<PAGE>

                          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, 1997

                                          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               (I.R.S. Employer
           or incorporation or organization)          Identification No.)


5451 Avenida Encinas, Suite A, Carlsbad, California          92008
     (Address of principal executive offices)              (zip code)

      Registrant's telephone number, including area code: (760) 603-9120

              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.  [ X ]

        The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of January 31, 1998 was approximately $53,507,000.  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 January 31, 1998 was 13,422,875.

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DOCUMENTS INCORPORATED BY REFERENCE

        Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on June 9, 1998, to be filed on or about April
30, 1998 and referred to herein as the "Proxy Statement", are incorporated as
provided in Part III.

                                        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 21 THROUGH 31 OF THIS REPORT.

OVERVIEW

        Vista Medical Technologies, Inc. ("Vista Medical" or the "Company")
develops, manufactures and markets proprietary visualization and information
systems that enable minimally invasive surgical solutions in cardiothoracic,
head, neck and spine and other selected microsurgical procedures.  The
Company also markets endoscopic cameras and related surgical instruments and
accessories.  Vista Medical's visualization and information systems bring
together the head-mounted display technology originally developed for
applications in military aerospace  by Kaiser Aerospace & Electronics
Corporation ("Kaiser Aerospace") and three-dimensional imaging capability
from its acquisition of Oktas, Inc.  The Company was founded as a
wholly-owned subsidiary of Kaiser Aerospace in July 1993, and became an
independent entity in July 1995 with the addition of several venture capital
funds as investors, prior to its initial public offering of shares of Common
Stock in July 1997 ("Initial Public Offering").

BACKGROUND

MINIMALLY INVASIVE SURGERY

        The development and subsequent widespread adoption of minimally
invasive surgical approaches 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 in a patient's body thereby avoiding the larger incisions
used in traditional open surgery.  A minimally invasive approach is most
advantageous in cases in which significant trauma results from gaining
surgical access to an affected organ or site.  Notable examples of minimally
invasive surgical procedures include laparoscopic procedures in the field of
general surgery and arthroscopic procedures in the field of orthopedic
surgery, many of which have become the standard of care and have achieved
significant procedure volumes rapidly.  For example, according to Medical
Data International, an independent research organization, the number of
laparoscopic surgical procedures performed annually in the United States
increased from approximately 84,000 in 1990 to more than an estimated 2.4
million in 1995.  Minimally invasive procedures are designed to be as
efficacious as conventional surgery, but with substantially reduced trauma.
Minimally invasive procedures are designed to reduce pain and suffering,
speed recovery, shorten the length of hospital stays and decrease many of the
costs associated with patient care.  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 ("MIM") is an extension of minimally
invasive surgery, characterized  by greater complexity and precision.  MIM
procedures have been made possible primarily by recent advances in medical
technology.  MIM is usually performed in very confined areas of the body,
involves critical anatomical structures, and often requires dissection and
reconstruction as well as excision.  As a result, the Company believes that
in order for MIM procedures to be extensively adopted, surgeons must have
access to enhanced visualization and other

                                      -2-

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specialized instruments and technology. Examples of MIM are emerging
procedures in cardiothoracic surgery and head, neck and spine ("HNS")
surgery.

CARDIOTHORACIC SURGERY

        CONVENTIONAL TREATMENTS.  Cardiovascular disease, the leading cause
of death in the United States, is typically treated with drugs, various
surgical procedures or both.  The two principal types of cardiovascular
disease are coronary artery disease and valvular heart disease.  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.  Conventional
cardiology procedures include angioplasty, atherectomy and inserting coronary
stents; conventional surgical procedures include coronary artery bypass graft
("CABG") and valve replacement or repair.  Angioplasty, atherectomy and
inserting coronary stents involve the use of a balloon-tipped catheter which
is threaded into the heart through an artery in a patient's leg.  Although
these procedures are less invasive than conventional CABG, a major drawback
is the high rate of restenosis or renarrowing of the blood vessel at the
treatment site. Traditional CABG and valve replacement or repair procedures
typically involve a sternotomy, whereby a surgeon makes a 12 to 18 inch
incision in the patient's chest, the sternum is cut in half with a bone saw,
and the rib cage is then spread open with a steel retractor to perform the
grafting procedures or to replace or repair the heart valves.  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 the Company believes most traditional CABG
procedures remain effective for more than a decade.

        According to recent data published by the American Heart Association,
there were approximately 628,000 open heart surgical procedures performed in
the United States in 1994.  Of these, 501,000 were CABG procedures, 60,000
were valve procedures and 67,000 were other procedures including congenital
and pediatric repairs.  The Company believes that worldwide there are
approximately 800,000 CABG procedures and approximately 100,000 valve
replacement or repair procedures performed each year.

        CARDIOTHORACIC MIM.  The application of minimally invasive techniques
to cardiothoracic surgery is commonly regarded as a revolutionary development
in modern surgery.  Minimally invasive CABG and valve replacement or repair
procedures avoid the trauma caused by sternotomy and promise to significantly
decrease pain and trauma and shorten recovery times.  The minimally invasive
approaches to surgical intervention are evolving and include methods
performed on either a beating or arrested heart.  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
cardiothoracic surgery, just as laparoscopy has revolutionized general
surgery.  However, cardiothoracic MIM 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.  The Company believes that a current
limitation to widespread adoption of cardiothoracic MIM is the restricted
visibility through the minimal 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. In
addition, the objective of minimizing the incision size ("keyhole" access) to
reduce trauma can only be achieved effectively with visualization, as has
been demonstrated in other minimally invasive applications.  As a result of
these factors, the development of cardiothoracic MIM will require enhanced
visualization, as well as specialized instruments and surgeon training in the
new techniques.

        THE VISTA MEDICAL SOLUTION.  The Company believes that an advanced
visualization technology which provides the surgeon with an intuitive and
ergonomic solution to the inherent vision restrictions of the MIM approach
will enable the use of the MIM technique with increased safety, efficacy and
precision.  In the cardiothoracic MIM area, the Company's proprietary
technologies are equally applicable whether the surgeon elects to use either
a beating or arrested heart approach.  In addition, the enhanced
visualization provided by the Company's products is expected to enable a
significant number of surgeons, who otherwise might be reluctant to perform
MIM, to adopt the procedures, thereby accelerating the rate of conversion
towards a standard of care.  Finally, there is growing evidence of patient
interest and demand for cardiothoracic MIM procedures.

                                     -3-
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HEAD, NECK AND SPINE (HNS) SURGERY

        CONVENTIONAL HNS TREATMENTS.  Conventional head, neck and spine
procedures are often invasive and involve a lengthy and painful recovery.
Neurosurgical procedures involving the brain and spinal cord have traditionally
been performed under microscopic visualization to facilitate the delicate
manipulations and extreme precision which are required.  More recently, the
visualization system often includes neuroendoscopes in combination with
microscopes.  The Company estimates there were approximately 315,000
neurosurgical and skull base procedures, 430,000 surgical sinus procedures and
650,000 spinal procedures performed in the United States in 1995.

        HNS MIM.  The Company believes that there are significant opportunities
to advance MIM techniques in HNS procedures which involve manipulation in close
proximity to critical anatomical structures.  The visualization techniques
currently available for these procedures are limited.  Existing fiberoptic
neuroendoscopes have inferior resolution, do not provide depth perception and
require a surgeon to view the procedure on a video monitor.  The position
required for both the principal and assistant surgeon to utilize a surgical
microscope is both ergonomically awkward and physically demanding.  In addition,
the assistant surgeon does not see the procedure in 3-D when using the teaching
attachment.  Many of these procedures also require the simultaneous monitoring
of multiple information sources, including the images used in the emerging
technique of image guided surgery.  Image guided surgery converts the output
from digital imaging modalities, such as magnetic resonance imaging (MRI) and
computerized tomography (CT), into highly precise computer models which help the
surgeon with pre-operative planning as well as choosing the least destructive
path when operating close to critical anatomy and locating and removing tissue
with the highest degree of safety and accuracy.

        THE VISTA MEDICAL SOLUTION.  In the HNS MIM area, the Company's products
incorporate 3-D visualization into a small diameter endoscope which provides the
surgeon with the critical element of depth perception missing from conventional
endoscopes.  In addition, the endoscopic image in the head-mounted display worn
by an assistant surgeon who is operating directly across from the principal
surgeon can be electronically reversed in order to align the assistant's
movements with those of the principal surgeon.  The Company can also retrofit
surgical microscopes, so that 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.  Multiple video images can be incorporated
into the display, operated by Vista Medical's Infomatix voice activated
software.

BUSINESS STRATEGY

        The Company's business strategy is to become the leading developer and
marketer of advanced visualization and information systems for MIM applications
in cardiothoracic, HNS and other selected surgical specialties.  Key elements of
the Company's strategy include:

        ESTABLISH ADVANCED VISUALIZATION TECHNOLOGIES AS STANDARD PRACTICE IN
MINIMALLY INVASIVE CARDIAC SURGERY.  The Company believes that it has the only
visualization system specifically designed for minimally invasive cardiac
surgery.  The Company is currently working with its Cardiac Clinical Advisory
Board and other leading surgeons to develop operating protocols which
incorporate advanced visualization technologies as standard practice.  The
Company then intends to provide training in these protocols, including the use
of the Company's visualization system, to other cardiac surgeons to accelerate
the general rate of conversion to MIM procedures, whether performed on a beating
or arrested heart.

        PROMOTE VISTA MEDICAL'S VISUALIZATION SOLUTION FOR USE IN ALL TYPES OF
CARDIAC SURGERY.  The Company believes that its technology is applicable to all
types of cardiac surgery, whether minimally invasive or conventional open heart,
especially where enhancement of the surgeon's view is particularly critical.
The Company believes that use of its advanced visualization product in open
heart surgeries will enhance visualization, improve the quality of procedures
and result in shorter operating times and reduced costs.

                                     -4-

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        DEVELOP MIM APPLICATIONS THROUGH SPECIALTY-FOCUSED BUSINESS UNITS BY
LEVERAGING THE COMPANY'S TECHNOLOGY PLATFORM.  The Company approaches its target
markets via its focused business units, the CardioThoracic Surgery division and
the HNS Microsurgery division.  The business units concentrate on the specific
requirements of their target markets, with dedicated clinical marketing
programs, clinical advisory boards, sales forces and customer support teams for
the introduction and support of the Company's products.  The Company's strategy
is to optimize its fundamental technology platform for each of these medical
specialties and to develop appropriate partnership and distribution systems both
in the United States and international markets.

        ACCELERATE ADOPTION OF THE SERIES 8000 ADVANCED VISUALIZATION AND
INFORMATION SYSTEM IN THE CARDIAC MARKET BY IMPLEMENTING A FEE-PER-PROCEDURE
PRICING STRATEGY.  The Company believes that it can accelerate the adoption
of its Series 8000 advanced visualization and information system in the
United States by implementing a fee-per-procedure pricing strategy.  This
strategy offers the Series 8000 on a rental basis and requires a payment to
the Company every time the Series 8000 is used in a procedure.  The Company
commissioned market research in order to determine the viability of a
fee-per-procedure pricing strategy in the United States market.  The results
of this market research support the Company's belief that an integrated
equipment and service package, including installation, in-service training,
on-going technical support and system upgrades for a single procedure-based
charge will maximize market penetration and assist in roll-out of the product
line.

        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.  The Company's
head-mounted display, incorporating picture-in-picture capability, is
designed to give the surgeon this real-time access to critical information
integrated with the anatomical images generated by the Company's camera
systems.

        ENTER INTO STRATEGIC RELATIONSHIPS WHICH COMPLEMENT COMPANY
RESOURCES. The Company intends to leverage its position in both technology
and distribution by forming strategic alliances with partners.  In November
1996, the Company and Medtronic, Inc. ("Medtronic"), a leading cardiac
company, entered into a strategic alliance providing for the distribution and
co-promotion of the Company's current and future visualization and
information systems for cardiac surgery, including the Series 8000 (the
"Vista Systems").  Medtronic will co-promote the product line in the United
States and act as the Company's exclusive distributor in Europe, the Middle
East (excluding Afghanistan and Pakistan) ("Middle East") and Africa.  In
February 1997, the Company entered into an agreement with Heartport, Inc.
("Heartport"), a leading company developing minimally invasive technology for
heart surgery.  Vista Medical sold four Series 8000 systems to Heartport, for
use in the Heartport Research and Training Center in Salt Lake City, Utah.
In January 1998, the Company entered into a worldwide exclusive distribution
agreement with Sofamor Danek L.P. together with Sofamor Danek Group, Inc.
("Sofamor Danek") for the distribution of the Company's current and future
visualization and information systems for neurosurgery, spinal surgery,
radiation delivery, otolaryngology and maxillofacial surgery.  Sofamor Danek
is a world leader in systems for spinal surgery.  The Company has also
entered into a Cooperative Technology Agreement to collaborate with Sofamor
Danek on integrating Vista Medical's technology with Sofamor Danek's
StealthStation-TM- Treatment Guidance Platform for image guided surgery.  The
Company has also formed strategic partnerships with Cogent Light Technologies
("Cogent Light") and GDE Systems, Inc. ("GDE") to incorporate light source
technology and information technologies, respectively, into its products.
The Company expects to pursue additional strategic relationships.

ADVANCED VISUALIZATION PRINCIPLES AND PRODUCT PLATFORM

        Vista Medical's proprietary technology is based on the following
principles which the Company believes are both essential in advancing the
techniques of MIM and offer several key advantages over other visualization
approaches:

        -       3-D VIEW.  The surgeon's ability to view the principal
                anatomical image in 3-D provides the accurate depth perception
                necessary so that vital anatomical structures are accurately
                identified and located, thereby improving safety, precision and
                speed of the procedure.

                                     -5-

<PAGE>

        -       HIGH RESOLUTION IMAGES.  The availability of a high resolution
                image which can be electronically managed under the surgeon's
                control significantly enhances the surgeon's ability to
                differentiate critical tissues in a confined setting and perform
                intricate dissection and reconstruction as well as excision.

        -       ACCESS.  The surgeon benefits from miniaturization technology
                which allows for the direct insertion of a camera into the body
                cavities or organs and provides high quality images from an
                optimal anatomical orientation.

        -       ERGONOMICS.  Due to the complex and time consuming nature of MIM
                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 operative
                data, on demand, in real time and integrated with the
                anatomical image within the surgeon's visual field, enhances
                procedure performance.

        The Company has applied its proprietary technology by incorporating the
above principles into its visualization product platform.

