<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                     For fiscal year ended December 31, 2000

                                       OR

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                          ACT OF 1934 (NO FEE REQUIRED)

               For the transition period from ________ to _______.

                         Commission File Number: 0-22743

                        VISTA MEDICAL TECHNOLOGIES, INC.
             (Exact name of Registrant as specified in its charter)

         DELAWARE                                          94-3184035
 (State or other jurisdiction of                        (I.R.S. Employer
  incorporation or organization)                        Identification No.)

                         5451 Avenida Encinas, Suite A,
                           Carlsbad, California 92008
                    (Address of principal executive offices)
                                 (760) 603-9120
              (Registrant's telephone number, including area code)

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

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

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X  No
                                             ---   ---
         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of January 31, 2001 was approximately $12,942,000. For the
purposes of this calculation, shares owned by officers, directors and 10%
stockholders known to the registrant have been deemed to be owned by affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.

         The number of shares outstanding of the registrant's Common Stock as of
March 23, 2001 was 19,589,386.

         Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on June 7, 2001, to be filed on or about April
30, 2001 and referred to herein as the "Proxy Statement", are incorporated as
provided in Part III.


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                                     PART I

Item 1. BUSINESS

         THE DISCUSSION OF THE COMPANY'S BUSINESS CONTAINED IN THIS ANNUAL
REPORT ON FORM 10-K MAY CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF FACTORS WHICH MAY AFFECT THE OUTCOME PROJECTED IN SUCH STATEMENTS,
PLEASE SEE "RISKS AND UNCERTAINTIES" AT PAGES 17 THROUGH 24 OF THIS REPORT.

OVERVIEW OF OUR BUSINESS

         We develop, manufacture and market products that provide information to
doctors performing minimally invasive general surgical, cardiac surgical and
other selected microsurgical procedures. We also develop and sponsor training
and support programs for medical personnel which enhance the adoption of
procedures incorporating use of our visualization technology. Our products
combine a head mounted display with video cameras to provide surgeons with
critical visual information during these microsurgical procedures, combined with
the ability to view new additional information in a voice-controlled,
picture-in-picture format, to facilitate real-time decision making during
surgery. Our product lines include the ORPC Advanced Visualization and
Information System for general surgery and other complex endoscopic procedures
and the Series 8000 Advanced Visualization and Information System, for use in
cardiac surgery. In general terms, endoscopic surgery involves a telescopic
viewing device which is inserted into a small incision in the body and which
allows the surgeon an adequate view of the internal part of the body being
repaired.

BACKGROUND

     MINIMALLY INVASIVE SURGERY

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

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

     MINIMALLY INVASIVE MICROSURGERY

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


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APPLICATION OF OUR PRODUCTS TO DIFFERENT SURGICAL PROCEDURES

     GENERAL SURGERY/GYNECOLOGY/UROLOGY

         CONVENTIONAL TREATMENTS.

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

         MINIMALLY INVASIVE MICROSURGERY.

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

         THE VISTA MEDICAL SOLUTION.

         We believe that the general technology required to drive renewed growth
in complex minimally invasive procedures for general surgery is now being
undertaken by many companies in fields complementary to ours, for example, in
surgical robotics, electrosurgery and surgical instrument design. We believe
that our advanced visualization and information technology will contribute to
this renewed growth by providing the surgeon with enhanced depth perception when
performing complicated, physically intricate tasks, and will provide the surgeon
with the ability to view additional information in a voice-controlled,
picture-in-picture format, to facilitate real-time decision making during a
procedure. We believe that conventional 2-D visualization systems compromise the
ability of a surgeon to maneuver, especially in complex reconstructive surgery,
and that our natural 3-D picture will provide the surgeon with an advantage in
these cases.

      CARDIAC SURGERY

         CONVENTIONAL TREATMENTS

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


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         MINIMALLY INVASIVE CARDIAC SURGERY

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

         THE VISTA MEDICAL SOLUTION.

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

OUR BUSINESS STRATEGY

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

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

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


                                        4
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    IDENTIFY SPECIFIC HIGH-VALUE PROCEDURES TO FACILITATE OUR ENTRY INTO THE
    GENERAL SURGERY MARKET

         Our strategy for entering the general surgery market involves
identification of high value procedures where our visualization technology
uniquely enhances procedure performance. The first of these is laparoscopic
gastric bypass, a surgical technique which addresses morbid or extreme obesity.
Morbid obesity affects approximately 8 million adults in the United States. We
have been working closely with surgeons pioneering the approach and in January
2000 launched the Laparascopic Bariatric Surgery Program to establish a national
network of centers to perform minimally invasive gastric bypass surgery. This
program is designed to provide participating hospitals with the complete
information, training and technology necessary to perform this surgery, and also
includes a national patient referral campaign. We began signing up, training and
delivering equipment to hospitals interested in participating in the program in
the first quarter of 2000. When our Laparoscopic Bariatric Surgery program is
fully established, we plan to use it as a model for subsequent procedures which
we are in the process of identifying and developing.

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

         We believe that we have the only visualization system specifically used
for minimally invasive cardiac surgery. We are currently working with members of
our clinical advisory boards, other leading surgeons and a strategic partner to
develop operating protocols which incorporate advanced visualization
technologies as standard practice. We intend to participate with our strategic
partner in providing training in these procedures, which include the use of our
visualization system.


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

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

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

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

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

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

ADVANCED VISUALIZATION PRINCIPLES AND OUR PRODUCT PLATFORM

         Our technology provides a 3-D visualization solution to the inherent
vision restrictions and demands of minimally invasive microsurgery. Our
technology provides the surgeon with a clear view of the anatomy with the
ability to view additional information in a voice-controlled, picture-in-picture
format, which facilitates real-time decision making during the procedure.


                                       5
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         Our technology is based on the following principles which we believe
are essential in advancing the techniques of minimally invasive microsurgery. We
believe these principles offer several key advantages over other visualization
approaches:

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

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

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

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

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


                                        6
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    HEAD MOUNTED DISPLAY

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

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

    THREE-DIMENSIONAL IMAGE ACQUISITION

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

        Our technology can package the twin cameras in two ways. In the first
method, a stereo micro-camera is attached to the end of a flexible or rigid
guide which can then be inserted directly into the body cavity and organs. The
image is directly captured by the camera chips without being transmitted through
multiple rod lenses as in a conventional design. The elimination of optical
surfaces produces several important advantages, including increased image
quality, improved contrast, better reliability and improved ability to sterilize
the instrument. Alternatively, for applications where standard endoscopic
surgical technique remains preferable, a stereo camera is mounted externally on
a stereo endoscope. This second method is the current preferred approach for the
procedures


                                        7
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in which we are primarily involved. The image acquired by either approach is
then processed for display by control electronics which we have developed. The
controller also includes image management features which contribute
significantly to procedure performance, such as dual image presentation and
picture-in-picture.

    INFORMATION MANAGEMENT

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

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

PRODUCT LINES

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

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

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

<TABLE>
<CAPTION>

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

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

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

</TABLE>


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<TABLE>

<S>                                 <C>
Stereo Camera                       High resolution stereo image processor.
Controller

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

Endoscopy Cart                      Cart which holds the Advanced System for
                                    Laparoscopy.

</TABLE>

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

        SERIES 8000 ADVANCED VISUALIZATION AND INFORMATION SYSTEM FOR HEART
        SURGERY

         We have developed the Series 8000 for minimally invasive and other
procedures in cardiac 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                          Head-mounted display and information
                                    processing computer which integrates
                                    three-dimensional visualization of surgical
                                    anatomy and related diagnostic and
                                    monitoring data. Beginning in 2001,
                                    CardioView will include the image management
                                    features of the ORPC, including voice
                                    control.

Stereo Endoscope                    10mm diameter stereo endoscopes in both
                                    0(0)and 30(0)angles of view.

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

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

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

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

CardioLight                         High intensity 300 watt xenon light source
                                    to illuminate the Stereo Endoscopes.

CardioConsole                       Console for rack mounting of all Series 8000
                                    modules.

</TABLE>

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

    OEM ENDOSCOPIC CAMERAS

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


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STRATEGIC ALLIANCES

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

       RICHARD WOLF, GMBH

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

       JOMED

         In May 2000, we entered into an exclusive distribution agreement and a
cooperative technology agreement with Jomed International. Under the exclusive
distribution agreement, Jomed became the exclusive distributor of our Series
8000 product in cardiac and related interventional radiology markets. In
connection with this agreement, Jomed agreed not to market or sell any product
directly competitive with our products in these fields. Jomed agreed to pay us a
fixed amount for each product ordered, as well as royalties based on gross
profits of units sold. We agreed to supply products to Jomed at a price that is
at least as favorable as that charged to other customers. Each year during the
term of the distribution agreement, we will agree upon a marketing plan with
Jomed and will be allowed to terminate Jomed's exclusive rights if they, by
negligence, fail to implement the marketing plans in any material respect. In
this event, Jomed would then retain non-exclusive rights to distribute our
product for a period of time. The distribution agreement is to remain in effect
until December 31, 2004 and is automatically renewable for additional one-year
periods if Jomed has met at least 70% of its projected sales for the previous
year. The distribution agreement may be terminated for material breach by either
party or if either party ceased to do business or seeks protectiion under any
bankruptcy proceeding.

        Under the terms of the cooperative technology agreement with Jomed, we
agreed to cooperate with Jomed on developing enhancements for our Series 8000
product to optimize its utilization as the standard visualization platform for
the placement of Jomed's SOLEM GraftConnector(TM). This agreement will terminate
when the exclusive distribution agreement terminates or if Jomed's exclusive
rights under that agreement terminate.

    GDE SYSTEMS

         In February 1997, GDE Systems, a leading military electronics and
information management company, granted us an exclusive worldwide license to
software, documentation and trademarks of GDE for use in the medical field.
Since 1993, GDE's subsidiary, Healthcom, had been adapting the software licensed
to us to provide high-speed, image-based information processing and networking
capabilities specifically for medical applications. In connection with the
license, we issued to GDE shares of our common stock with a value based on the
initial public offering price, of $250,000 and will pay GDE a royalty on
revenues derived from any products based upon or derived from the GDE software.
We also made a non-refundable payment of $250,000 in December 1998 as a
combination of royalty payments earned through such date and a royalty advance
creditable against future royalties. Under this license agreement, we hired
three of GDE's software development engineers, none of whom are currently
employed by us. GDE has a right of first refusal to license our improvements to
the software for use in non-medical markets, subject to the payment of a royalty
to us.


                                       10
<PAGE>


    KAISER AEROSPACE

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

        In June 2000, we retroactively waived future payment of specified
royalties by Kaiser provided for in the license agreement with them. In return,
Kaiser agreed to cancel an order that we had placed for a shipment of head
mounted display units, without additional cost to us. We have not ordered any
additional current generation head mounted display units from Kaiser since that
time.

LICENSE AGREEMENTS

     We have licensed aspects of our technology from third parties.

     MCKINLEY OPTICS, INC.

