(k) notification.

     INVESTIGATIONAL DEVICE EXEMPTION APPLICATION

         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 regulations. If the device presents a "significant risk," the
manufacturer or distributor of the device is required to file an investigational
device exemption application with the FDA prior to commencing human clinical
trials. This application must be supported by data, typically the result of
animal and bench testing. If the 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, "good manufacturing"
requirements and post-market surveillance, and may include post-market registry
and other actions deemed necessary by the FDA. A new 510(k), pre-market approval
or pre-market approval 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), pre-market approval or premarket
approval supplement.


                                       20
<PAGE>


     FOREIGN REQUIREMENTS

         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 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.

MARKETING AND SALES

         We organize our sales and marketing efforts by optimizing the
configuration of our systems for specific applications and disciplines and
distributing them via partners' sales forces or directly as appropriate. We
believe that this type of structure provides the commitment and focus necessary
to introduce and support new advanced technology to distinct market segments. As
we enter additional market segments we will seek to preserve the distinct focus,
although there is a limit to the extent of segmentation possible. In all cases
we follow specific principles in developing our business.

     TRAINING

         The introduction of new technology requires training for both surgeons
and operating room personnel. We began training programs in minimally invasive
gastric bypass in January 2000 in conjunction with the Alvarado Center for
Surgical Weight Control. We began company sponsored heart training programs in
the third quarter of 1997. In June 1998 we transferred responsibility for this
training to Medtronic and in March 2000 we took back responsibility for this
training.

       CLINICAL EVALUATION

         All of our product lines have been developed with frequent input from
our three clinical advisory boards which are discussed under "--Clinical
Advisory Boards." This evaluation phase is expected to progress into a
publication phase with advisors publishing results of their experience in
leading publications or speaking at major clinical conferences. We support such
research, although we have no control over the content or timing of any
publication or presentation, because impartial education of the general clinical
audience is a key component in establishing procedure and equipment acceptance.
As part of our strategy, we also intend to continue to support seminars and
symposiums and participate in industry trade shows either independently or in
conjunction with our strategic partners.


                                       21
<PAGE>


     INTERNATIONAL SALES

         We have entered into a strategic relationship with Richard Wolf, GmbH,
for distribution of our products in general surgery, gynecology, and urology in
all international markets. For a description of that relationship, please see
"--Strategic Alliances--Richard Wolf, GmbH." As of March 2000, we took back
responsibility for sales of our products in all other fields and markets. We
will continue to evaluate partnership opportunities as appropriate for
international sales of all of our product lines.

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. There can be no assurance,
however, that we will be successful in identifying, developing and marketing new
products or enhancing our existing products.

         Although several companies compete with aspects of our visualization
product line, we believe there is no single company which offers a complete and
integrated advanced visualization and information system specifically directed
at minimally invasive microsurgical applications. In addition, we are not aware
of any other head-mounted display which has been cleared for marketing in
surgical applications by the FDA. We do 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.
Also, several companies are currently developing and marketing visualization
products for minimally invasive microsurgery which could be applied to heart
surgery. There can be no assurance that we will be successful in competing with
any such companies.

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

CLINICAL ADVISORY BOARDS

         We have established three clinical advisory boards made up of leading
surgeons, one focused on minimally invasive heart surgery, another focused on
head, neck and spine microsurgery and a third general advisory board focused on
several other 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 heart 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. Our clinical advisory boards are
intended to act as a clinical reference for us and to provide access to
potential training sites for our visualization products.

EMPLOYEES

         As of February 15, 2000, we had 25 full-time employees, none of whom
hold advanced degrees. None of our employees is represented by a collective
bargaining agreement, nor have we experienced work stoppages. We believe our
relations with our employees are good.


                                       22
<PAGE>

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 annual 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 annual report. The following discussion should be read in
conjunction with our consolidated financial statements and notes thereto.

WE NEED ADDITIONAL FUNDS TO SUPPORT OUR OPERATIONS. IF WE ARE UNABLE TO OBTAIN
THEM, WE WILL HAVE TO CEASE OR SIGNIFICANTLY SCALE BACK OUR OPERATIONS.

         Our existing working capital will not be sufficient to meet our present
needs past April 2000. If we are unable to raise sufficient funds in the
offering in which we are currently engaged, we may be unable to continue
operations. If this offering is not consummated on the required schedule or on
terms acceptable to us, we may be required to curtail or significantly scale
back our operating plans and possibly relinquish rights to portions of our
technology or products and discontinue our operations. Our 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;

         -        The costs of developing marketing and distribution
                  capabilities.

         If our current offering is successful, we anticipate that the net
proceeds from the offering and the interest income generated from those
proceeds, together with our existing cash, cash equivalents and short-term
investments and product revenues will be sufficient to fund our operations
through the year 2000. Circumstances, however, including slow rate of market
acceptance of our products or our inability to scale up manufacturing, would
accelerate our use of proceeds from this offering and require us to seek
additional funds to support our operating requirements.

WE MAY NOT BE ABLE TO MAINTAIN THE LISTING OF OUR COMMON STOCK ON THE NASDAQ
SMALLCAP MARKET.

         On February 10, 2000, our common stock ceased to be quoted on the
Nasdaq National Market and began to be quoted on the Nasdaq SmallCap Market as a
result of Nasdaq's concern about our ability to maintain continued compliance
with some of the Nasdaq National Market


                                       23
<PAGE>

requirements for continued quotation. We presented Nasdaq with a compliance plan
to address this and other concerns in an effort to ensure that our common stock
would continue to be quoted on the Nasdaq SmallCap Market. The compliance plan
consisted of obtaining additional capital, a process in which we are currently
engaged, and effecting a reverse split of our comon stock. We cannot assure you,
however, that we will be successful in our compliance plan, or that even if
successful, Nasdaq will continue to allow our common stock to be quoted on the
Nasdaq SmallCap Market. If we are unable to maintain our status on the Nasdaq
SmallCap Market, there may not continue to be an active trading market for our
common stock. If this occurs, you may not be able to sell your shares quickly or
at the market price if trading in our stock is not active.

WE HAVE A HISTORY OF LOSSES AND MAY NOT BECOME PROFITABLE.

         Since our formation in July 1993, and as of December 31, 1999, we had
incurred cumulative net losses of $57.9 million. We expect to incur substantial
losses for at least the next 12 months. We may never achieve or sustain
profitability in the future. Even if we achieve profitability, we may not be
able to sustain it on an ongoing basis.

WE ARE, TO A SIGNIFICANT EXTENT, DEPENDENT ON DISTRIBUTION PARTNERS TO SELL OUR
PRODUCTS.

         We do not have a sales force and, in the past, have been primarily
dependent on our agreements with Medtronic and Sofamor Danek for sales of the
majority of products derived from our core three-dimensional technology. Both
of these agreements have recently been terminated. We are in discussion with
and have agreed heads of terms subject to a definitive agreement with an
international cardiac products company to transition distribution in heart
surgery and to continue support to our heart customer base. However, this
transition may not be achieved without operational disruption and unplanned
cost, or at all. If we are unable to make this transition, we may be
unsuccessful in distributing our heart surgery products and may lose
significant revenues as a result thereof.

         In addition, we have changed recently our strategic emphasis for our
core three-dimensional technology to general surgery, gynecology and urology.
Although we have signed an exclusive agreement for international distribution in
those market segments and a non-exclusive co-marketing arrangement in the United
States with Richard Wolf, GmbH, we cannot assure you that we will be successful
in these areas of sales. Even if we are successful, we cannot assure you that
the revenue achieved in these areas of emphasis will be sufficient to compensate
for the loss of sales revenue from the termination of our agreements with
Medtronic and Sofamor Danek. Either of these results could have an adverse
affect on our financial condition and results of operations.

         OUR PROFITABILITY IS DEPENDENT UPON THE SUCCESSFUL DEVELOPMENT AND
COMMERCIALIZATION OF OUR PRODUCTS BASED ON OUR CORE THREE-DIMENSIONAL
TECHNOLOGY.

         Products derived from our core technology - the ORPC for general
surgery, the Series 8000 for minimally invasive heart surgery and StereoSite
systems for head, neck and spine microsurgery - are expected to account for the
majority of our revenues over the next several years. The demand for these
products may not be sufficient to allow us to achieve profitable operations.

         Our development efforts for improvements to these products may not be
successful. In addition, other products under development may not 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.


                                       24
<PAGE>


OUR SUCCESS IS DEPENDENT UPON ACCEPTANCE OF MINIMALLY INVASIVE MICROSURGICAL
PROCEDURES BY THE MEDICAL COMMUNITY AS A RELIABLE, SAFE AND COST EFFECTIVE
ALTERNATIVE TO EXISTING TREATMENTS.

         To date, minimally invasive microsurgical 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, minimally invasive
microsurgical procedures will be adopted by the medical community or, if they
are adopted, the number of procedures that will be performed.

         Most patients with heart disease first consult with a cardiologist, who
then may treat the patient with drugs or non-surgical interventions, such as
angioplasty, the insertion of a balloon-type device in a heart vessel, and
intravascular stents, or refer the patient to a heart surgeon for open-chest
coronary artery bypass surgery. Cardiologists may not recommend minimally
invasive 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, heart surgeons may choose not to recommend minimally
invasive 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 heart surgeons since the initial
use of such surgery in the mid-1950s.

         Even if the clinical safety and effectiveness of minimally invasive
microsurgical procedures is established in general surgery, heart and other
specialties, surgeons, specialists and other physicians may choose not to
recommend the procedures for any number of other reasons. Adoption of these
procedures by doctors will depend, for example, upon our ability to facilitate
training of surgeons to perform minimally invasive microsurgery and the
willingness of such surgeons to perform such procedures. Doctors may also elect
not to recommend the minimally invasive procedures based on possible
unavailability of acceptable reimbursement from health care payors. Health care
payor acceptance may require evidence of the cost effectiveness of minimally
invasive procedures as compared to other currently available treatments. We
believe that physician endorsements will be essential for clinical adoption of
minimally invasive procedures and these endorsements may not be obtained.
Patient acceptance of new procedures will depend upon doctor recommendations, as
well as other factors, including the effectiveness of, and the rate and severity
of complications associated with, the procedure as compared to other treatments.

WIDESPREAD USE OF OUR PRODUCTS 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.

         Evaluations of visualization technology such as ours 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, we cannot
assure you that visualization and information system enhancements incorporated,
or to be incorporated, in our products 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.


