VISTA MEDICAL TECHNOLOGIES INC, 424B1, 1997-07-03

VISTA MEDICAL TECHNOLOGIES INC
424B1, 1997-07-03
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE>
4,000,000 SHARES

[LOGO]

VISTA MEDICAL TECHNOLOGIES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)

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All of the 4,000,000 shares of Common Stock offered hereby are being sold by
the Company. Prior to this Offering, there has been no public market for the
Common Stock of the Company. For factors considered in determining the initial
public offering price, see "Underwriting."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "VMTI."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT (1) COMPANY (2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share................................................. $9.00 $0.63 $8.37
Total (3)................................................. $36,000,000 $2,520,000 $33,480,000
</TABLE>

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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.

(2) Before deducting estimated expenses of $700,000 payable by the Company.

(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 600,000 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to the Company will be $41,400,000,
$2,898,000 and $38,502,000, respectively. See "Underwriting."

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The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about July
9, 1997, against payment therefor in immediately available funds.

GOLDMAN, SACHS & CO. SALOMON BROTHERS INC
---------

The date of this Prospectus is July 2, 1997.
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FRONT OUTSIDE FLAP

TEXT IN UPPER RIGHT CORNER:

VISTA MEDICAL'S 3D HMD FOR MINIMALLY INVASIVE MICROSURGERY

Vista Medical Technologies (Vista Medical) was originally founded by Kaiser
Aerospace and Electronics Corporation, a leader in the development and
manufacture of heads-up and head mounted displays (HMD) for aerospace
applications. Vista Medical's HMD, specifically designed for minimally invasive
microsurgery, incorporates the visualization, information and human factors
technology developed by Kaiser for its military customers.

(PHOTOGRAPH DESCRIPTION AND CAPTIONS)

1. Background: Blue with clouds

2. Top left: Typical aerospace display

3. Top left (lower and more centered): A flight helmet (head mounted display).

4. Center: Vista Medical Head Mounted Display (HMD) for surgery.

5. Lower left hand corner: Typical surgical data which will be shown on the
HMD.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

The Company intends to furnish to its stockholders annual reports containing
audited financial statements certified by an independent public accounting firm
and quarterly reports containing unaudited interim financial information for the
first three fiscal quarters of each fiscal year of the Company.

THE COMPANY HAS RIGHTS IN THE FOLLOWING TRADEMARKS: 3D
SCOPE-REGISTERED TRADEMARK-, DESIGN OF CONE AND VISTA MEDICAL TECHNOLOGIES &
DESIGN. IN ADDITION, THE COMPANY HAS APPLIED TO REGISTER THE FOLLOWING
TRADEMARKS: MIM, STEREOSITE, CARDIOCAMERA, CARDIOZOOM, INFOMATIX, CARDIOVIEW,
CARDIOCONTROLLER, CARDIOGUIDE, CARDIOCONSOLE AND CARDIOLIGHT. THIS PROSPECTUS
ALSO INCLUDES NAMES AND TRADEMARKS OF COMPANIES OTHER THAN THE COMPANY,
INCLUDING HEARTPORT AND PORT-ACCESS WHICH ARE TRADEMARKS OF HEARTPORT, INC.

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INSIDE COVER

Background: Blue with images of a heart

Text in center right of page: Series 8000 Advanced Visualization and
Information System for Cardiac Surgery

Center right: Cardiac surgeons using the Company's system.

Lower left: The Series 8000 Advanced Visualization and Information Sytem and
the Company's micro-cameras.

Text in lower right corner: The Series 8000 is a 3D image acquisition and
display system developed in consultation with the Company's Clinical Advisory
Board to respond to the requirements of minimally invasive cardiac surgical
applications. Vista Medical believes that the Series 8000 is the only
visualization and information system specifically designed for minimally
invasive cardiac surgery. The photograph shows cardiac surgeons wearing the
CardioView HMDs and using the miniature 3D CardioCamera. Also shown is the
CardioConsole, the central control unit for the Series 8000, and a close-up view
of the series 8000 camera options.

The Series 8000 product has been cleared to market in the U.S. by the FDA
with expected commercial availability later this year.

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FRONT INSIDE FLAP

Text in upper right corner: StereoSite Systems for Head, Neck and Spine
Surgery

Background: Blue with imprint of the head.

Center: Two surgeons, with one using the Vista Medical System in a
neurological application.

Right Corner: Diagnostic data.

Text in lower left corner: Advances in neurosurgery and related specialties
are increasingly dependent on the provision of accurate diagnostic and guidance
information to the surgeon in real-time. Vista Medical's StereoSite system for
microscopic and microendoscopic applications are designed to give the surgeon
the ergonomic advantages of an HMD combined with the ability to integrate data
into the anatomical view. Illustrated here is an example of information in the
form of computer derived 3D reconstructions of the brain used by the
neurosurgeon for preoperative surgical planning and intra-operative guidance.
The photograph shows a surgeon operating using a surgical microscope for
magnified visualization, with a colleague observing the same image on a Vista
Medical HMD.

The StereoSite systems are under development, have not been cleared to
market in the U.S. by the FDA and are not commercially available.