         In September 1995, Mr. H. McKinley and McKinley Optics, Inc. granted to
us a perpetual, exclusive, worldwide license in the medical field to make, have
made, modify, use, lease, market, sell and otherwise distribute certain
endoscopes and other medical products incorporating a stereo objective lens
and/or a relay lens configuration. Under the terms of this license agreement, we
are obligated to pay McKinley an annual maintenance royalty, additional
royalties upon the sale of certain numbers of systems incorporating the McKinley
technology and royalties on net sales of products incorporating the McKinley
technology. The exclusive license granted under this agreement becomes a
non-exclusive license, or, under certain circumstances, the license terminates,
in the event we fail to pay any royalties. In addition, we have the right to
terminate the agreement with limited notice.

    FUJI

         In June 1996, Fuji Film Co. and Fuji Photo Optical Co., Ltd. granted to
us a non-exclusive license to certain optical zoom technology for use in
endoscopes. We are obligated to pay royalties on net sales of products in the
United States which incorporate Fuji's technology. We have not incorporated any
of this technology into our products and thus have not been obligated for any
royalties as of the date of this annual report. Fuji may terminate the agreement
if we do not cure any violation of the agreement within a limited period of
time. Our failure to retain rights to these technologies could negatively impact
our business.


                                       11
<PAGE>


     CARL ZEISS

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

INTELLECTUAL PROPERTY PROTECTION

         We rely on a combination of technical leadership, patent, trade secret,
copyright and trademark protection and nondisclosure agreements to protect our
proprietary rights. As of December 31, 2000, we had exclusive ownership rights
to 15 issued United States patents, 9 pending United States patent applications
and 4 pending foreign applications covering various aspects of our devices and
systems. Furthermore, as of the same date, we had exclusive rights in the
medical field to five issued United States patents, one pending United States
patent application, 11 issued foreign patents and 8 pending foreign applications
covering various aspects of our devices and systems. In 1998 we additionally
obtained from Carl Zeiss non-exclusive rights to three issued United States
patents and four pending foreign applications. We intend to file additional
patent applications in the future. The failure of such patents to issue could
damage our ability to protect our proprietary information.

         Our future success will depend, in part, on our ability to continue to
develop patentable products, enforce our patents and obtain patent protection
for our products both in the United States and in other countries. The patent
positions of medical device companies, however, are generally uncertain and
involve complex legal and factual questions. We are not certain that patents
will issue from any patent applications owned by or licensed to us or that, if
patents do issue, the claims allowed will be sufficiently broad to protect our
technology. In addition, we cannot assure you that any issued patents owned by
or licensed to us will not be challenged, invalidated or circumvented, or that
the rights granted thereunder will provide us with competitive advantages.

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

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

         In general, the development of visualization and information systems is
intensely competitive. Patents issued and patent applications filed relating to
medical devices are numerous and current and potential competitors and other
third parties may have filed or in the future may file applications for, or have
not received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to


                                       12
<PAGE>


be used by us. We cannot assure you that third parties will not assert
infringement claims against us in the future or that any such assertions will
not result in costly litigation or require us to obtain a license to
intellectual property rights of such parties. Any such licenses may not be
available on acceptable terms, if at all. Furthermore, parties making such
claims may be able to obtain injunctive or other equitable relief that could
effectively block our ability to make, use, sell or otherwise practice our
intellectual property (whether or not patented or described in pending patent
applications), or to further develop or commercialize our products in the United
States and abroad and could result in the award of substantial damages. Defense
of any lawsuit or failure to obtain any such license could damage our business.

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

REGULATION

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

    DEVICE CLASSES

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

         Class I devices are subject to general controls, such as establishment
registration and product listing, labeling, adulteration and misbranding
provisions and medical device reporting requirements and, unless exempt, to
pre-market notification and adherence to "good manufacturing practice"
standards. Class II devices are subject to general controls and special
controls, such as performance standards, post-market surveillance, patient
registries and FDA guidelines. Generally, Class III devices are those that must
receive pre-market approval by the FDA to ensure their safety and effectiveness.
Examples of Class III products include, life-sustaining, life-supporting and
implantable or new devices which have not been found to be substantially
equivalent to legally marketed devices. Class III devices ordinarily require
clinical testing to ensure safety and effectiveness and FDA clearance prior to


                                       13
<PAGE>


marketing and distribution. The FDA also has the authority to require clinical
testing of Class I and Class II devices. A pre-market approval application must
be filed if a proposed device is not substantially equivalent to a legally
marketed predicate device or if it is a Class III device for which the FDA has
called for such application. A pre-market approval application typically takes
several years to be approved by the FDA.

    DEVICE  APPROVAL

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

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

    INVESTIGATIONAL DEVICE EXEMPTION APPLICATION

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

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


                                       14
<PAGE>


    FOREIGN REQUIREMENTS

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

MARKETING AND SALES

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

       TRAINING

         The introduction of new technology requires training for both surgeons
and operating room personnel. The model for our training philosophy is our
sponsorship of the Laparascopic Bariatric Surgery program, introduced in early
2000. This comprehensive program is designed to provide participants with the
complete information, training and technology necessary to perform minimally
invasive gastric bypass surgery as a treatment for morbid obesity.

       CLINICAL EVALUATION

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

    INTERNATIONAL SALES

         We have entered into a strategic relationship with Richard Wolf, GmbH,
for distribution of our products in general surgery, gynecology, and urology in
all international markets, and with Jomed N.V. for cardiac surgery. For a
description of these relationships, please see "--Strategic Alliances". We will
continue to evaluate partnership opportunities as appropriate for international
sales of all of our product lines.


                                       15
<PAGE>


COMPETITION

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

         Although several companies compete with aspects of our visualization
product line, we believe there is no single company which offers a complete and
integrated advanced visualization and information system specifically directed
at minimally invasive microsurgical applications. In addition, we are not aware
of any other stereo head- mounted display which has been cleared for marketing
in surgical applications by the FDA. We do believe that a number of large
companies, with significantly greater financial, manufacturing, marketing,
distribution and technical resources and experience than ours, are focusing on
the development of visualization products for minimally invasive microsurgery.
There can be no assurance that we will be successful in competing with any such
companies.

CLINICAL ADVISORY BOARDS

         We have established clinical advisory boards made up of leading
surgeons, one focused on minimally invasive cardiac surgery, and a general
advisory board focused on other minimally invasive specialties. Members of our
clinical advisory boards consult with us exclusively in the field of
visualization, but are free to consult with other non-competing instrumentation
companies and are employed elsewhere on a full-time basis. Our clinical advisory
boards are intended to act as a clinical reference for us and to provide access
to potential training sites for our visualization products.

EMPLOYEES

         As of February 28, 2001, we had 35 full-time employees, none of whom
hold advanced degrees. None of our employees is represented by a collective
bargaining agreement, nor have we experienced work stoppages. We believe our
relations with our employees are good.


                                       16
<PAGE>


RISKS AND UNCERTAINTIES

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

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

         On February 10, 2000, our common stock ceased to be quoted on the
Nasdaq National Market and began to be quoted on the Nasdaq SmallCap Market as a
result of Nasdaq's concern about our ability to maintain continued compliance
with some of the Nasdaq National Market requirements for continued quotation. In
addition, since that time, Nasdaq has placed us on probation twice for failing
to maintain a minimum bid price of $1.00 per share of our common stock. Although
we have successfully complied with the terms of these probations, our common
stock has recently failed to maintain a consistent bid price above $1.00 per
share and we cannot assure you that we will be able to remain compliant with the
continued listing requirements of Nasdaq. If we are unable to remain compliant,
Nasdaq may not continue to allow our common stock to be quoted on the Nasdaq
SmallCap Market. If we are unable to maintain our status on the Nasdaq SmallCap
Market, there may not continue to be an active trading market for our common
stock. If this occurs, you may not be able to sell your shares quickly or at the
market price.

WE MAY NEED ADDITIONAL FUNDS TO SUPPORT OUR CURRENTLY PROPOSED OPERATIONS. IF WE
ARE UNABLE TO OBTAIN THEM, WE MAY HAVE TO SIGNIFICANTLY SCALE BACK OUR
OPERATIONS OR FOREGO OPPORTUNITIES IN NEW MARKET SEGMENTS.

         We recently announced that we are working on a strategic initiative
extending our business to become more involved in the medical treatment of
severe obesity. If we decide to pursue this initiative, we will be required to
raise additional funds to support our operations. In addition, if we are unable
to sustain our cash flow under our current business plan, we will be required to
raise additional funds. If we are unable to raise sufficient funds from an
offering of securities or otherwise, we may be unable to continue operations at
their current level and may be unable to pursue this new objective. Moreover,
our liquidity and capital requirements will depend upon other numerous factors,
including the following:

         -        The extent to which our products gain market acceptance;

         -        The progress and scope of product evaluations;

         -        The timing and costs of filing future regulatory submissions;

         -        The timing and costs required to receive both domestic and
                  international governmental approvals;

         -        The timing and costs of product introductions;

         -        The extent of our ongoing research and development programs;

         -        The costs of sponsorship training of the physicians to become
                  proficient in the use of our products and procedures;

         -        The costs of developing marketing and distribution
                  capabilities.


                                       17
<PAGE>


        Even if we are successful in raising additional funds, circumstances,
including slow rate of market acceptance of our products or our inability to
scale up manufacturing, would accelerate our use of proceeds from any offering
we might do and require us to seek additional funds to support our operating
requirements.

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

         Since our formation in July 1993, and as of December 31, 2000, we had
incurred cumulative net losses of $61.6 million. We expect to incur substantial
losses for at least the next 12 months. We may never achieve or sustain
profitability in the future. Even if we achieve profitability, we may not be
able to sustain it on an ongoing basis.

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

         We only have a small direct sales force and, in the past, we were
primarily dependent on agreements with third parties for sales of the majority
of products derived from our core three-dimensional technology. Two of our
primary distribution agreements were terminated in 2000 and we just recently
entered into an arrangement with Jomed N.V. to transition distribution in
cardiac surgery and to continue supporting our cardiac customer base. However,
this transition may not be achieved without operational disruption and unplanned
cost, or at all. If we are unable to make this transition, we may be
unsuccessful in distributing our cardiac surgery products and may lose revenues.

         In addition, during the last year, we changed our strategic emphasis
for our core three-dimensional technology for applications in general surgery,
gynecology and urology. We cannot assure you that we will be successful in these
areas of sales. Even if we are successful, we cannot assure you that the revenue
achieved in these areas of emphasis will be sufficient to compensate for any
loss of sales revenue from the termination of our previous distribution
agreements for cardiac products. Either of these results could have an adverse
affect on our financial condition and results of operations.

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

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

         Our development efforts for improvements to these products may not be
successful. In addition, other products under development may not be shown to be
safe or effective, capable of being manufactured in commercial quantities at
acceptable costs, acquire appropriate regulatory clearances or be successfully
marketed.

OUR SUCCESS IS DEPENDENT UPON ACCEPTANCE OF A MINIMALLY INVASIVE APPROACH TO
COMPLEX PROCEDURES AS A RELIABLE, SAFE AND COST EFFECTIVE ALTERNATIVE TO
EXISTING TREATMENTS.

         Complex minimally invasive procedures are only performed on a very
limited basis by a relatively small number of highly skilled surgeons. We are
unable to predict how quickly, if at all, complex minimally invasive procedures
will be adopted by the medical community or, if they are adopted, the number of
procedures that will be performed.