HEAD-MOUNTED DISPLAY

        The head-mounted display ("HMD") was originally developed for mission
critical applications in military aerospace by Kaiser Aerospace, one of the
world's leading manufacturers of head-mounted displays for aviation
applications.  The HMD was determined by the Company to be the optimal solution
to the display challenge of MIM.  The fundamental technology and human factors
experience incorporated in the Company's HMD was originally developed by Kaiser
Aerospace and is the result of substantial investment in the technologies of
advanced aerospace display systems and incorporates extensive human factors
experience.  This human factors knowledge, derived from many years of analysis
into the display characteristics which enable pilots performing critical
physical tasks to simultaneously absorb and react to crucial information, is a
key element in the Company's HMD design.  Kaiser's original know-how and
technical knowledge have been transferred to the Company pursuant to the
development agreement with Kaiser Electro-Optics, Inc. ("Kaiser
Electro-Optics"), a subsidiary of Kaiser Aerospace.  The Company has done
significant additional development work, and has proprietary rights, in the
surgical HMD design.  The Vista Medical HMD, which the Company believes is the
first specifically designed for surgical use, provides 3-D visualization of an
endoscopic or microscopic image, has the capability of integrating relevant data
and presents the images to a surgeon in an optically correct, intuitive and
ergonomic way.  Wearing the HMD, the microsurgeon can also perform surgery
"in-line" -- the natural way people perform micro-critical tasks -- eyes, hands,
instruments and subject in line.  This is not the case when the surgeon is
observing the anatomy on a remotely-positioned video monitor.

        The Company's HMD 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.  It is presently contemplated
that further enhancements to the HMD will 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 the HMD
is fixed in relation to the surgeon's eyes, but his or her head may move into
any position necessary for comfort.  The HMD 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.  The HMD 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.  The HMD is also designed so that it can
be worn with conventional surgical loupes.

                                     -6-

<PAGE>

THREE-DIMENSIONAL IMAGE ACQUISITION

        Vista Medical believes that 3-D visualization capability is critical in
MIM procedures such as cardiothoracic and neurosurgical procedures.  The
Company's technology for stereo visualization consists of the following
proprietary elements: the optical system, the stereo camera and the stereo
processor.  The 3-D endoscopic optical system employed by Vista Medical was
originally developed and patented by a noted optical designer, Mr. H. McKinley,
and is licensed exclusively to the Company for medical applications.  The system
is designed to replicate the exact view that the surgeon would have if the
procedures were being performed open and he or she had direct sight of the
anatomy.  The Company believes that the McKinley optical system will provide it
with a significant and enduring competitive advantage because it provides
natural depth perception, and it can be 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.

        Vista Medical's 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 optical endoscope design.  The
elimination of optical surfaces produces several important advantages, including
increased image quality, improved contrast, better reliability and improved
ability to sterilize by autoclaving.  Alternatively, for applications where a
standard optical endoscope configuration 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
developed exclusively by the Company.  The controller will also include image
management features which will contribute significantly to procedure
performance, such as zoom control, dual image presentation and
picture-in-picture.

INFORMATION MANAGEMENT

        Medicine is an information rich discipline, but the provision of
relevant information in real-time to surgeons has not been developed to the
levels attained, for example, in military aviation.  The HMD is designed to give
the surgeon real-time access on demand to critical information, integrated with
the anatomical images generated by the Company's camera systems.  Therefore, the
surgeon will be able to command the diagnostic and monitoring information
relevant to the specific procedure while it is taking place.  In addition to
real-time display, the information can be managed (stored or transmitted) within
the hospital or to remote locations for training, advisory or administrative
purposes.  The applications software to control this flow of information is a
key element in Vista Medical's long-term product strategy, which positions
visualization within the context of a total information service to the surgeon.

        The Company's data integration capability has been enhanced through an
exclusive license from GDE which has added high speed image-based information
processing and networking software to the Company's technology platform.  The
Company believes that its technology will demonstrate that real-time access to
relevant information, along with enhanced visualization, is a critical
requirement of performing MIM and other surgical procedures.

                                     -7-

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PRODUCT LINES

        Vista Medical develops products based on the Company's core technology
and product platform described above, that are customized for the specific
cardiothoracic and HNS procedures to which they are directed.  The Company's
product lines are as follows:

              SERIES 8000 ADVANCED VISUALIZATION AND INFORMATION SYSTEM

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

<TABLE>
<CAPTION>
COMPONENT           DESCRIPTION
-----------------   -----------------------------------------------------------
<S>                 <C>
CardioView (1)      Head-mounted display (HMD) and information
                    processing computer which integrates 3-D
                    visualization of surgical anatomy and related
                    diagnostic and monitoring data (up to four HMDs
                    may be used simultaneously with each
                    Series 8000).

CardioCamera        2-D and 3-D miniature high resolution digital
                    cameras.  Cameras can be delivered directly into
                    the surgical field or positioned externally by
                    attachment to retractor systems.

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

CardioLight         High power xenon light source incorporating
                    micro-illuminated light delivery technology
                    developed by Cogent Light.

CardioConsole       Console for rack mounting of all Series 8000
                    modules.

Cardio3DScope (2)   Small diameter, angled, rotatable Stereo
                    endoscope.

CardioRecorder (2)  3-D disk image recorder.
</TABLE>

---------

(1)     The Company expects to introduce a voice-activated control feature for
        CardioView in future versions of the Series 8000.

(2)     The Company expects to introduce the Cardio3DScope and the
        CardioRecorder in future versions of the Series 8000.  The
        CardioRecorder developed by an OEM supplier is currently under
        evaluation by the Company.

        Of the components listed in the table above, CardioView, CardioCamera,
CardioController, CardioLight and CardioConsole are necessary for Series 8000
commercialization.  510(k) clearances to market the first four components have
been received, and 510(k) clearance to market is not necessary for the
CardioConsole component.  The Cardio3DScope has also received 510(k) clearance
to market.

                                     -8-

<PAGE>

                   STEREOSITE SYSTEMS FOR MICROSCOPY AND ENDOSCOPY

        The Company is developing two systems, designed specifically for
microscopic and endoscopic procedures in HNS Microsurgery, which will be
marketed under the brand name of StereoSite.

<TABLE>
<CAPTION>
COMPONENT           DESCRIPTION
-----------------   -----------------------------------------------------------
<S>                 <C>
HMD/Processor       Head-mounted display and information processing
                    computer which provides 3-D visualization of
                    surgical anatomy and related diagnostic and
                    monitoring data (up to four HMDs may be used
                    simultaneously with each StereoSite system).

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

MSVA                Micro-stereo video adapter ("MSVA") which
                    retrofits to the surgical microscope to produce a
                    3-D video image to be displayed on the HMD.  The
                    MSVA incorporates twin 3-chip cameras.

Light Source        High power xenon light source incorporating
                    micro-illuminated light delivery technology
                    developed by Cogent Light.
</TABLE>

        In the same manner as the Series 8000, the StereoSite systems
incorporate advanced visualization principles and the Company's platform
technology in application specific packages.  The Company expects that its
StereoSite system targeted at microscopy will incorporate the HMD and MSVA
and expects that its StereoSite system targeted at microendoscopy will
incorporate the HMD, the 3-D Scope and the light source.  The Company
currently has prototype StereoSite systems available and placed at evaluation
sites.

        The Company received 510(k) clearance to market for the processor
component of the HMD for the StereoSite systems in December 1997.  All other
required 510(k) clearances to market required for initial commercialization
had been previously received.  The Company expects the StereoSite system for
microsurgery to be commercially available in second quarter 1998, with
initial shipments to its strategic partner, Sofamor Danek, at the end of
first quarter 1998.

OTHER PRODUCTS

        RELATED CARDIOTHORACIC AND HNS PRODUCTS.  The Company's
CardioThoracic Surgery division is the exclusive North American distributor
of instruments manufactured by Delacroix-Chevalier, a French corporation, and
sutures manufactured by Peters, a French corporation, which are particularly
appropriate for the minimally invasive approach.

        ENDOSCOPIC CAMERA.  Endoscopic cameras are the state-of-the-art in
two-dimensional endoscopic imaging.  The Company currently manufactures
compact, high resolution endoscopic cameras under its own label and for OEM
customers and strategic partners.  These products have historically accounted
for a significant portion of the Company's revenues.

        ELECTRONIC ZOOM LAPAROSCOPE (EZL).  The EZL represents a new
generation of laparoscopes in which the camera is placed on the distal end of
the endoscope and then inserted inside the body.  The EZL incorporates Vista
Medical's unique proprietary zoom feature, which allows a surgeon to
manipulate the image by zooming in and out at the touch of a button, while
remaining in focus and without moving the scope.  This capability is not
available in any other currently marketed endoscope and the Company is
currently seeking a strategic partner with distribution capability in
laparoscopy.  The Company may also utilize the zoom technology in future
products for the CardioThoracic Surgery and HNS Microsurgery divisions.

                                     -9-

<PAGE>

STRATEGIC ALLIANCES

        The Company intends to leverage its 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 certain of its products.  The Company has entered into strategic
partnering arrangements as follows:

MEDTRONIC

        In November 1996, Vista Medical and Medtronic, a leading cardiac
company, entered into a strategic alliance providing for the distribution and
co-promotion of the Company's current and future visualization and
information systems for cardiac surgery, including the Series 8000 (the
"Vista Systems"). The parties entered into a co-promotion agreement for the
United States and Canada under which Medtronic will promote the Vista Systems
in conjunction with Medtronic's own proprietary products for minimally
invasive cardiac surgery. Vista Medical will be responsible for the sale and
distribution of the Vista Systems to customers in the United States and
Canada.  The Company will be responsible for obtaining all regulatory
clearances in the United States and Canada, will provide training and
installation at its expense and will pay Medtronic a sales commission based
on net revenues generated by the installation and use of the Vista Systems in
the United States and Canada.  During the term of the co-promotion agreement,
Medtronic has agreed not to market or sell in the United States and Canada
visualization products which are competitive with Vista Medical in
cardiothoracic surgical procedures.  Medtronic's right to co-promote will
terminate in December 1999, subject to (i) earlier termination for
Medtronic's failure to meet certain objectives or breach of material
obligations by either party and (ii) automatic renewal if certain performance
criteria are met.

        Medtronic will also act as Vista Medical's exclusive distributor for
the Vista Systems for use in cardiothoracic surgical procedures in Europe,
the Middle East and Africa.  Medtronic will be responsible for obtaining all
regulatory clearances other than the CE mark and will provide training and
installation at its expense.  Medtronic will purchase the Vista Systems for a
transfer price to be adjusted each year.  Medtronic's exclusive
distributorship will terminate on the third anniversary of the initial
commercial release of the Vista Systems in Europe, subject to earlier
termination for Medtronic's failure to meet certain objectives or breach of
material obligations by either party.

        The initial term of co-promotion and/or distributorship will be
automatically renewed for an additional two-year term provided certain
performance criteria are met.  Vista Medical retains the worldwide right to
distribute products based upon the technology incorporated in the Vista
Systems for use in specialties other than cardiothoracic surgery.  Vista
Medical also retains the right to make the Vista Systems available worldwide
(other than in Europe, the Middle East and Africa) for clinical and training
programs organized by any company.  Medtronic has the right of first refusal
to obtain distribution rights for the Vista Systems in other areas of the
world.

        In connection with entering into the co-promotion agreement,
Medtronic made a $10 million equity investment in the Company and received
2,000,000 shares of Series C Preferred Stock, which were automatically
converted into 1,500,000 shares of Common Stock in connection with the
Initial Public Offering.

HEARTPORT

        In February 1997, the Company entered into a Supply and Services
Agreement with Heartport, a leading company developing minimally invasive
technology for heart surgery.  Vista Medical 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 has agreed to use the Series 8000
in its training centers, to promote that its training courses utilize the
Series 8000 and to endorse the Series 8000 as the preferred 3-D video
visualization and information solution for minimally invasive heart surgery.
Until December 31, 1999, the Company will maintain and support the four
systems at the Heartport Research and Training Center and will collaborate
with Heartport with the goal of ensuring that the Series 8000 is compatible
with technology used in the performance of Heartport's Port-Access
procedures. During the period ending December 31, 2003, the Company has also
agreed to provide the Vista Systems to

                                     -10-
<PAGE>

hospitals, clinics or similar sites in North America whose surgeons have been
trained at the Heartport Research and Training Center, without discrimination
and on the best available terms and conditions the Company offers to any
other similarly situated customers of the Company.  In connection with the
agreement, the Company issued to Heartport a warrant to purchase up to
100,000 shares of Common Stock, exercisable at any time prior to March 31,
2001, at a price of $6.67 per share.

SOFAMOR DANEK

        In January 1998, Vista Medical and Sofamor Danek, a leading provider of
systems for spinal surgery, entered into an exclusive distribution agreement
appointing Sofamor Danek as Vista Medical's exclusive worldwide distributor for
the Company's current and future visualization and information systems for
neurosurgery, spinal surgery, radiation delivery, otolaryngology and
maxillofacial surgery (the "StereoSite Systems").  The Company will be
responsible for obtaining all regulatory clearances in the United States and all
necessary CE Mark clearances.  Sofamor Danek shall be responsible for obtaining
all other regulatory clearances.  Sofamor Danek will purchase StereoSite Systems
for a transfer price to be adjusted each year, and in 1998 and 1999 Sofamor
Danek will make guaranteed minimum purchases of StereoSite Systems as long as
certain conditions are fulfilled.  Sofamor Danek's exclusive distributorship may
terminate, in whole or in part, if Sofamor Danek fails to meet certain
performance objectives.  The term of the distributorship expires on December 31,
2002, provided, however, that the term will be automatically extended for
successive two-year periods provided certain performance criteria are met.
Sofamor Danek has a right of first refusal to obtain distribution rights for
StereoSite Systems for orthopedic surgery (other than arthroscopy).

        The Company and Sofamor Danek also entered into a cooperative technology
agreement, pursuant to which the parties have agreed to work exclusively
together in performing research and development specifically designed to enhance
StereoSite Systems or integrate SteroSite Systems with Sofamor Danek's image
guidance systems and certain other products, including systems and instruments
for spinal surgery.  Vista has agreed to spend certain minimum amounts each year
during the term of the cooperative technology agreement on research and
development specifically focused on StereoSite Systems.  The term of the
cooperative technology agreement will expire upon the termination of Sofamor
Danek's exclusive rights under the distribution agreement.