                                       25
<PAGE>


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 in the
quantities that are necessary for us to achieve significant commercial sales. We
may not be able to establish or maintain reliable, high-volume manufacturing at
commercially reasonable costs. We may also require additional manufacturing
facilities if production volumes increase; acquisition of new manufacturing
facilities will likely involve relocation. The manufacture of our products
primarily involves the assembly of a number 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 FDA regulations and the need for further FDA
                  approval of new manufacturing processes and facilities and

         -        other production constraints.

         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 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.

         Any significant supply interruption, or inventory shortage or overage,
would negatively impact our ability to manufacture our products. We use and rely
on specific components 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 specified
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. Some 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.


                                       26
<PAGE>


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

         The manufacture and sale of medical devices intended for commercial
distribution are subject to extensive governmental regulation. Our failure to
comply with regulatory requirements would jeopardize our ability to market our
products. Noncompliance with applicable requirements can result in failure of
the regulatory agency 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.

         Medical devices are regulated in the United States primarily by the FDA
and, to a lesser extent, by state agencies. Sales of medical device products
outside the United States are subject to foreign regulatory requirements that
vary from country to country. Generally, medical devices require pre-market
clearance or pre-market approval prior to commercial distribution. A
determination that information available on the medical device is not sufficient
to grant the needed clearance or approval will delay market introduction of the
product. In addition, 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. 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. The current regulatory environment in Europe for medical devices
differs significantly from that in the United States. For additional information
concerning the regulatory framework under which we operate, please see
"Business--Government Regulation."

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 general surgery, heart surgery, or to head, neck and spine
microsurgery.

         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.


                                       27
<PAGE>



WE EXPECT FLUCTUATIONS IN OUR OPERATING RESULTS.

         Our results of operations 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 our 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.

OUR PROFITABILITY IS DIRECTLY RELATED TO THE LEVEL OF REIMBURSEMENTS FOR
SURGICAL PROCEDURES USING OUR PRODUCTS.

         Our profitability is directly related to the level of payments for the
surgical procedures in which our products are involved, either by Medicare or
private insurance companies. We 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 our
products are intended to be used. It is a continuing trend in U.S. health care
for such payments to be under continual scrutiny and downward pressure. We
believe that reimbursement in the future will be subject to increased
restrictions, 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.

         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


                                       28
<PAGE>


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 such third-party payors.

         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 products.

WE HAVE LIMITED EXPERIENCE MARKETING OUR PRODUCTS OVERSEAS AND MAY NOT BE
SUCCESSFUL IN EXPANDING INTO INTERNATIONAL MARKETS WITHOUT EXPERIENCED PARTNERS.

         We have limited experience in directly 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,
including laws regulating manufacture and sale of medical devices. In addition,
the laws of some 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 we might incur in connection with the
development, manufacture and sale of our products. In addition, increased
product liability coverage may be required if additional 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.


                                       29
<PAGE>


IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY BE UNABLE TO
PREVENT OTHER COMPANIES FROM USING OUR TECHNOLOGY IN COMPETITIVE PRODUCTS.

         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. Patents may never issue from any
patent applications owned by or licensed to us. Even if patents do issue, the
claims allowed may not be sufficiently broad to protect our technology. In
addition, issued patents owned by or licensed to us may be challenged,
invalidated or circumvented, or the rights granted thereunder may not 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, require disputed rights to be licensed
from or to third parties or require us to cease using the technology in dispute.
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. Others may independently develop or otherwise acquire the same or
substantially equivalent technologies or otherwise gain access to our
proprietary technology or disclose such technology. It is difficult to protect
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.


                                       30
<PAGE>


WE HAVE LICENSED SOME ASPECTS OF OUR PRODUCTS FROM THIRD PARTIES AND MAY LOSE
THE RIGHTS TO THESE ESSENTIAL ASPECTS UNDER THE AGREEMENTS WHICH GOVERN THOSE
RELATIONSHIPS.

         We have licensed some aspects of our technology from third parties. The
rights under the governing agreements may be terminated if we breach our
obligations or in other circumstances. Our failure to retain rights to these
licensed rights could negatively impact our business. For additional information
concerning the agreements which govern these relationships, please see
"Business--Strategic Alliances" and "Business - Licenses."

IF WE ARE NOT ABLE TO ATTRACT AND RETAIN KEY TECHNICAL AND SENIOR MANAGEMENT
PERSONNEL AND DOCTORS TO PARTICIPATE IN OUR ADVISORY BOARDS, IT MAY ADVERSELY
AFFECT OUR ABILITY TO OBTAIN FINANCING OR DEVELOP OUR PRODUCTS.

         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 some of whom perform
important functions beyond those suggested by their 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.
Competition for such personnel is intense, and we may not be successful in
attracting or retaining such personnel.

         Members of our 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, including confidentiality provisions
with each of the members of our clinical advisory boards, the consulting and
confidentiality agreements between us and each of the members of our clinical
advisory boards may be terminated or breached.

OUR STOCK PRICE COULD CONTINUE TO BE VOLATILE AND YOUR INVESTMENT IN OUR COMMON
STOCK COULD SUFFER A DECLINE IN VALUE, ADVERSELY AFFECTING OUR ABILITY TO RAISE
ADDITIONAL CAPITAL.

         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. The
market price of our common stock has historically been 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, and


                                       31
<PAGE>


         -        general market conditions.

         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.

WE ARE NOT USING UNDERWRITERS TO SELL THE COMMON STOCK IN OUR CURRENT OFFERING.

         The common stock in the offering we are currently engaged in is being
offered directly by us to a limited number of investors. We will not engage any
broker-dealers or underwriters to sell the common stock offered by our
prospectus. We are not experts in selling stock. As a result, we may not be as
successful as a professional broker-dealer in marketing the common stock. In
fact, we may not be able to sell the stock at all. If we are unable to locate
and negotiate terms of a sale satisfactory to us, we will only be able to fund
our operations through April 2000 without additional funding, and may be forced
to discontinue our operations.

OUR USE OF HAZARDOUS MATERIALS MAY RESULT IN UNEXPECTED AND SUBSTANTIAL CLAIMS
AGAINST US FOR WHICH WE DO NOT HAVE SUFFICIENT FINANCIAL RESOURCES.

         Our research and development activities may involve the controlled use
of hazardous materials and chemicals. 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 AND ANY GAINS FROM YOUR INVESTMENT IN
OUR STOCK WILL HAVE TO COME FROM INCREASES IN THE PRICE OF SUCH STOCK.

         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.

OUR CHARTER DOCUMENTS MAY PREVENT US FROM PARTICIPATING IN TRANSACTIONS THAT
COULD BE BENEFICIAL TO YOU.

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

FUTURE OFFERINGS COULD DILUTE YOUR INTEREST IN YOUR STOCK.

         If the net proceeds of our current offering, together with available
funds and cash generated from operations, are insufficient to satisfy our cash
needs, we may be required to sell additional equity or convertible debt
securities. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders.


                                       32
<PAGE>


Item 2. PROPERTIES

         Our facilities consist of approximately 6,500 square feet of office
space located in Carlsbad, California, in which our executive offices, some
marketing staff and software engineers are located. The lease for our Carlsbad
facility expires in December 2000. In addition, we maintain a facility of
approximately 37,100 square feet in Westborough, Massachusetts in which our
development, engineering, manufacturing operations and customer service
personnel are located. The leases under which we have acquired the right to
occupy the Westborough facilities expire at various points in time beginning in
October 2001 and ending in October 2002. During the third quarter of 1999, a
restructuring and workforce reduction led us to close part of our Westborough
facilities. We believe that suitable additional space will be available to us,
when needed, on commercially reasonable terms.

Item 3. LEGAL PROCEEDINGS

         From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this Annual Report, we are not a party to any legal proceedings.

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

        None.

                                     PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        (a) Market Price of and Dividends on the Registrant's Common Equity.

         Our Common Stock is traded on the over-the-counter market and prices
are quoted on the Nasdaq SmallCap Market under the symbol "VMTI." The following
table sets forth the high and low sale prices for the Common Stock on the Nasdaq
National market from July 2, 1997 (the date of our initial public offering)
through December 31, 1999.

<TABLE>
<CAPTION>
                                                  HIGH         LOW
                                                  ----         ---
<S>                                               <C>          <C>
3rd Quarter 1997............................      18.50        8.88

4th Quarter 1997............................      15.50        8.88

1st Quarter 1998............................      13.13        8.00

2nd Quarter 1998 ...........................      11.50        3.38

3rd Quarter 1998 ...........................       5.06        1.50

4th Quarter 1998............................       3.63        2.00

1st Quarter 1999............................       3.31        2.00

2nd Quarter 1999 ...........................       2.09        1.38

3rd Quarter 1999 ...........................       1.69        0.38

4th Quarter 1999............................       1.03        0.31
</TABLE>


         On March 23, 2000 the last reported sale price of the Common Stock was
$1.50. As of March 13, 2000, there were approximately 145 holders of record of
the Common Stock.

We have never declared or paid any cash dividends on our capital stock. We
currently do not intend to pay any cash dividends in the foreseeable future and
intend to retain our earnings, if any, for the operation of our business.

         (b) Recent Sales of Unregistered Securities.

         None


                                       33
<PAGE>



Item 6. SELECTED FINANCIAL DATA

                                              SELECTED FINANCIAL DATA

         The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and notes thereto
appearing elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                    --------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:                       1995            1996           1997            1998            1999
                                                    ----            ----           ----            ----            ----
                                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                               <C>             <C>            <C>             <C>             <C>
  Sales ..................................        $ 1,719         $ 2,244        $  4,141        $  6,572        $  5,516
  Costs and expenses:
     Cost of sales .......................          1,272           2,253           4,559           6,119           7,521
     Research and development ............          1,904           3,880           6,875           5,480           3,229
     Sales and marketing .................            834           2,057           5,011           5,953           2,890
     General and administrative ..........          1,034           3,103           5,499           5,039           2,178
     Restructuring expense ...............           --              --              --               940             690
                                                   ------         -------       ---------      ----------      ----------
  Total costs and expenses ...............          5,044          11,293          21,944          23,531          16,508
                                                   ------         -------       ---------      ----------      ----------
  Loss from operations ...................         (3,325)         (9,049)        (17,803)        (16,959)        (10,992)

  License income .........................           --             1,493            --              --              --
  Interest income ........................             51             117             926             900             218
  Other gains/(losses) ...................           --              --              --              (662)             51
                                                   ------         -------       ---------      ----------      ----------
  Net loss ...............................        $(3,274)        $(7,439)       $(16,877)       $(16,720)       $(10,723)
                                                   ======         =======       =========      ==========      ==========

  Basic and diluted net loss per share (1)        $(88.49)        $(37.01)       $  (2.51)       $  (1.26)       $  (0.79)
                                                   ======         =======       =========      ==========      ==========

Shares used in computing basic and
     diluted loss per share (1) ..........         37,000         201,000       6,731,000      13,312,000      13,594,000
                                                   ======         =======       =========      ==========      ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                    --------------------------------------------------------------------
BALANCE SHEET DATA:                                 1995            1996           1997            1998            1999
                                                    ----            ----           ----            ----            ----
                                                                              IN THOUSANDS
<S>                                              <C>              <C>            <C>            <C>            <C>
Cash, cash equivalents and short-term
   investments ............................      $  3,339         $ 10,285       $ 24,113       $  8,803       $  1,658
  Working capital .........................         4,224           10,805         25,977         12,128          2,972
  Total assets ............................         5,208           14,316         32,130         16,605          7,367
  Total debt ..............................          --               --             --             --             --
  Accumulated deficit .....................        (6,181)         (13,620)       (30,498)       (47,218)       (57,941)
Total stockholders' equity (deficit) ......         4,707           12,961         29,866         14,666          4,584

</TABLE>



                                       34
<PAGE>



Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

         This annual report may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including those discussed earlier 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
annual report. The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto.