        Even if the clinical safety and effectiveness of complex minimally
invasive procedures is established in general surgery, cardiac and other
specialties, surgeons, specialists and other physicians may choose not to


                                       18
<PAGE>


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

WIDESPREAD USE OF OUR PRODUCTS WILL REQUIRE SPONSORING THE TRAINING OF A LARGE
NUMBER OF SURGEONS, AND THE TIME REQUIRED TO INSTITUTE A TRAINING PROGRAM AND TO
TRAIN SUCH SURGEONS COULD ADVERSELY AFFECT NEAR TERM MARKET ACCEPTANCE.

         Evaluations of visualization technology such as ours conducted to date
have shown that there is a learning process involved for surgeons and other
members of the surgery team to become proficient with the use of the systems.
Based on the clinical and laboratory procedures performed to date, we cannot
assure you that visualization and information system enhancements incorporated,
or to be incorporated, in our products will prove suitable for use by a
substantial number of surgeons. If they prove unsuitable for a large number of
surgeons to use, the potential markets and applications for our products would
be significantly limited.

THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH ANY SCALE-UP OF MANUFACTURING WHICH
MAY BE REQUIRED TO MEET MARKET DEMAND AND BECOME PROFITABLE.

         We have never established high-volume manufacturing operations and if
we are required to do so to meet market demand or to become profitable, we may
not be able to establish or maintain reliable operations at commercially
reasonable costs. We may also require additional manufacturing facilities if
production volumes increase. Acquisition of new manufacturing facilities would
also likely involve relocation. Difficulties in scaling up manufacturing of
products could result from problems involving:

         -        quality control and assurance,

         -        component and service availability,

         -        adequacy of control policies and procedures,

         -        lack of qualified personnel,

         -        compliance with FDA regulations and the need for further FDA
                  approval of new manufacturing processes and facilities and

         -        other production constraints.

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

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

         Any significant supply interruption, or inventory shortage or overage,
would negatively impact our ability to manufacture our products. We use and rely
on specific components and services used in our systems for which we have only a
single source of supply. The manufacture of our products in larger commercial
quantities will


                                       19
<PAGE>


require a substantial increase in component supplies and will
likely necessitate the replacement of current suppliers or the addition of new
suppliers. The qualification of additional or replacement vendors for specified
components or services is a lengthy process. In addition, the substitution of
replacement vendors may entail re-engineering time and cost and could delay the
supply of our products.

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

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

        The manufacture and sale of medical devices intended for commercial
distribution are subject to extensive governmental regulation. Our failure to
comply with regulatory requirements would jeopardize our ability to market our
products. Noncompliance with applicable requirements can result in failure of
the regulatory agency to grant pre-market clearance or approval for devices,
withdrawal or suspension of approval, total or partial suspension of production,
fines, injunctions, civil penalties, refunds, recall or seizure of products and
criminal prosecution.

         Medical devices are regulated in the United States primarily by the FDA
and, to a lesser extent, by state agencies. Sales of medical device products
outside the United States are subject to foreign regulatory requirements that
vary from country to country. Generally, medical devices require pre-market
clearance or pre-market approval prior to commercial distribution. A
determination that information available on the medical device is not sufficient
to grant the needed clearance or approval will delay market introduction of the
product. In addition, material changes or modifications to, and changes in
intended use of, medical devices also are subject to FDA review and clearance or
approval. The FDA regulates the research, testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, promotion and distribution of
medical devices in the United States and the export of unapproved medical
devices from the United States to other countries. The time required to obtain
approvals required by foreign countries may be longer or shorter than that
required for FDA clearance, and requirements for licensing may differ from FDA
requirements. The current regulatory environment in Europe for medical devices
differs significantly from that in the United States. For additional information
concerning the regulatory framework under which we operate, please see
"Business--Regulation."

WE EXPECT TO ENCOUNTER RAPID TECHNOLOGICAL CHANGE AND SIGNIFICANT COMPETITION.

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

         We believe that a number of large companies, with significantly greater
financial, manufacturing, marketing, distribution and technical resources and
experience than ours, are focusing on the development of visualization products
for minimally invasive microsurgery. Several companies are currently developing
and marketing visualization products for minimally invasive microsurgery which
could be applied to general surgery, heart surgery, or to head, neck and spine
microsurgery.

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


                                       20
<PAGE>


WE EXPECT FLUCTUATIONS IN OUR OPERATING RESULTS.

         Our results of operations may vary significantly from quarter to
quarter depending upon numerous factors, including the following:

         -        timing and results of product evaluations,

         -        delays associated with the FDA and other regulatory approval
                  processes,

         -        demand for and utilization of our products,

         -        changes in our pricing policies or those of our competitors,

         -        changes in third-party payment guidelines,

         -        the number, timing and significance of product enhancements
                  and new product announcements by us or our competitors,

         -        our ability to develop, introduce and market new and enhanced
                  versions of our products on a timely basis,

         -        customer order deferrals in anticipation of enhancements or of
                  new product introductions by us or our competitors,

         -        product quality problems,

         -        personnel changes and

         -        the level of international sales.

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

        Our profitability is directly related to the level of payments for the
surgical procedures in which our products are involved, either by Medicare or
private insurance companies. We could be adversely affected by changes in
payment policies of government or private health care payors, particularly to
the extent any such changes affect payment for the procedure in which our
products are intended to be used. It is a continuing trend in U.S. health care
for such payments to be under continual scrutiny and downward pressure. We
believe that reimbursement in the future will be subject to increased
restrictions, both in the United States and in foreign markets and that the
overall escalating cost of medical products and services has led to and will
continue to lead to increased pressures on the health care industry, both
foreign and domestic, to reduce the cost of products and services, including
products which we offer.

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


                                       21
<PAGE>


         If we obtain the necessary foreign regulatory registrations or
approvals, market acceptance of our products in international markets would be
dependent, in part, upon the acceptance by the prevailing health care financing
system in each country. Health care financing systems in international markets
vary significantly by country and include both government sponsored health care
programs and private insurance. We cannot assure you that these financing
systems will endorse the use of our products.

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

         We have limited experience in directly marketing our products overseas.
Changes in overseas economic conditions, currency exchange rates, foreign tax
laws or tariffs or other trade regulations could negatively impact our business.
The anticipated international nature of our business is also expected to subject
our representatives, agents and distributors to laws and regulations of the
foreign jurisdictions in which they operate or in which our products are sold,
including laws regulating manufacture and sale of medical devices. In addition,
the laws of some foreign countries do not protect our intellectual property
rights to the same extent as do the laws of the United States.

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

         We face an inherent and significant business risk of exposure to
product liability claims in the event that the use of our products results in
personal injury or death. Also, in the event that any of our products proves to
be defective, we may be required to recall or redesign such products. Our
current product liability insurance coverage limit is $10.0 million per
occurrence and in the aggregate. Our coverage limits may not be adequate to
protect us from any liabilities we might incur in connection with the
development, manufacture and sale of our products. In addition, increased
product liability coverage may be required if additional products are used in
clinical evaluations or successfully commercialized. Product liability insurance
is expensive and in the future may not be available to us on acceptable terms,
if at all. A successful product liability claim or series of claims brought
against us in excess of our insurance coverage or a product recall would
negatively impact our business.

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

         Our future success will depend, in part, on our ability to continue
developing patentable products, enforcing our patents and obtaining patent
protection for our products both in the United States and in other countries.
The patent positions of medical device companies, however, are generally
uncertain and involve complex legal and factual questions. Patents may never
issue from any patent applications owned by or licensed to us. Even if patents
do issue, the claims allowed may not be sufficiently broad to protect our
technology. In addition, issued patents owned by or licensed to us may be
challenged, invalidated or circumvented, or the rights granted thereunder may
not provide us with competitive advantages.

         The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Litigation,
which would result in substantial expense, may be necessary to enforce any
patents issued or licensed to us and/or to determine the scope and validity of
proprietary rights of third parties or whether our products, processes or
procedures infringe any such third-party proprietary rights. We may also have to
participate in interference proceedings declared by the United States Patent and
Trademark Office, which could result in substantial expense, to determine the
priority of inventions covered by our issued United States patents or pending
patent applications. Furthermore, we may have to participate at substantial cost
in International Trade Commission proceedings to enjoin importation of products
which would compete unfairly with our products. Any adverse outcome of any
patent litigation, including interference proceedings, could subject us to
significant liabilities to third parties, require disputed rights to be licensed
from or to third parties or require us to cease using the technology in dispute.
Any such licenses may not be available on acceptable terms, if at all.
Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief that could effectively block our ability to make, use,
sell or otherwise practice our intellectual property, whether or not patented or
described in


                                       22
<PAGE>


pending patent applications, or to further develop or commercialize our products
in the United States and abroad and could result in the award of substantial
damages. Defense of any lawsuit or failure to obtain any such license could
damage our business.

         In addition to patents,we rely on unpatented trade secrets to protect
our proprietary technology. Others may independently develop or otherwise
acquire the same or substantially equivalent technologies or otherwise gain
access to our proprietary technology or disclose this technology. It is
difficult to protect rights to unpatented proprietary technology. Third parties
may obtain patent rights to these unpatented trade secrets, which patent rights
could be used to assert infringement claims against us. We also rely on
confidentiality agreements with our collaborators, employees, advisors, vendors
and consultants to protect our proprietary technology. These agreements may be
breached, we may not have adequate remedies for any breach and our trade secrets
may otherwise become known or be independently developed by competitors. In
addition, our agreements with employees and consultants require disclosure of
ideas, developments, discoveries or inventions conceived during employment or
consulting, as the case may be, and assignment to us of proprietary rights to
such matters related to our business and technology. The extent to which efforts
by others will result in patents and the effect on us of the issuance of such
patents is unknown.

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

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

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

         Our future business and operating results depend in significant part
upon the continued contributions of our key technical and senior management
personnel, many of whom would be difficult to replace and some of whom perform
important functions beyond those suggested by their job titles or descriptions.
Our business and future operating results also depend in significant part upon
our ability to attract and retain qualified management, manufacturing,
technical, marketing and sales and support personnel for our operations.
Competition for such personnel is intense, and we may not be successful in
attracting or retaining such personnel.

         Members of our clinical advisory boards consult with us exclusively in
the field of visualization, but are free to consult with other non-competing
instrumentation companies and are employed elsewhere on a full-time basis. As a
result, they only spend a limited amount of time on our business. Although we
have entered into consulting agreements, including confidentiality provisions
with each of the members of our clinical advisory boards, the consulting and
confidentiality agreements between us and each of the members of our clinical
advisory boards may be terminated or breached.

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

         The market prices and trading volumes for securities of emerging
companies, like ours, have historically been highly volatile and have
experienced significant fluctuations unrelated to the operating performance. The
market price of our common stock has historically been highly volatile and may
be significantly affected by factors such as:


                                       23
<PAGE>


         -        actual or anticipated fluctuations in our operating results,

         -        changes in financial estimates by securities analysts,

         -        announcements of technological innovations,

         -        new products or new contracts by us or our competitors,

         -        regulatory announcements,

         -        developments with respect to patents or proprietary rights,

         -        conditions and trends in the medical device and other
                  technology industries,

         -        adoption of new accounting standards affecting the medical
                  device industry, and

         -        general market conditions.

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

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

         Our research and development activities may involve the controlled use
of hazardous materials and chemicals. The risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, we could be held liable for any resultant damages, and any
such liability could exceed our resources. We may incur substantial cost to
comply with environmental regulations.

WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS AND ANY GAINS FROM YOUR INVESTMENT IN
OUR STOCK WILL HAVE TO COME FROM INCREASES IN THE PRICE OF SUCH STOCK.

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

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

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


                                       24
<PAGE>


Item 2. PROPERTIES

         Our facilities consist of approximately 6,500 square feet of office
space located in Carlsbad, California, in which our executive offices, plus some
marketing and sales staff are located. The lease for our Carlsbad facility
expires in January 2002. In addition, we maintain a facility of approximately
37,100 square feet in Westborough, Massachusetts in which our development,
engineering, manufacturing operations and customer service personnel are
located. We currently sublease approximately 19,280 square feet of this space to
three other parties and only occupy 17,820 square feet for our operations. The
leases under which we have acquired the right to occupy the Westborough
facilities expire at various points in time beginning in October 2001 and ending
in October 2002. We believe that suitable additional space will be available to
us, when needed, on commercially reasonable terms.

3. LEGAL PROCEEDINGS

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


                                       25
<PAGE>


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

        None.
                                     PART II

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

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

         Our Common Stock is traded on the over-the-counter market and prices
are quoted on the Nasdaq SmallCap Market under the symbol "VMTI." The following
table sets forth the high and low sale prices for the Common Stock on the Nasdaq
National market from January 1, 1999 through December 31, 2000.

<TABLE>
<CAPTION>

                                                    HIGH       LOW
                                                    ----       ---
<S>                                                 <C>         <C>
1st Quarter 1999 ............................       3.31        2.00

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

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

4th Quarter 1999 ............................       1.03        0.31

1st Quarter 2000 ............................       2.88        0.63

2nd Quarter 2000.............................       1.38        0.63

3rd Quarter 2000 ............................       2.00        0.94

4th Quarter 2000 ............................       1.50        0.19

</TABLE>

         On March 23, 2001 the last reported sale price of the Common Stock was
$0.81. As of March 13, 2001, there were approximately 142 holders of record of
the Common Stock.

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

         (b) Recent Sales of Unregistered Securities.

         On November 28, 2000, we sold 5,275 shares of our common stock to
Medtronic, Inc., in connection with the termination of an agreement with them.
These shares were issued in exchange for Medtronic assisting us with the
distribution of our products during a six month period following termination of
this agreement. We also sold 14,076 shares of our common stock to John Kennedy,
one of our officers, as partial payment of his regular salary. These shares were
issued under the terms of a common stock purchase agreement dated as of August
2, 2000 between us and Mr. Kennedy. All of these shares were issued as private
offerings in reliance upon an exemption from registration pursuant to Section
4(2) of the Securities Act of 1933.


                                       26
<PAGE>


Item 6. SELECTED FINANCIAL DATA

                             SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>

                                                                              YEARS ENDED DECEMBER 31,
                                                        -------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:                             1996         1997           1998         1999             2000
                                                        --------    ----------    -----------   -----------     -----------
                                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                     <C>         <C>           <C>           <C>             <C>
  Sales..............................................   $  2,244    $    4,141    $     6,572   $     5,516     $     6,539

  Costs and expenses:

     Cost of sales...................................      2,253         4,559          6,119         7,521           5,947

     Research and development........................      3,880         6,875          5,480         3,229           1,736

     Sales and marketing.............................      2,057         5,011          5,953         2,890           1,158

     General and administrative......................      3,103         5,499          5,039         2,178           1,925

     Restructuring expense...........................         --            --            940           690            (400)
                                                        --------    ----------    -----------   -----------     -----------
  Total costs and expenses...........................     11,293        21,944         23,531        16,508          10,366
                                                        --------    ----------    -----------   -----------     -----------
  Loss from operations...............................     (9,049)      (17,803)       (16,959)      (10,992)         (3,827)

  License income.....................................      1,493            --             --            --              --

  Interest income....................................        117           926            900           218             213

  Other gains/(losses)...............................         --            --           (662)           51              --
                                                        --------    ----------    -----------   -----------     -----------
  Net loss...........................................   $ (7,439)   $  (16,877)   $   (16,720)  $   (10,723)    $    (3,614)
                                                        ========    ==========    ===========   ===========     ===========

  Basic and diluted net loss per share (1)...........   $ (37.01)   $    (2.51)   $     (1.26)  $     (0.79)    $     (0.20)
                                                        ========    ==========    ===========   ===========     ===========

Shares used in computing basic and
     diluted loss per share (1)......................    201,000     6,731,000     13,312,000    13,594,000      17,982,000
                                                        ========    ==========    ===========   ===========     ===========

</TABLE>

<TABLE>
<CAPTION>

                                                                                YEARS ENDED DECEMBER 31,
                                                             --------------------------------------------------------
BALANCE SHEET DATA:                                            1996        1997        1998        1999        2000
                                                             --------    --------    --------    --------    --------
                                                                                       IN THOUSANDS
<S>                                                          <C>         <C>         <C>         <C>         <C>
Cash, cash equivalents and short-term
    investments ..........................................   $ 10,285    $ 24,113    $  8,803    $  1,658    $  2,934

  Working capital ........................................     10,805      25,977      12,128       2,972       5,113

  Total assets ...........................................     14,316      32,130      16,605       7,367       7,155

   Total debt ............................................         --          --          --          --          --

   Accumulated deficit ...................................    (13,620)    (30,498)    (47,218)    (57,941)    (61,555)

 Total stockholders' equity ..............................     12,961      29,866      14,666       4,584       6,151

</TABLE>

                                       27
<PAGE>


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

         This annual report may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including those discussed earlier at "risks and uncertainties." While this
outlook represents our current judgment on the future direction of our business,
such risks and uncertainties could cause actual results to differ materially
from any future performance suggested below. We undertake no obligation to
release publicly the results of any revisions to these forward-looking
statements to reflect events or circumstances arising after the date of this
annual report. The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto.

OVERVIEW OF OUR BUSINESS

         We develop, manufacture and market products that provide information to
doctors performing minimally invasive, general surgical, cardiac surgical and
other selected microsurgical procedures. We have not yet generated substantial
revenues from the sales of these products since our formation in July 1993. We
expect to continue to incur substantial losses for at least the next 12 months.
As of December 31, 2000, our accumulated deficit was approximately $61,555,000.
We are not certain that our development efforts will result in commercially
available products, that we will be successful in introducing new products under
development, or that required regulatory approval of products will continue to
be obtained in a timely manner, if at all.

         At December 31, 1998, 1999 and 2000, we had 76, 25 and 32 employees,
respectively. The number of our employees decreased in 1999 as a result of an
internal restructuring whereby we closed part of our Westborough operations and
consequently reduced staffing. We expect staffing to continue to increase
modestly in the near term to approximately 40 employees and stabilize at or near
that level for the balance of our fiscal year 2001. Our expectation is based on
the fact that significant development work on our core platform technology is
now complete and on strategic decisions to partner rather than develop an
independent distribution capability.

OUR RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999

     SALES

         We had revenues from product sales of $6,539,000 and $5,516,000 for the
years ended December 31, 2000 and 1999 respectively. The increase in revenues
during 2000 was primarily due to revenues generated from our Laparoscopic
Bariatric Surgery Program, which became an area of focus in 2000. Sales to
individual customers exceeding 10% or more of revenues in the years ended
December 31, were as follows: during 1998 three customers accounted for 34%, 25%
and 13% of revenues, respectively, during 1999, three customers accounted for
45%, 28% and 16% of revenues, respectively, and during 2000, two customers
accounted for 51% and 23% of revenues respectively.

     COSTS AND EXPENSES

         Cost of sales. Our cost of sales were $5,947,000 and $7,520,000 for the
years ended December 31, 2000 and 1999, respectively. The decrease in cost of
sales during 2000 was primarily due to a reduction in manufacturing overhead
expenses during 2000 compared to 1999.

         Research and development expenses. Our research and development
expenses were $1,736,000 and $3,229,000 for the years ended December 31, 2000
and 1999, respectively. The decrease in research and development expenses during
2000 was primarily attributable to decreases in staffing and related supply and
occupancy costs and a decrease in contract services related to development
efforts.


                                       28
<PAGE>


         Sales and marketing expenses. Our sales and marketing expenses were
$1,158,000 and $2,890,000 for the years ended December 31, 2000 and 1999,
respectively. The decrease in sales and marketing expenses during 2000 reflects
a reduction in staffing and related expenses as a result of an internal
restructuring and a one-time $806,000 sales expense reversal in connection with
the termination of our distribution agreement with Medtronic.

         General and administrative expenses. Our general and administrative
expenses were $1,925,000 and $2,178,000 for the years ended December 31, 2000
and 1999, respectively. The decrease during 2000 was primarily due to a
reduction in staffing and related expenses and a reduction in deferred
compensation expense.

         Restructuring expenses. We recorded credits for restructuring charges
of $400,000 and charges of $690,000 for the years ended December 31, 2000 and
1999, respectively. Restructuring credits during 2000 are primarily attributable
to us subleasing the second floor space of our facility in Westborough,
Massachusetts. The expenses in 1999 relate to our decision to close part of our
facilities in Westborough, after a significant reduction in our workforce during
the third quarter of 1999 and represented the value of continuing lease
obligations, prior to arranging subleases.

     OTHER INCOME AND LOSSES

         Interest income. Our net interest income was $213,000 and $218,000 for
the years ended December 31, 2000 and 1999, respectively. The decrease in 2000
was due primarily to decreasing average cash balances.

         Other gains and losses. We had no other gains or losses for the year
ended December 31, 2000 and other gains of $51,000 for the year ended December
31, 1999. The gains during 1999 relate to proceeds obtained from a sale of
securities in connection with an earlier license agreement signed in 1996 with
Imagyn Medical Technologies, Inc. (formerly Urohealth Systems, Inc.).

     TAXES

         At December 31, 2000, we had federal and state tax loss carryforwards
of approximately $48,857,000 and $42,127,000, respectively. The federal tax loss
carryforwards will expire in 2010. Approximately $408,000 of the state tax loss
carryforwards expired in 2000 and will continue to expire in 2001 unless
previously utilized. At December 31, 2000, we also had federal and state
research tax credit carryforwards of approximately $2,008,000 and $743,000,
respectively, which will begin to expire in 2010 unless previously utilized. We
have provided a full valuation allowance on the deferred tax assets as
realization of such assets is uncertain.

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

     SALES

         We had revenues from product sales of $5,516,000 and $6,572,000 for the
years ended December 31, 1999 and 1998, respectively. The decrease in revenues
from 1998 to 1999 was due to a reduction in sales of StereoSite systems, which
we no longer sell, and associated distribution fees paid by Sofamor Danek, one
of our former distributors, as well as a reduction in sales of our Series 8000
Advanced Visualization and Information System for minimally invasive cardiac
surgery during 1999. These reductions were partially offset by higher sales of
original equipment manufacturer products, including deliveries to a second
customer in 1999, by product deliveries to a second distributor for the head,
neck and spine market during 1999 and by product sales to OEC Medical
(subsequently acquired by General Electric) for the medical imaging market
during the 1999 period.

     COSTS AND EXPENSES

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


                                       29
<PAGE>


         Research and development expenses. Our research and development
expenses were $3,229,000 and $5,480,000 for the years ended December 31, 1999
and 1998, respectively. The decrease in research and development expenses was
primarily attributable to decreases in staffing and related supply and occupancy
costs and a decrease in contract services related to development efforts.