GDE SYSTEMS

        In February 1997, GDE, a leading military electronics and information
management company, granted the Company an exclusive worldwide license to
software, documentation and trademarks of GDE for use in the medical field.
Since 1993, GDE's subsidiary, Healthcom, has been adapting the software licensed
to Vista Medical to provide high-speed, image-based information processing and
networking capabilities specifically for medical applications.  In connection
with the license, Vista Medical issued to GDE 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.
Vista Medical has also agreed to make a non-refundable payment of at least
$250,000 by December 31, 1998 as a combination of royalty payments earned
through such date and a royalty advance creditable against future royalties due
thereafter.  Pursuant to the license agreement, Vista Medical has hired three of
GDE's software development engineers.  GDE has a right of first refusal to
license Vista Medical improvements to the software for use in non-medical
markets, subject to the payment of a royalty to Vista Medical.  The parties also
agreed to negotiate in good faith to enter into a services agreement which would
provide Vista Medical with access to GDE consultancy services on a
project-by-project basis, on terms to be mutually agreed upon.

COGENT LIGHT

        The Company and Cogent Light formed a strategic alliance in March 1996,
pursuant to a memorandum of understanding, to cooperate in the development of
products for minimally invasive cardiac surgery which incorporate Cogent Light's
proprietary light fiber delivery technology.  Pursuant to the memorandum of
understanding, Cogent Light is currently providing its single fiber and
MicroBundle technologies exclusively for incorporation into the Series 8000,
including CardioCamera, CardioLight and Cardio3DScope.  The memorandum of
understanding

                                      -11-

<PAGE>

stipulates that Vista Medical will incorporate only a Cogent Light
source in its cardiac surgical instrumentation, for example, CardioLight,
provided such light source meets all of Vista Medical's performance
requirements.  The parties retain rights to their respective intellectual
property, with new developments under the alliance being jointly owned and
cross-licensed to each party.

KAISER AEROSPACE

        In July 1995, the Company entered into a Manufacturing Supply Agreement
with Kaiser Electro-Optics, a subsidiary of Kaiser Aerospace.  This agreement
was subsequently amended in December 1997.  In December 1997, the Company
entered into a Technology Strategic Alliance: Memorandum of Understanding (the
"Technology Strategic Alliance") with Kaiser Aerospace, which superseded a
similar agreement entered into by the Company and Kaiser Electro-Optics in July
1995.  The Technology Strategic Alliance provides that the Company and Kaiser
Aerospace, represented by its subsidiary Kaiser Electro-Optics, will cooperate
in joint development programs related to the HMD as appropriate to be negotiated
on an arms-length and project-by-project basis for a five-year term.  The
Company contracts with Kaiser Electro-Optics for development and manufacturing
services related to the Company's HMD, including initial production quantities
for the HMD.  The Manufacturing Supply Agreement provides that Kaiser
Electro-Optics will be the Company's preferred supplier for a five-year period
for not less than 75% of its requirements for the optical subassembly of the
Company's HMD, provided that pricing and other terms are competitive and
mutually agreed upon.  Pursuant to the Technology Strategic Alliance, Kaiser
Aerospace granted the Company a right of first refusal to exclusively license
independently developed new technology or devices for medical applications.
Reciprocally, in December 1997, the Company entered into a License Agreement
with Kaiser Aerospace pursuant to which the Company exclusively licensed to
Kaiser Aerospace the right to manufacture and distribute industrial and
professional versions of its HMD in market segments other than medicine in
return for an upfront payment and royalties based on sales.

UROHEALTH (IMAGYN MEDICAL TECHNOLOGIES)

        In December 1996, the Company and Urohealth Systems, Inc., which changed
its name to Imagyn Medical Technologies in 1997 ("Imagyn"), entered into a
license agreement under which the Company exclusively licensed visual instrument
technology developed principally for the field of gynecology (the "Newman
Technology") to Imagyn for use in gynecology, urology and general surgery on a
worldwide basis.  Imagyn will pay to Vista Medical a sliding royalty based on
sales of products incorporating the Newman Technology, subject to certain
maximums and minimums.  The agreement may be terminated in the event of an
uncured material breach or insolvency by either party.  In connection with the
license agreement, the parties entered into a consulting agreement whereby Vista
Medical agreed to use its reasonable efforts to provide the services of Allen
Newman, the Company's Vice President and General Manager, HNS Microsurgery, as a
consultant to Imagyn on a limited basis.  The Company exclusively licensed the
Newman Technology from Mr. Newman in September 1994.  The Newman license
agreement was amended in December 1996 to permit the Company to sublicense the
Newman Technology to Imagyn, formerly Urohealth Systems, Inc.  In connection
with the amendment of the Newman license agreement, including the termination of
royalty rights for camera systems, the Company paid Mr. Newman an additional sum
of money and agreed to pay Mr. Newman a percentage of the royalties received
from Imagyn for sales of disposable products manufactured under the sublicense.

MARKETING AND SALES

        The Company has organized its sales and marketing efforts by
specialty-specific divisions: Vista CardioThoracic Surgery division ("VCS") and
Vista HNS Microsurgery division ("VHNS").  The Company believes that this
organizational structure provides the commitment and focus necessary to
introduce and support new advanced technology to these two distinct market
segments.  Each division, however, will follow similar strategic principles in
developing its business.

        TRAINING.  The introduction of new technology requires training for both
surgeons and operating room personnel.  VCS began training programs in the third
quarter of 1997 and expects to be able to train up to 250

                                       -12-

<PAGE>

surgeons on an annual basis.  VCS will also provide the visualization
equipment for training programs organized by Medtronic, Heartport and other
cardiac surgery companies.  The VCS training format will involve one or two
day sessions at selected locations where surgeons will have the opportunity
to use the Series 8000 in a laboratory environment.  Operating room personnel
will receive in-service training from company representatives when equipment
is installed.  VHNS intends to utilize a similar format specifically designed
for HNS surgeons in conjunction with Sofamor Danek.  See "--Strategic
Alliances."  VHNS will distribute its products worldwide through Sofamor
Danek, its sales forces and independent distributors.

        CLINICAL EVALUATION.  VCS and VHNS product lines have been developed
with frequent input from the Clinical Advisory Boards of each division.  This
evaluation phase will progress into a publication phase with the Company's
advisors publishing results of their experience in leading publications and
speaking at major clinical conferences.  The Company supports such research,
although it has 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
their strategy, VCS and VHNS also intend to continue to support seminars and
symposiums and participate in industry trade shows.

        SALES FORCE.  The VCS sales force consists of a combination of direct
and independent sales representatives.  VCS currently markets and supports its
products through seven direct and 19 independent representatives and four
clinical specialists.  In addition, Medtronic will co-promote the Series 8000 in
conjunction with Medtronic's own proprietary products for minimally invasive
cardiac surgery in the United States.

        PATIENT EDUCATION.  As the success of the Company's products is
dependent on the adoption of MIM procedures, it must support the purchasers of
its products in the introduction of these procedures to the local community.
The Company has therefore engaged a national firm, specializing in medical
communications, to provide public relations assistance to create patient
awareness of the minimally invasive surgical options.  Initial emphasis will be
to support the launch of the Series 8000.

        INTERNATIONAL SALES.  The Company has entered into a strategic
relationship with Medtronic for the distribution of the Series 8000 in Europe,
the Middle East and Africa.  See "--Strategic Alliances--Medtronic."  The
StereoSite systems will be distributed internationally by Sofamor Danek.  See
"Strategic Alliances--Sofamor Danek."

MANUFACTURING

        The Company has established a manufacturing facility in Westborough,
Massachusetts, which it believes generally meets the Good Manufacturing Practice
("GMP") standards set by the FDA as well as the requirements of the European
Quality Systems standard ISO9001/EN46001.  The Company believes this facility is
adequate for the Company's near-term manufacturing requirements which are
principally final assembly of sub-assemblies and components, including hardware
and software.  The Company has been manufacturing OEM camera systems in limited
quantities for two years and has been developing the necessary procedures,
systems and controls and hiring supervisory staff throughout this period.  The
Company believes that its current manufacturing facility will be adequate to
meet its forecasted requirements through 1998 and that additional space will be
available when required on reasonable commercial terms.

        The Company lacks experience in manufacturing its products under
development, including the Series 8000, in the quantities that would be
necessary to achieve significant commercial sales.  The manufacture of the
Company's products primarily involves the assembly of a number of sub-assemblies
and components either by the Company directly or by contract manufacturers.
Companies such as Vista Medical often encounter difficulties in scaling up
manufacturing of products, which 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 review and possible approval of new
manufacturing processes and facilities or other production constraints.  There
can be no assurance that reliable, high-volume manufacturing can be established
or maintained at commercially reasonable costs.  The Company will also require
additional manufacturing facilities as production volumes increase; acquisition
of new manufacturing facilities will likely involve relocation.

                                       -13-

<PAGE>

Any of these factors could have a material adverse effect on the Company's
business, financial condition and results of operation.

        The Company uses or relies on certain components and services used in
its devices that are provided by sole source suppliers.  The qualification of
additional or replacement vendors for certain components or services is a
lengthy process.  In addition, the substitution of replacement vendors may
entail re-engineering time and cost and could delay the supply of the Company's
products.  Any significant supply interruption would have a material adverse
effect on the Company's ability to manufacture its products and, therefore, a
material adverse effect on its business, financial condition and results of
operations.

        The Company has, 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 design and production
processes which further reduce costs.

COMPETITION

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

        Although several companies compete with aspects of the Company's
visualization product line, the Company believes 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, the Company believes that no other head-mounted display has been
cleared for marketing in surgical applications by the FDA.  The Company believes
that a number of large companies, with significantly greater financial,
manufacturing, marketing, distribution and technical resources and experience
than that of the Company, are focusing on the development of visualization
products for MIM.  Several companies are currently developing and marketing
visualization products for MIM which could be applied to cardiac surgery.  There
can be no assurance that the Company will be successful in competing with any
such companies.

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

GOVERNMENT 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.

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

                                       -14-

<PAGE>

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

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

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

        The Company has received 510(k) clearance to market the following
product lines in the United States: (i) 3-D video endoscope (April 1997);
(ii) mini cameras (April 1997); (iii) illumination system (April 1997);
(iv) head mounted display (September 1996); (v) additional cardiothoracic
indications for the 3-D scope (July 1996); (vi) sinus telescopes (October 1995);
(vii) video endoscope with zoom (January 1995); (viii) stereo viewing system
(November 1994); (ix) dental camera (November 1994); (x) three-chip (endoscopic)
video camera (June 1994); and (xi) 3-D scope (December 1992).  All 510(k)
clearances to market necessary for Series 8000 commercialization have been
received.  In addition, in December 1997 the Company received clearance to
market the processor component of the HMD, incorporating enhanced software
capabilities required by the StereoSite systems.  All other required 510(k)
clearances to market for the StereoSite systems have been received.
Internationally, all of the Company's current products have qualified for the CE
mark under the Electromagnetic Compatibility Directive for sale in Europe.

        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 IDE regulations.  If the
device presents a "significant risk," the manufacturer or distributor of the
device is required to file an IDE application with the FDA prior to commencing
human clinical trials.  The IDE application must be supported by data, typically
the result of animal and bench testing.  If the IDE application is approved by
the FDA, human clinical trials may begin at a specific number of investigational
sites with a maximum number of patients, as approved by the FDA.  If the device
presents a "non-significant risk," approval by an Institutional Review Board
prior to commencing human clinical trials is required, as well as compliance
with labeling, record keeping, monitoring and other requirements. However, the
FDA can disagree with a non-significant risk device finding.

                                       -15-

<PAGE>

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

        Sales of medical device products outside the United States are
subject to foreign regulatory requirements that vary from country to country.
The time required to obtain approvals required by foreign countries may be
longer or shorter than that required for FDA clearance, and requirements for
licensing may differ from FDA requirements.  Failure to comply with
regulatory requirements could have a material adverse effect on the Company's
business, financial condition and results of operations.  The current
regulatory environment in Europe for medical devices differs significantly
from that in the United States. Europe is currently in the transitional
process of implementing the Medical Device Directive which was adopted on
January 1, 1995 with a transition period through June 1998.  After June 1998,
all medical devices sold in the European Union must bear the CE mark.
Devices are now classified by manufacturers according to the risks they
represent with a classification system giving Class III as the highest risk
devices and Class I as the lowest.  Once the device has been classified, the
manufacturer can follow one of a series of conformity assessment routes,
typically through a registered quality system, and demonstrate compliance to
a European Notified Body.  After that, the CE mark may be applied to the
device.  Maintenance of the system is ensured through annual on-site audits
by the Notified Body and a post-market surveillance system requiring the
manufacturer to submit serious complaints to the appropriate governmental
authority.  With respect to the Series 8000 and StereoSite systems, the
Company is responsible for gaining, at its expense, the CE mark in Europe.
All components of the Series 8000 and StereoSite systems have qualified for
the CE mark under the Medical Device Directive.

PATENTS AND PROPRIETARY RIGHTS

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

        The Company has rights in the following trademarks: 3D
Scope-Registered Trademark-, Design of Cone and Vista Medical Technologies &
Design.  In addition, the Company has applied to register the following
trademarks: MIM, StereoSite, CardioCamera, Infomatix, CardioView,
CardioController, CardioGuide, CardioConsole and CardioLight.

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

                                       -16-
<PAGE>

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

        In June 1996, Fuji Film Co. and Fuji Photo Optical Co., Ltd.
(collectively, "Fuji") granted to the Company a non-exclusive license to
certain optical zoom technology for use in endoscopes.  Vista Medical is
obligated to pay royalties on net sales of products in the United States which
incorporate Fuji's technology.  Fuji may terminate the agreement if Vista
Medical does not cure any violation of the agreement within a limited period of
time.  Failure of the Company to retain rights to these technologies could have
a material, adverse effect on the Company's business, financial condition and
results of operations.