OVERVIEW OF OUR BUSINESS

         We develop, manufacture and market products that provide information to
doctors performing minimally invasive heart, head, neck and spine, general
surgical and other selected microsurgical procedures. We 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 December 31, 1999, our accumulated deficit was approximately $57,941,000.
We are not certain 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.

         At December 31, 1997, 1998, and 1999, we had 104, 76 and 25 employees,
respectively. We had increased our staffing significantly during 1996 and 1997
to support our research and development, manufacturing scale up, service and
support, sales and marketing and general and administrative activities related
to new products. In June 1998, however, we entered into a broader distribution
agreement with Medtronic whereby they were to distribute our Series 8000 system
for cardiac surgery in the United States as well as international markets and we
no longer needed a direct sales organization. The signing of this agreement
precipitated a broad restructuring of our operations which resulted in a
significant downsizing of our work force from prior levels. We expect staffing
to continue to increase modestly in the near term to approximately 35 employees
and stabilize at or near that level for the balance of our fiscal year 2000. Our
expectation is based on the fact that significant development work on our core
platform technology is now complete and on strategic decisions to partner rather
than develop an independent distribution capability.

OUR RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998

    SALES

         We had revenues from product sales of $5,516,000 for the year ended
December 31, 1999 and revenue from product sales and distribution fees of
$6,572,000 for the year ended December 31,1998. The decrease in revenues from
1998 to 1999 was due to a reduction in sales of StereoSite systems and
associated distribution fees paid by Sofamor Danek, our distributor in the head,
neck and spine market, and a reduction in sales of our Series 8000 Advanced
Visualization and Information System for minimally invasive cardiac surgery
during 1999 compared to 1998. These were partially offset by higher sales of OEM
products, including deliveries to a second OEM customer in the 1999 period, by
product deliveries to a second distributor for the head, neck and spine market
during 1999 and by product sales to OEC Medical (subsequently acquired by
General Electric) for the medical imaging market during the 1999 period. Sales
to individual customers exceeding 10% or more of revenues in the years ended
December 31, were as follows: during 1997, three customers accounted for 25%,
19% and 10% of revenues, respectively; during 1998 three customers accounted for
34%, 25% and 13% of revenues, respectively, and during 1999, three customers
accounted for 45%, 28% and 16% of revenues, respectively.

    COSTS AND EXPENSES

         Cost of sales. Our cost of sales were $7,520,000 and $6,119,000 for the
years ended December 31, 1999 and 1998, respectively. The increase in cost of
sales during the 1999 period was primarily due to significant inventory reserve
charges we took in 1999 compared to 1998, partially offset by lower product
sales levels during the 1999 period and a reduction in manufacturing overhead
expenses during 1999 compared to 1998.


                                       35
<PAGE>


         Research and development expenses. Our research and development
expenses were $3,229,000 and $5,480,000 for the years ended December 31, 1999
and 1998, respectively. 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.

         Sales and marketing expenses. Our sales and marketing expenses were
$2,890,000 for the year ended December 31, 1999 and $5,953,000 for the year
ended December 31, 1998. The decrease in sales and marketing expenses reflects
the transition of all sales, marketing and distribution efforts associated with
our Series 8000 for minimally invasive heart surgery in the United States to
Medtronic following an agreement announced at the end of June 1998 and a
reduction in staffing and related expenses as a result of a restructuring
completed during the third quarter of 1999.

         General and administrative expenses. Our general and administrative
expenses were $2,178,000 and $5,039,000 for the years ended December 31, 1998
and 1998, respectively. The decrease was primarily due to a reduction in
staffing and related expenses following a third quarter restructuring, a
reduction in deferred compensation expense and lower professional, legal and
consulting service fees.

         Restructuring expenses. We recorded restructuring charges of $690,000
during the year ended December 31, 1999 and restructuring charges of $940,000
during the year ended December 31, 1998. The restructuring expenses during 1999
relate to a decision to close part of our facilities in Westborough, MA after a
significant reduction in our workforce during the third quarter of 1999 and
represents the value of continuing lease obligations. The restructuring expenses
in 1998 related primarily to termination and severance payments to employees in
connection with transfer of sales and marketing responsibility in the United
States for our Series 8000 System for minimally invasive cardiac surgery to
Medtronic, 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.

        OTHER INCOME AND LOSSES

         Interest income. Our net interest income was $218,000 for the year
ended December 31, 1999 compared to $900,000 for the year ended December 31,
1998. The decrease was due primarily to decreasing average investment balances
of our excess cash.

         Other gains and losses. We had other gains of $51,000 for the year
ended December 31, 1999 and other losses of $662,000 for the year ended December
31, 1998. The gains during the 1999 period 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.), while the
losses during the 1998 period relate to recognition of a permanent reduction in
value of those securities.

        TAXES

         At December 31, 1999, we had federal and state tax loss carry forwards
of approximately $44,990,000 and $40,207,000, respectively. The federal and
state tax loss carry forwards will expire in 2010 and 2000, respectively, unless
previously utilized. At December 31, 1999, we also had federal and state
research tax credit carry forwards of approximately $1,835,000 and $952,000
respectively, which will begin to expire in 2010 unless previously utilized. We
have provided a full valuation allowance on the deferred tax assets as
realization of such assets is uncertain.


                                       36
<PAGE>


YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997

    SALES

         We had revenues from product sales and distribution fees of $6,572,000
and $4,141,000 for the years ended December 31, 1998 and 1997, respectively. The
increase in revenues from 1997 to 1998 was primarily due to sales of our Series
8000 Advanced Visualization and Information ("Series 8000") product for
minimally invasive cardiac surgery launched in September 1997, and sales of
StereoSite systems and associated distribution fees paid by Sofamor Danek, our
strategic partner and exclusive distributor for the HNS market. Sales to
individual customers exceeding 10% or more of revenues in the years ended
December 31, were as follows: during 1996 three customers accounted for 30%, 27%
and 25% of revenues; during 1997, three customers accounted for 25%, 19% and 10%
of revenues, respectively; during 1998 three customers accounted for 34%, 25%
and 13% of revenues, respectively.

    COSTS AND EXPENSES

         Cost of sales. Our cost of sales were $6,119,000 and $4,560,000 for the
years ended December 31, 1998 and 1997, respectively. The increase in cost of
sales was primarily due to increased costs corresponding to the growth in
revenues partially offset by lower manufacturing scale-up expenses incurred in
1998 versus 1997 to accommodate new product launches targeted at cardiothoracic
and HNS markets with our Series 8000 and StereoSite systems, respectively.

         Research and development expenses. Our research and development
expenses were $5,480,000 and $6,875,000 for the years ended December 31, 1998
and 1997, respectively. 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, both
in the second half of the year as major product launches were completed by the
end of the first half of 1998.

         Sales and marketing expenses. Our sales and marketing expenses
increased from $5,011,000 in 1997 to $5,953,000 in 1998. The increase in sales
and marketing expense was attributable to the development and expansion of our
cardiothoracic surgery sales force in the first half of 1998 and increased
marketing efforts associated with commercialization of new products. During the
second half of the year sales and marketing expenses decreased as a result of
transitioning 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.

         General and administrative expenses. Our general and administrative
expenses were $5,039,000 and $5,499,000 for the years ended December 31, 1998
and 1997, respectively. The decrease was primarily due to a reduction in
staffing and related expenses following a second quarter restructuring, a
reduction in deferred compensation expense and lower professional, legal and
consulting service fees partially offset by increased costs associated with
being a public company for the full year of 1998 compared to a half year in
1997.

         Restructuring expenses. We recorded restructuring charges during the
second quarter of 1998 of $940,000 and had no such charges for 1997. The
restructuring expenses related primarily to termination and severance payments
to employees in connection with transfer of sales and marketing responsibility
in the United States for our Series 8000 System for minimally invasive cardiac
surgery to Medtronic, 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.

    OTHER INCOME AND LOSSES

         Interest income. Our net interest income decreased from $926,000 in
1997 to $900,000 in 1998, due primarily to decreasing average investment
balances in the second half of the year of excess cash following our initial
public offering in July of 1997.

         Other losses. We reported other losses of $662,000 in 1998 and had no
such corresponding losses for 1997. The losses for 1998 relate to recognition of
a permanent reduction in value of securities we received in connection with an
earlier license agreement signed in 1996 with Imagyn Medical Technologies, Inc.
(formerly Urohealth Systems, Inc.)


                                       37
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Net cash used in operating activities was approximately $7,157,000,
$14,177,000 and $15,494,000 in 1999, 1998 and 1997, respectively. The decrease
in net cash used in operating activities during 1999 compared to 1998 was
primarily attributable to decreasing net losses and lower inventory purchases
offset by lower non-cash expense for depreciation and amortization and no
customer advance payments in 1999 compared to 1998. The decrease in net cash
used in operating activities in 1998 compared to 1997 was primarily attributable
to lower inventory purchases and higher non-cash expenses for depreciation and
amortization and asset write-downs during 1998 offset by increasing payments on
accounts payable and increasing accounts receivable balances.

         Net cash provided by investing activities was approximately $809,000
and $14,209,000 in 1999 and 1998, respectively and net cash used in investing
activities was approximately $20,024,000 in 1997. The decrease in net cash
provided by investing activities in 1999 compared to 1998 was primarily
attributable to declining balances of short term investments reaching maturity
partially offset by decreasing purchases of property and equipment. The net cash
provided by investing activities in 1998 was primarily attributable to the
maturities of short term investments offset by purchases of property and
equipment. The net cash used in investing activities in 1997 was 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.