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

         General and administrative expenses. Our general and administrative
expenses were $2,178,000 and $5,039,000 for the years ended December 31, 1999
and 1998, respectively. The decrease was primarily due to a reduction in
staffing and related expenses following a second quarter restructuring in 1999,
a reduction in deferred compensation expense and lower professional, legal and
consulting service fees.

         Restructuring expenses. We recorded restructuring charges of $690,000
and $940,000 during the years ended December 31, 1999 and 1998, respectively.
The restructuring expenses during 1999 relate to a decision to close part of our
facilities in Westborough, Massachusetts after a significant reduction in our
workforce during the third quarter of 1999 and represents the value of
continuing lease obligations. The restructuring charges in 1998 related
primarily to termination and severance payments to employees in connection with
transfer of sales and marketing responsibility in the United States for our
Series 8000 System for minimally invasive cardiac surgery to a third party
distributor, termination and severance payments to employees in connection with
a general restructuring and work force reduction, and write down of assets
related to a strategic decision to discontinue distribution of a line of cardiac
instruments and sutures earlier than previously planned.

     OTHER INCOME AND LOSSES

         Interest income. Our net interest income was $218,000 and $900,000 for
the years ended December 31, 1999 and 1998, respectively. The decrease in 1999
was due primarily to decreasing average investment balances.

         Other gains and losses. We had other gains of $51,000 for the year
ended December 31, 1999 and other losses of $662,000 for the year ended December
31, 1998. The gains during 1999 relate to proceeds from a sale of securities in
connection with an earlier license agreement signed in 1996 with Imagyn Medical
Technologies, Inc. (formerly Urohealth Systems, Inc.), while the losses during
1998 relate to recognition of a permanent reduction in value of those
securities.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash used in operating activities was approximately $3,388,000,
$7,157,000 and $14,177,000 in 2000, 1999 and 1998, respectively. The decrease in
net cash used in operating activities during 2000 compared to 1999 was primarily
attributable to decreasing net losses and lower inventory purchases offset by
lower non-cash expenses for depreciation and amortization. The decrease in net
cash used in operating activities during 1999 compared to 1998 was primarily
attributable to decreasing net losses and lower inventory purchases offset by
lower non-cash expenses for depreciation and amortization and no customer
advance payments in 1999 compared to 1998.

         Net cash used in investing activities was approximately $210,000 in
2000 and net cash provided by investing activities was approximately $809,000
and $14,209,000 in 1999 and 1998, respectively. The decrease in net cash
provided by investing activities in 2000 compared to 1999 was primarily
attributable to declining balances of short-term investments reaching maturity
partially offset by decreasing purchases of property and equipment. The decrease
in net cash provided by investing activities in 1999 compared to 1998 was also
primarily attributable to declining balances of short term investments reaching
maturity partially offset by decreasing purchases of property and equipment.


                                       30
<PAGE>


         Cash flows from financing activities were $4,819,000, $91,000 and
$265,000 in 2000, 1999 and 1998, respectively. The cash flows from financing
activities during the 2000 period were primarily attributable to the sale of
stock to three of our stockholders with net proceeds of approximately
$4,591,000, along with an increase in purchases of stock by employees through
our employee stock purchase plan, partially offset by a lower level of stock
option exercises. The cash flows from financing activities in 1999 and 1998 were
primarily attributable to proceeds from the purchase of stock by employees
through our employee stock purchase plan and the exercise of stock options.

         We recently announced that we are working on a strategic initiative to
extend our business to become more involved in the medical treatment of severe
obesity. If we decide to pursue this initiative, we will be required to raise
additional funds to support our operations. In addition, if we are unable to
sustain our cash flow under our current business plan, we will be required to
raise additional funds. If we are unable to raise sufficient funds from an
offering of securities or otherwise, we may be unable to continue operations at
their current level and may be unable to pursue this new objective. Even if we
are successful in raising additional funds, circumstances, including slow rate
of market acceptance of our products or our inability to scale up manufacturing,
would accelerate our use of proceeds from any offering we might do and require
us to seek additional funds to support our operating requirements.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         At December 31, 2000, our investment portfolio included fixed-income
securities of $2.1 million. These securities are subject to interest rate risk
and will decline in value if interest rates increase. Due to the short-term
nature of our investment portfolio, an immediate 10 percent increase in interest
rates would have no material impact on our financial condition or results of
operations.

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

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

          Not applicable.

                                    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.


                                       31
<PAGE>


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.


                                       32
<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, 1999
                  and 2000................................................................F-3
         Consolidated Statements of Operations for the years
                  ended December 31, 1998, 1999 and 2000..................................F-4
         Consolidated Statements of Stockholders' Equity for
                  the years ended December 31, 1998, 1999 and 2000........................F-5
         Consolidated Statements of Cash Flows for the years
                  ended December 31, 1998, 1999 and 2000..................................F-9
         Notes to Consolidated Financial Statements.......................................F-10

</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 except for Schedule II required under Regulation S-X, Rule
         5-04. which is included herein following the Financial Statements.

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


                                       33
<PAGE>



(c)  Exhibits

<TABLE>
<CAPTION>

  NUMBER
  EXHIBIT               DESCRIPTION
  -------               -----------
<S>               <C>
3.2(1)            Restated Bylaws.
4.1(1)            Form of certificate for common stock.
10.1(1)           Series A-1 Preferred Stock Purchase Agreement with the
                  purchasers listed on Schedule A thereto, dated July 27, 1995.
10.2*(1)          Manufacturing Supply Agreement with Kaiser Electro-Optics,
                  Inc., dated July 19, 1995.
10.3(1)           Amended and Restated Investors' Rights Agreement with the
                  stockholders listed on Schedule A thereto, dated November 27,
                  1996.
10.4(1)           Amendment to the Amended and Restated Investors' Rights
                  Agreement with Heartport and the stockholders listed on
                  Exhibit A thereto, dated February 22, 1997.
10.5(1)           Letter Agreement regarding Investment Representations and
                  Registration Rights between us and Urohealth Systems, Inc.,
                  dated December 13, 1996.
10.6*(1)          Consulting Agreement with Harry R. McKinley, dated September
                  15, 1995, as amended.
10.7(1)           Form of Professional Services Agreement.
10.8(1)           Form of Non-Disclosure Agreement for Proprietary or Business
                  Confidential Information.
10.9(1)           Non-Competition, Non-Disclosure and Patent and Inventions
                  Assignment Agreement among Harry R. McKinley, McKinley Optics,
                  Inc. and AST, dated December 18, 1991.
10.10*(1)         License and Development Agreement among Harry R. McKinley,
                  McKinley Optics, Inc. and AST, dated December 18, 1991, as
                  amended on June 28, 1994.
10.11*(1)         License Agreement with Allen Newman, dated September 2, 1994,
                  as amended December 13, 1996.
10.12*(1)         Agreement to Amend License and Development Agreement with
                  Harry R. McKinley and McKinley Optics, Inc., dated September
                  15, 1995.
10.13*(1)         License Agreement with Kaiser Aerospace, dated July 19, 1995.
10.14*(1)         Technology Strategic Alliance: Memorandum of Understanding
                  with Kaiser Electro Optics, Inc., dated July 19, 1995.
10.15*(1)         Non-Exclusive License Agreement with Fuji Photo Film Co., Ltd.
                  and Fuji Photo Film Optical Co., Ltd., dated June 25, 1996.
10.16(1)          Lease dated April 14, 1994, as amended by a certain First
                  Amendment to Lease dated March 29, 1996 and a Second Amendment
                  to Lease dated October 22, 1996 with Robert F. Tambone, as
                  Trustee of MAT Realty Trust, u/d/t dated June 4, 1986.
10.17(1)          Standby Letter of Credit from Silicon Valley Bank, dated
                  August 9, 1996.
10.18(1)          1995 Stock Option Plan.
10.19(1)          1995 Stock Option Plan Form of Notice of Grant.
10.20(1)          1995 Stock Option Plan Form of Stock Option Agreement.
10.21(1)          1995 Stock Option Plan Form of Stock Purchase Agreement.
10.22(1)          1997 Stock Option/Stock Issuance Plan, as amended.
10.23(1)          1997 Stock Option/Stock Issuance Plan Form of Notice of Grant.
10.24(1)          1997 Stock Option/Stock Issuance Plan Form of Stock Option
                  Agreement.
10.25(1)          1997 Stock Option/Stock Issuance Plan Form of Stock Purchase
                  Agreement.
10.26(1)          1997 Employee Stock Purchase Plan.
10.27(1)          Form of Indemnification Agreement between us and each of our
                  directors.
10.28(1)          Form of Indemnification Agreement between us and each of our
                  officers.
10.29(1)          Form of Waiver of Registration Rights, dated February 28,
                  1997.
10.30(1)          1997 Stock Option/Stock Issuance Plan Form of Stock Issuance
                  Agreement.
10.31(1)          Stock Issuance Agreement dated March 3, 1997 with those
                  purchasers set forth in Schedule A.
10.32(3)          Common Stock Purchase Warrant with Silicon Valley Bank, dated
                  October 23, 1997.
10.33(3)          Second Amendment to the Amended and Restated Investor's Rights
                  Agreement with Silicon Valley Bank and the Stockholders listed
                  on Exhibit A thereto, dated October 22, 1997.
10.34(3)          Technology Strategic Alliance: Memorandum of Understanding
                  with Kaiser Electro Optics, dated December 9, 1997.

</TABLE>

                                       34
<PAGE>


<TABLE>


<S>               <C>
10.35(3)          Amendment to Manufacturing Supply Agreement with Kaiser
                  Electro-Optics, dated December 9, 1997.
10.36(3)          Amendment to License Agreement with Kaiser Aerospace, dated
                  December 8, 1997.
10.37*(3)         License Agreement with Kaiser Aerospace, dated December 9,
                  1997.
10.38(4)          Amended and Restated Sales Agreement with Medtronic, Inc.,
                  dated June 26, 1998 (with certain confidential portions
                  omitted).
10.39(5)          Vista Medical Technologies, Inc., Industrial Real Estate Lease
                  with Ocean Point Tech Centre dated July 7, 1998.
10.40(6)          Amendment Number One to License Agreement with Imagyn Medical
                  Technologies, Inc., dated October 2, 1998.
10.41(6)          Employment Agreement with John Lyon dated December 28, 1998.
10.42(6)          Employment Agreement with Koichiro Hori dated December 28,
                  1998.
10.43(6)          Employment Agreement with Allen Newman dated December 28,
                  1998.
10.44(6)          Employment Agreement with Robert De Vaere dated December 28,
                  1998.
10.45(7)          Fifth Amendment to Lease dated April 30, 1999.
10.46(7)          Sofamor Danek letter Amendment dated April 1999.
10.47(8)          Agreement with John Lyon dated July 20, 1999.
10.48(8)          Agreement with Koichiro Hori dated July 20, 1999.
10.49(8)          Agreement with Allen Newman dated July 20, 1999.
10.50(8)          Agreement with Robert De Vaere dated July 20, 1999.
10.51*(9)         Sales Agreement with Richard Wolf, GmbH, dated December 22,
                  1999.
10.52(10)         Termination Agreement with Medtronic, Inc., dated March 27,
                  2000.
10.53(10)         Transition Agreement with Medtronic,Inc., dated March 27,
                  2000.
10.54(10)         Common Stock purchase Agreement with John Kennedy, dated as of
                  August 2, 2000.
10.55             Amendment Two to Industrial Real Estate Lease with Ocean
                  Pacific Tech Centre, dated January 30, 2001.
10.56             Exclusive Distribution Agreement with Jomed International,
                  dated as of May 19, 2000.
10.57             Cooperative Technology Agreement with Jomed International,
                  dated as of May 19, 2000.
23.1              Consent of Ernst & Young LLP, Independent Auditors.
24.1              Power of Attorney (included on Signature Page).