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

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

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

        The Company relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire the same or substantially equivalent

                                       -17-
<PAGE>

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

                                       -18-

<PAGE>

CLINICAL ADVISORY BOARDS

        The Company has established three Clinical Advisory Boards made up of
leading surgeons, one focused on minimally invasive cardiac surgery, another
focused on HNS microsurgery and a third General Advisory Board focused on
several other specialties.  The Company also has formed a Research Advisory
Board to conduct specific research in the development of techniques applicable
to the use of video assistance in minimally invasive cardiac surgery.  Members
of the Clinical Advisory Boards consult with the Company exclusively in the
field of visualization, but are free to consult with other non-competing
instrumentation companies and are employed elsewhere on a full-time basis.  The
Clinical Advisory Boards are intended to act as a clinical reference for the
Company and to provide access to potential training sites for the Company's
visualization products.  The Clinical Advisory Boards, Research Advisory Board
and their members are as follows:

<TABLE>
<CAPTION>
                   CLINICAL ADVISORY BOARD: CARDIOTHORACIC SURGERY

             ADVISOR (1)                  INSTITUTION AND LOCATION
             -----------                  ------------------------

<S>                               <C>
Delos M. Cosgrove III, M.D. . .   The Cleveland Clinic Foundation, Cleveland, OH

Federico Benetti, M.D.  . . . .   Fundacon Benetti, Rosario, Argentina

Alain Carpentier, M.D.  . . . .   Hopital Broussais, Paris, France

O. Howard Frazier, M.D. . . . .   Texas Heart Institute, Houston, TX

Laman A. Gray, M.D. . . . . . .   University of Louisville, Louisville, KY

Renee S. Hartz, M.D.  . . . . .   Tulane University, New Orleans, LA

Urban Lonn, M.D.  . . . . . . .   University Hospital, Linkoping, Sweden

William F. Northrup, III, M.D.    Minneapolis Heart, Minneapolis, MN

M. Clive Robinson, M.D. . . . .   University of Kentucky, Lexington, KY

William I. Santamore, Ph.D. . .   University of Louisville, Louisville, KY

Meredith L. Scott, M.D. . . . .   Florida Hospital, Orlando, FL

Hani Shennib, M.D.  . . . . . .   Montreal General Hospital, Montreal, Canada

Albert Starr, M.D.  . . . . . .   St. Vincent Hospital, Portland, OR

Victor F. Trastek, M.D. . . . .   Mayo Clinic Foundation, Rochester, MN

Gus J. Vlahakes, M.D. . . . . .   Massachusetts General Hospital, Boston, MA

John C. Wain, M.D.  . . . . . .   Massachusetts General Hospital, Boston, MA

----------
(1)     Each of the listed advisors specializes in cardiac surgery, with the
        exceptions of Drs. John Wain and Victor Trastek, who specialize in
        thoracic surgery, and Dr. William Santamore, who is a cardiovascular
        researcher.
</TABLE>

<TABLE>
<CAPTION>
                 RESEARCH ADVISORY BOARD:  CARDIOTHORACIC SURGERY

             ADVISOR                      INSTITUTION AND LOCATION
             -------                      ------------------------

<S>                               <C>
Lawrence H. Cohn, M.D. . . .      Brigham & Women's Hospital, Boston, MA

Jacob Bergsland, M.D. . . . .     Buffalo General Hospital, Buffalo, NY

Robert J. March, M.D. . . . .     Rush Presbyterian St. Lukes Medical Center,
                                  Chicago, IL

Valavanur A. Subramanian, M.D.    Lennox Hill Hospital, New York, NY
</TABLE>

                                       -19-

<PAGE>

<TABLE>
<CAPTION>
                      CLINICAL ADVISORY BOARD: HNS MICROSURGERY


             ADVISOR                      INSTITUTION AND LOCATION
             -------                      ------------------------
<S>                               <C>
Richard D. Bucholz, M.D.  . .     St. Louis University School of Medicine,
                                  St. Louis, MO

Peter W. Carmel, M.D.   . . .     New Jersey School of Medicine, Newark, NJ

John Diaz Day, M.D.   . . . .     Lahey Clinic, Burlington, MA

Joseph F. Hahn, M.D.  . . . .     The Cleveland Clinic Foundation, Cleveland, OH

Michael L. Levy, M.D.   . . .     Children's Hospital, Los Angeles, CA

Raymond J. Linovitz, M.D.   .     Scripps Memorial Hospital, Encinitas, CA

Axel Perneczky, M.D.  . . . .     University of Mainz, Mainz, Germany

Michael Schulder, M.D.  . . .     New Jersey School of Medicine, Newark, NJ

</TABLE>


<TABLE>
<CAPTION>
                 CLINICAL ADVISORY BOARD: OTHER SPECIALTIES

         ADVISOR              ADVISORY FOCUS            INSTITUTION AND LOCATION
         -------              --------------            ------------------------

<S>                           <C>                      <C>
G. David Adamson, M.D.         Gynecology              Fertility Physicians of Northern California, Palo
                                                       Alto, CA

Desmond H. Birkett, M.D.       General Surgery         Lahey Clinic, Woburn, MA

James T. Caillouette, M.D.     Orthopedics             Hoag Hospital, Newport Beach, CA

John A. Coller, M.D.           Colo-rectal Surgery     Lahey Clinic, Woburn, MA

Douglas Olsen, M.D.            General Surgery         Vanderbilt University School of Medicine,
                                                       Nashville, TN

John H. Payne, Jr., M.D.       General Surgery         Kaiser Permanente Hospital, Honolulu, HI

Stanley Shapshay, M.D.         Otolaryngology          New England Medical Center, Boston, MA
</TABLE>

HUMAN RESOURCES

        As of January 31, 1998, the Company had 104 full-time employees, of
whom 12 hold advanced degrees.  None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company
experienced work stoppages. The Company believes its relations with its
employees are good.

                                       -20-

<PAGE>

RISKS AND UNCERTAINTIES

        IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN
THE COMPANY.  PROSPECTIVE INVESTORS 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.  ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER
OF FACTORS, INCLUDING THOSE IDENTIFIED UNDER "RISKS AND UNCERTAINTIES" AND
ELSEWHERE IN THIS ANNUAL REPORT.

        DEVELOPMENT STAGE COMPANY; SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL
REQUIREMENTS

        Since its formation in July 1993, the Company has been engaged in the
development of visualization and information systems and related surgical
instruments and accessories that enable minimally invasive microsurgery ("MIM")
solutions for applications in cardiothoracic and other selected microsurgical
procedures and in manufacturing and marketing limited quantities of camera
systems to customers as an OEM.  As of December 31, 1998, the Company had
incurred cumulative net losses of $30.5 million since its formation.  The
Company expects to incur substantial and increasing operating losses before it
will reach profitability, if at all.  Furthermore, the Company expects its
expenses in all categories to increase as its marketing and other business
activities expand.  There can be no assurance that the Company will achieve or
sustain profitability in the future.  Failure to achieve significant commercial
revenues or profitability would have a material adverse effect on the Company's
business, financial condition and results of operations.

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

      DEPENDENCE UPON AND UNCERTAINTY REGARDING COMMERCIALIZATION OF SERIES 8000

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

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

        Evaluations of the Series 8000 conducted to date have shown that there
is a learning process involved for surgeons and other members of the surgery
team to become proficient with the use of the system.  Based on the clinical and
laboratory procedures performed to date, there can be no assurance that
visualization and information system enhancements incorporated, or to be
incorporated, in the Series 8000 will prove suitable for use by a substantial
number of cardiothoracic surgeons.  If the Series 8000 proves unsuitable for a
number of surgeons to use, the potential markets and applications for the
Company's products would be significantly limited.  Widespread use

                                       -21-

<PAGE>

of the Series 8000 will require training of a large number of
surgeons, and the time required to institute a training program and to train
such surgeons could adversely affect market acceptance.  Failure to
successfully commercialize the Series 8000 would have a material adverse
effect on the Company's business, financial condition and results of
operations.

        UNCERTAINTY OF CLINICAL ADOPTION OF MINIMALLY INVASIVE MICROSURGICAL
PROCEDURES

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

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

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

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

        LACK OF COMMERCIAL MANUFACTURING EXPERIENCE; SCALE-UP RISK

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

                                       -22-

<PAGE>

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

        LIMITED SALES, MARKETING, DISTRIBUTION AND TECHNICAL SUPPORT EXPERIENCE;
DEPENDENCE ON SOFAMOR DANEK

        The Company has organized its sales and marketing efforts by the
Company's CardioThoracic Surgery and HNS Microsurgery divisions.  The Company
currently markets its cardiothoracic products in North America through seven
direct (Company employee) sales representatives and 19 independent sales
representatives.  The products of the Company's HNS Microsurgery division will
be sold via Sofamor Danek's sales force.  Establishment of a sales force capable
of effectively commercializing the Company's cardiothoracic products will
require substantial efforts and significant management and financial resources.
There can be no assurance that the Company will be able to establish such a
sales capability on a timely basis or at all.

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

        The Company is dependent on its relationship with Sofamor Danek for a
variety of reasons, and the termination of this relationship could have a
material adverse effect on the Company.  Sofamor Danek is engaged in the
worldwide development, manufacturing and distribution of systems for spinal
surgery.  Sofamor Danek manufactures products in the United States and Europe
and sells its products to surgeons and hospitals worldwide.  Pursuant to an
exclusive distribution agreement between Sofamor Danek and the Company, the
Company appointed Sofamor Danek as Vista Medical's exclusive worldwide
distributor for the Company's current and future visualization and information
systems for neurosurgery, spinal surgery, radiation delivery, otolaryngology and
maxillofacial surgery (the "StereoSite Systems").  Sofamor Danek will purchase
StereoSite Systems for a transfer price to be adjusted each year, and in 1998
and 1999 Sofamor Danek will make guaranteed minimum purchases of StereoSite
Systems as long as certain conditions are fulfilled.  Sofamor Danek's exclusive
distributorship may terminate, in whole or in part, if Sofamor Danek fails to
meet certain performance objectives.  The term of the distributorship expires on
December 31, 2002, provided, however, that the term will be automatically
extended for successive two-year periods provided certain performance criteria
are met.  Sofamor Danek has a right of first refusal to obtain distribution
rights for StereoSite Systems for orthopedic surgery (other than arthroscopy).
There can be no assurance that Sofamor Danek will commit significant resources
to market StereoSite Systems or that its marketing activities will be effective.

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

                                       -23-

<PAGE>

        POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY

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

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

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

        NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC
AND INTERNATIONAL REGULATION

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

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

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

        Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) notification or submission and approval of a PMA application.  If a
medical device manufacturer or distributor can establish that a device is
"substantially equivalent" to a legally marketed Class I or Class II device, or
to a Class III device for which the FDA has not called for a PMA, the
manufacturer or distributor may market the device upon receipt of an FDA order
determining such a device

                                       -24-

<PAGE>

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.

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

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

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

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

        RAPID TECHNOLOGICAL CHANGE; SIGNIFICANT COMPETITION

        The medical device market is characterized by intensive development
efforts and rapidly advancing technology.  The future success of the Company
will depend, in large part, upon its ability to anticipate and keep

                                       -25-
<PAGE>

pace with advancing technology and competing innovations.  There can be no
assurance, however, that the Company will be successful in identifying,
developing and marketing new products or enhancing its existing products.

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

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

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

        RELIANCE ON STRATEGIC RELATIONSHIPS

        The Company intends to pursue strategic relationships with
corporations and research institutions with respect to the research,
development, regulatory approval and marketing of certain of its products.
The Company's future success may depend, in part, on its relationships with
such partners, including, for example, the Company's relationships with
Medtronic and Sofamor Danek.  The Company will have limited or no control
over the resources that any partner may devote to the Company's products, or
over its partners' development and marketing efforts.  There can be no
assurance that any of the Company's present or future collaborative partners
will perform their obligations as expected or will devote sufficient
resources to the development or marketing of the Company's potential
products.  Any parallel development by a partner of alternate technologies,
preclusion from entering into competitive arrangements, failure to obtain
timely regulatory approvals, premature termination of a collaborative
agreement or failure by a partner to devote sufficient resources to the
development and commercialization of the Company's products would have a
material adverse effect on the Company's business, financial condition and
results of operations.  The Company anticipates that these partners may have
the unilateral right to terminate any such relationship without significant
penalty. There can be no assurance that the Company will be successful in
establishing or maintaining any such strategic relationships in the future or
that any such relationship will be successful.

        FLUCTUATIONS IN OPERATING RESULTS

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

        UNCERTAINTY RELATING TO THIRD-PARTY PAYMENTS

        The Company expects that sales volumes and prices of the Company's
products will be directly influenced by the profitability to, or
cost-effectiveness for, hospitals of the procedures in which the Company's
products are involved.  Profitability levels are directly related to the
level of payments for these procedures, either by Medicare or private
insurance companies, and it is a continuing trend in U.S. health care for
such payments to be under continual scrutiny and downward pressure.  The
Company expects that its products typically will be used by hospitals

                                       -26-

<PAGE>

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

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

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

        RISK RELATING TO INTERNATIONAL OPERATIONS

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

        PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE

        The Company faces an inherent and significant business risk of exposure
to product liability claims in the event that the use of its products results in
personal injury or death and there can be no assurance that the Company will not
experience any material product liability losses in the future.  Also, in the
event that any of the Company's products prove to be defective, the Company may
be required to recall or redesign such products.  The Company's current product
liability insurance coverage limit is $10.0 million per occurrence and in the
aggregate.  There can

                                       -27-

<PAGE>

be no assurance that such coverage limits are adequate to protect the Company
from any liabilities it might incur in connection with the development,
manufacture and sale of its products.  In addition, the Company may require
increased product liability coverage if any products are used in clinical
evaluations or successfully commercialized.  Product liability insurance is
expensive and in the future may not be available to the Company on acceptable
terms, if at all.  A successful product liability claim or series of claims
brought against the Company in excess of its insurance coverage or a product
recall could have a material adverse effect on the Company's business,
financial condition and results of operations.

        UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY;
RISKS OF FUTURE LITIGATION

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

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

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

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

        In general, the development of visualization and information systems and
related surgical instruments and accessories is intensely competitive.  Patents
issued and patent applications filed relating to medical devices are numerous
and there can be no assurance that current and potential competitors and other
third parties have not filed or in the future will not file applications for, or
have not received or in the future will not receive, patents or obtain
additional proprietary rights relating to products or processes used or proposed
to be used by the Company.  There

                                       -28-

<PAGE>

can also be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertions will not
result in costly litigation or require the Company to obtain a license to
intellectual property rights of such parties.  There can be no assurance that
any such licenses would be available on terms acceptable to the Company, if
at all.  Furthermore, parties making such claims may be able to obtain
injunctive or other equitable relief that could effectively block the
Company's ability to make, use, sell or otherwise practice its intellectual
property (whether or not patented or described in pending patent
applications), or to further develop or commercialize its products in the
United States and abroad and could result in the award of substantial
damages.  Defense of any lawsuit or failure to obtain any such license could
have a material adverse effect on the Company.

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

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

        In June 1996, Fuji Film Co. and Fuji Photo Optical Co., Ltd.
(collectively, "Fuji") granted to the Company a non-exclusive license to certain
optical zoom technology for use in endoscopes.  Vista Medical is obligated to
pay royalties on net sales of products in the United States which incorporate
Fuji's technology.  Fuji may terminate the agreement if Vista Medical does not
cure any violation of the agreement within a limited period of time.  Failure of
the Company to retain rights to these technologies could have a material,
adverse effect on the Company's business, financial condition and results of
operations.