         Cash flows from financing activities were $91,000, $265,000 and
$32,728,000 in 1999, 1998 and 1997, respectively. The cash flows from financing
activities in 1999 and 1998 were primarily attributable to proceeds from the
purchase of stock by employees through our employee stock purchase plan and the
exercise of stock options. Cash flows from financing activities in 1997 were
primarily attributable to proceeds from our initial public offering.

         We anticipate that our existing cash, cash equivalents and short-term
investments, and product revenues, will be sufficient to fund our operations
through April 2000. 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
$3,500,000 in additional financing will be required to fund operations through
December 31, 2000. We are currently engaged in an offering to raise the
additional capital necessary to fund our operations, however, we may not be
successful in our efforts. In addition, certain circumstances, including slow
rate of market acceptance of our products or our inability to scale up
manufacturing, would accelerate our use of proceeds and require us to seek
additional funds to support our operating requirements. Accordingly, we may,
from time to time, seek to raise additional funds through public or private
equity financings, debt financings or from other sources. Additional financing
may not be available at all or that, if available, that we could obtain
financing 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.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         At December 31, 1999, our investment portfolio included fixed-income
securities of $1.3 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 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated financial statements and supplementary data required
by this item are set forth at the pages indicated in 14(a)(1).

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

          Not applicable.

                                       38

<PAGE>


                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         (a) Identification of Directors. The information under the caption
"Proposal 1 - Election of Directors," appearing in the Proxy Statement, is
incorporated herein by reference.

         (b) Identification of Executive Officers. The information under the
headings "Executive Officers and Key Employees," appearing in the Proxy
Statement, is incorporated herein by reference.

         (c) Compliance with Section 16(a) of the Exchange Act. The information
under the caption "Compliance with Section 16(a) of the Securities Exchange Act
of 1934," appearing in the Proxy Statement, is incorporated herein by reference.

Item 11. EXECUTIVE COMPENSATION

         The information under the headings "Executive Compensation and Other
Information," appearing in the Proxy Statement, is incorporated herein by
reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information under the headings "Ownership of Securities," appearing
in the Proxy Statement, is incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information under the heading "Certain Relationships and Related
Transactions," appearing in the Proxy Statement, is incorporated herein by
reference.


                                       39
<PAGE>


                                     PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)      (1) Financial Statements

         The financial statements required by this item are submitted in a
         separate section beginning on Page F-1 of this report.

                                                                     PAGE NO.
                                                                     --------
         Report of Ernst & Young LLP, Independent Auditors.............F-2

         CONSOLIDATED FINANCIAL STATEMENTS

         Consolidated Balance Sheets at December 31, 1998
                  and 1999.............................................F-3
         Consolidated Statements of Operations for the years
                  ended December 31, 1997, 1998 and 1999...............F-4
         Consolidated Statements of Stockholders' Equity for
                  the years ended December 31, 1997, 1998 and 1999.....F-5
         Consolidated Statements of Cash Flows for the years
                  ended December 31, 1997, 1998 and 1999...............F-7
         Notes to Consolidated Financial Statements....................F-8

         (2)     Financial Statement Schedules

         All schedules for which provision is made in the applicable accounting
         regulation of the Securities and Exchange Commission are not required
         under the related instructions or are inapplicable, and therefore have
         been omitted except for Schedule II required under Regulation S-X, Rule
         5-04. which is included herein following the Financial Statements.

(b) No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.


                                       40
<PAGE>



(c)  Exhibits

  NUMBER
  EXHIBIT               DESCRIPTION

3.2(1)     Restated Bylaws.
4.1(1)     Form of certificate for common stock.
10.1(1)    Asset Purchase Agreement between with AST, dated September 15, 1995
10.2(1)    Asset Purchase Agreement with ProMedica Distribution, Inc. and
           stockholders of ProMedica Distribution, Inc., dated July 26, 1996.
10.3(1)    Series A-1 Preferred Stock Purchase Agreement with the purchasers
           listed on Schedule A thereto, dated July 27, 1995.
10.4(1)    Series B Preferred Stock Purchase Agreement with the investors listed
           on Schedule A thereto, dated July 12, 1996.
10.5(1)    Series C Preferred Stock Purchase Agreement with Medtronic Asset
           Management, Inc., dated November 27, 1996.
10.6*(1)   Manufacturing Supply Agreement with Kaiser Electro-Optics, Inc.,
           dated July 19, 1995.
10.7*(1)   Sales Agreement with Medtronic, Inc., dated November 27, 1996.
10.8*(1)   Supply and Services Agreement with Heartport, dated February 22,
           1997.
10.9*(1)   Supplemental Rights Agreement with Medtronic, Inc., dated November
           27, 1996.
10.10(1)   Amended and Restated Investors' Rights Agreement with the
           stockholders listed on Schedule A thereto, dated November 27, 1996.
10.11(1)   Amendment to the Amended and Restated Investors' Rights Agreement
           with Heartport and the stockholders listed on Exhibit A thereto,
           dated February 22, 1997.
10.12(1)   Letter Agreement regarding Investment Representations and
           Registration Rights between us and Urohealth Systems, Inc., dated
           December 13, 1996.
10.13*(1)  Consulting Agreement with Harry R. McKinley, dated September 15,
           1995, as amended.
10.14*(1)  Consulting Agreement with Urohealth Systems, Inc., dated December 13,
           1996.
10.15(1)   Form of Professional Services Agreement.
10.16(1)   Form of Non-Disclosure Agreement for Proprietary or Business
           Confidential Information.
10.17(1)   Non-Competition, Non-Disclosure and Patent and Inventions Assignment
           Agreement among Harry R. McKinley, McKinley Optics, Inc. and AST,
           dated December 18, 1991.
10.18*(1)  License and Development Agreement among Harry R. McKinley,
           McKinley Optics, Inc. and AST, dated December 18, 1991, as amended on
           June 28, 1994.
10.19*(1)  License Agreement with Allen Newman, dated September 2, 1994, as
           amended December 13, 1996.
10.20*(1)  Agreement to Amend License and Development Agreement with Harry R.
           McKinley and McKinley Optics, Inc., dated September 15, 1995.
10.21*(1)  License Agreement with Kaiser Aerospace, dated July 19, 1995.
10.22*(1)  Technology Strategic Alliance: Memorandum of Understanding with
           Kaiser Electro Optics, Inc., dated July 19, 1995.
10.23*(1)  Non-Exclusive License Agreement with Fuji Photo Film Co., Ltd. and
           Fuji Photo Film Optical Co., Ltd., dated June 25, 1996.
10.24(1)   Memorandum of Understanding with Cogent Light Technologies, dated
           March 27, 1996.
10.25*(1)  License Agreement with Urohealth, dated December 13, 1996.
10.26*(1)  License Agreement with HealthCom, Inc. and GDE Systems, Inc., dated
           February 28, 1997.
10.27(1)   Lease dated April 14, 1994, as amended by a certain First Amendment
           to Lease dated March 29, 1996 and a Second Amendment to Lease dated
           October 22, 1996 with Robert F. Tambone, as Trustee of MAT Realty
           Trust, u/d/t dated June 4, 1986.
10.28(1)   Standby Letter of Credit from Silicon Valley Bank, dated August 9,
           1996.
10.29(1)   1995 Stock Option Plan.
10.30(1)   1995 Stock Option Plan Form of Notice of Grant.
10.31(1)   1995 Stock Option Plan Form of Stock Option Agreement.
10.32(1)   1995 Stock Option Plan Form of Stock Purchase Agreement.


                                       41
<PAGE>


10.33(1)   1997 Stock Option/Stock Issuance Plan, as amended.
10.34(1)   1997 Stock Option/Stock Issuance Plan Form of Notice of Grant.
10.35(1)   1997 Stock Option/Stock Issuance Plan Form of Stock Option Agreement.
10.36(1)   1997 Stock Option/Stock Issuance Plan Form of Stock Purchase
           Agreement.
10.37(1)   1997 Employee Stock Purchase Plan.
10.38(1)   Form of Indemnification Agreement between us and each of our
           directors.
10.39(1)   Form of Indemnification Agreement between us and each of our
           officers.
10.40(1)   Form of Waiver of Registration Rights, dated February 28, 1997.
10.41(1)   1997 Stock Option/Stock Issuance Plan Form of Stock Issuance
           Agreement.
10.42(1)   Stock Issuance Agreement dated March 3, 1997 with those purchasers
           set forth in Schedule A.
10.43(2)   Vista Medical Technologies, Inc. Third Amendment to Lease, dated
           September 1, 1997.
10.44(3)   Common Stock Purchase Warrant with Silicon Valley Bank, dated October
           23, 1997.
10.45(3)   Second Amendment to the Amended and Restated Investor's Rights
           Agreement with Silicon Valley Bank and the Stockholders listed on
           Exhibit A thereto, dated October 22, 1997.
10.46(3)   Fourth Amendment to Lease, dated October 30, 1997.
10.47(3)   Technology Strategic Alliance: Memorandum of Understanding with
           Kaiser Electro Optics, dated December 9, 1997.
10.48(3)   Amendment to Manufacturing Supply Agreement with Kaiser
           Electro-Optics, dated December 9, 1997.
10.49(3)   Amendment to License Agreement with Kaiser Aerospace, dated December
           8, 1997.
10.50*(3)  License Agreement with Kaiser Aerospace, dated December 9, 1997.
10.51*(3)  Exclusive Distribution Agreement with Sofamor Danek L.P., dated
           January 7, 1998.
10.52*(3)  Cooperative Technology Agreement with Sofamor Danek Group, Inc.,
           dated January 7, 1998.
10.53(4)   Amended and Restated Sales Agreement with Medtronic, Inc., dated June
           26, 1998 (with certain confidential portions omitted).
10.54(5)   Vista Medical Technologies, Inc., Industrial Real Estate Lease with
           Ocean Point Tech Centre dated July 7, 1998.
10.55(6)   Amendment Number One to License Agreement with Imagyn Medical
           Technologies, Inc., dated October 2, 1998.
10.56(6)   Employment Agreement with John Lyon dated December 28, 1998.
10.57(6)   Employment Agreement with Koichiro Hori dated December 28, 1998.
10.58(6)   Employment Agreement with Allen Newman dated December 28, 1998.
10.59(6)   Employment Agreement with Robert De Vaere dated December 28, 1998.
10.60(7)   Fifth Amendment to Lease dated April 30, 1999.
10.61(7)   Sofamor Danek letter Amendment dated April 1999.
10.62(8)   Agreement with John Lyon dated July 20, 1999.
10.63(8)   Agreement with Koichiro Hori dated July 20, 1999.
10.64(8)   Agreement with Allen Newman dated July 20, 1999.
10.65(8)   Agreement with Robert De Vaere dated July 20, 1999.
10.66*     Sales Agreement with Richard Wolf, GmbH, dated December 22, 1999.
23.1       Consent of Ernst & Young LLP, Independent Auditors.
24.1       Power of Attorney.
27.1       Financial Data Schedule

--------------
(1)        Incorporated by reference to our Registration Statement on Form S-1,
           as amended, filed on July 2, 1997.