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PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND THE COMPANY'S FINANCIAL STATEMENTS (INCLUDING THE NOTES
THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED
HEREIN, ALL INFORMATION CONTAINED IN THIS PROSPECTUS (I) GIVES EFFECT TO A
THREE-FOR-FOUR REVERSE SPLIT OF THE COMMON STOCK, PAR VALUE $0.01 PER SHARE (THE
"COMMON STOCK"), OF THE COMPANY, (II) REFLECTS THE CONVERSION OF ALL OUTSTANDING
SHARES OF THE COMPANY'S PREFERRED STOCK, PAR VALUE $0.01 (THE "PREFERRED
STOCK"), INTO AN AGGREGATE OF 8,680,679 SHARES OF COMMON STOCK AND (III) ASSUMES
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THIS PROSPECTUS MAY
CONTAIN, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED UNDER THE HEADING "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER SUCH INFORMATION SET
FORTH UNDER THE HEADING "RISK FACTORS."

THE COMPANY

Vista Medical Technologies, Inc. ("Vista Medical" or the "Company")
develops, manufactures and intends to market proprietary visualization and
information systems that enable minimally invasive surgical solutions in
cardiothoracic, head, neck and spine ("HNS") and other selected microsurgical
procedures. The Company currently markets endoscopic cameras and related
surgical instruments and accessories. Vista Medical's visualization and
information systems bring together head-mounted display ("HMD") technology
originally developed for applications in military aerospace by Kaiser Aerospace
and Electronics Corporation ("Kaiser Aerospace") and three-dimensional ("3-D")
imaging capability from its acquisition of Oktas, Inc.

The application of minimally invasive techniques to cardiothoracic surgery
is commonly regarded as a revolutionary development in modern surgery. Minimally
invasive cardiac procedures avoid the trauma caused by sternotomy and promise to
significantly decrease pain and trauma and shorten recovery times.
Cardiothoracic MIM requires the surgeon to perform technically challenging
procedures, including working on tiny delicate structures (such as a one
millimeter heart vessel) with highly restricted access through small incisions.

The Company believes that an advanced visualization technology which
provides the surgeon with an intuitive and ergonomic solution to the inherent
vision restrictions of the MIM approach will enable the use of the MIM technique
with increased safety, efficacy and precision. In order to meet this
visualization challenge, the Company has developed proprietary visualization and
information systems.

Vista Medical's proprietary technology is based on the following principles
which the Company believes are essential in advancing the techniques of MIM: (i)
three-dimensional view; (ii) high resolution images; (iii) improved access
through miniaturization technology; (iv) optimized surgical ergonomics; and (v)
integration of anatomical image with critical monitoring and diagnostic
information.

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Based on these principles, Vista Medical develops visualization products and
related information systems that are customized for the specific cardiothoracic
and HNS procedures to which they are directed. The Company's product lines
include the Series 8000 Advanced Visualization and Information System ("Series
8000"), designed for use in cardiothoracic procedures, and StereoSite, designed
for use in microscopic and endoscopic procedures in HNS. All 510(k) clearances
to market necessary for Series 8000 commercialization have been received, with
expected commercial availability later this year. The StereoSite systems are
under development, have not been cleared to market in the U.S. by the U.S. Food
and Drug Administration ("FDA") and are not commercially available. The Company
anticipates filing a required 510(k) pre-market notification for the processor
component of the HMD for the StereoSite system in third quarter 1997. All other
required 510(k) clearances to market for the StereoSite system have been
received. The Company also offers surgical instruments and accessories designed
for use in both cardiothoracic and HNS MIM procedures.

BUSINESS STRATEGY

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

- Establish advanced visualization technologies as standard practice in
minimally invasive cardiac surgery.

- Promote Vista Medical's visualization solution for use in all types of
cardiac surgery.

- Develop MIM applications through specialty-focused business units by
leveraging the Company's technology platform.

- Accelerate adoption of the Series 8000 Advanced Visualization and
Information System in the cardiac market by implementing a per-procedure
pricing strategy.

- Increase the surgeon's real-time access to critical data.

- Enter into strategic relationships which complement Company resources.

To assist in implementing its business strategy, the Company has established
two Clinical Advisory Boards made up of leading surgeons, one focused on
minimally invasive cardiac surgery, the other focused on HNS microsurgery and a
number of other specialties. Members of the Clinical Advisory Boards consult
with the Company exclusively in the field of visualization. The Clinical
Advisory Boards are intended to act as a clinical reference for the Company and
to provide access to potential training sites for the Company's visualization
products.

RECENT DEVELOPMENTS

In November 1996, Vista Medical and Medtronic, Inc. ("Medtronic"), a leading
cardiac company, entered into a strategic alliance providing for the
distribution and co-promotion of the Company's current and future visualization
and information systems for cardiac surgery, including the Series 8000 (the
"Vista Systems"). Medtronic will act as Vista Medical's exclusive distributor
for the Vista Systems for use in cardiothoracic surgical procedures in Europe,
the Middle East (excluding Afghanistan and Pakistan) and Africa and will
co-promote the Vista Systems in North America. Vista Medical retains direct
distribution rights in North America as well as the worldwide right to
distribute its systems for use in all other procedures. In conjunction with
entering into the agreement, Medtronic made a $10.0 million equity investment in
the Company.

The Company believes that the control and processing of information is a key
component in the development of advanced visualization systems. As a result, in
February 1997, the Company obtained from GDE Systems, Inc. ("GDE"), a leading
military electronics and information management company,

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an exclusive worldwide license to software and documentation and trademarks of
GDE for use in the medical field. Since 1993, GDE's subsidiary, Healthcom, has
been adapting the software licensed to Vista Medical to provide high-speed,
image-based information processing and networking capabilities specifically for
medical applications. In connection with the license, Vista Medical will issue
to GDE Common Stock with a value (based on the initial public offering price) of
$250,000.