        DEPENDENCE ON KEY PERSONNEL AND ADVISORS

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

                                       -29-

<PAGE>

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

        NEED TO MANAGE A CHANGING BUSINESS

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

        YEAR 2000 ISSUES

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

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

        POTENTIAL VOLATILITY OF STOCK PRICE

        The market prices and trading volumes for securities of emerging
companies, like the Company, have historically been highly volatile and have
experienced significant fluctuations unrelated to the operating performance of
such companies.  The market price of the shares of Common Stock is likely to be
highly volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, changes in
financial estimates by securities analysts, announcements of technological
innovations, new products or new contracts by the Company or its competitors,
regulatory announcements, developments with respect to patents or

                                       -30-
<PAGE>

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

        HAZARDOUS MATERIALS

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

        NO DIVIDENDS

        The Company currently intends to retain any future earnings for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future.

        EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF SECOND
RESTATED CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW

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

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

Item 2. PROPERTIES

        The Company's facilities consist of approximately 6,500 square feet
of office space located in Carlsbad, California, in which the Company's
executive offices and the HNS Microsurgery division are located, pursuant to
a lease which expires in November 1998.  In addition, the Company maintains a
facility of approximately 37,100 square feet in Westborough, Massachusetts in
which the Company's development and manufacturing operations and the
CardioThoracic Surgery division are located, pursuant to several leases which
expire at various points in time beginning in May 1999 and ending in October
2001.  The Company believes that suitable additional space will be available
to it, when needed, on commercially reasonable terms.

                                  -31-

<PAGE>

Item 3. LEGAL PROCEEDINGS

        From time to time, Vista Medical may be involved in litigation
relating to claims arising out of its operations in the normal course of
business.  As of the date of this Annual Report, the Company is 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.

        The Company's Common Stock is traded on the over-the-counter market
and prices are quoted on the Nasdaq National 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 its initial public offering on July
2, 1997 through December 31, 1997.

        YEAR ENDED DECEMBER 31, 1997:

<TABLE>
<CAPTION>
                                       HIGH      LOW
                                       ----     ----
<S>                                    <C>      <C>
3rd Quarter (July 2 through
 September 30) . . . . . . . . . . .   18.50    8.88


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

</TABLE>

        On March 27, 1998, the last reported sale price of the Common Stock
was $11.50.  As of January 31, 1998, there were approximately 163 holders of
record of the Common Stock.

        The Company has never declared or paid any cash dividends on its
capital stock.  The Company currently does not intend to pay any cash
dividends in the foreseeable future and intends to retain its earnings, if
any, for the operation of its business.

        (b)     Recent Sales of Unregistered Securities.

        Since January 1, 1997, the Company has sold and issued the following
unregistered securities (which numbers have been adjusted for the reverse
stock split effected in February 1997):

(1)     From January 1, 1997 to February 18, 1997, the Company issued an
aggregate of 112,500 options to purchase shares of Common Stock with exercise
prices ranging from $0.80 to $4.00 per share under the 1995 Stock Option Plan
(the "Predecessor Plan") and an aggregate of 43,750 shares of Common Stock
were issued through the exercise of options granted under the Predecessor
Plan for an aggregate exercise price of $31,174.80.

(2)     On February 22, 1997, the Company issued a warrant to purchase
100,000 shares of Common Stock at an exercise price per share equal to $6.67
to Heartport in consideration of Heartport entering into a certain Supply and
Services Agreement with the Company.

(3)     On March 3, 1997, the Company issued an aggregate of 3,000 shares of
Common Stock to certain employees of the Company in consideration for past
services rendered to the Company.

(4)     On July 3, 1997, the Company issued 27,777 shares of Common Stock to
GDE in consideration of GDE entering into a certain License Agreement with
the Company.

                                     -32-

<PAGE>

(5)     On October 23, 1997, the Company issued a warrant to purchase 27,184
shares of Common Stock at an exercise price per share equal to $12.875 to
Silicon Valley Bank ("The Bank") in connection with the Bank entering into a
loan and security agreement with the Company.

        The sales and issuances of securities in the above transactions were
deemed to be exempt under the Act by virtue of Section 4(2) thereof and/or
Regulation D and Rule 701 promulgated thereunder as transactions not
involving any public offering.  The purchasers in each case represented their
intention to acquire the securities for investment only and not with a view
to the distribution thereof.  Appropriate legends were affixed to the stock
certificates issued in such transactions.  Similar representations of
investment intent were obtained and similar legends imposed in connection
with any subsequent transfers of any such securities.  The Company believes
that all recipients had adequate access, through employment or other
relationships, to information about the Company to make an informed
investment decision.

Item 6. SELECTED FINANCIAL DATA

                               SELECTED FINANCIAL DATA

        The selected financial data set forth below with respect to the
Company's consolidated statements of operations for each of the three years
in the period ended December 31, 1997, and with respect to the Company's
consolidated balance sheets at December 31, 1996 and 1997, are derived from
the financial statements of the Company that have been audited by Ernst &
Young LLP, independent auditors, which are included elsewhere herein and are
qualified by reference to such financial statements.  The statement of
operations data for the period from July 19, 1993 (inception) to December 31,
1993 and the year ended December 31, 1994, and the balance sheet data at
December 31, 1993, 1994 and 1995 have been derived from financial statements
audited by Ernst & Young LLP, independent auditors, which are not included
herein.  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 the Company's financial statements and notes
thereto appearing elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                           ----------------------------------------------------------
                                            1993(1)       1994         1995        1996        1997
                                           --------     -------      --------    --------    --------
                                                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                        <C>          <C>          <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
 Sales . . . . . . . . . . . . . . . .   $      73   $      59    $   1,719     $ 2,244      $ 4,141
 Costs and expenses:
  Cost of sales. . . . . . . . . . . .          50          43        1,272       2,253        4,559
  Research and development . . . . . .         310       1,328        1,904       3,880        6,875
  Sales and marketing. . . . . . . . .          48         291          834       2,057        5,011
  General and administrative . . . . .         562         758        1,034       3,103        5,499
                                         ---------   ---------    ---------   ---------   ----------
 Total costs and expenses. . . . . . .         970       2,420        5,044      11,293       21,944
                                         ---------   ---------    ---------   ---------   ----------
 Loss from operations. . . . . . . . .        (897)     (2,361)      (3,325)     (9,049)     (17,803)
 Minority interest in net loss of
   consolidated partnership. . . . . .          80         270           --          --           --
 License income  . . . . . . . . . . .          --          --           --       1,493           --
 Interest income . . . . . . . . . . .          --          --           51         117          926
                                         ---------   ---------    ---------   ---------   ----------
 Net loss  . . . . . . . . . . . . . .       $(817)    $(2,091)     $(3,274)    $(7,439)     (16,877)
                                         ---------   ---------    ---------   ---------   ----------
                                         ---------   ---------    ---------   ---------   ----------
 Basic and diluted net loss per
  share(2) . . . . . . . . . . . . . .   (1,089.33)  (2,788.00)   $   (1.22)     $(1.06)      $(1.52)
                                         ---------   ---------    ---------   ---------   ----------
                                         ---------   ---------    ---------   ---------   ----------
 Shares used in computing basic
  and diluted net loss per share(2). .       1,000       1,000    2,682,000   7,037,000   11,072,000
                                         ---------   ---------    ---------   ---------   ----------
                                         ---------   ---------    ---------   ---------   ----------
</TABLE>

                                         -33-

<PAGE>

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                           ----------------------------------------------------------
                                             1993        1994         1995        1996         1997
                                           --------     -------      --------    --------    --------
                                                                   (IN THOUSANDS)
<S>                                        <C>          <C>          <C>         <C>         <C>
BALANCE SHEET DATA:
 Cash, cash equivalents and short-term
   investments. . . . . . . . . . . . .    $    442      $    9      $ 3,399     $10,285      $24,113
 Working capital. . . . . . . . . . . . .       409         (76)       4,224      10,805       25,977
 Total assets . . . . . . . . . . . . . .       855         475        5,208      14,316       32,130
 Total debt . . . . . . . . . . . . . . .     1,293       3,243           --          --           --
 Accumulated deficit. . . . . . . . . . .      (817)     (2,907)      (6,181)    (13,620)     (30,498)
 Total stockholders' equity (deficit) . .      (816)     (2,906)       4,707      12,961       29,866
-----------
</TABLE>

(1)     July 19, 1993 (inception) to December 31, 1993.
(2)     See Notes 1 and 8 of Notes to Consolidated Financial Statements for
        information concerning the computation of basic and diluted net loss per
        share and shares used in computing basic and diluted net loss per share.


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 BELOW AT "RISKS AND UNCERTAINTIES."  WHILE THIS
OUTLOOK REPRESENTS MANAGEMENT'S CURRENT JUDGMENT ON THE FUTURE DIRECTION OF
THE BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED BELOW.  THE COMPANY
UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING
AFTER THE DATE HEREOF.  THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO.

OVERVIEW

        The Company develops, manufactures and markets proprietary visualization
and information systems that enable minimally invasive surgical solutions in
cardiothoracic, head, neck and spine ("HNS") and other selected microsurgical
procedures.  The Company also markets endoscopic cameras and related surgical
instruments and accessories and has generated minimal revenues from the sales of
these products since its formation in July 1993.  The Company expects to
continue to incur substantial losses for at least the next 12 months.  As of
December 31, 1997, the Company's accumulated deficit was approximately
$30,500,000.  There can be no assurance that the Company's development efforts
will result in commercially available products, that the Company will be
successful in introducing its products under development, or that required
regulatory approval of products will continue to be obtained in a timely manner,
if at all.

        The Company has increased its staffing each year to support its research
and development, manufacturing and sales and marketing activities. At
December 31, 1995, 1996, 1997, the Company had 21, 49 and 104 employees,
respectively. The Company expects to continue to increase staffing levels
significantly in future periods in support of its research and development,
manufacturing scale up, service and support, sales and marketing and general and
administrative activities related to new products. The Company expects that its
increased staffing needs will negatively impact operating income, which in turn
may impact the Company's ability to achieve profitability.

        The Company recorded noncash deferred compensation in 1996 and 1997
totalling approximately $3,500,000 in connection with the grant of certain
stock options, of which approximately $1,100,000 was recognized as an expense
in 1997. The unamortized balance of the deferred compensation will be
expensed over the vesting periods of the options (typically four or five
years) and, therefore, will continue to impact the Company's operating
results through 2001.

        In October 1997 the Company implemented a fee-per-procedure pricing
strategy for the Series 8000 in the United States market. This strategy,
designed to accelerate adoption of the Series 8000, earns a fee for the
Company every time the Series 8000 is used in a procedure. Therefore,
revenues are directly related to actual usage, subject to minimum payment
requirements. Customers receive an integrated equipment and service package,
including installation, in-service training, on-going technical support and
system upgrades, for a single charge which can be clearly related to a
specific procedure. The Company believes that such strategy, based upon a
service contract rather than an upfront capital payment, will allow more
rapid penetration of the available market. The Company intends to amortize
the cost of the Series 8000 over the term of the service contract and will
provide necessary reserves for

                                 -34-

<PAGE>

the required maintenance and upgrades of the machines.  Under the
fee-per-procedure pricing strategy, the Company is required to allocate
adequate capital resources to fund such investment, as the customer does not
purchase the system with an upfront capital payment.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1997

        SALES

        The Company had revenues from product sales of $2,244,000 and $4,141,000
for the years ended December 31, 1996 and 1997, respectively.  The increase in
revenues from 1996 to 1997 was primarily due to sales of the Company's Series
8000 Advanced Visualization and Information ("Series 8000") product for
minimally invasive cardiac surgery launched in September 1997, revenues
associated with a line of cardiac instruments and sutures for which the Company
acquired distribution rights in the second half of 1996, and increased original
equipment manufacturer ("OEM") sales of the Company's endoscopic cameras during
1997 compared to 1996. Sales to individual customers exceeding 10% or more of
revenues in the years ended December 31, were as follows: during 1995 one
customer accounted for 85% of revenues; 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.

        COSTS AND EXPENSES

        COST OF SALES.  The Company's cost of sales were $2,253,000 and
$4,560,000 for the years ended December 31, 1996 and 1997, respectively.  The
increase in cost of sales was primarily due to increased costs corresponding to
the growth in revenues and manufacturing scale-up expenses the Company incurred
to accommodate new product launches targeted at cardiothoracic and HNS markets
including the Series 8000 product.  The Company expects to continue to incur
expenses related to manufacturing scale-up associated with the Series 8000 and
its StereoSite systems for HNS markets in the first and second quarters of 1998.

        RESEARCH AND DEVELOPMENT EXPENSES.  The Company's research and
development expenses were $3,880,000 and $6,875,000 for the years ended December
31, 1996 and 1997, respectively.  The increase in research and development
expenses was attributable to continued development and expansion of the
Company's research and development organization focused on development,
prototyping and evaluation of new products and consisted of increases in
staffing and related supply and occupancy costs.  Contracted research and
development effort also contributed to the increase.  The Company believes that
a significant level of investment for product development and evaluation is
necessary to maintain its technological advantage and, accordingly, anticipates
that it will continue spending in research and development near current levels.

        SALES AND MARKETING EXPENSES.  Sales and marketing expenses increased
from $2,057,000 in 1996 to $5,011,000 in 1997.  The increase in sales and
marketing expense was attributable to the Company's development and expansion of
its sales force, increased marketing efforts associated with commercialization
of new products, and commissions and other expenses related to revenues
associated with a line of cardiac instruments and sutures for which the Company
acquired distribution rights in the second half of 1996.  The Company expects
that such expenses will continue to increase as it expands its sales and
marketing efforts in connection with commercialization of new products.

        GENERAL AND ADMINISTRATIVE EXPENSES.  The Company's general and
administrative expenses were $3,103,000 and $5,499,000 for the years ended
December 31, 1996 and 1997, respectively.  The increase was primarily due to
increases in staffing and related expenses associated with the continued
development of the Company's administrative infrastructure, amortization of
deferred compensation in connection with the grant of certain stock options in
1996 and early 1997, expansion of the Company's information and communication
systems, increases in legal and professional fees associated with business
development efforts, and costs associated with being a public company. The
Company recorded noncash deferred compensation of approximately $3,500,000 in
connection with the grant of certain stock options during 1996 and 1997, of
which approximately $1,100,000 and $447,000 were recognized as an expense in
1997 and 1996, respectively. The unamortized balance of the deferred
compensation will be expensed over the vesting periods of the options (typically
four or five years) and, therefore, will continue to impact the Company's
operating results through 2001. The Company expects its general and
administrative expenses

                               -35-

<PAGE>

to continue to increase in the future as it increases its administrative
staff and systems to manage the growth of the Company and as a result of
increases in expenses associated with being a public company.