(2)        Incorporated by reference to our Form 10-Q, filed on November 13,
           1997.

(3)        Incorporated by reference to our Form 10-K, filed on March 30, 1998.

(4)        Incorporated by reference to our Form 10-Q, filed on August 12, 1998.

(5)        Incorporated by reference to our Form 10-Q, filed on November 13,
           1998.


                                       42
<PAGE>


(6)        Incorporated by reference to our Form 10-K, filed on March 29 1999.

(7)        Incorporated by reference to our Form 10-Q, filed on August 13, 1999.

(8)        Incorporated by reference to our Registration Statement on Form S-1
           filed on September 7, 1999.

*          Certain confidential portions of this exhibit were omitted by means
           of redacting a portion of the text (the "Mark"). This exhibit has
           been filed separately with the Secretary of the Securities and
           Exchange Commission without the Mark pursuant to our application
           requesting confidential treatment under Rule 406 under the Securities
           Act.

SUPPLEMENTAL INFORMATION

         Copies of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held June 9, 2000 and copies of the form of proxy to be used
for such Annual Meeting were furnished to the Commission prior to the time they
were distributed to the Stockholders.


                                       43
<PAGE>


     SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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:  March 29, 2000         By:  /s/ John R. Lyon
                                          -------------------------
                                           John R. Lyon
                                           President and Chief Executive Officer

                                POWER OF ATTORNEY

         Know all men by these presents, that each person whose signature
appears below constitutes and appoints John R. Lyon or Robert J. De Vaere, his
or her attorney-in-fact, with power of substitution in any and all capacities,
to sign any amendments to this Annual Report on Form 10-K, and to file the same
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his or her substitute or substitutes may do or cause to be
done by virtue hereof.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
    SIGNATURE                               TITLE                                  DATE
    ---------                               -----                                  ----
<S>                                 <C>                                         <C>
/s/  John R. Lyon                   President, Chief Executive                  March 29, 2000
-----------------------------         Officer and Director (Principal
    (John R. Lyon)                    Executive Officer)

/s/  Robert J. De Vaere             Vice President of Finance and               March 29, 2000
-----------------------------         Administration and Chief
    (Robert J. De Vaere)              Financial Officer (Principal
                                      Financial and Accounting Officer)

/s/  James C. Blair                 Chairman of the Board and Director          March 29, 2000
-----------------------------
    (James C. Blair)

/s/  Olav B. Bergheim               Director                                    March 29, 2000
-----------------------------
    (Olav B. Bergheim)

/s/  Nicholas B. Binkley            Director                                    March 29, 2000
-----------------------------
    (Nicholas B. Binkley)

/s/  Daniel J. Holland              Director                                    March 29, 2000
-----------------------------
    (Daniel J. Holland)

/s/  Larry M. Osterink              Director                                    March 29, 2000
-----------------------------
    (Larry M. Osterink)
</TABLE>

                                       44
<PAGE>

 Vista Medical Technologies, Inc.

                   Index to Consolidated Financial Statements

Report of Ernst & Young LLP, Independent Auditors......................F-2

Consolidated Financial Statements

Consolidated Balance Sheets at December 31, 1998 and 1999 .............F-3

Consolidated Statements of Operations for the years ended
         December 31, 1997, 1998 and 1999..............................F-4

Consolidated Statements of Stockholders' Equity for the years ended
         December 31, 1997, 1998 and 1999..............................F-5

Consolidated Statements of Cash Flows for the years ended
         December 31, 1997, 1998 and 1999..............................F-7

Notes to Consolidated Financial Statements.............................F-8



                                      F-1
<PAGE>



Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
Vista Medical Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Vista Medical
Technologies, Inc. as of December 31, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vista
Medical Technologies, Inc. at December 31, 1998 and 1999 and the results of its
consolidated operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 1 to the financial statements, Vista Medical Technologies,
Inc. has reported accumulated losses aggregating $57.9 million and lacks
sufficient working capital to enable the Company to fund operations through the
end of 2000, which raises substantial doubt about its ability to continue as a
going concern. Management's plans as to these matters are described in Note 1.
The 1999 financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.

                                       /s/ Ernst & Young LLP

San Diego, California
January 31, 2000


                                      F-2
<PAGE>



                                         Vista Medical Technologies, Inc.

                                            Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            ----------------------------
ASSETS                                                          1998            1999
                                                            ------------    ------------
<S>                                                         <C>             <C>
Current assets:
   Cash and cash equivalents ............................   $  7,625,804    $  1,368,910
   Short-term investments ...............................      1,176,800         289,189
   Accounts receivable, net .............................        752,233       1,177,109
   Inventories, net .....................................      4,354,338       2,649,542
   Other current assets .................................        157,443         269,397
                                                             -----------    -------------
Total current assets ....................................     14,066,618       5,754,147
Property and equipment, net .............................      2,056,535       1,320,397
Patents and other assets, net ...........................        481,594         292,178
                                                            ------------    -------------
Total Assets ............................................   $ 16,604,747    $  7,366,722
                                                            ============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable .....................................   $    552,441    $    985,520
   Accrued compensation .................................        300,807         205,481
   Accrued liabilities ..................................      1,085,009       1,591,276
                                                            ------------    ------------
Total current liabilities ...............................      1,938,257       2,782,277

Commitments

Stockholders' equity:
   Common stock, $.01 par value:
      Authorized shares - 35,000,000
      Issued and outstanding shares - 13,572,101 in 1998
        and 13,795,525 in 1999...........................        135,721         137,955
   Additional paid-in capital ...........................     62,856,201      63,042,737
   Notes receivable from stockholders ...................        (78,375)        (78,375)
   Deferred compensation ................................     (1,030,420)       (576,738)
   Unrealized gain/loss on investments ..................          1,211            --
   Accumulated deficit ..................................    (47,217,848)    (57,941,134)
                                                            -------------   -------------
Total stockholders' equity ..............................     14,666,490       4,584,445
                                                            -------------   -------------
Total liabilities and stockholders' equity ..............   $ 16,604,747    $  7,366,722
                                                            =============   =============
</TABLE>

SEE ACCOMPANYING NOTES


                                      F-3
<PAGE>

                        VISTA MEDICAL TECHNOLOGIES, INC.

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                            --------------------------------------------
                                                1997            1998            1999
                                            ------------    ------------    ------------
<S>                                         <C>             <C>             <C>
Sales ...................................   $  4,141,082    $  6,572,473    $  5,516,104
Costs and expenses:
   Cost of sales ........................      4,559,521       6,119,108       7,520,480
   Research and development .............      6,875,069       5,479,788       3,229,330
   Sales and marketing ..................      5,010,953       5,953,102       2,890,436
   General and administrative ...........      5,498,820       5,039,183       2,177,517
   Restructuring expense ................           --           939,919         690,269
                                            ------------    ------------    ------------
Total cost and expenses .................     21,944,363      23,531,100      16,508,032
                                            ------------    ------------    ------------
Loss from operations ....................    (17,803,281)    (16,958,627)    (10,991,928)

Interest income .........................        926,243         900,379         218,017
Other gains/(losses) ....................           --          (662,090)         50,625
                                            ------------    ------------    ------------

Net loss ................................   $(16,877,038)   $(16,720,338)   $(10,723,286)
                                            ============    ============    ============

Basic and diluted loss per share ........   $      (2.51)   $      (1.26)   $      (0.79)
                                            ============    ============    ============

Shares used in basic and diluted loss per
   share computations ...................      6,731,000      13,312,366      13,594,328
                                            ============    ============    ============
</TABLE>



SEE ACCOMPANYING NOTES


                                      F-4
<PAGE>

                        Vista Medical Technologies, Inc.

                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                       CONVERTIBLE
                                     PREFERRED STOCK                  COMMON STOCK         ADDITIONAL
                                 -------------------------       ----------------------     PAID-IN
                                   SHARES         AMOUNT          SHARES       AMOUNT       CAPITAL
                                 -------------------------       ----------------------   -----------
<S>                              <C>           <C>                <C>       <C>           <C>
Balance at December 31, 1996     11,574,252    $   115,742        538,224   $     5,382   $28,615,223

Exercise of stock
        options for cash               --             --          150,273         1,503        61,901
     Issuance of common
        stock for services             --             --            3,000            30        19,980
     Payments on notes
        receivable from
        stockholders                   --             --             --            --            --
     Issuance of common
        stock in conjunction
        with the initial
        public offering at
        $9.00 per share                --             --        4,000,000        40,000    32,554,990
Conversion of
        convertible
        preferred stock in
        conjunction with the
        initial public
        offering                (11,574,252)      (115,742)     8,680,679        86,807        28,935
Issuance of stock
        under employee stock
        purchase plan                  --             --            7,085            71        54,129
Issuance of common
        stock for technology
        license                        --             --           27,777           278       249,715
Deferred compensation                  --             --             --            --         946,640
Amortization of
        deferred compensation          --             --             --            --            --
Unrealized gain(loss)
        on investments                 --             --             --            --            --
Net loss                               --             --             --            --            --
                                -----------    -----------     ----------   -----------   -----------
Balance at December 31, 1997           --      $      --       13,407,038   $   134,071   $62,531,513
                                ===========    ===========     ==========   ===========   ===========

<CAPTION>

                                    NOTES
                                 RECEIVABLE       DEFERRED      UNREALIZED       ACCUMULATED                     COMPREHENSIVE
                              FROM STOCKHOLDERS COMPENSATION    GAIN (LOSS)        DEFICIT          TOTAL           INCOME
                              ----------------- ------------   ------------     -------------       -----        -------------
<S>                                  <C>        <C>             <C>             <C>             <C>              <C>
Balance at December 31, 1996         (93,375)   $ (2,061,549)   $       --      $(13,620,472)   $ 12,960,951

Exercise of stock
        options for cash        $       --      $       --              --              --      $     63,404
     Issuance of common
        stock for services              --              --              --              --            20,010
     Payments on notes
        receivable from
        stockholders                  15,000            --              --              --            15,000
     Issuance of common
        stock in conjunction
        with the initial
        public offering at
        $9.00 per share                 --              --              --              --        32,594,990
Conversion of
        convertible
        preferred stock in
        conjunction with the
        initial public
        offering                        --              --              --              --              --
Issuance of stock
        under employee stock
        purchase plan                   --              --              --              --            54,200
Issuance of common
        stock for technology
        license                         --              --              --              --           249,993
Deferred compensation                   --          (946,640)           --              --              --
Amortization of
        deferred compensation           --         1,066,115            --              --         1,066,115
Unrealized gain(loss)
        on investments                  --              --          (416,313)           --          (416,313)       (416,313)
Net loss                                --              --              --       (16,877,038)    (16,877,038)    (16,877,038)
                                ------------    ------------    ------------    ------------    ------------    ------------
Balance at December 31, 1997    $    (78,375)   $ (1,942,074)   $   (416,313)   $(30,497,510)   $ 29,731,312    $(17,293,351)
                                ============    ============    ============    ============    ============    ============

</TABLE>


                                      F-5
<PAGE>



                        Vista Medical Technologies, Inc.