In February 1997, the Company entered into an agreement with Heartport, Inc.
("Heartport"), a leading company developing minimally invasive technology for
heart surgery. Vista Medical will sell four Series 8000 systems to Heartport,
for use in the Heartport Research and Training Center in Salt Lake City, Utah.
Heartport has agreed to use the Series 8000 in its training centers, to promote
that its training courses utilize the Series 8000 and to endorse the Series 8000
as the preferred 3-D video visualization and information solution for minimally
invasive heart surgery. In connection with the agreement, the Company issued to
Heartport a warrant to purchase up to 100,000 shares of Common Stock,
exercisable at any time after this Offering and prior to March 31, 2001, at a
price of $6.67 per share.

Since February 1997, Vista Medical's CardioThoracic Surgery division has
exhibited the Series 8000 at two major cardiothoracic surgery meetings in the
U.S. and at the World Congress on Minimally Invasive Cardiac Surgery in Paris.
Surgeons attending these conferences expressed interest in the potential growth
of minimally invasive surgeries and the importance of enabling technologies such
as visualization. At these conferences, hundreds of surgeons participated in a
hands-on demonstration of the Series 8000, expressed interest and requested
additional information.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 4,000,000 shares

Common Stock to be outstanding after the
Offering.................................... 13,297,528 shares (1)

Use of proceeds.............................. Fund product introductions, sales and
marketing activities, research and
development, acquisition of capital equipment
for manufacturing scale-up and for working
capital and other general corporate purposes.
See "Use of Proceeds."

Nasdaq National Market symbol................ VMTI
</TABLE>

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(1) Based on shares outstanding as of March 31, 1997. Does not include (i)
1,282,676 shares of Common Stock issuable upon exercise of options
outstanding as of March 31, 1997 at a weighted average exercise price of
$0.54 per share pursuant to the Company's stock option plans, (ii) 100,000
shares of Common Stock issuable upon the exercise of warrants granted to
Heartport at an exercise price of $6.67 per share and (iii) a number of
shares of Common Stock equal to $250,000 divided by the initial public
offering price of the Common Stock offered hereby to be issued to GDE
immediately following the closing of this Offering. See "Capitalization,"
"Management--Benefit Plans" and "Description of Capital Stock."

RISK FACTORS

The shares offered hereby involve a high degree of risk, and prospective
purchasers should carefully consider the factors described under the heading
"Risk Factors."

5
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SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- --------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Sales.............................................. $ 59 $ 1,719 $ 2,244 $ 241 $ 829

Costs and expenses:
Cost of sales.................................... 43 1,272 2,253 184 826
Research and development......................... 1,328 1,904 3,880 533 1,514
Sales and marketing.............................. 291 834 2,057 313 745
General and administrative....................... 758 1,034 3,103 399 1,164
--------- --------- ----------- ---------- -----------
Total costs and expenses....................... 2,420 5,044 11,293 1,429 4,249
--------- --------- ----------- ---------- -----------
Loss from operations............................... (2,361) (3,325) (9,049) (1,188) (3,420)

Minority interest in net loss of consolidated
partnership....................................... 270 -- -- -- --
License income..................................... -- -- 1,493 -- --
Interest income.................................... -- 51 117 34 102
--------- --------- ----------- ---------- -----------
Net loss........................................... $ (2,091) $ (3,274) $ (7,439) $ (1,154) $ (3,318)
--------- --------- ----------- ---------- -----------
--------- --------- ----------- ---------- -----------
Pro forma net loss per share (1)................... $ (0.86) $ (0.37)

Shares used in computing pro forma net loss per
share (1)......................................... 8,626,898 9,079,976
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
AS
ACTUAL ADJUSTED (2)
---------- ------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:

Cash, cash equivalents and short-term investments.................................... $ 5,844 $ 38,624
Working capital...................................................................... 7,554 40,334
Total assets......................................................................... 11,226 44,006
Total debt........................................................................... -- --
Accumulated deficit.................................................................. (16,939) (16,939)
Total stockholders' equity........................................................... 9,955 42,735
</TABLE>

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(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share and shares used
in computing pro forma net loss per share.

(2) Gives effect to the sale of 4,000,000 shares of Common Stock offered by the
Company in this Offering at the initial public offering price of $9.00 per
share and the application of the net proceeds therefrom, after deducting the
underwriting discount and offering expenses payable by the Company. See "Use
of Proceeds."

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RISK FACTORS

AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED
HEREBY. THIS PROSPECTUS MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT
MIGHT CAUSE SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW.

DEVELOPMENT STAGE COMPANY; SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL
REQUIREMENTS

Since its formation in July 1993, the Company has been engaged in the
development of visualization and information systems and related surgical
instruments and accessories that enable MIM solutions for applications in
cardiothoracic and other selected microsurgical procedures and in manufacturing
and marketing limited quantities of camera systems to customers as an original
equipment manufacturer ("OEM"). As of March 31, 1997, the Company had incurred
cumulative net losses of $16.9 million since its formation. The Company expects
to incur substantial and increasing operating losses before it will reach
profitability, if at all. Furthermore, the Company expects its expenses in all
categories to increase as its marketing and other business activities expand.
There can be no assurance that the Company will achieve or sustain profitability
in the future. Failure to achieve significant commercial revenues or
profitability would have a material adverse effect on the Company's business,
financial condition and results of operations.