--------
</TABLE>

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

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

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

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

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

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

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

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

(9)               Incorporated by reference to our Form 10-K, filed on March 29,
                  2000.

(10)              Incorporated by reference to our Form 10-Q, filed May 12,
                  2000.


                                       35
<PAGE>


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

SUPPLEMENTAL INFORMATION

         Copies of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held June 7, 2001 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.


                                       36
<PAGE>


     SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                        VISTA MEDICAL TECHNOLOGIES, INC.

         Date:  March 29, 2001          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 Stephen A. Gorgol, his or
her attorney-in-fact, with power of substitution in any and all capacities, to
sign any amendments to this Annual Report on Form 10-K, and to file the same
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his or her substitute or substitutes may do or cause to be
done by virtue hereof.

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

<TABLE>
<CAPTION>

    SIGNATURE                                TITLE                                      DATE
    ---------                                -----                                      ----
<S>                                   <C>                                          <C>

/s/  John R. Lyon                     President, Chief Executive                   March 29, 2001
-------------------------------       Officer and Director (Principal
    (John R. Lyon)                    Executive Officer)


/s/  Stephen A. Gorgol                Vice President of Finance and                March 29, 2001
-------------------------------       Chief Financial Officer (Principal
    (Stephen A. Gorgol)               Financial and Accounting Officer)


/s/  James C. Blair                   Chairman of the Board and Director           March 29, 2001
-------------------------------
    (James C. Blair)


/s/  Olav B. Bergheim                 Director                                     March 29, 2001
-------------------------------
    (Olav B. Bergheim)


/s/  Nicholas B. Binkley              Director                                     March 29, 2001
-------------------------------
    (Nicholas B. Binkley)


/s/  Daniel J. Holland                Director                                     March 29, 2001
-------------------------------
    (Daniel J. Holland)


/s/  Larry M. Osterink                Director                                     March 29, 2001
------------------------------
     (Larry M. Osterink)

</TABLE>


                                       37
<PAGE>



                        Vista Medical Technologies, Inc.

                   Index to Consolidated Financial Statements

<TABLE>

<S>                                                                         <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2

Consolidated Financial Statements

Consolidated Balance Sheets at December 31, 1999 and 2000.................. F-3
Consolidated Statements of Operations for the years ended
         December 31, 1998, 1999 and 2000.................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
         December 31, 1998, 1999 and 2000.................................. F-5
Consolidated Statements of Cash Flows for the years ended
         December 31, 1998, 1999 and 2000.................................. F-7
Notes to Consolidated Financial Statements................................. F-8

</TABLE>


                                      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, 1999 and 2000 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vista Medical
Technologies, Inc. at December 31, 1999 and 2000 and the results of its
consolidated operations and its cash flows for each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.

As discussed in Note 1 to the financial statements, Vista Medical Technologies,
Inc. continues to experience losses from operations and has accumulated losses
aggregating $61.6 million through December 31, 2000. This raises substantial
doubt about its ability to continue as a going concern. Management's plan as to
this matter is described in Note 1. The 2000 financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.

                                                   /s/ Ernst & Young LLP

San Diego, California
January 29, 2001


                                      F-2
<PAGE>


                        Vista Medical Technologies, Inc.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                                                          DECEMBER 31,
ASSETS                                                                             --------------------------
Current assets:                                                                        1999           2000
                                                                                   --------------------------
<S>                                                                                <C>            <C>
   Cash and cash equivalents ...................................................   $ 1,368,910    $ 2,589,006

   Short-term investments.......................................................       289,189        345,224

   Accounts receivable, net.....................................................     1,177,109      1,363,915

   Inventories, net ............................................................     2,649,542      1,701,668

   Other current assets.........................................................       269,397        116,868
                                                                                   ------------   ------------
Total current assets ...........................................................     5,754,147      6,116,681

Property and equipment, net.....................................................     1,320,397        900,083

Patents and other assets, net...................................................       292,178        137,747
                                                                                   ------------   ------------
Total Assets ...................................................................   $ 7,366,722    $ 7,154,511
                                                                                   ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:

   Accounts payable.............................................................   $   985,520    $   460,168

   Accrued compensation.........................................................       205,481        192,660

   Accrued liabilities..........................................................     1,591,276        350,521
                                                                                   ------------   ------------
Total current liabilities ......................................................     2,782,277      1,003,349

Commitments

Stockholders' equity:
   Common stock, $.01 par value:

      Authorized shares - 35,000,000

      Issued and outstanding shares - 13,795,525 in 1999 and
         19,589,386 in 2000.....................................................        137,955       195,894

   Additional paid-in capital...................................................     63,042,737    67,856,614

   Notes receivable from stockholders ..........................................        (78,375)      (78,375)

   Deferred compensation........................................................       (576,738)     (267,951)

   Unrealized gain/loss on investments .........................................             --            --

   Accumulated deficit..........................................................    (57,941,134)   (61,555,020)
                                                                                   ------------   ------------
Total stockholders' equity .....................................................      4,584,445      6,151,162
                                                                                   ------------   ------------
Total liabilities and stockholders' equity .....................................   $  7,366,722   $  7,154,511
                                                                                   ============   ============

</TABLE>


SEE ACCOMPANYING NOTES

                                      F-3
<PAGE>


                        Vista Medical Technologies, Inc.

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>

                                                                           YEARS ENDED DECEMBER 31,
                                                               --------------------------------------------
                                                                   1998            1999            2000
                                                               ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>
Sales ......................................................   $  6,572,473    $  5,516,104    $  6,539,213

Costs and expenses:

   Cost of sales............................................      6,119,108       7,520,480       5,946,887

   Research and development.................................      5,479,788       3,229,330       1,735,617

   Sales and marketing......................................      5,953,102       2,890,436       1,158,422

   General and administrative...............................      5,039,183       2,177,517       1,925,168

   Restructuring expense(recovery) .........................        939,919         690,269        (399,750)
                                                               ------------    ------------    ------------
Total cost and expenses ....................................     23,531,100      16,508,032      10,366,344
                                                               ------------    ------------    ------------
Loss from operations........................................    (16,958,627)    (10,991,928)     (3,827,131)

Interest income.............................................        900,379         218,017         213,245

Other gains/(losses) .......................................       (662,090)         50,625              --
                                                               ------------    ------------    ------------

Net loss....................................................   $(16,720,338)   $(10,723,286)   $ (3,613,886)
                                                               ============    ============    ============

Basic and diluted loss per share ...........................   $      (1.26)   $      (0.79)   $      (0.20)
                                                               ============    ============    ============

Shares used in basic and diluted loss per
   share computations ......................................     13,312,366      13,594,328      17,982,089
                                                               ============    ============    ============

</TABLE>

SEE ACCOMPANYING NOTES


                                       F-4
<PAGE>


                        Vista Medical Technologies, Inc.

           Consolidated Statements of Stockholders' Equity (continued)

<TABLE>
<CAPTION>

                                                       COMMON STOCK                    ADDITIONAL                   NOTES
                                             -------------------------------            PAID-IN                  RECEIVABLE
                                               SHARES                AMOUNT             CAPITAL               FROM STOCKHOLDERS
                                             ----------             --------           ----------             -----------------
<S>                                          <C>                    <C>                <C>                    <C>
Balance at December 31, 1997                 13,407,038             $134,071           $62,531,513                 $     (78,375)

Exercise of stock
        options for cash                        119,627                1,196                60,626                 $          --
      Issuance of stock
        under employee stock
        purchase plan                            45,436                  454               202,870                            --
     Issuance of warrant
        in connection with
        credit facility                              --                   --               134,833                            --
     Deferred compensation                           --                   --               (73,641)                           --
     Amortization of
        deferred compensation                        --                   --                    --                            --
     Adjustments to unrealized
         gain (loss) on investments
         resulting from
         realization of loss on
         investment                                  --                   --                    --                            --
      Net loss                                       --                   --                    --                            --
                                             ----------             --------           -----------                  ------------

Balance at December 31, 1998                 13,572,101             $135,721           $62,856,201                 $     (78,375)
                                             ==========             ========           ===========                  ============
Exercise of stock
        options for cash                        178,158                1,781                41,086                            --
      Issuance of stock
        under employee stock
        purchase plan                            45,266                  453                47,622                            --
     Issuance of warrant
        in connection with
        offering                                     --                   --                10,828                            --
     Deferred compensation -
        issuance of options to
        consultants                                  --                   --                87,000                            --
     Amortization of
        deferred compensation                        --                   --                    --                            --
     Adjustments to unrealized
         gain (loss) on investments
         resulting from
         realization of loss on
         investment                                  --                   --                    --                            --
      Net loss                                       --                   --                    --                            --
                                             ----------             --------           -----------                  ------------

Balance at December 31, 1999                 13,795,525             $137,955           $63,042,737                  $    (78,375)
                                             ==========             ========           ===========                  ============


</TABLE>

                                      F-5
<PAGE>


<TABLE>
<CAPTION>

                                            DEFERRED        UNREALIZED        ACCUMULATED                    COMPREHENSIVE
                                          COMPENSATION      GAIN (LOSS)         DEFICIT         TOTAL             LOSS
                                          ------------      -----------       -----------       -----        -------------
<S>                                       <C>               <C>               <C>               <C>          <C>
Balance at December 31, 1997              $(1,942,074)        $(416,313)      $(30,497,510)     $29,731,312   $(17,293,351)
Exercise of stock
           options for cash                         --               --                 --           61,822
         Issuance of stock
           under employee stock
           purchase plan                            --               --                 --          203,324
         Issuance of warrant
           in connection with
           credit facility                          --               --                 --          134,833
         Deferred compensation                 213,058               --                 --          139,417
         Amortization of
           deferred compensation               698,596               --                 --          698,596
         Adjustments to unrealized
           gain (loss) on investments
           resulting from
           realization of loss on
           investment                               --          417,524                 --          417,524        417,524
         Net loss                                   --               --        (16,720,338)     (16,720,338)   (16,720,338)
                                           -----------      -----------       ------------      -----------   ------------

Balance at December 31,1998                $(1,030,420)          $1,211       $(47,217,848)     $14,666,490   $(16,302,814)
                                           ===========      ===========       ============      ===========   ============

Exercise of stock
           options for cash                         --               --                 --           42,867
         Issuance of stock
           under employee stock
           purchase plan                            --               --                 --           48,075
         Issuance of warrant
           in connection with
           offering                                 --               --                 --           10,828
         Deferred compensation-
           issuance of options to
           consultants                         (87,000)              --                 --               --
         Amortization of
           deferred compensation               540,682               --                 --          540,682
         Adjustments to unrealized
           gain (loss) on investments
           resulting from
           realization of loss on
           investment                               --           (1,211)                --           (1,211)        (1,211)
         Net loss                                   --               --        (10,723,286)     (10,723,286)   (10,723,286)
                                           -----------      -----------      -------------      -----------   ------------
Balance at December 31, 1999               $  (576,738)     $        --      $ (57,941,134)     $ 4,584,445   $(10,724,497)
                                           ===========      ===========      =============      ===========   ============

</TABLE>

SEE ACCOMPANYING NOTES


                                      F-6
<PAGE>


                        Vista Medical Technologies, Inc.