        OTHER INCOME

        LICENSE INCOME.  The Company had license income of $1,493,000 in 1996
and no income from licensing of technology in 1997.  The license income in 1996
related to a perpetual license to certain of the Company's technology and
patents unrelated to its main products and markets.  No other technology is
being developed with the purpose of being licensed and the Company does not
anticipate any future licensing arrangements of any of its core technology for
medical applications.

        INTEREST INCOME.  Interest income increased from $117,000 in 1996 to
$926,000 in 1997, due primarily to increasing average investment balances of the
Company following the Initial Public Offering.

        TAXES.

        At December 31, 1997, the Company had federal and state tax loss
carryforwards of approximately $22,500,000 and $3,100,000, respectively.  The
federal and state tax loss carryforwards will expire in 2010 and 2000,
respectively, unless previously utilized.  At December 31, 1997, the Company
also had federal and state research tax credit carryforwards of approximately
$390,000 and $330,000 respectively, which will expire in 2010 unless previously
utilized.  The Company has provided a full valuation allowance on the deferred
tax assets as realization of such assets is uncertain.

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

        SALES

        SALES.  The Company had revenues from product sales of $1,719,000 and
$2,244,000 for the years ended December 31, 1995 and 1996, respectively. The
increase in revenue from 1995 to 1996 was attributable to the increased sales of
the Company's endoscopic cameras and the sale of surgical instruments and
sutures for which the Company acquired distribution rights during 1996. Sales to
individual customers exceeding 10% or more of revenues for the years ended
December 31, 1995 and 1996 were as follows: during 1995, one customer accounted
for 85% of revenues; during 1996, three customers accounted for 30%, 27% and 25%
of revenues. For the years ended December 31, 1995 and 1996, the same customer
accounted for 85% and 25% of revenues, respectively.

        COSTS AND EXPENSES

        COST OF SALES.  The Company's cost of sales were $1,272,000 and
$2,253,000 for the years ended December 31, 1995 and 1996, respectively. The
increase in cost of sales from 1995 to 1996 was attributable to the increase in
revenues from 1995 to 1996 as well as the investment the Company made in its
manufacturing infrastructure to accommodate the scale-up for new product
introductions.

        RESEARCH AND DEVELOPMENT EXPENSES.  The Company's research and
development expenses were $1,904,000 and $3,880,000 for the years ended
December 31, 1995 and 1996, respectively. The increase in research and
development expenses from 1995 to 1996 was attributable to significant increases
in staffing, contract research and development expense, and consulting fees
related to development, prototyping and evaluation of future products.

        SALES AND MARKETING EXPENSES.  Sales and marketing expenses increased
from $834,000 in 1995 to approximately $2,057,000 in 1996. The increase from
1995 to 1996 was related to significant increases in staffing and related
expenses, commissions and professional and consulting fees as the Company
continued to build its sales operations and expand its marketing activities in
relation to future products.

        GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative
expenses were $1,034,000 and $3,103,000 for the years ended December 31, 1995
and 1996, respectively. The increase from 1995 to 1996 was

                                 -36-
<PAGE>

primarily attributable to the continued development of corporate management
and related support functions, the addition of new facilities and expansion
of current facilities, expansion of the Company's information systems and the
amortization of deferred compensation in the amount of $447,000.

        OTHER INCOME

        LICENSE INCOME.  License income of $1,493,000 in 1996 represents the net
amount received by the Company from a perpetual license to certain of its
technology and patents unrelated to the Company's main products and markets. The
license to Imagyn, formerly Urohealth Systems, Inc., was a unique, non-recurring
transaction that involved a license of only that component of the Company's
technology that it did not want to pursue. For this reason, the license fees
were treated as non-operating income. Prior to 1996, the Company had no license
income. No other technology is being developed with the purpose of being
licensed and the Company does not anticipate any future licensing arrangements
of any of its core technology for medical applications.

        INTEREST INCOME.  Interest income represents the net amount of interest
earned by the Company on its cash and short-term investments and interest
expense on debt. Interest income increased from approximately $51,000 for the
year ended December 31, 1995 to approximately $117,000 for the year ended
December 31, 1996 due primarily to increasing average investment balances. The
Company had immaterial amounts of interest income prior to 1995.

LIQUIDITY AND CAPITAL RESOURCES

        The Company completed its Initial Public Offering in July 1997, raising
approximately $32,700,000 net of offering costs.  Prior to the Initial Public
Offering, the Company satisfied its liquidity requirements from the private sale
of common and preferred stock, through advances from a related party, and from
the proceeds from licensing certain of the Company's technology.

        In October 1997, the Company completed a $10,000,000 Loan and Security
Agreement ("Loan Agreement") to finance the placement with customers of its
Series 8000 product on a pay per procedure basis rather than through an upfront
capital payment.

        Net cash used in operating activities was approximately $3,567,000,
$6,937,000 and $15,494,000 in 1995, 1996 and 1997.  The increase in net cash
used in operating activities was primarily attributable to increasing net losses
during the such periods and investment in inventories associated with expansion
of the Company's product line.

        Net cash used in investing activities was approximately $298,000,
$1,239,000 and $20,025,000 in 1995, 1996 and 1997, respectively.  The increase
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 $7,090,000, $15,061,000 and
$32,728,000 in 1995, 1996 and 1997, respectively.  The cash flows from financing
activities in 1995 and 1996 were primarily attributable to the private sale of
preferred stock while cash flows from financing activities in 1997 were
primarily attributable to proceeds from the Company's Initial Public Offering.

        The Company anticipates that the net proceeds from the Initial Public
Offering completed in July 1997 and the interest income thereon, together with
borrowings available under a $10,000,000 Loan Agreement, existing cash, cash
equivalents and short-term investments, and product revenues, will be sufficient
to fund its operations through 1998.

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

                                    -37-

<PAGE>

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

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Not applicable.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The consolidated financial statements and supplementary data of the
Company 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.
                                       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.

                                     -38-
<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.
<TABLE>
<CAPTION>
                                                                     PAGE NO.
                                                                     --------
   <S>                                                                <C>
   Report of Ernst & Young LLP, Independent Auditors . . . . . . .    F-2
   CONSOLIDATED FINANCIAL STATEMENTS
   Consolidated Balance Sheets at December 31, 1996
   and 1997  . . . . . . . . . . . . . . . . . . . . . . . . . . .    F-3
   Consolidated Statements of Operations for the years
   ended December 31, 1995, 1996 and 1997  . . . . . . . . . . . .    F-4
   Consolidated Statements of Stockholders' Equity for
   the years ended December 31, 1995, 1996 and 1997. . . . . . . .    F-5
   Consolidated Statements of Cash Flows for the years
   ended December 31, 1995, 1996 and 1997  . . . . . . . . . . . .    F-7
   Notes to Consolidated Financial Statements  . . . . . . . . . .    F-8
</TABLE>

                (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.

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

        (c)     Exhibits


<TABLE>
<CAPTION>
  NUMBER
  EXHIBIT               DESCRIPTION
----------              -----------
<S>            <C>
  (1) 3.1      Second Restated Certificate of Incorporation of
               the Company (Exhibit 3.2).

  (1) 3.2      Restated Bylaws of the Company (Exhibit 3.4).


 (1) 10.1      Asset Purchase Agreement between the Company and
               AST, dated September 15, 1995.

 (1) 10.2      Asset Purchase Agreement between the Company,
               ProMedica Distribution, Inc. (ProMedica) and
               certain stockholders of ProMedica, dated July 26,
               1996.

 (1) 10.3      Series A-1 Preferred Stock Purchase Agreement
               among the Company and the purchasers listed on
               Schedule A thereto, dated July 27, 1995.

 (1) 10.4      Series B Preferred Stock Purchase Agreement among
               the Company and the investors listed on
               Schedule A thereto, dated July 12, 1996.

 (1) 10.5      Series C Preferred Stock Purchase Agreement
               between the Company and Medtronic Asset
               Management, Inc., dated November 27, 1996.

 (1) 10.6      Common Stock Purchase Warrant between the Company
               and Heartport, Inc. (Heartport), dated
               February 22, 1997.

 (1) 10.7      International Distribution Agreement between AST
               and AMCO, Inc., dated September 20, 1994 (with
               certain confidential portions omitted).
</TABLE>
                             -39-


<PAGE>

<TABLE>
<CAPTION>
  NUMBER
  EXHIBIT               DESCRIPTION
----------              -----------
<S>            <C>
 (1) 10.8      Manufacturing Supply Agreement between the
               Company and Kaiser Electro-Optics, Inc. ("KEO"),
               dated July 19, 1995 (with certain confidential
               portions omitted).

 (1) 10.9      U.S.A. and Canada Distribution Agreement between
               the Company and Delacroix-Chevalier Inc., dated
               July 11, 1996 (with certain confidential portions
               omitted).

 (1) 10.10     Distributor Agreement between the Company and
               Peters, dated July 15, 1996 (with certain
               confidential portions omitted).

 (1) 10.11     Sales Agreement between the Company and
               Medtronic, Inc., dated November 27, 1996 (with
               certain confidential portions omitted).

 (1) 10.12     Supply and Services Agreement between the Company
               and Heartport, dated February 22, 1997 (with
               certain confidential portions omitted).

 (1) 10.13     Supplemental Rights Agreement between the Company
               and Medtronic, Inc., dated November 27, 1996
               (with certain confidential portions omitted).

 (1) 10.14     Amended and Restated Investors' Rights Agreement
               between the Company and the stockholders listed
               on Schedule A thereto, dated November 27, 1996.

 (1) 10.15     Amendment to the Amended and Restated Investors'
               Rights Agreement between the Company, Heartport
               and the stockholders listed on Exhibit A thereto,
               dated February 22, 1997.

 (1) 10.16     Letter Agreement regarding Investment
               Representations and Registration Rights between
               the Company and Imagyn, formerly Urohealth
               Systems, Inc. (Imagyn), dated December 13, 1996.

 (1) 10.17     Consulting Agreement between the Company and
               Harry R. McKinley, dated September 15, 1995, as
               amended (with certain confidential portions
               omitted).

 (1) 10.18     Consulting Agreement between the Company and
               Imagyn, dated December 13, 1996 (with certain
               confidential portions omitted).

 (1) 10.19     Form of Professional Services Agreement.

 (1) 10.20     Form of Non-Disclosure Agreement for Proprietary
               or Business Confidential Information.

 (1) 10.21     Non-Competition, Non-Disclosure and Patent and
               Inventions Assignment Agreement among Harry R.
               McKinley, McKinley Optics, Inc. and AST, dated
               December 18, 1991.

 (1) 10.22     License and Development Agreement among Harry R.
               McKinley, McKinley Optics, Inc. ("MOI") and AST,
               dated December 18, 1991, as amended on June 28,
               1994 (with certain confidential portions
               omitted).

 (1) 10.23     License Agreement between the Company and Allen
               Newman, dated September 2, 1994, as amended
               December 13, 1996 (with certain confidential
               portions omitted).

 (1) 10.24     Agreement to Amend License and Development
               Agreement between Harry R. McKinley, MOI and the
               Company, dated September 15, 1995 (with certain
               confidential portions omitted).

 (1) 10.25     License Agreement between the Company and Kaiser
               Aerospace, dated July 19, 1995 (with certain
               confidential portions omitted).

 (1) 10.26     Technology Strategic Alliance: Memorandum of
               Understanding between the Company and Kaiser
               Electro Optics, Inc., dated July 19, 1995 (with
               certain confidential portions omitted).
</TABLE>

                                  -40-
<PAGE>

<TABLE>
<CAPTION>
  NUMBER
  EXHIBIT               DESCRIPTION
----------              -----------
<S>            <C>
 (1) 10.27     Non-Exclusive License Agreement between the
               Company, Fuji Photo Film Co., Ltd. and Fuji Photo
               Film Optical Co., Ltd., dated June 25, 1996 (with
               certain confidential portions omitted).

 (1) 10.28     Memorandum of Understanding between the Company
               and Cogent Light Technologies, dated March 27,
               1996.

 (1) 10.29     License Agreement between the Company and Imagyn,
               dated December 13, 1996 (with certain
               confidential portions omitted).

 (1) 10.30     License Agreement between the Company,
               HealthCom, Inc. and GDE Systems, Inc., dated
               February 28, 1997 (with certain confidential
               portions omitted).

 (1) 10.31     Lease dated April 14, 1994, as amended by a
               certain First Amendment to Lease dated March 29,
               1996 and a certain Second Amendment to Lease
               dated October 22, 1996 between the Company and
               Robert F. Tambone, as Trustee of MAT Realty
               Trust, u/d/t dated June 4, 1986.

 (1) 10.32     Standard Sublease between the Company and
               Quintiles Pacific, Inc., dated January 23, 1996.

 (1) 10.33     Standby Letter of Credit from Silicon Valley
               Bank, dated August 9, 1996.

(1)+ 10.34     1995 Stock Option Plan.

(1)+ 10.35     1995 Stock Option Plan Form of Notice of Grant.

(1)+ 10.36     1995 Stock Option Plan Form of Stock Option
               Agreement.

(1)+ 10.37     1995 Stock Option Plan Form of Stock Purchase
               Agreement.

(1)+ 10.38     1997 Stock Option/Stock Issuance Plan, as
               amended.

(1)+ 10.39     1997 Stock Option/Stock Issuance Plan Form of
               Notice of Grant.

(1)+ 10.40     1997 Stock Option/Stock Issuance Plan Form of
               Stock Option Agreement.

(1)+ 10.41     1997 Stock Option/Stock Issuance Plan Form of
               Stock Purchase Agreement.

(1)+ 10.42     1997 Employee Stock Purchase Plan.

 (1) 10.43     Form of Indemnification Agreement between the
               Company and each of its directors.

 (1) 10.44     Form of Indemnification Agreement between the
               Company and each of its officers.

 (1) 10.45     Form of Waiver of Registration Rights, dated
               February 28, 1997.

(1)+ 10.46     1997 Stock Option/Stock Issuance Plan Form of
               Stock Issuance Agreement.

(1)+ 10.47     Issuance Agreement dated March 3, 1997 between
               the Company and those purchasers set forth in
               Schedule A.

 (2) 10.48     Vista Medical Technologies, Inc. Third Amendment
               to Lease, dated September 1, 1997.

   * 10.49     Loan and Security Agreement between the Company
               and Silicon Valley Bank, dated October 22, 1997.