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

DEPENDENCE UPON AND UNCERTAINTY REGARDING COMMERCIALIZATION OF SERIES 8000

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

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

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

UNCERTAINTY OF CLINICAL ADOPTION OF MINIMALLY INVASIVE MICROSURGICAL PROCEDURES

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

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

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

There can be no assurance that MIM procedures will gain clinical adoption.
Failure of these procedures to achieve significant clinical adoption would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Background," "Business -- Product
Lines," "Business -- Marketing and Sales," "Business -- Competition" and
"Business -- Government Regulation."

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LACK OF COMMERCIAL MANUFACTURING EXPERIENCE; SCALE-UP RISK

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

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

LIMITED SALES, MARKETING, DISTRIBUTION AND TECHNICAL SUPPORT EXPERIENCE

The Company has organized its sales and marketing efforts by the Company's
CardioThoracic Surgery and HNS Microsurgery divisions. The Company currently
markets its cardiothoracic products in North America through four direct
(Company employee) sales representatives and 30 independent sales
representatives. The Company is in the process of hiring up to eight additional
direct sales representatives to support the introduction of its Series 8000 by
the CardioThoracic Surgery division. A similar combination of direct and
independent sales representatives will market the products of the Company's HNS
Microsurgery division. Establishment of a sales force capable of effectively
commercializing the Company's systems will require substantial efforts and
significant management and financial resources. There can be no assurance that
the Company will be able to establish such a sales capability on a timely basis
or at all.

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

POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY

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

The Company expects to manufacture its products based on forecasted product
orders and intends to purchase subassemblies and components prior to receipt of
purchase orders from customers. Lead

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times for materials and components ordered by the Company vary significantly and
depend on factors such as the business practices of the specific supplier,
contract terms and general demand for a component at a given time. Certain
components used in the Company's products have long lead times. As a result,
there is a risk of excess or inadequate inventory if orders do not match
forecasts.

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

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

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

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

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

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

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

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

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

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

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

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RAPID TECHNOLOGICAL CHANGE; SIGNIFICANT COMPETITION

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

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

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

There can be no assurance that physicians will use MIM surgical procedures
to replace or supplement established treatments, such as conventional open-chest
heart surgery, angioplasty or intravascular stents, or that MIM cardiac surgery
will be competitive with current or future technologies. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors. Failure to do so would have a material adverse effect
upon the Company's business, financial condition and results of operations. See
"Business -- Competition."

RELIANCE ON STRATEGIC RELATIONSHIPS

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

FLUCTUATIONS IN OPERATING RESULTS

Results of operations of the Company may vary significantly from quarter to
quarter depending upon numerous factors, including the following: timing and
results of product evaluations; delays associated with the FDA and other
regulatory approval processes; demand for and utilization of the Company's
products; changes in pricing policies by the Company or its competitors; changes
in third-party payment guidelines; the number, timing and significance of
product enhancements and new product announcements by the Company and its
competitors; the ability of the Company to develop,

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introduce and market new and enhanced versions of the Company's products on a
timely basis; customer order deferrals in anticipation of enhancements or new
products offered by the Company or its competitors; product quality problems;
personnel changes; and the level of international sales. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."

UNCERTAINTY RELATING TO THIRD-PARTY PAYMENTS

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

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

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

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RISK RELATING TO INTERNATIONAL OPERATIONS

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

PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE

The Company faces an inherent and significant business risk of exposure to
product liability claims in the event that the use of its products results in
personal injury or death and there can be no assurance that the Company will not
experience any material product liability losses in the future. Also, in the
event that any of the Company's products prove to be defective, the Company may
be required to recall or redesign such products. The Company's current product
liability insurance coverage limit is $4.0 million in the aggregate. There can
be no assurance that such coverage limits are adequate to protect the Company
from any liabilities it might incur in connection with the development,
manufacture and sale of its products. In addition, the Company may require
increased product liability coverage if any products are used in clinical
evaluations or successfully commercialized. Product liability insurance is
expensive and in the future may not be available to the Company on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company in excess of its insurance coverage or a product
recall could have a material adverse effect on the Company's business, financial
condition and results of operations.

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

Vista Medical relies on a combination of technical leadership, patent, trade
secret, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. As of May 31, 1997, the Company had exclusive
ownership rights to seven issued United States patents, 10 pending United States
patent applications and eight pending foreign applications covering various
aspects of its devices and systems. Furthermore, as of the same date, the
Company had exclusive rights in the medical field to four issued United States
patents, one pending United States patent application, three issued foreign
patents and nine pending foreign applications covering various aspects of its
devices and systems. The Company intends to file additional patent applications
in the future. The failure of such patents to issue could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company's future success will depend, in part, on its ability to
continue to develop patentable products, enforce its patents and obtain patent
protection for its products both in the United States and in other countries.
The patent positions of medical device companies, including the Company,
however, are generally uncertain and involve complex legal and factual
questions. There can be no assurance that patents will issue from any patent
applications owned by or licensed to the Company or that, if patents do issue,
the claims allowed will be sufficiently broad to protect the Company's
technology. In addition,

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there can be no assurance that any issued patents owned by or licensed to the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide competitive advantages to the Company.

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

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

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

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developed by competitors. In addition, the Company's agreements with its
employees and consultants require disclosure to the Company of ideas,
developments, discoveries or inventions conceived during employment or
consulting, as the case may be, and assignment to the Company of proprietary
rights to such matters related to the business and technology of the Company.
The extent to which efforts by others will result in patents and the effect on
the Company of the issuance of such patents is unknown. Failure to obtain or
maintain patent and trade secret protection, for any reason, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Patents and Proprietary Rights" and
"Business -- Competition."