           Consolidated Statements of Stockholders' Equity (continued)

<TABLE>
<CAPTION>

                                                          COMMON STOCK                    ADDITIONAL                 NOTES
                                                 -------------------------------           PAID-IN                RECEIVABLE
                                                   SHARES                AMOUNT            CAPITAL             FROM STOCKHOLDERS
                                                 ----------             --------         -----------           ----------------
<S>                                              <C>                    <C>              <C>                   <C>
Balance at December 31, 1999                     13,795,525             $137,955         $63,042,737           $    (78,375)

Exercise of stock
        options for cash                             28,612                  286              12,017           $         --
      Issuance of stock
        under employee stock
        purchase plan                                91,487                  915              44,577                     --
     Deferred compensation                               --                   --              52,870                     --
     Amortization of
        deferred compensation                            --                   --                  --                     --
     Issuance of common stock
        in conjunction with a
        second offering at $0.85
        per share                                 5,654,411               56,544           4,577,653
     Issuance of warrant
        for services                                     --                   --             103,595
     Issuance of common
        stock to employee                            14,076                  141              15,518
     Issuance of common
        to business partner                           5,275                   53               7,647
     Net loss                                            --                   --                  --                     --
                                                 ----------             --------         -----------           ------------
Balance at December 31, 2000                     19,589,386             $195,894         $67,856,614           $   ( 78,375)
                                                 ==========             ========         ===========           ============

</TABLE>


                                      F-7
<PAGE>


<TABLE>
<CAPTION>

                                               DEFERRED         UNREALIZED      ACCUMULATED                    COMPREHENSIVE
                                             COMPENSATION       GAIN (LOSS)       DEFICIT          TOTAL           LOSS
                                            --------------      -----------    --------------   -----------    -------------
<S>                                         <C>                 <C>            <C>              <C>            <C>
Balance at December 31, 1999                $     (576,738)      $       --     $ (57,941,134)   $ 4,584,455    $(10,724,497)

Exercise of stock
       options for cash                                 --               --                --         12,303
     Issuance of stock
       under employee stock
       purchase plan                                    --               --                --         45,492
     Deferred compensation                         (52,870)              --                --             --
     Amortization of
       deferred  compensation                      361,657               --                --        361,657
     Issuance of common stock
       in conjunction with a
       second offering at $0.85
       per share                                                                                   4,634,197
     Issuance of warrant
       for services                                                                                  103,595
     Issuance of common
       stock to employee                                                                              15,659
     Issuance of common
       to business partner                                                                             7,700
     Net loss                                           --               --       (3,613,886)     (3,613,886)     (3,613,886)
                                            --------------      -----------    --------------   ------------   -------------
Balance at December 31, 2000                $     (267,951)     $        --    $ (61,555,020)   $  6,151,162   $  (3,613,886)
                                            ==============      ===========    =============    ============   =============

</TABLE>

SEE ACCOMPANYING NOTES


                                      F-8
<PAGE>


                        Vista Medical Technologies, Inc.

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                                 YEARS ENDED DECEMBER 31,
                                                                                   -----------------------------------------------
                                                                                        1998              1999            2000
                                                                                   -----------------------------------------------
<S>                                                                                <C>               <C>               <C>
OPERATING ACTIVITIES
Net loss.........................................................................  $(16,720,338)     $(10,723,286)     $(3,613,886)
Adjustments to reconcile net loss to net cash used for operating activities:
      Depreciation and amortization..............................................     2,380,772         1,053,674          729,126
      Amortization of premium on short-term investments..........................       128,346              (301)              --
      Non-cash restructuring charges.............................................       139,417                --               --
      Amortization of deferred compensation......................................       698,596           540,682          361,657
      Amortization of deferred interest expense related to stock warrants........        26,964            10,828               --
      Write-down for impairment on available for sale securities.................       662,090                --               --
      Gain on sale of securities...............................................              --           (50,625)              --
      Changes in operating assets and liabilities, net of effect of
         acquisitions:
               Accounts receivable...............................................      (230,617)         (424,876)        (186,806)
               Inventories.......................................................    (1,009,371)        1,704,797          947,874
               Other current assets..............................................       104,421          (111,954)         152,529
               Accounts payable..................................................      (664,669)          433,080         (525,353)
               Accrued compensation..............................................      (215,936)          (95,326)         (12,822)
               Accrued liabilities...............................................       523,680           506,266       (1,240,754)
                                                                                    -----------     -------------    -------------
Net cash flows used for operating activities.....................................   (14,176,645)       (7,157,041)      (3,388,435)

INVESTING ACTIVITIES
Purchases of short-term investments..............................................    (2,291,745)         (113,299)         (56,035)
Maturities of short-term investments.............................................    17,770,944         1,000,000               --
Sale of equity securities........................................................            --            81,535               --
Increase in patent and other assets..............................................      (250,000)               --               --
Purchase of property and equipment...............................................    (1,020,397)         (159,031)        (154,380)
                                                                                    -----------     -------------    -------------
Net cash flows (used for) provided by investing activities.......................    14,208,802           809,205        (210,415)

FINANCING ACTIVITIES

Issuance of common stock, net....................................................       265,145            90,942       4,818,946
                                                                                    -----------     -------------    -------------
Net cash flows provided by financing activities..................................       265,145            90,942        4,818,946
Net increase (decrease) in cash and cash equivalents.............................       297,302        (6,256,894)       1,220,096
Cash and cash equivalents at beginning of year...................................     7,328,502         7,625,804        1,368,910
                                                                                    -----------     -------------    -------------
Cash and cash equivalents at end of year.........................................   $ 7,625,804     $   1,368,910    $   2,589,006
                                                                                    ===========     =============    =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...........................................................   $       776     $          --    $          --
                                                                                    ===========     =============    =============

</TABLE>

SEE ACCOMPANYING NOTES


                                       F-9
<PAGE>


                        Vista Medical Technologies, Inc.

                   Notes to Consolidated Financial Statements

                                December 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS ACTIVITY

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

BASIS OF PRESENTATION

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company believes that its current
cash, cash equivalents and short-term investments of $2.9 million as of December
31, 2000, together with anticipated product revenues and interest income, will
be sufficient to meet its anticipated capital requirements through December
2001. However, certain circumstances, including slow rate of market acceptance
of its products or inability to scale up manufacturing, would accelerate use of
these funds and require it to seek additional funds to support operating
requirements. There can be no assurance that the requisite fundings will be
consummated in the necessary time frame or on terms acceptable to the Company.
Should the Company be unable to raise sufficient funds, the Company may be
required to curtail its operating plans and possibly relinquish rights to
portions of the Company's technology or products.

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES

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

REVENUE RECOGNITION

The Company recognizes revenue pursuant to Staff Accounting Bulletin ("SAB") No.
101 "REVENUE RECOGNITION IN FINANCIAL STATEMENTS." Accordingly, revenue is
recognized when all four of the following criteria are met: (i) persuasive
evidence that an arrangement exists; (ii) delivery of the product and/or
services has occurred; (iii) the selling price is fixed or determinable and;
(iv) collectibility is reasonably assured. Sales returns are estimated based on
the historical experience and management's expectations and are recorded at the
time product revenue is recognized. Shipping and handling costs are included in
cost of sales.


                                      F-10
<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 of three months or less when purchased 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, 2000, the cost of cash
equivalents and short-term investments was equivalent to fair value and the
Company had no unrealized gains or losses.

As of December 31, 1999 and 2000, the Company's cash, cash equivalents and
short-term investments were classified as available-for-sale and consisted of:

<TABLE>
<CAPTION>

                                            1999         2000
                                         -----------------------
<S>                                      <C>          <C>
Cash                                     $  361,813   $  310,967
Money market funds                        1,007,097    2,278,039
Certificates of deposit                     289,189      345,224
                                         ----------   ----------
                                         $1,658,099   $2,934,230
                                         ==========   ==========

</TABLE>

All of the Company's debt securities mature in 2001.

CONCENTRATION OF CREDIT RISK

The Company provides credit, in the normal course of business, to commercial
entities that meet specified credit requirements. The Company's principal
customers consist of original equipment manufacturers and distribution partners.
The Company provides for losses from uncollectible accounts and such losses have
historically not exceeded management's expectations. As of December 31, 2000,
two customers comprised $301,575 and $612,468, or 22 % and 44% of the
outstanding trade receivables, respectively.

INVENTORIES

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


                                      F-11
<PAGE>


                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)

PROPERTY AND EQUIPMENT

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

PATENTS

Patents are carried at cost and 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
value. There have not been any impairments of long-lived assets to date.

RESTRUCTURING EXPENSES

The Company recorded credits associated with restructuring expenses of $400,000
during 2000. The partial recovery represents the subletting of the second floor
of the Company's facility in Westborough, Massachusetts. During 1999, the
Company recorded a $690,000 restructuring charge.

STOCK-BASED COMPENSATION

As permitted by Statement of Financial Accounting Standard ("SFAS") No. 123, the
Company has elected to follow Accounting Principles Board Opinion ("APB") No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related Interpretations 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.

Deferred compensation for options granted to non-employees has been determined
in accordance with SFAS 123 and Emerging Issues Task Force Issue ("EITF") No.
96-18 as the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measured. Deferred charges
for options granted to non- employees are periodically remeasured as the
underlying options vest.

NEW ACCOUNTING STANDARDS

In June 1998, the FASB issued SFAS 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES," as amended in June 2000 by SFAS 138, "ACCOUNTING FOR
CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES," which requires
companies to recognize all derivatives as either assets or liabilities in the
balance sheet and measure such instruments at fair value. As amended by SFAS
137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF
THE EFFECTIVE DATE OF FASB STATEMANT NO. 133," the provisions of


                                      F-12
<PAGE>


                    Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)


SFAS 133 will require adoption no later than the beginning of the Company's
fiscal year ending December 31, 2001. Adoption of SFAS 133, as amended by SFAS
138, is not expected to have a material impact on the Company's financial
statements.

NEW ACCOUNTING STANDARDS (CONTINUED)


In March 2000, the FASB issued FASB interpretation ("FIN") No. 44, "ACCOUNTING
FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB
OPINION NO. 25." The interpretation requires that stock options that have been
modified to effectively reduce the exerxcise price generally be accounted for as
variable. The Company adopted the Interpretation prospectively as of July 1,
2000. The adoption of the interpretation has not had a significant impact on the
Company's financial statements.