           Consolidated Statements of Stockholders' Equity (continued)

<TABLE>
<CAPTION>
                                       CONVERTIBLE
                                     PREFERRED STOCK                COMMON STOCK         ADDITIONAL
                                 -------------------------     ----------------------     PAID-IN
                                   SHARES         AMOUNT        SHARES       AMOUNT       CAPITAL
                                 -------------------------     ----------------------    ----------
<S>                              <C>           <C>                <C>       <C>             <C>
Exercise of stock
        options for cash              --           --          119,627          1,196         60,626
      Issuance of stock
        under employee stock
        purchase plan                 --           --           45,436            454        202,870
     Issuance of warrant
        in connection with
        credit facility               --           --             --             --          134,833
     Deferred compensation            --           --             --             --          (73,641)
     Amortization of
        deferred compensation         --           --             --             --             --
     Adjustments to unrealized
         gain (loss) on investments
         resulting from
         realization of loss on
         investment                   --           --             --             --             --
      Net loss                        --           --             --             --             --
                                 ----------  -----------    ----------     ----------   ------------
Balance at December 31, 1998          --     $     --       13,572,101     $  135,721   $ 62,856,201
                                 ==========  ===========    ==========     ==========   ============

Exercise of stock
        options for cash              --           --          178,158          1,782         41,086
      Issuance of stock
        under employee stock
        purchase plan                 --           --           45,266            453         47,622
     Issuance of warrant
        in connection with
        offering                      --           --             --             --           10,828
     Deferred compensation -
       issuance of options to
       consultants                    --           --             --             --           87,000
     Amortization of
       deferred compensation          --           --             --             --             --
     Adjustments to unrealized
       gain (loss) on investments
       resulting from
       realization of loss on
       investment                     --           --             --             --             --
      Net loss                        --           --             --             --             --
                                 ----------  -----------    ----------     ----------   ------------
Balance at December 31, 1999          --     $     --       13,795,525     $  137,955   $ 63,042,737
                                 ==========  ===========    ==========     ==========   ============

<CAPTION>

                                           NOTES
                                        RECEIVABLE       DEFERRED      UNREALIZED       ACCUMULATED                   COMPREHENSIVE
                                     FROM STOCKHOLDERS COMPENSATION   GAIN  (LOSS)        DEFICIT          TOTAL         INCOME
                                     ----------------- ------------   ------------     -------------       -----      -------------
<S>                                  <C>               <C>            <C>              <C>             <C>            <C>
Exercise of stock                        $    --              --              --              --            61,822
        options for cash
      Issuance of stock
        under employee stock
        purchase plan                         --              --              --              --           203,324
     Issuance of warrant
        in connection with
        credit facility                       --              --              --              --           134,833
     Deferred compensation                    --           213,058            --              --           139,417
     Amortization of
        deferred compensation                 --           698,596            --              --           698,596
     Adjustments to unrealized
        gain (loss) on investments
        resulting from
        realization of loss on
        investment                           --              --           417,524            --           417,524         417,524
     Net loss                                --              --              --       (16,720,338)    (16,720,338)    (16,720,338)
                                         ---------    ------------    ------------    ------------    ------------    ------------
Balance at December 31, 1998             $ (78,375)   $ (1,030,420)   $      1,211    $(47,217,848)   $ 14,666,490    $(16,302,814)
                                         =========    ============    ============    ============    ============    ============
Exercise of stock
        options for cash                      --              --              --              --            42,868
      Issuance of stock
        under employee stock
        purchase plan                         --              --              --              --
     Issuance of warrant                      --              --              --              --            48,075
        in connection with
        offering                              --              --              --              --            10,828
     Deferred compensation -
       issuance of options to
       consultants                            --           (87,000)           --              --              --
     Amortization of
        deferred compensation                 --           540,682            --              --           540,682
     Adjustments to unrealized
         gain (loss) on investments
         resulting from
         realization of loss on
         investment                           --              --            (1,211)           --            (1,211)         (1,211)
      Net loss                                --              --              --       (10,723,286)    (10,723,286)    (10,723,286)
                                         ---------    ------------    ------------    ------------    ------------    ------------
Balance at December 31, 1999             $ (78,375)   $   (576,738)   $       --      $(57,941,134)   $  4,584,445    $(10,724,497)
                                         =========    ============    ============    ============    ============    ============
</TABLE>


SEE ACCOMPANYING NOTES


                                      F-6
<PAGE>

                        Vista Medical Technologies, Inc.,

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                               --------------------------------------------
                                                                                   1997            1998            1999
                                                                               ------------    ------------    ------------
<S>                                                                            <C>             <C>             <C>
OPERATING ACTIVITIES
Net loss ...................................................................   $(16,877,038)   $(16,720,338)   $(10,723,286)
Adjustments to reconcile net loss to net cash used for operating activities:
      Depreciation and amortization ........................................      1,260,707       2,380,772       1,053,674
      Amortization of premium on short-term investments ....................        129,631         128,346            (301)
      Stock issued for services rendered ...................................         20,010            --              --
      Non-cash restructuring charges .......................................           --           139,417            --
      Amortization of deferred compensation ................................      1,066,115         698,596         540,682
      Amortization of deferred interest expense related to stock warrants ..           --            26,964          10,828
      Write-down for impairment on available for sale securities ...........           --           662,090            --
      Common stock received/issued in exchange for  license agreement ......        249,993            --              --
      Gain on sale of securities ...........................................           --              --           (50,625)
      Changes in operating assets and liabilities, net of effect of
        acquisitions:
               Accounts receivable .........................................          4,503        (230,617)        424,876)
               Inventories .................................................     (2,132,142)     (1,009,371)      1,704,797
               Other current assets ........................................       (125,464)        104,421        (111,954)
               Accounts payable ............................................        609,471        (664,669)        433,080
               Accrued compensation ........................................        290,200        (215,936)        (95,326)
               Accrued liabilities .........................................          9,868         523,680         506,266
                                                                               ------------    ------------    ------------
Net cash flows used for operating activities ...............................    (15,494,146)    (14,176,645)     (7,157,041)

INVESTING ACTIVITIES
Purchases of short-term investments ........................................    (23,689,018)     (2,291,745)       (113,299)
Maturities of short-term investments .......................................      7,080,000      17,770,944       1,000,000
Sale of equity securities ..................................................           --              --            81,535
Increase in patent and other assets ........................................           --          (250,000)           --
Purchase of property and equipment .........................................     (3,415,457)     (1,020,397)       (159,031)
                                                                               ------------    ------------    ------------
Net cash flows (used for) provided by investing activities .................    (20,024,475)     14,208,802         809,205

FINANCING ACTIVITIES
Payments on shareholder notes receivable ...................................         15,000            --              --
Issuance of common stock, net ..............................................     32,712,594         265,145          90,942
                                                                               ------------    ------------    ------------
Net cash flows provided by financing activities ............................     32,727,594         265,145          90,942
Net increase (decrease) in cash and cash equivalents .......................     (2,791,027)        297,302      (6,256,894)
Cash and cash equivalents at beginning of year .............................     10,119,529       7,328,502       7,625,804
                                                                               ------------    ------------    ------------
Cash and cash equivalents at end of year ...................................   $  7,328,502    $  7,625,804    $  1,368,910
                                                                               ============    ============    ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .....................................................   $       --      $        776    $       --
                                                                               ============    ============    ============
</TABLE>


SEE ACCOMPANYING NOTES


                                      F-7
<PAGE>

                        Vista Medical Technologies, Inc.

                   Notes to Consolidated Financial Statements

                                December 31, 1999

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS ACTIVITY

Vista Medical Technologies, Inc. ("the Company") was founded in July 1993 and
develops, manufactures and markets proprietary 3-D visualization and information
systems that enable minimally invasive surgical solutions in heart, head, neck
and spine, general surgical and other selected microsurgical procedures. Vista
Medical's visualization and information systems bring together head-mounted
display technology originally developed for applications in military aerospace
by Kaiser Aerospace and Electronics Corporation and three-dimensional imaging
capability from its acquisition of Oktas, Inc.

LIQUIDITY

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company believes that its current
cash, cash equivalents and short-term investments of $1.7 million as of December
31, 1999, together with anticipated product revenues and interest income, will
be sufficient to meet its anticipated capital requirements through April 2000.
Substantial additional capital resources will be required to fund continuing
expenditures related to the Company's research, development, manufacturing and
commercialization of new products, and Management estimates $3,500,000 in
additional financing will be required to fund operations through December 31,
2000. The Company is currently engaged in an offering to raise the additional
capital necessary to fund its operations through 2000 and beyond and has filed
an S-1 with the Securities and Exchange Commission in connection with the
offering to register seven million shares. However, it may not be successful in
its efforts. In addition, certain circumstances, including slow rate of market
acceptance of its products or inability to scale up manufacturing, would
accelerate use of proceeds and require it to seek additional funds to support
operating requirements. However, there can be no assurance that the requisite
fundings will be consummated in the necessary time frame or on terms acceptable
to the Company. Should the Company be unable to raise sufficient funds, the
Company may be required to curtail its operating plans and possibly relinquish
rights to portions of the Company's technology or products.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Oktas, Inc. Significant intercompany accounts and
transactions have been eliminated.