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

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

DEPENDENCE ON KEY PERSONNEL AND ADVISORS

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

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

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breached. In addition, there can be no assurance that any of such agreements
will be renewed upon termination. See "Business -- Clinical Advisory Boards."

NEED TO MANAGE A CHANGING BUSINESS

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

NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE

Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this Offering. The initial public offering price will be
determined through negotiations among the Company and the representatives of the
Underwriters based on several factors and may not be indicative of the market
price of the Common Stock after this Offering. The market price of the shares of
Common Stock is likely to be highly volatile and may be significantly affected
by factors such as actual or anticipated fluctuations in the Company's operating
results, changes in financial estimates by securities analysts, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, regulatory announcements, developments with respect to patents or
proprietary rights, conditions and trends in the medical device and other
technology industries, adoption of new accounting standards affecting the
medical device industry, general market conditions and other factors. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market prices for
shares of early stage companies. These broad market fluctuations may adversely
affect the market price of the Common Stock. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. Such
litigation, if brought against the Company, could result in substantial costs
and a diversion of management's attention and resources. See "Underwriting."

CONTROL BY EXISTING STOCKHOLDERS, OFFICERS AND DIRECTORS

Upon completion of this Offering, the present directors, executive officers
and principal stockholders of the Company and their affiliates will beneficially
own approximately 68.6% of the outstanding Common Stock. As a result, these
stockholders will be able to exercise control over all matters requiring
stockholder approval (including the election of directors and approval of
significant corporate transactions) irrespective of how other stockholders may
vote. Such concentration of ownership may have the effect of delaying or
preventing a change in control of the Company and thereby adversely affect the
market price of the Common Stock. See "Principal Stockholders."

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SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of a substantial number of shares of Common Stock in the public market
following this Offering could adversely affect the market price for the Common
Stock. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"), and by lock-up agreements under which the Company's
officers, directors and certain stockholders of the Company (who hold an
aggregate of approximately 9,139,000 shares of Common Stock, including shares
issued or issuable upon the exercise of vested options and warrants outstanding
as of May 31, 1997) have agreed not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of this Prospectus without the
prior written consent of Goldman, Sachs & Co. Goldman, Sachs & Co. may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to lock-up agreements. As a result of restrictions under
the Securities Act and the lock-up agreements, the following shares of Common
Stock (including shares issued or issuable upon the exercise of vested options
and warrants outstanding as of May 31, 1997) will be eligible for future sale:
on the date of this Prospectus, 4,000,750 shares (including the 4,000,000 shares
offered hereby) will be eligible for sale; an additional approximately 9,039,000
shares will be eligible for sale 180 days after the date of this Prospectus; the
remaining 100,000 shares of Common Stock will become eligible for sale under
Rule 144 at various dates thereafter as the holding period provisions of Rule
144 are satisfied. In addition, the Company intends to register on the effective
date of this Offering a total of 2,820,000 shares of Common Stock subject to
outstanding options or reserved for issuance under the Company's 1997 Stock
Option/Stock Issuance Plan and 200,000 shares of Common Stock reserved for
issuance under its 1997 Employee Stock Purchase Plan. Further, upon expiration
of such lock-up agreements, holders of approximately 8,780,679 shares of Common
Stock will be entitled to certain registration rights with respect to such
shares. If such holders, by exercising their registration rights, cause a large
number of shares to be registered and sold in the public market, such sales
could have a material adverse effect on the market price for the Common Stock.

The Company cannot predict the effect, if any, that market sales of shares
or the availability of shares for sale will have on the market price of the
Common Stock prevailing from time to time. Sales of significant amounts of the
Common Stock in the public market could adversely affect the market price of the
Common Stock and could impair the Company's ability to raise capital through an
offering of its equity securities. See "Description of Capital Stock --
Registration Rights" and "Shares Eligible for Future Sale."

HAZARDOUS MATERIALS

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

NO DIVIDENDS

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

18
<PAGE>
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF SECOND RESTATED
CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW

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

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

Making more difficult or discouraging a change in control of the Company may
adversely affect the market price of the Common Stock. See "Description of
Capital Stock -- Preferred Stock" and "Description of Capital Stock -- Possible
Antitakeover Effect of Certain Charter Provisions."

SUBSTANTIAL DILUTION

Investors participating in this Offering will incur immediate, substantial
dilution. To the extent outstanding options to purchase the Common Stock are
exercised, there will be further dilution. If the net proceeds of this Offering,
together with available funds and cash generated from operations, are
insufficient to satisfy the Company's cash needs, the Company may be required to
sell additional equity or convertible debt securities. The sale of additional
equity or convertible debt securities could result in additional dilution to the
Company's stockholders. See "Dilution" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

19
<PAGE>
THE COMPANY

Based on these principles, Vista Medical develops visualization products and
related information systems that are customized for the specific cardiothoracic
and HNS procedures to which they are directed. The Company's product lines
include the Series 8000 Advanced Visualization and Information System ("Series
8000"), designed for use in cardiothoracic procedures, and StereoSite, designed
for use in microscopic and endoscopic procedures in HNS. All 510(k) clearances
to market necessary for Series 8000 commercialization have been received, with
expected commercial availability later this year. The StereoSite systems are
under development, have not been cleared to market in the U.S. by the U.S. Food
and Drug Administration ("FDA") and are not commercially available. The Company
anticipates filing a required 510(k) pre-market notification for the processor
component of the HMD for the StereoSite system in third quarter 1997. All other
required 510(k) clearances to market for the StereoSite system have been
received. The Company also offers surgical instruments and accessories designed
for use in both cardiothoracic and HNS MIM procedures.