2. BALANCE SHEET COMPONENTS

Accounts receivable consist of the following:

<TABLE>
<CAPTION>

                                                             December 31,
                                                         1999           2000
                                                     --------------------------
<S>                                                  <C>            <C>
Gross accounts receivable                            $ 1,210,884    $ 1,377,224
Less: reserves                                           (33,775)       (13,309)
                                                     -----------    -----------
                                                     $ 1,177,109    $ 1,363,915
                                                     ===========    ===========

</TABLE>

Inventories consists of the following:

<TABLE>
<CAPTION>

                                                            December 31,
                                                         1999           2000
                                                     --------------------------
<S>                                                  <C>            <C>
Parts                                                $ 3,574,107    $ 2,261,441
Work in process                                          334,437        461,269
Finished goods                                         1,360,068      1,224,706
                                                     -----------    -----------
                                                       5,268,612      3,947,416
Less: reserves                                        (2,619,070)    (2,245,748)
                                                     -----------    -----------
                                                     $ 2,649,542    $ 1,701,668
                                                     ===========    ===========

</TABLE>


                                      F-13
<PAGE>


                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)


2. BALANCE SHEET COMPONENTS (CONTINUED)


Property and equipment consists of the following:

<TABLE>
<CAPTION>

                                                             December 31,
                                                         1999           2000
                                                     --------------------------
<S>                                                  <C>            <C>
Machinery and equipment                              $ 1,539,408    $ 1,570,711
Office computers, furniture and equipment                991,346      1,020,282
Marketing demonstration equipment                      3,251,392      3,336,314
Leasehold improvements                                   282,521        291,740
                                                     -----------    -----------
                                                       6,064,667      6,219,047
Less: accumulated depreciation                        (4,744,270)    (5,318,964)
                                                     -----------    -----------
                                                     $ 1,320,397    $   900,083
                                                     ===========    ===========

</TABLE>

Patents and other assets consists of the following:

<TABLE>
<CAPTION>

                                                            December 31,
                                                        1999           2000
                                                     ------------------------
<S>                                                  <C>            <C>
Patents and other intangible assets                  $ 229,621      $ 229,621
Prepaid royalties                                      187,500         67,500
                                                     ---------      ---------
                                                       417,121        297,121
Less: accumulated amortization                        (124,943)      (159,374)
                                                     ---------      ---------
                                                     $ 292,178      $ 137,747
                                                     =========      =========

</TABLE>

Accrued liabilities consists of the following:

<TABLE>
<CAPTION>

                                                            December 31,
                                                        1999            2000
                                                     --------------------------
<S>                                                  <C>            <C>
Customer advances                                    $  430,539     $     4,173
Deferred royalty payments                               434,350              --
Restructuring reserves                                  628,733              --
OEM warranty                                                 --         105,000
Miscellaneous liabilities                                97,654         241,348
                                                     ----------     -----------
                                                     $1,591,276     $   350,521
                                                     ==========     ==========

</TABLE>


                                      F-14
<PAGE>


                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)


3. MAJOR CUSTOMERS

  Sales to individual customers exceeding 10% or more of revenues in the years
ended December 31, were as follows: during 1998, Sofamor Danek Group, Inc.,
Medtronic, Inc. and Aesculap AG accounted for 34%, 25% and 13% of revenues,
respectively; during 1999, Richard Wolf, GmbH, Aesculap AG and Medtronic, Inc.
accounted for 45%, 28% and 16% of revenues, respectively, during 2000, Richard
Wolf, GmbH and Aesculap AG accounted for 51% and 23% of revenues, respectively.


4.  COMMITMENTS

The Company leases its corporate facilities and certain equipment under
operating leases that expire on various dates through 2002. Annual future
minimum lease payments as of December 31, 2000 are as follows:

<TABLE>
<CAPTION>

         YEAR ENDING DECEMBER 31,
         ------------------------
         <S>                                         <C>
         2001                                        $   573,000
         2002                                            137,000
                                                     -----------
                                                     $   710,000
                                                     ===========

</TABLE>

Rent expense was approximately $501,646, $523,629 and $360,784 for the years
ended December 31, 1998, 1999 and 2000, respectively. Aggregate future minimum
rentals to be received under noncancelable subleases as of December 31, 2000
total $391,760.

5. STOCKHOLDERS' EQUITY

1995 STOCK OPTION PLAN

The Company reserved 2,015,610 shares of common stock under the 1995 Stock
Option Plan (the "1995 Plan") for issuance to eligible employees, officers,
directors, advisors and consultants. The 1995 Plan provides for the grant of
incentive and nonstatutory stock options. Terms of the stock option agreements,
including vesting requirements, are determined by the Board of Directors,
subject to the provisions of the 1995 Plan. Options granted by the Company
generally vest over four to five years and are exercisable from the date of
grant for a period of ten years.

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

The Company recorded $52,870 of deferred compensation for options granted during
the year ended December 31, 2000, representing the fair value of stock options
granted to Company consultants and advisors in 2000. These options vest over two
to four years and the Company is recognizing the compensation expense over the
vesting period.

1997 STOCK OPTION PLAN/ STOCK ISSUANCE PLAN

In February 1997, the Company adopted the 1997 Stock Option Plan/Stock Issuance
Plan (the "1997 Plan") and


                                      F-15
<PAGE>


                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)


reserved 2,820,000 shares for issuance under the plan. 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, 2000, 207,254 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, 1997                         1,517,528        $  .20 - $14.38              $ 2.85
Granted                                                356,000        $ 2.25 - $11.38              $ 3.32
Exercised                                            (119,627)        $  .20 - $ 4.00              $  .52
Canceled                                             (219,020)        $  .20 - $14.38              $ 4.59
                                                     ---------        ---------------            ---------

Balance at December 31, 1998                         1,534,881        $  .20 - $14.38              $ 2.80
Granted                                              1,075,000        $  .41 - $  .63              $ 3.32
Exercised                                            (178,158)        $  .20 - $ 2.44              $  .24
Canceled                                             (431,730)        $  .20 - $11.38              $ 3.17
                                                     ---------        ---------------            ---------

Balance at December 31, 1999                         1,999,993        $  .20 - $14.38              $ 1.79
Granted                                                358,500        $  .47 - $ 1.25              $  .98
Exercised                                             (28,612)        $  .20 - $  .80              $  .43
Canceled                                             (118,180)        $  .20 - $14.38              $ 4.11
                                                     ---------        ---------------            ---------

Balance at December 31, 2000                         2,211,701        $  .20 - $14.38              $ 1.55
                                                     =========        ===============            =========
</TABLE>


                                      F-16
<PAGE>



                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>

                                                                                                EXERCISABLE STOCK
                                         OUTSTANDING STOCK OPTIONS                                    OPTIONS
                            ----------------------------------------------------        ---------------------------------
                                                WEIGHTED--
                                                 AVERAGE              WEIGHTED-                               WEIGHTED-
                                                REMAINING              AVERAGE                                 AVERAGE
      RANGE OF                                 CONTRACTUAL            EXERCISE                                 EXERCISE
EXERCISE PRICE              SHARES            LIFE (MONTHS)             PRICE             SHARES                PRICE
--------------              ------            -------------             -----            -------                -----
<S>                       <C>                 <C>                     <C>               <C>                 <C>
$  .20  -  $ 1.25         1,842,701                94                 $      .52        1,053,007           $      .41
$ 2.25  -  $ 2.44           122,500                94                 $     2.33           57,625           $     2.34
$ 4.00  -  $ 5.06            82,000                89                 $     5.06           54,958           $     5.06
$ 9.88                       78,500                80                 $     9.88           85,858           $     9.88
$11.31  -  $14.38            86,000                84                 $    11.54           56,438           $    11.60

</TABLE>

The weighted average fair value of stock options granted during 1999 and 2000
was $0.24 and $0.65, respectively. The weighted average remaining life of the
options at December 31, 1999 and 2000 was 86 and 76 months, respectively.

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 125% and a weighted average expected life of the option of 2 to 5 years.

<TABLE>
<CAPTION>

                                                                            YEARS ENDED DECEMBER 31,
                                                        1998                         1999                       2000
                                                 -------------------------------------------------------------------------
<S>                                              <C>                          <C>                       <C>
Adjusted pro forma net loss                      $      (17,083,126)          $     (10,827,615)        $      (3,839,136)
                                                 ==================           =================         =================

Adjusted pro forma net loss per share            $           ( 1.28)          $          ( 0.80)        $           (0.21)
                                                 ==================           =================         =================

</TABLE>

In December, 2000, the company issued a warrant to a corporate partner to
purchase 199,222 shares of common stock at a price of $0.01 per share. The
warrant is exercisable for seven years following the date of issuance. The
estimated fair value of the warrant was $104,000, which was expensed.

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 under the plan. 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


                                      F-17
<PAGE>


                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)


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.

In June 2000, the Company adopted an amendment to the Purchase Plan which
increased the number of shares of common stock authorized for issuance over the
term of the Purchase Plan by an additional 200,000 shares.


6. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1999 and 2000 are shown
below. A valuation allowance of $24,659,000 at December 31, 2000 has been
established to offset the deferred tax assets, as realization of such assets is
uncertain.

<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                                1999                           2000
                                                                         -----------------------------------------------
<S>                                                                      <C>                           <C>
Deferred tax assets:
     Net operating loss carry forwards                                   $      18,212,000             $      19,746,000
     Research and development credits                                            2,454,000                     2,491,000
     Capitalized research and development                                          839,000                       984,000
     Depreciation                                                                  288,000                        84,000
     Inventory reserve                                                           1,062,000                       915,000
     Other, net                                                                    450,000                       439,000
                                                                         -----------------             -----------------
Total deferred tax assets                                                       23,305,000                    24,659,000
Valuation allowance for deferred tax assets                                    (23,305,000)                  (24,659,000)
                                                                         -----------------             -----------------
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,
2000.

At December 31, 2000, the Company has federal and state tax net loss
carryforwards of approximately $48,857,000 and $42,127,000, respectively. The
federal tax loss carryforwards will begin to expire in 2010. Approximately
$408,000 of the state tax loss carryforwards expired in 2000, and will continue
to expire in 2001 unless previously utilized. At December 31, 2000, the Company
also has federal and state research tax credit carry forwards of approximately
$2,008,000 and $743,000, respectively, which will begin to expire in 2010 unless
previously utilized.

The difference between the federal and state tax loss carryforwards is primarily
attributable to the capitalization of


                                      F-18
<PAGE>


                        Vista Medical Technologies, Inc.

             Notes to Consolidated Financial Statements (continued)


6. INCOME TAXES (CONTINUED)


research and development expenses for California tax purposes and 50 percent
limitation on California loss carryforwards.

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.

7. TRANSACTIONS WITH RELATED PARTIES

The Company has a technology strategic alliance and a manufacturing supply
agreement with a Kaiser Aerospace subsidiary, a significant shareholder of the
Company, for the development and manufacturing of certain of the 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
$3,020,000, $793,000 and $0 for the years ending December 31, 1998, 1999 and
2000, respectively. At December 31, 2000, the Company had no current purchase
obligations under these agreements.

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


                                      F-19
<PAGE>


                                                                     SCHEDULE II


                        VISTA MEDICAL TECHNOLOGIES, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

        Reserve for                      Balance at            Charged to                               Balance
       Obsolete and                    Beginning of             Costs and                                at End
     Unusable Inventory                      Period              Expenses          Deductions         of Period
     ------------------                      ------              --------          ----------         ---------
<S>                                    <C>                    <C>                 <C>               <C>
Year ended December 31, 1998            $  175,000            $ 1,033,538         $  (274,538)      $  934,000
Year ended December 31, 1999               934,000              1,878,963            (193,893)       2,619,070
Year ended December 31, 2000             2,619,070                787,821          (1,161,143)       2,245,748

</TABLE>

                                      S-1