     10.50     Common Stock Purchase Warrant between the Company
               and Silicon Valley Bank, dated October 23, 1997.
</TABLE>

                                  -41-
<PAGE>

<TABLE>
<CAPTION>
  NUMBER
  EXHIBIT               DESCRIPTION
----------              -----------
<S>            <C>
     10.51     Second Amendment to the Amended and Restated
               Investor's Rights Agreement between the Company,
               Silicon Valley Bank, and the Stockholders listed
               on Exhibit A thereto, dated October 22, 1997.

     10.52     Fourth Amendment to Lease, dated October 30,
               1997.

     10.53     Technology Strategic Alliance: Memorandum of
               Understanding between the Company and KEO, dated
               December 9, 1997.

     10.54     Amendment to Manufacturing Supply Agreement
               between the Company and KEO, dated December 9,
               1997.

     10.55     Amendment to License Agreement between the
               Company and Kaiser Aerospace, dated December 9,
               1997.

   * 10.56     License Agreement between the Company and Kaiser
               Aerospace, dated December 9, 1997.

   * 10.57     Exclusive Distribution Agreement between the
               Company and Sofamor Danek L.P., dated January 7,
               1998.

   * 10.58     Cooperative Technology Agreement between the
               Company and Sofamor Danek Group, Inc., dated
               January 7, 1998.

     11.1      Statement re: Computation of Per Share Data.

     23.1      Consent of Ernst & Young LLP, Independent
               Auditors.

     24.1      Power of Attorney. (See page 43)

     27.1      Financial Data Schedule.

     27.2      Financial Data Schedule.
</TABLE>

----------------
+              Management contract or compensatory plan.

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



(1)            Incorporated by reference to the same-numbered
               exhibit (except as otherwise indicated) to the
               Company's Registration Statement on Form S-1
               (No. 333-22985), filed on March 7, 1997, as
               amended.


(2)            Incorporated by reference to the Company's
               Form 10-Q, filed on November 13, 1997.

SUPPLEMENTAL INFORMATION

        Copies of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held June 9, 1998 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.

                                        -42-

<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 30, 1998                 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 30, 1998
--------------------------    Officer and Director (Principal
    (John R. Lyon)            Executive Officer)

/s/  Robert J. De Vaere      Vice President of Finance and             March 30, 1998
--------------------------    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 30, 1998
--------------------------
    (James C. Blair)

/s/  Olav B. Bergheim        Director                                  March 30, 1998
--------------------------
    (Olav B. Bergheim)

/s/ Nicholas B. Binkley      Director                                  March 30, 1998
--------------------------
   (Nicholas B. Binkley)

/s/  Daniel J. Holland       Director                                  March 30, 1998
--------------------------
    (Daniel J. Holland)

/s/  Larry M. Osterink       Director                                  March 30, 1998
--------------------------
    (Larry M. Osterink)
</TABLE>

                                   -43-
<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, 1996 and 1997....................F-3
Consolidated Statements of Operations for the years ended
   December 31, 1995, 1996 and 1997..........................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
   December 31, 1995, 1996 and 1997..........................................F-5
Consolidated Statements of Cash Flows for the years ended
   December 31, 1995, 1996 and 1997..........................................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, 1996 and 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1996 and 1997 and the
results of its consolidated operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.




San Diego, California
January 16, 1998


                                      F-2

<PAGE>

                        Vista Medical Technologies, Inc.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>


                                                                                   DECEMBER 31,
                                                                      ------------------------------------
                                                                            1996              1997
                                                                      ------------------------------------
<S>                                                                     <C>             <C>
ASSETS
Current assets:
   Cash and cash equivalents                                               $10,119,529     $  7,328,502
   Short-term investments                                                      165,000       16,784,345
   Accounts receivable, net                                                    526,119          521,616
   Inventories, net                                                          1,212,825        3,344,967
   Other current assets                                                        136,400          261,864
                                                                      ------------------------------------
Total current assets                                                        12,159,873       28,241,294

Property and equipment, net                                                  1,082,103        3,327,283
Patents and other assets, net                                                1,073,741          561,873
                                                                      ------------------------------------
Total assets                                                               $14,315,717      $32,130,450
                                                                      ------------------------------------
                                                                      ------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                       $    607,639     $  1,217,110
   Accrued compensation                                                        226,543          516,743
   Accrued liabilities                                                         520,584          665,285
                                                                      ------------------------------------
Total current liabilities                                                    1,354,766        2,399,138

Commitments

Stockholders' equity :
   Convertible preferred stock, $.01 par value:
     Authorized shares - 5,000,000
     Issued and outstanding shares - 11,574,252 in 1996, no shares
       in 1997                                                                 115,742                -
   Common stock, $.01 par value:
     Authorized shares - 35,000,000
     Issued and outstanding shares - 538,224 in 1996 and
        13,407,038 in 1997                                                       5,382          134,071
   Additional paid-in capital                                               28,615,223       62,531,513
   Notes receivable from stockholders                                          (93,375)         (78,375)
   Deferred compensation                                                    (2,061,549)      (1,942,074)
   Unrealized gain/loss on investments                                               -         (416,313)
   Accumulated deficit                                                     (13,620,472)     (30,497,510)
                                                                      ------------------------------------
Total stockholders' equity                                                  12,960,951       29,731,312
                                                                      ------------------------------------
Total liabilities and stockholders' equity                                 $14,315,717      $32,130,450
                                                                      ------------------------------------
                                                                      ------------------------------------

</TABLE>

SEE ACCOMPANYING NOTES.



                                            F-3
<PAGE>

                        Vista Medical Technologies, Inc.

                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                     ------------------------------------------------------
                                                              1995             1996              1997
                                                     ------------------------------------------------------
<S>                                                    <C>               <C>              <C>
Sales                                                     $ 1,719,223       $ 2,243,756      $ 4,141,082

Costs and expenses:
   Cost of sales                                            1,272,010         2,252,509        4,559,521
   Research and development                                 1,903,618         3,880,069        6,875,069
   Sales and marketing                                        834,518         2,056,767        5,010,953
   General and administrative                               1,034,434         3,103,256        5,498,820
                                                     ------------------------------------------------------
Total cost and expenses                                     5,044,580        11,292,601       21,944,363
                                                     ------------------------------------------------------

Loss from operations                                       (3,325,357)       (9,048,845)     (17,803,281)

License income                                                      -         1,493,000                -
Interest income                                                51,407           116,706          926,243
                                                     ------------------------------------------------------

Net loss                                                  $(3,273,950)      $(7,439,139)    $(16,877,038)
                                                     ------------------------------------------------------
                                                     ------------------------------------------------------

Basic and diluted loss per share                          $     (1.22)      $     (1.06)    $      (1.52)
                                                     ------------------------------------------------------
                                                     ------------------------------------------------------

Shares used in basic and diluted loss per share
   computations                                             2,682,000         7,037,000       11,072,000
                                                     ------------------------------------------------------
                                                     ------------------------------------------------------

SEE ACCOMPANYING NOTES.

</TABLE>

                                             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,
1994                               -     $      -          750        $ 8     $      992
   Issuance of Series A
     convertible
     preferred stock for
     cash                     6,037,736    60,377           -           -      7,897,585
   Issuance of Series A
     convertible
     preferred stock to
     retire debt              1,792,453    17,925           -           -      2,357,075
   Issuance of Series A
     convertible
     preferred stock for
     the assets                 154,581     1,546           -           -        203,274
   Issuance of Series A
     convertible
     preferred stock for
     minority partnership
     interest                   264,151     2,642           -           -        347,358
   Exercise of stock
     options
   Net loss                           -         -     148,125       1,481         28,144

Balance at December 31,               -         -           -           -              -
1995                          ---------------------  ------------------------------------
   Issuance of Series B       8,248,921    82,490     148,875       1,489     10,834,428
     convertible
     preferred stock for
     cash                     1,279,331    12,792           -           -      5,065,848
   Issuance of Series B
     convertible
     preferred stock for
     assets                      46,000       460           -           -        183,540
   Issuance of Series C
     convertible
     preferred stock for
     cash                     2,000,000    20,000           -           -      9,948,619
   Exercise of stock
     options
   Deferred compensation              -         -     389,349       3,893         73,977
   Amortization of
       deferred                       -         -           -           -      2,508,811
       compensation
   Net loss                           -         -           -           -              -

Balance at December 31,               -          -           -           -              -
1996                          ---------------------  ------------------------------------
                             11,574,252  $ 115,742     538,224     $ 5,382   $ 28,615,223

</TABLE>

<TABLE>
<CAPTION>

                                NOTES
                              RECEIVABLE
                                FROM           DEFERRED      UNREALIZED    ACCUMULATED
                             STOCKHOLDERS    COMPENSATION    GAIN (LOSS)      DEFICIT         TOTAL
                            ----------------------------------------------------------------------------
<S>                          <C>        <C>                 <C>          <C>             <C>
Balance at December 31,       $    -        $     -          $    -        $ (2,907,383)   $(2,906,383)
1994
   Issuance of Series A
     convertible
     preferred stock for
     cash                          -              -               -                -         7,957,962
   Issuance of Series A
     convertible
     preferred stock to
     retire debt                   -              -               -                -         2,375,000
   Issuance of Series A
     convertible
     preferred stock for
     the assets                    -              -               -                -           204,820
   Issuance of Series A
     convertible
     preferred stock for
     minority partnership
     interest                      -              -               -                -           350,000
   Exercise of stock
     option                    (29,625)           -               -                -              -
   Net loss                        -              -               -          (3,273,950)    (3,273,950)

Balance at December 31,      ---------------------------------------------------------------------------
   1995                        (29,625)           -               -          (6,181,333)     4,707,449
   Issuance of Series B
     convertible
     preferred stock for
     cash                          -              -               -                 -        5,078,640
   Issuance of Series B
     convertible
     preferred stock for
     assets                        -              -               -                 -          184,000
   Issuance of Series C
     convertible
     preferred stock for
     cash                          -              -               -                 -        9,968,619
   Exercise of stock
     options                   (63,750)           -               -                 -           14,120
   Deferred compensation
   Amortization of                 -         (2,508,811)          -                 -             -
     deferred
     compensation                  -            447,262           -                            447,262
   Net loss                        -               -              -          (7,439,139)    (7,439,139)

Balance at December 31,      ---------------------------------------------------------------------------
1996                            (93,375)   $ (2,061,549)         $   -    $ (13,620,472)   $12,960,951

</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                        -      $    -       150,273     $ 1,503     $ 61,901
     options for cash
   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
                              -------------------------------------------------------------------
                              -------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>

                                NOTES
                              RECEIVABLE
                                FROM           DEFERRED      UNREALIZED    ACCUMULATED
                             STOCKHOLDERS    COMPENSATION    GAIN (LOSS)      DEFICIT         TOTAL
                            ----------------------------------------------------------------------------
<S>                          <C>           <C>              <C>          <C>             <C>
   Exercise of stock            $    -        $       -       $      -      $       -      $ 63,404
     options for cash
   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)
   Net loss                          -                -              -    (16,877,038)  (16,877,038)
                            ----------------------------------------------------------------------------
Balance at December 31,
1997                          $(78,375)     $(1,942,074)    $ (416,313)  $(30,497,510) $ 29,731,312
                            ----------------------------------------------------------------------------
                            ----------------------------------------------------------------------------

</TABLE>

SEE ACCOMPANYING NOTES.

                                             F-6

<PAGE>
                        Vista Medical Technologies, Inc.

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                     ------------------------------------------------------
                                                              1995              1996             1997
                                                     ------------------------------------------------------
<S>                                                    <C>               <C>              <C>
OPERATING ACTIVITIES
Net loss                                                  $(3,273,950)      $(7,439,139)    $(16,877,038)
Adjustments to reconcile net loss to net cash used
   for operating activities:
     Depreciation and amortization                             36,138           351,256        1,260,707
     Amortization of premium on short-term                          -                 -          129,631
       investments
     Stock issued for services rendered                             -                 -           20,010
     Amortization of deferred compensation                          -           447,262        1,066,115
     Acquired in-process research and development             350,000                 -                -
     Write-off of non recoverable patent costs                 28,733                 -                -
     Common stock received/issued in exchange for
       license agreement                                            -          (693,000)         249,993
     Changes in operating assets and liabilities,
       net of effect of acquisitions:
         Accounts receivable                                 (568,264)          126,752            4,503
         Inventories                                         (472,579)         (405,706)      (2,132,142)
         Other current assets                                 (30,846)          (64,105)        (125,464)
         Accounts payable                                     255,192           171,714          609,471
         Accrued compensation                                 108,750            79,133          290,200
         Accrued liabilities                                     (424)          488,591            9,868
                                                     ------------------------------------------------------
Net cash flows used for operating activities               (3,567,250)       (6,937,242)     (15,494,146)

INVESTING ACTIVITIES
Purchases of short-term investments                          (165,000)                -      (23,689,018)
Maturities of short-term investments                                -                 -        7,080,000
Increase in patent and other assets                           (51,975)          (17,895)               -
Purchase of property and equipment                            (80,954)       (1,220,888)      (3,415,457)
                                                     ------------------------------------------------------
Net cash flows used for investing activities                 (297,929)       (1,238,783)     (20,024,475)

FINANCING ACTIVITIES
Payments on shareholder notes receivable                            -                 -           15,000
Advances from a related party                               2,136,000                 -                -
Repayment of advances to a  related party                  (3,004,000)                -                -
Issuance of common stock, net                                       -            14,120       32,712,594
Issuance of convertible preferred stock, net                7,957,962        15,047,259                -
                                                     ------------------------------------------------------
Net cash flows provided by financing activities             7,089,962        15,061,379       32,727,594
Net increase (decrease) in cash and cash equivalents        3,224,783         6,885,354       (2,791,027)
Cash and cash equivalents at beginning of year                  9,392         3,234,175       10,119,529
                                                     ------------------------------------------------------
Cash and cash equivalents at end of year                   $3,234,175       $10,119,529      $ 7,328,502
                                                     ------------------------------------------------------
                                                     ------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest                                  $       1,711       $       183      $         -
                                                     ------------------------------------------------------
                                                     ------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Debt obligation to related party converted to
   Series A convertible preferred stock                    $2,375,000       $         -      $         -
                                                     ------------------------------------------------------
                                                     ------------------------------------------------------
Exercise of stock options for stockholder notes
   receivable                                            $     29,625       $    63,750      $         -
                                                     ------------------------------------------------------
                                                     ------------------------------------------------------
Issuance of convertible preferred stock in
   conjunction with acquisitions                         $    554,820       $   184,000      $         -
                                                     ------------------------------------------------------
                                                     ------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
                                              F-7
<PAGE>

                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

                              December 31, 1997


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 and manufactures proprietary visualization and information systems
that enable minimally invasive surgical solutions in cardiothoracic, head,
neck and spine 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.