20
<PAGE>
BUSINESS STRATEGY

- Establish advanced visualization technologies as standard practice in
minimally invasive cardiac surgery.

- Promote Vista Medical's visualization solution for use in all types of
cardiac surgery.

- Develop MIM applications through specialty-focused business units by
leveraging the Company's technology platform.

- Accelerate adoption of the Series 8000 Advanced Visualization and
Information System in the cardiac market by implementing a per-procedure
pricing strategy.

- Increase the surgeon's real-time access to critical data.

- Enter into strategic relationships which complement Company resources.

RECENT DEVELOPMENTS

The Company believes that the control and processing of information is a key
component in the development of advanced visualization systems. As a result, in
January 1997, the Company obtained from GDE Systems, Inc. ("GDE"), a leading
military electronics and information management company, an exclusive worldwide
license to software and documentation and trademarks of GDE for use in the
medical field. Since 1993, GDE's subsidiary, Healthcom, has been adapting the
software licensed to Vista Medical to provide high-speed, image-based
information processing and networking capabilities specifically for medical
applications. In connection with the license, Vista Medical will issue to GDE
Common Stock with a value (based on the initial public offering price) of
$250,000.

21
<PAGE>
Company issued to Heartport a warrant to purchase up to 100,000 shares of Common
Stock, exercisable at any time after this Offering and prior to March 31, 2001,
at a price of $6.67 per share.

Since February 1997, Vista Medical's CardioThoracic Surgery division has
exhibited the Series 8000 at two cardiothoracic surgery meetings in the U.S. and
at the World Congress on Minimally Invasive Cardiac Surgery in Paris. Surgeons
attending these conferences expressed interest in the potential growth of
minimally invasive surgeries and the importance of enabling technologies such as
visualization. At these conferences, hundreds of surgeons participated in a
hands-on demonstration of the Series 8000, expressed interest and requested
additional information.

The Company was incorporated in the State of California in July 1993 and
reincorporated in the State of Delaware in November 1996. Unless the context
indicates otherwise, the "Company" or "Vista Medical" refers to Vista Medical
Technologies, Inc. The Company's principal executive offices are located at 5451
Avenida Encinas, Suite A, Carlsbad, California 92008, and its telephone number
is (760) 603-9120.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered hereby are estimated to be approximately $32,780,000
($37,802,000 if the Underwriters' over-allotment option is exercised in full),
after deducting the estimated underwriting discounts and commissions and other
estimated offering expenses.

From the anticipated $32.8 million net proceeds of this Offering, the
Company intends to use approximately $10.7 million to fund product
introductions, approximately $6.5 million for sales and marketing activities,
approximately $5.4 million for research and development, approximately $2.4
million for the acquisition of capital equipment for manufacturing scale-up and
the balance of approximately $7.8 million for working capital and general
corporate purposes. The Company may also use a portion of the net proceeds for
the acquisition of products and technologies complementary to those of the
Company. There are no present arrangements or agreements for any such
acquisitions.

The amounts actually expended for each purpose may vary significantly
depending upon numerous factors, including the progress of the Company's product
development, the regulatory status of such products, the timing of regulatory
approvals, technological advances, the commercial potential of the Company's
products and the status of competitive products. In addition, expenditures will
also depend upon the establishment of collaborative agreements with other
companies, the availability of additional financing and other factors. The
Company anticipates that the net proceeds from this Offering and the interest
income thereon, together with its existing cash, cash equivalents and short-term
investments, will be sufficient to fund its operations through 1998. Pending
application of the net proceeds as described above, the Company intends to
invest the net proceeds of this Offering in short-term investment-grade
securities.

DIVIDEND POLICY

The Company has never declared or paid dividends on its capital stock. The
Company does not anticipate paying any cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, operating results, current and anticipated cash
needs and plans for expansion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

22
<PAGE>
CAPITALIZATION

The following table sets forth as of March 31, 1997 (i) the actual
capitalization of the Company, after giving effect to the three-for-four reverse
split of the Common Stock, (ii) the pro forma capitalization of the Company,
after giving effect to the conversion of all outstanding shares of Preferred
Stock into Common Stock at the closing of this Offering and (iii) as adjusted to
give effect to the sale by the Company of 4,000,000 shares of Common Stock
offered hereby, at the initial public offering price of $9.00 per share less
estimated underwriting discounts and commissions and other expenses of this
Offering.

<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------
AS
ACTUAL PRO FORMA ADJUSTED
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments........................... $ 5,844 $ 5,844 $ 38,624
---------- ----------- ----------
---------- ----------- ----------

Long-term obligations less current portion.................................. $ -- $ -- $ --

Stockholders' equity:

Convertible preferred stock, $.01 par value; 18,000,000 shares authorized
actual; 5,000,000 authorized pro forma and as adjusted; 11,574,252
issued and outstanding actual; and no shares issued and outstanding pro
forma and as adjusted................................................... 116 -- --

Common stock, $.01 par value; 25,000,000 shares authorized actual;
35,000,000 authorized pro forma and as adjusted; 616,849 shares issued
and outstanding actual; 9,297,528 shares pro forma; and 13,297,528
shares as adjusted (1).................................................. 6 93 133

Additional paid-in capital................................................ 29,413 29,442 62,182