USE OF ESTIMATES

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the consolidated financial statements. Actual results
could differ from those estimates.

REVENUE RECOGNITION

Revenues from product sales are recognized when products are shipped.


                                      F-8
<PAGE>

                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents and short-term investments consist of money market funds,
certificates of deposit and commercial paper. The Company considers all highly
liquid investments with maturities when purchased of three months or less to be
cash equivalents. The Company evaluates the financial strength of institutions
at which significant investments are made and believes the related credit risk
is limited to an acceptable level.

The Company has adopted Statement of Financial Accounting Standards No. 115,
"ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES", and has
classified its cash equivalents and short-term investments as available-for-sale
in accordance with that standard. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. At December 31, 1999, the cost of cash
equivalents and short-term investments was equivalent to fair value and the
Company had no unrealized gains or losses.

As of December 31, 1998 and 1999, the Company's cash, cash equivalents and
short-term investments were classified as available-for-sale and consisted of:

<TABLE>
<CAPTION>
                                                    1998                  1999
                                                 ----------           ----------
<S>                                              <C>                  <C>
Cash                                             $  159,469           $  361,813
Money market funds                                7,499,558            1,007,097
Corporate bonds                                   1,018,577                 --
Commercial paper                                       --                   --
Certificates of deposit                             125,000              289,189
                                                 ----------           ----------
                                                 $8,802,604           $1,658,099
                                                 ==========           ==========
</TABLE>


All of the Company's debt securities mature in 2000.

CONCENTRATION OF CREDIT RISK

The Company provides credit, in the normal course of business, to commercial
entities that meet specified credit requirements. The Company's principal
customers consist of original equipment manufacturers and distribution partners.
The Company provides for losses from uncollectible accounts and such losses have
historically not exceeded management's expectations. As of December 31, 1999,
two customers comprised $264,900 and $807,343, or 23% and 69% of the
outstanding trade receivables, respectively.

INVENTORIES

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

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. The Company provides for depreciation
on property and equipment using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Marketing
demonstration equipment is amortized over a one-year useful life.

                                      F-9
<PAGE>


                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PATENTS

Capitalized patent costs are amortized over five years commencing on the date
the patent is issued. The Company reviews its patents for impairment on an
annual basis or whenever events or changes in circumstances indicate that the
carrying value of the asset would not be recoverable.


IMPAIRMENT OF LONG-LIVED ASSETS

The Company records impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. There have not been any impairments of long-lived assets to date.

RESTRUCTURING EXPENSES

The Company recorded charges associated with restructuring expenses of $690,000
during 1999. The restructuring expenses related to a decision to close part of
the Company's facilities in Westborough, MA after a significant reduction in
workforce during the third quarter of 1999 and represents the value of
continuing lease obligations of the facilities. The Company has made payments
totalling approximately $61,000 during 1999, and has a remaining liability of
approximately $629,000 at December 31, 1999.

STOCK-BASED COMPENSATION

As permitted by Statement of Financial Accounting Standard (SFAS) No. 123, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related Interpretations ("APB
25") in accounting for its employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals the fair value of
the underlying stock on the date of grant, no compensation expense is
recognized.

NEW ACCOUNTING STANDARDS

As of January 1, 1998, the Company adopted SFAS 130, REPORTING COMPREHENSIVE
INCOME. SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
has no impact on the Company's net income or shareholder's equity. SFAS 130
requires unrealized gains or losses on the Company's available-for-sale
securities and the foreign currency translation adjustments, which prior to
adoption were reported separately in shareholder's equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.

As of January 1, 1998, the Company adopted SFAS 131, SEGMENT INFORMATION. SFAS
131 amends the requirements for public enterprises to report financial and
descriptive information about its reportable operating segments. The Company
currently operates in one business and operating segment and the adoption of
this standard did not have a material impact on the Company's financial
statements as reported.


                                      F-10
<PAGE>


                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

2. BALANCE SHEET COMPONENTS

Inventories consists of the following:

<TABLE>
<CAPTION>
                                                        December 31,
                                                1998                    1999
                                            -----------------------------------
<S>                                         <C>                     <C>
Parts                                       $ 3,913,529             $ 3,574,107
Work in process                                 334,812                 334,437
Finished goods                                1,039,997               1,360,068
                                            -----------             -----------
                                              5,288,338               5,268,612
Less: reserves                                 (934,000)             (2,619,070)
                                            -----------             -----------
                                            $ 4,354,338             $ 2,649,542
                                            ===========             ===========
</TABLE>




Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                           December 31,
                                                      1998              1999
                                                  -----------------------------
<S>                                               <C>               <C>
Machinery and equipment                           $ 1,532,121       $ 1,539,408
Office computers, furniture and equipment             982,999           991,346
Marketing demonstration equipment                   3,110,576         3,251,392
Investment in leased assets                              --                --
Leasehold improvements                                279,940           282,521
                                                  -----------       -----------
                                                    5,905,636         6,064,667
Less: accumulated depreciation                     (3,849,101)       (4,744,270)
                                                  -----------       -----------
                                                  $ 2,056,535       $ 1,320,397
                                                  ===========       ===========
</TABLE>



Patents and other assets consists of the following:

<TABLE>
<CAPTION>
                                                           December 31,
                                                      1998               1999
                                                    ---------------------------
<S>                                                 <C>                     <C>
Investment in common stock                          $  30,910               $--
Patents and other intangible assets                   378,685           229,621
Prepaid royalties                                     307,500           187,500
                                                    ---------         ---------
                                                      717,095           417,121
Less: accumulated amortization                       (235,501)         (124,943)
                                                    ---------         ---------
                                                    $ 481,594         $ 292,178
                                                    =========         =========
</TABLE>

                                      F-11
<PAGE>



                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

2. BALANCE SHEET COMPONENTS (CONTINUED)

 Accrued liabilities consists of the following:

<TABLE>
<CAPTION>
                                                           December 31,
                                                     1998                1999
                                                  ------------------------------
<S>                                               <C>                 <C>
Customer advances                                 $  286,666          $  430,539
Deferred Royalty Payments                            434,350             434,350
Restructuring reserves                                  --               628,733
Unbilled sales expense                               267,709                --
Miscellaneous liabilities                             96,284              97,654
                                                  ----------          ----------
                                                  $1,085,009          $1,591,276
                                                  ==========          ==========
</TABLE>


3. MAJOR CUSTOMERS

Sales to individual customers exceeding 10% or more of revenues in the years
ended December 31, were as follows: during 1997, Linvatec Corporation,
Medtronic, Inc. and Aesculap AG accounted for 25%, 19% and 10% of revenues,
respectively; during 1998, Sofamor Danek Group, Inc., Medtronic, Inc. and
Aesculap AG accounted for 34%, 25% and 13% of revenues, respectively; during
1999, Richard Wolf, GmbH, Aesculap AG and Medtronic, Inc. accounted for 45%, 28%
and 16% of revenues, respectively.

4.  COMMITMENTS

The Company leases its corporate facilities and certain equipment under
operating leases that expire on various dates through 2002. Annual future
minimum lease payments as of December 31, 1999 are as follows:

<TABLE>
         YEAR ENDING DECEMBER 31,
         ------------------------
         <S>                                                        <C>
         2000                                                          588,000
         2001                                                          450,000
         2002                                                          126,000
                                                                    ----------
                                                                    $1,164,000
                                                                    ==========
</TABLE>


Rent expense was approximately $342,000, $501,646 and $523,629 for the years
ended December 31, 1997, 1998 and 1999, respectively.

5. STOCKHOLDERS' EQUITY

1995 STOCK OPTION PLAN

The Company reserved 2,015,610 shares of common stock under the 1995 Stock
Option Plan ("the 1995 Plan") for issuance to eligible employees, officers,
directors, advisors and consultants. The 1995 Plan provides for the grant of


                                      F-12
<PAGE>


                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

5. STOCKHOLDERS' EQUITY (CONTINUED)

incentive and nonstatutory stock options. Terms of the stock option agreements,
including vesting requirements, are determined by the Board of Directors,
subject to the provisions of the 1995 Plan. Options granted by the Company
generally vest over four to five years and are exercisable from the date of
grant for a period of ten years.

The exercise price of the incentive stock options must equal at least the fair
market value of the stock on the date of grant. The exercise price of
nonstatutory stock options must equal at least 85% of the fair market value of
the stock on the date of grant. The Company has the option, in the event of
termination of employment to repurchase unvested shares issued under the 1995
Plan at the original issue price.

The Company recorded $87,000 of deferred compensation for options granted during
the year ended December 31, 1999, representing the fair value of stock options
granted to Company consultants and advisors in 1999 in accordance with EITF
96-18. These options vest over two to four years and the Company is recognizing
this compensation expense over the vesting period.

1997 STOCK OPTION PLAN/ STOCK ISSUANCE PLAN

In February 1997, the Company adopted the 1997 Stock Option Plan/Stock Issuance
Plan (the "1997 Plan") and reserved 2,820,000 shares for issuance thereunder.
The 1997 Plan incorporates the outstanding options under the 1995 Plan and no
further options will be granted under the 1995 Plan.

At December 31, 1999, 447,574 options were available for future grant.