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.

In 1997, the Company instituted a fee-per-procedure program in the United
States whereby the Company's cardiothoracic surgery product, the Series 8000,
is placed in a hospital for a specific term. The Company retains ownership of
the asset, which is classified on the balance sheet as investment in leased
assets and depreciated over the term of agreement. Revenue is recognized on a
monthly basis based on actual number of procedures performed by the hospital,
subject to a minimum monthly usage requirement. The Company accrues the
warranty and upgrade costs for this program on a monthly basis over the life
of the agreement.



                                  F-8
<PAGE>

                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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, 1997, the cost of cash equivalents and short-term investments compared to
estimated fair value resulted in unrealized losses of $416,313.

As of December 31, 1996 and 1997, the Company's cash, cash equivalents and
short-term investments were classified as available-for-sale and consisted of:

<TABLE>
<CAPTION>

                                                                  1996             1997
                                                           ------------------------------------
<S>                                                        <C>               <C>
Cash                                                          $     105,500     $     573,223
Money market funds                                               10,014,029         3,789,419
Corporate bonds                                                           -        16,588,437
Commercial paper                                                          -         2,996,768
Certificates of deposit                                             165,000           165,000
                                                           ------------------------------------
                                                                $10,284,529     $  24,112,847

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

</TABLE>

All of the Company's debt securities mature in 1998, except one security with
a fair market value of approximately $1,000,000 that matures in 1999.

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, distribution partners,
and hospitals in the U.S. and Europe. The Company provides for losses from
uncollectible accounts and such losses




                                     F-9
<PAGE>

                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

have historically not exceeded management's expectations. As of December 31,
1997, one customer comprised $268,950 or 50% of the outstanding trade
receivables.






                                       F-10


<PAGE>

                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 five to seven years.
Marketing demonstration equipment is amortized over a one-year useful life,
and assets leased under the fee-per-procedure program are depreciated over
the term of the agreement.

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.

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.



                                    F-11

<PAGE>

                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOSS PER SHARE

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

NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"REPORTING COMPREHENSIVE INCOME", and SFAS No. 131, "SEGMENT INFORMATION".
Both of these standards are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 requires that all components of comprehensive
income, including net income, be reported in the financial statements in the
period in which they are recognized. Comprehensive income is defined as the
change in equity during a period from transactions and other events and
circumstances from non-owner sources. Net income and other comprehensive
income, including foreign currency translation adjustments, and unrealized
gains and losses on investments, shall be reported, net of their related tax
effect, to arrive at comprehensive income. The Company believes that
comprehensive income or loss will not be materially different than net income
or loss. SFAS No. 131 amends the requirements for public enterprises to
report financial and descriptive information about its reportable operating
segments. Operating segments, as defined by SFAS No. 131, are components of
an enterprise for which financial information is available and evaluated
regularly by the Company in deciding how to allocate resources and in
assessing performance. The financial information is required to be reported
on the basis that it is used internally for evaluating the segment
performance. The Company believes it operates in one business and operating
segment and that adoption of SFAS No. 131 will not have a material impact on
the Company's financial statements.

                                      F-12
<PAGE>

                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

2. BALANCE SHEET COMPONENTS

Inventories consists of the following:

<TABLE>
<CAPTION>

                                                                        DECEMBER 31,
                                                             -----------------------------------
                                                                   1996               1997
                                                             -----------------------------------
<S>                                                        <C>                 <C>
Parts and materials                                          $      567,707        $  1,977,878
Work in process                                                     286,099             662,237
Finished goods                                                      359,019             704,852
                                                             -----------------------------------
                                                             $    1,212,825        $  3,344,967
                                                             -----------------------------------
                                                             -----------------------------------

</TABLE>

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                             -----------------------------------
                                                                   1996               1997
                                                             -----------------------------------
<S>                                                        <C>                 <C>
Machinery and equipment                                      $    271,747         $  1,400,892
Office computers, furniture and equipment                         352,911              839,533
Marketing demonstration equipment                                 776,420            2,199,736
Investment in leased assets                                             -              206,011
Leasehold improvements                                             68,704              239,067
                                                             -----------------------------------
                                                                1,469,782            4,885,239
Less: accumulated depreciation                                   (387,679)          (1,557,956)
                                                             -----------------------------------
                                                             $  1,082,103            3,327,283
                                                             -----------------------------------
                                                             -----------------------------------

</TABLE>

Patents and other assets consists of the following:

<TABLE>
<CAPTION>

                                                                        DECEMBER 31,
                                                             -----------------------------------
                                                                   1996             1997
                                                             -----------------------------------
<S>                                                           <C>                 <C>
Investment in common stock                                        $   693,000       $  271,562
Patents and other intangible assets, net                              323,241          232,811
Prepaid royalties                                                      57,500           57,500
                                                             -----------------------------------
                                                                   $1,073,741       $  561,873
                                                             -----------------------------------
                                                             -----------------------------------

</TABLE>

3.  MAJOR CUSTOMERS

Sales to individual customers exceeding 10% or more of revenues in the years
ended December 31, were as follows: during 1995 one customer accounted for
85% of revenues; 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.





                                     F-13
<PAGE>

                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

4.  COMMITMENTS

The Company leases its corporate facilities and certain equipment under
operating leases that expire on various dates through 2001. Annual future
minimum lease payments as of December 31, 1997 are as follows:

<TABLE>
<CAPTION>

         YEAR ENDING DECEMBER 31,
         ------------------------
<S>                                                                      <C>
         1998                                                               $   387,000
         1999                                                                   399,000
         2000                                                                   412,000
         2001                                                                   426,000
         2002                                                                         -
                                                                       ------------------
                                                                             $1,624,000
                                                                       ------------------
                                                                       ------------------

</TABLE>

Rent expense was approximately $75,000, $183,000 and $342,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.

5.  LICENSE INCOME AND INVESTMENT IN COMMON STOCK

In December 1996, the Company granted a perpetual license to certain of its
technology and patents to Imagyn Medical Technologies, Inc. ("Imagyn"),
formerly Urohealth Systems, Inc. In exchange for the license the Company
received $1,000,000 in cash and 110,000 shares of common stock valued at
$693,000. The common stock received is restricted stock of a publicly traded
company with restrictions on the sale of the stock for two years from the
date of the agreement in accordance with the provisions of Rule 144 under the
Securities Act of 1933 as amended. The licensed technology and patent rights
were obtained by the Company through a perpetual license and royalty
agreement with an officer of the Company. In connection with the license
agreement with Imagyn, the Company amended an existing license agreement with
the officer to make its terms consistent with the licensing agreement with
Imagyn in exchange for $200,000.

In 1997, the fair value of the common stock declined to $271,562 at December
31, 1997. In accordance with SFAS 115, the Company has recorded this
unrealized loss of $421,438 as an adjustment to stockholders' equity.

6.  LINE OF CREDIT

In October 1997, the Company signed a loan and security agreement with a
bank, subject to maximum advances of $10 million, at an annual interest rate
of 1.5% above the bank's prime rate (the prime rate was 8.5% at December 31,
1997). The line of credit expires in October 2002, and there were no amounts
outstanding under the line of credit at





                                     F-14
<PAGE>

                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

6.  LINE OF CREDIT (CONTINUED)

December 31, 1997. In conjunction with the line of credit agreement, the
Company issued a warrant expiring in October 2002, to purchase 27,184 shares
of common stock at $12.875 per share. The value of the warrant of
approximately $135,000 will be charged to interest expense over the life of
the agreement.

7. STOCKHOLDERS' EQUITY

CHANGE IN CAPITALIZATION

In February 1997, the Board of Directors approved an amendment to the
Articles of Incorporation increasing the number of authorized shares of
common stock to 35,000,000 shares with a $.01 par value per share and
5,000,000 shares of preferred stock at $.01 par value per share.

In February 1997, the Company's stockholders approved a 3 for 4 reverse stock
split of the Company's common stock. All share, per share and stock option
amounts have been restated to reflect retroactively the reverse stock split.

INITIAL PUBLIC OFFERING

During 1997, the Company issued 4,000,000 shares of common stock at $9.00 per
share in connection with its initial public offering. In conjunction with
this offering, all outstanding shares of preferred stock were converted to
common stock at a 4 for 3 conversion ratio. There are no shares of preferred
stock outstanding at December 31, 1997.

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
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.





                                     F-15
<PAGE>

                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

7. STOCKHOLDERS' EQUITY (CONTINUED)

The Company recorded $947,000 of deferred compensation for options granted
during the year ended December 31, 1997, representing the difference between
the option exercise price and the deemed value for financial statement
presentation purposes for stock options granted to employees in 1997. The
Company is amortizing the deferred compensation recorded in 1996 and 1997
over the vesting period of the options and the Company recorded $1,066,000 of
compensation expense during the year ended December 31, 1997.

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, 1997, 1,227,824 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, 1994                                      -            $  -        $    -
Granted                                                     655,322            $.20        $  .20
Exercised                                                  (148,125)           $.20        $  .20
Canceled                                                          -              -         $    -
                                                     ------------------------------------------------------
Balance at December 31, 1995                                507,197            $.20        $  .20
Granted                                                   1,173,888    $.20 -  $.80        $  .33
Exercised                                                  (389,349)           $.20        $  .20
Canceled                                                    (45,935)           $.20        $  .20
                                                     ------------------------------------------------------
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
                                                     ------------------------------------------------------
                                                     ------------------------------------------------------

</TABLE>





                                                F-16
<PAGE>

                        Vista Medical Technologies, Inc.

             Index to Consolidated Financial Statements (continued)



7. 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                PRICE           SHARES        PRICE
---------------------------------------------------------------------------------------------------------
<S>                     <C>                 <C>               <C>                 <C>          <C>
$.20 - $.80               1,107,528             101              $    .32         336,352      $    .29
$4.00                        75,000             109              $   4.00          12,500      $   4.00
$9.88                       170,000             116              $   9.88          16,103      $   9.88
$11.31 - 14.38              165,000             119              $  12.07             667      $  13.61

</TABLE>

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 2.5 to 5 years.

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                     ------------------------------------------------------
                                                           1995              1996               1997
                                                     ------------------------------------------------------
<S>                                                  <C>               <C>                <C>
Adjusted pro forma net loss                             $3,279,659        $7,451,220         $17,047,180
                                                     ------------------------------------------------------
                                                     ------------------------------------------------------
<S>                                                 <C>                <C>               <C>
Adjusted pro forma net loss per share                 $        (1.22)     $      (1.06)     $       (1.54)
                                                     ------------------------------------------------------
                                                     ------------------------------------------------------

</TABLE>






                                     F-17
<PAGE>

                        Vista Medical Technologies, Inc.

             Index to Consolidated Financial Statements (continued)


8.  LOSS PER SHARE

The following table sets forth the computation of basic and diluted earnings
per share:

<TABLE>
<CAPTION>

                                                            1995              1996               1997
                                                     -------------------------------------------------------
<S>                                                  <C>               <C>                <C>
Numerator:
   Net loss                                              $(3,273,950)      $(7,439,139)      $(16,877,038)

Denominator:
   Weighted-average common shares                             37,000           201,000           6,731,000
   Weighted-average effect of assumed conversion
     of preferred shares from date of issuance
                                                           2,645,000         6,836,000           4,340,000
                                                     -------------------------------------------------------
   Denominator for basic and diluted loss per share
                                                           2,682,000         7,037,000          11,072,000
                                                     -------------------------------------------------------
                                                     -------------------------------------------------------

   Basic loss per share                              $         (1.22)  $         (1.06)   $         (1.52)
                                                     -------------------------------------------------------
                                                     -------------------------------------------------------

</TABLE>

All other potential common shares have been excluded from the diluted EPS
computation as they are antidilutive. The Company has not issued any common
shares or potential common shares that are considered nominal issuances under
the requirements of Staff Accounting Bulletin No. 98.

Loss per share information as presented on the financial statements has been
presented because historical loss per share information is not indicative of
the Company's capital structure following its July 1997 initial public
offering. Basic loss per share, without an adjustment for convertible
preferred stock, would have been $(2.51) in 1997 and $(36.97) in 1996.



                                     F-18
<PAGE>

                        Vista Medical Technologies, Inc.

             Index to Consolidated Financial Statements (continued)


9. 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, 1996 and
1997 are shown below. A valuation allowance has been recognized to offset the
deferred tax assets, as realization of such assets is uncertain.

<TABLE>
<CAPTION>

                                                                         DECEMBER 31,
                                                              -----------------------------------
                                                                    1996              1997
                                                              -----------------------------------
<S>                                                           <C>             <C>
Deferred tax liabilities:
   Depreciation                                                 $    (51,000)   $              -

Deferred tax assets:
   Net operating loss carryforwards                                3,197,000           8,840,000
   Research and development credits                                  229,000             600,000
   Depreciation                                                            -             280,000
   Other, net                                                         32,000             950,000
                                                              -----------------------------------
Total deferred tax assets                                          3,458,000          10,670,000
Valuation allowance for deferred tax assets                       (3,407,000)        (10,670,000)
                                                              -----------------------------------
Net deferred tax assets                                               51,000                   -
                                                              -----------------------------------
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 carryforwards up to the
date of change in ownership have been reported by the previous consolidated
group. All tax loss and tax credit carryforwards reflected in the
accompanying financial statements reflect activity only for the period
beginning July 1995 and ending December 31, 1996.

At December 31, 1997, the Company has federal and state tax net loss
carryforwards of approximately $22,500,000 and $3,100,000, respectively. The
federal and state tax loss carryforwards will begin to expire in 2010 and
2000, respectively, unless previously utilized. The Company also has federal
and state research tax credit carryforwards of approximately $390,000 and
$330,000, respectively, which will expire in 2010 unless previously utilized.

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





                                     F-19
<PAGE>

                        Vista Medical Technologies, Inc.

             Index to Consolidated Financial Statements (continued)


9. INCOME TAXES (CONTINUED)

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 carryforwards.

10. TRANSACTIONS WITH RELATED PARTIES

The Company has a technology strategic alliance and a manufacturing supply
agreement with a Kaiser Aerospace subsidiary for the development and
manufacturing of certain of the 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 $292,000, $1,205,000
and $2,878,000 for the years ending December 31, 1995, 1996 and 1997,
respectively. At December 31, 1997, the Company had approximately $2,820,000
in purchase commitments with Kaiser 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.

11.   COLLABORATIVE AGREEMENTS

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.





                                     F-20
<PAGE>

                        Vista Medical Technologies, Inc.

             Index to Consolidated Financial Statements (continued)


12.  SUBSEQUENT EVENT

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






                                     F-21