Notes receivable stockholders............................................. (93) (93) (93)

Deferred compensation..................................................... (2,548) (2,548) (2,548)

Accumulated deficit....................................................... (16,939) (16,939) (16,939)
---------- ----------- ----------

Total stockholders' equity.............................................. 9,955 9,955 42,735
---------- ----------- ----------

Total capitalization.................................................... $ 9,955 $ 9,955 $ 42,735
---------- ----------- ----------
---------- ----------- ----------
</TABLE>

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

(1) Based on shares outstanding as of March 31, 1997. Does not include (i)
1,282,676 shares of Common Stock issuable upon exercise of options
outstanding as of March 31, 1997 at a weighted average exercise price of
$0.54 per share pursuant to the Company's stock option plans, (ii) 100,000
shares of Common Stock issuable upon the exercise of warrants granted to
Heartport at an exercise price of $6.67 per share and (iii) a number of
shares of Common Stock equal to $250,000 divided by the initial public
offering price of the Common Stock offered hereby to be issued to GDE
immediately following the closing of this Offering. See "Management--Benefit
Plans" and "Description of Capital Stock."

23
<PAGE>
DILUTION

The net tangible book value of the Company at March 31, 1997 was $9,645,187,
or $1.04 per share (after giving effect to the conversion of all outstanding
shares of Preferred Stock into Common Stock upon the consummation of this
Offering). Net tangible book value per share of Common Stock represents the
amount of total tangible assets of the Company less total liabilities divided by
the number of shares of sthe Common Stock outstanding. After giving effect to
the sale of the 4,000,000 shares of Common Stock offered hereby at the initial
public offering price of $9.00 per share, and after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, the Company's net tangible book value as of March 31, 1997 would have
been $42,425,187 or $3.19 per share of Common Stock. This represents an
immediate increase in net tangible book value per share of Common Stock of $2.15
to existing stockholders and immediate dilution in net tangible book value of
$5.81 per share to new investors purchasing Common Stock in this Offering. The
following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $ 9.00
Net tangible book value per share of Common Stock at March
31, 1997................................................ 1.04
Increase per share attributable to new investors.......... 2.15
Net tangible book value per share of Common Stock after this
Offering.................................................. 3.19
---------
Dilution per share to new investors (1)..................... $ 5.81
---------
---------
</TABLE>

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

(1) If the Underwriters' over-allotment option is exercised in full, dilution
per share to new investors would be $5.59.

The following table summarizes, on a pro forma basis as of March 31, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by new investors purchasing shares in this Offering (before
deduction of underwriting discounts and commissions and estimated offering
expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 9,297,528 70% $ 26,395,504 42% $ 2.84
New investors................. 4,000,000 30% 36,000,000 58% $ 9.00
------------- ----- -------------- -----
Total....................... 13,297,528 100% $ 62,395,504 100%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>

All of the above computations assume no exercise of outstanding options or
warrants to purchase Common Stock. As of March 31, 1997, options to purchase
1,282,676 shares of Common Stock were outstanding at a weighted average exercise
price of approximately $0.54 per share under the Company's stock option plan. To
the extent these options become vested and are exercised, there will be further
dilution to new investors. As of March 31, 1997, the Company had also (i) issued
warrants to Heartport to purchase 100,000 shares of Common Stock at an exercise
price of $6.67 per share and (ii) agreed to issue to GDE immediately following
the closing of this Offering a number of shares of Common Stock equal to
$250,000 divided by the initial public offering price of the Common Stock
offered hereby. As of March 31, 1997, the Company also had an additional
1,537,324 shares of Common Stock available for grant pursuant to the Company's
stock option plan. Further dilution may result from the exercise of such
outstanding options. See "Management -- Benefit Plans" and "Description of
Capital Stock."

24
<PAGE>
SELECTED FINANCIAL DATA

The selected financial data set forth below with respect to the Company's
consolidated statements of operations for each of the three years in the period
ended December 31, 1996, and with respect to the Company's consolidated balance
sheets at December 31, 1995 and 1996, are derived from the financial statements
of the Company that have been audited by Ernst & Young LLP, independent
auditors, which are included elsewhere herein and are qualified by reference to
such financial statements. The statement of operations data for the period from
July 19, 1993 (inception) to December 31, 1993, and the balance sheet data at
December 31, 1993 and 1994 have been derived from financial statements audited
by Ernst & Young LLP, independent auditors, which are not included herein. The
unaudited statement of operations data for the three months ended March 31, 1996
and 1997 and the unaudited balance sheet at March 31, 1997 have been derived
from unaudited financial statements also appearing herein which, in the opinon
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the financial position and
results of operations for the unaudited interim periods. The operating results
for the three months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the full fiscal year ending December 31, 1997
or for any subsequent period. The selected financial data set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements and
notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- ------------------------
1993 (1) 1994 1995 1996 1996 1997
----------- --------- --------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................................... $ 73 $ 59 $ 1,719 $ 2,244 $ 241 $ 829
Costs and expenses:
Cost of sales..................................... 50 43 1,272 2,253 184 826
Research and development.......................... 310 1,328 1,904 3,880 533 1,514
Sales and marketing............................... 48 291 834 2,057 313 745
General and administrative........................ 562 758 1,034 3,103 399 1,164
----------- --------- --------- ---------- ------------ ----------
Total costs and expenses............................ 970 2,420 5,044 11,293 1,429 4,249
----------- --------- --------- ---------- ------------ ----------
Loss from operations................................ (897) (2,361) (3,325) (9,049) (1,188) (3,420)
Minority interest in net loss of consolidated
partnership....................................... 80 270 -- -- -- --
License income...................................... -- -- -- 1,493 -- --
Interest income..................................... -- -- 51 117 34 102
----------- --------- --------- ---------- ------------ ----------
Net loss............................................ $ (817) $ (2,091) $ (3,274) $(7,439) $ (1,154 ) $ (3,318)
----------- --------- --------- ---------- ------------ ----------
----------- --------- --------- ---------- ------------ ----------
Pro forma net loss per share (2).................... $ (0.86) $ (0.37)
---------- ----------
---------- ----------
Shares used in computing pro forma net loss per
share (2)......................................... 8,626,898 9,079,976
---------- ----------
---------- ----------