The following tables summarizes stock option activity under the Plan:

<TABLE>
<CAPTION>
                                                                                                         WEIGHTED
                                                                                                          AVERAGE
                                                                        NUMBER OF        PRICE PER       PRICE PER
                                                                         SHARES            SHARE           SHARE
                                                                        ---------        ---------         ------
<S>                                                                     <C>           <C>                  <C>
Balance at December 31, 1996                                            1,245,801     $  .20 - $  .80      $  .32
Granted                                                                   447,500     $  .80 - $14.38      $ 8.94
Exercised                                                               (150,273)     $  .20 - $  .80      $  .42
Canceled                                                                 (25,500)              $  .60      $  .60
                                                                        --------      ---------------      ------
Balance at December 31, 1997                                            1,517,528     $  .20 - $14.38      $ 2.85
Granted                                                                   356,000     $ 2.25 - $11.38      $ 3.32
Exercised                                                               (119,627)     $  .20 - $ 4.00      $  .52
Canceled                                                                (219,020)     $  .20 - $14.38      $ 4.59
                                                                        --------      ---------------      ------
Balance at December 31, 1998                                            1,534,881     $  .20 - $14.38      $ 2.80
Granted                                                                 1,075,000     $  .41 - $  .63      $  .51
Exercised                                                               (178,158)     $  .20 - $ 2.44      $  .24
Canceled                                                                (431,730)     $  .20 - $11.38      $ 3.17
                                                                        --------      ---------------      ------
Balance at December 31, 1999                                            1,999,993     $  .20 - $14.38      $ 1.79
                                                                        =========     ===============      ======
</TABLE>


                                      F-13
<PAGE>

                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

5. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
                                                                                         EXERCISABLE STOCK
                                     OUTSTANDING STOCK OPTIONS                                OPTIONS
                           --------------------------------------------------            -----------------
                                               WEIGHTED--
                                                AVERAGE             WEIGHTED-                        WEIGHTED-
                                               REMAINING             AVERAGE                          AVERAGE
   RANGE OF                                   CONTRACTUAL           EXERCISE                         EXERCISE
EXERCISE PRICE             SHARES            LIFE (MONTHS)            PRICE             SHARES         PRICE
--------------             ------            -------------            -----            -------         -----
<S>                       <C>                    <C>                  <C>              <C>             <C>
$  .20  -  $  .80         1,570,638              102                  $  .43           738,854         $  .35
$ 2.25  -  $ 2.44           144,855              106                  $ 2.33            42,193         $ 2.34
$ 4.00  -  $ 5.06            82,000              101                  $ 5.06            43,208         $ 5.06
$ 9.98                      108,500               92                  $ 9.88            68,236         $ 9.88
$11.31 -    14.38            94,000               96                  $11.52            47,104         $11.55
</TABLE>

The weighted average fair value of stock options granted during 1998 and 1999
was $1.60 and $0.24, respectively. The weighted average remaining life of the
options at December 31, 1998 and 1999 was 93 and 86 months, respectively.

1997 EMPLOYEE STOCK PURCHASE PLAN

In February 1997, the Company adopted the 1997 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 200,000 shares for issuance, thereunder.
The Purchase Plan permits eligible employees of the Company to purchase
shares of Common Stock, at semi-annual intervals, through periodic payroll
deductions. Payroll deductions may not exceed 10% of the participant's base
salary, and the purchase price per share will not be less than 85% of the
lower of the fair market value of the common stock at either the beginning or
the end of the semi-annual intervals.

Adjusted pro forma information regarding net income is required by SFAS 123,
and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using the minimum value
method for option pricing for options granted prior to the initial public
offering and the "Black-Scholes" method for option pricing for options
granted subsequent to the initial public offering with the following
weighted-average assumptions: risk-free interest rate range of 5.5% to 6.0%;
dividend yield of 0%; volatility of 55% and a weighted average expected life
of the option of 2 to 5 years.
<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                               1997            1998               1999
                                          -------------------------------------------------
<S>                                       <C>              <C>               <C>
Adjusted pro forma net loss               $ (17,047,180)   $ (17,083,126)    $ (10,827,615)

Adjusted pro forma net loss per share     $      ( 2.53)   $      ( 1.28)    $       (0.80)
                                          ==============   ==============    ==============
</TABLE>

                                        F-14

<PAGE>
                     Vista Medical Technologies, Inc.

           Notes to Consolidated Financial Statements (continued)

6. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets as of December 31, 1998 and
1999 are shown below. A valuation allowance of $23,305,000 at December 31,
1999 has been recognized to offset the deferred tax assets, as realization of
such assets is uncertain.
<TABLE>
<CAPTION>
                                                        December 31,
                                                     1998           1999
                                                 ---------------------------
<S>                                              <C>            <C>
Deferred tax assets:
   Net operating loss carry forwards             $ 14,990,000    $ 18,212,000
   Research and development credits                 2,000,000       2,454,000
   Capitalized research and development               640,000         839,000
   Depreciation                                       310,000         288,000
   Inventory reserve                                  193,000       1,062,000
   Other, net                                         487,000         450,000
                                                 ------------    -------------
Total deferred tax assets                          18,620,000      23,305,000
Valuation allowance for deferred tax assets       (18,620,000)    (23,305,000)
                                                 -------------   -------------
Net deferred tax assets
Net deferred taxes                               $      --             --
                                                 =============   =============
</TABLE>

As the Company was part of a consolidated group prior to the change in
ownership in July 1995, all tax loss and tax credit carry forwards up to the
date of change in ownership have been reported by the previous consolidated
group. All tax loss and tax credit carry forwards reflected in the
accompanying financial statements reflect activity only for the period
beginning July 1995 and ending December 31, 1999.

At December 31, 1999, the Company has federal and state tax net loss carry
forwards of approximately $44,990,000 and $40,207,000, respectively. The
federal and state tax loss carry forwards will begin to expire in 2010 and
2000, respectively, unless previously utilized. The Company also has federal
and state research tax credit carry forwards of approximately $1,835,000 and
$952,000, respectively, which will begin to expire in 2010 unless previously
utilized.

The difference between the federal and state tax loss carry forwards is
primarily attributable to the capitalization of research and development
expenses for California tax purposes and fifty percent limitation on
California loss carry forwards.

In accordance with Sections 382 and 383 of the Internal Revenue Code, a
change in ownership of greater than 50 percent of a corporation within a
three-year period will place an annual limitation on the Company's ability to
utilize its existing tax loss and tax credit carry forwards.

7. TRANSACTIONS WITH RELATED PARTIES

The Company has a technology strategic alliance and a manufacturing supply
agreement with a Kaiser Aerospace subsidiary, a significant shareholder of
the Company, for the development and manufacturing of certain of the

                                      F-15

<PAGE>
                         Medical Technologies, Inc.

              Notes to Consolidated Financial Statements (continued)

7. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

Company's proprietary products. Under the terms of the agreements, which were
amended in December 1997, and which expire in December 2002, Kaiser Aerospace
will provide development and consulting services and a minimum of 75% of
certain of the Company's product requirements provided certain competitive
criteria are met. Payments made to Kaiser under these arrangements totaled
approximately $2,878,000, $3,020,000 and $793,000 for the years ending
December 31, 1997, 1998 and 1999, respectively. At December 31, 1999, the
Company had no current purchase obligations under these agreements.

In December 1997, the Company entered into a license agreement with a
subsidiary of Kaiser Aerospace whereby Kaiser acquired a license and will pay
royalties for sale of head mounted displays, derived from Vista's
developments, in non-medical market segments. In connection with the
agreement, the Company received $250,000 in license fees.

MEDTRONIC

In November 1996, Vista Medical and Medtronic, a leading cardiac company,
entered into a strategic alliance providing for the exclusive distribution in
Europe, the Middle East and Africa and co-promotion in the United States and
Canada, of the Company's current and future visualization and information
systems for cardiac surgery. Medtronic's right to distribute will terminate
on the third anniversary of the initial commercial release in Europe and
rights to co-promote will terminate in December 1999, subject to (i) earlier
termination for Medtronic's failure to meet certain objectives or breach of
contract by either party and (ii) automatic renewal if certain performance
criteria are met.

In connection with entering into the distribution and co-promotion agreement,
Medtronic made a $10 million equity investment in the Company which converted
into 1,500,000 shares of common stock in connection with the Initial Public
Offering.

In June 1998, Vista Medical and Medtronic amended their sales agreement to
appoint Medtronic as the Company's exclusive distributor for current and
future visualization and information systems for cardiothoracic surgery in
the United State, Europe, Japan and several other significant geographical
regions.

SOFAMOR DANEK

In January 1998, the Company concluded a definitive agreement with Sofamor
Danek Group, Inc. which would provide world wide distribution of Vista's
second major product line, the StereoSite visualization and information
system for head, neck and spine microsurgery. The five year renewable
alliance also called for collaboration on integration of Vista and Sofamor
Danek technology on future products. The agreement called for guaranteed
minimum purchases by Sofamor Danek in 1998 and 1999 if certain conditions
were fulfilled. The term of the distributorship expires on December 31, 2002,
provided, however, that the term would be automatically extended for
successive two-year periods if certain performance criteria were met. In
connection with the agreement, the Company recognized revenue on payment from
Sofamor Danek for exclusive distribution rights and deferred revenue on
payments related to advance, non-refundable royalties. The Company would also
receive royalties on future sales.

In January 1999, Medtronic, the Company's strategic partner in the
cardiothoracic surgery market acquired Sofamor Danek, the Company's strategic
partner in the head, neck and spine market. In April 1999 Vista's
distribution agreement with Sofamor Danek was amended to become non-exclusive
to allow Vista to appoint additional distributors, in recognition of a sales
shortfall created when Sofamor Danek declined to purchase $1.6 million of
StereoSite systems within the contractual time period.

                                      F-16

<PAGE>

                       Vista Medical Technologies, Inc.

          Notes to Consolidated Financial Statements (continued)

8. SUBSEQUENT EVENTS (UNAUDITED)

MEDTRONIC

In March 2000, Vista Medical and Medtronic agreed to terminate the sales
agreement. Vista will retain the responsibility to service Series 8000
systems previously retained by Medtronic; otherwise Medtronic and Vista
mutually agreed to release each other from any future obligations or claims.
Vista also agreed to pay Medtronic approximately $800,000 relating to
reimbursable sales and marketing expenses, which will be satisfied by a sales
transition plan, whereby Medtronic will provide Vista sales leads, introduce
sales representatives to current and potential Vista customers and assist
Vista sales representative in the sales process. For each purchase order
received by Vista as a result of the sales transition plan, Vista will grant
Medtronic Vista Common Stock equal to the gross margin of the sales, to a
maximum value of $1,000,000. The sales transition plan will be in force for
six months, after which Vista's obligation to reimburse Medtronic any amount
under the termination agreement will be released, regardless of the value of
any Common Stock which is granted as of the termination date.

As a condition of the termination of the sales agreement, Medtronic has
agreed that it will not sell any of its Vista Common Stock in an open market
trade for a price of less than $1.75 per share, until at least December 31,
2000.

SOFAMOR DANEK

In March 2000, Vista and Medtronic Sofamor Danek terminated their
distribution agreement and associated cooperative technology agreement by
mutual consent on terms described above in the section entitled "Medtronic."

                                    F-17

<PAGE>


                                                                  SCHEDULE II

                        VISTA MEDICAL TECHNOLOGIES, INC.

                       VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>

   Reserve for                    Balance at       Charged to                   Balance
   Obsolete and                  Beginning of      Costs and                    at End
 Unusable Inventory                 Period          Expense      Deductions    of Period
 ------------------              ------------       ---------    ----------    ----------
<S>                                <C>              <C>          <C>           <C>
Year ended December 31, 1997       $      0         $  175,000    $       0    $  175,000
Year ended December 31, 1998        175,000          1,033,538     (274,538)      934,000
Year ended December 31, 1999        934,000          1,878,963     (193,893)    2,619,070
</TABLE>