DECEMBER 31,
--------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997
----------- --------- --------- ---------- ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments... $ 442 $ 9 $ 3,399 $ 10,285 $ 5,844
Working capital..................................... 409 (76) 4,224 10,805 7,554
Total assets........................................ 855 475 5,208 14,316 11,226
Total debt.......................................... 1,293 3,243 -- -- --
Accumulated deficit................................. (817) (2,907) (6,181) (13,620) (16,939)
Total stockholders' equity (deficit)................ (816) (2,906) 4,707 12,961 9,955
</TABLE>

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

(1) July 19, 1993 (inception) to December 31, 1993.

(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share and shares used
in computing pro forma net loss per share.

25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following should be read in conjunction with "Selected Financial Data"
and the Company's Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.

OVERVIEW

The Company develops, manufactures and intends to market proprietary
visualization and information systems that enable minimally invasive surgical
solutions in cardiothoracic, head, neck and spine ("HNS") and other selected
microsurgical procedures. The Company currently markets endoscopic cameras and
related surgical instruments and accessories.

The Company has generated minimal revenues, principally from the sale of its
endoscopic cameras, and has been unprofitable since its formation in July 1993.
For the period from the Company's formation to March 31, 1997, the Company has
incurred cumulative net losses of approximately $16.9 million. The Company
expects to continue to incur substantial losses for at least the next 18 months.
There can be no assurance that the Company's development efforts will result in
commercially available products, that the Company will be successful in
introducing its products under development, or that required regulatory approval
of products will continue to be obtained in a timely manner, if at all.

The Company has increased its staffing each year to support its research and
development, manufacturing and sales and marketing activities. At December 31,
1994, 1995, 1996 and at March 31, 1997, the Company had 11, 21, 49 and 59
employees, respectively. The Company expects to continue to increase staffing
levels significantly in future periods in support of its research and
development, manufacturing scale up, service and support, sales and marketing
and general and administrative activities related to new products. The Company
expects that its increased staffing needs will negatively impact operating
income, which in turn may impact the Company's ability to achieve profitability.

The Company recorded noncash deferred compensation of approximately $2.5
million in connection with the grant of certain stock options during 1996, of
which approximately $447,000 was recognized as an expense in 1996. The Company
recorded an additional $743,000 of deferred compensation for stock options
granted in January and February 1997. The unamortized balance of the deferred
compensation will be expensed over the vesting periods of the options (typically
four or five years) and, therefore, will continue to impact the Company's
operating results through 2001.

The Company plans to adopt a per-procedure pricing strategy for the Series
8000 in the United States market. This strategy, designed to accelerate adoption
of the Series 8000, would require a payment to the Company every time the Series
8000 is used in a procedure. Therefore, revenues are directly related to usage.
In return, customers would receive an integrated equipment and service package,
including installation, in-service training, on-going technical support and
system upgrades, for a single charge which can be clearly related to a specific
procedure. The Company believes that adoption of such a strategy, based upon a
service contract rather than an upfront capital payment, will allow more rapid
penetration of the available market. The Company intends to amortize the cost of
the Series 8000 over the term of the service contract. Under the per-procedure
pricing strategy, the Company is required to allocate adequate capital resources
to fund such investment, as the customer does not purchase the system with an
upfront capital payment.

This discussion may contain forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in such forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors."

26
<PAGE>
RESULTS OF OPERATIONS

QUARTERS ENDED MARCH 31, 1996 AND 1997

SALES. The Company had revenues from product sales of $241,000 in the
quarter ended March 31, 1996 and $829,000 in the quarter ended March 31, 1997.
The increase was primarily attributable to the sales of surgical instruments and
sutures for which the Company acquired distribution rights during the second
half of 1996 and to the increased sales of the Company's endoscopic cameras to
new and existing customers. Sales to individual customers exceeding 10% or more
of revenues for the three months ended March 31, 1996 and 1997 were as follows:
for the three months ended March 31, 1996, three customers accounted for 62%,
20% and 12% of revenues; for the three months ended March 31, 1997, four
customers accounted for 27%, 18%, 17% and 10% of revenues, three of whom were
greater than 10% customers for the three months ended March 31, 1996. The
Company believes that the loss of any of these customers would not have a
material adverse effect on the Company's business, operating results or
financial condition and that concentration of revenues to individual customers
will likely decrease in future periods as the Company introduces new products.

COST OF SALES. Cost of sales consist primarily of purchased parts and
supplies, labor, facilities-related expenses and equipment depreciation. The
Company's cost of sales were $184,000 for the quarter ended March 31, 1996 and
$826,000 for the quarter ended March 31, 1997. The increase in these expenses
was related to the growth in revenue between the periods and to investment in
manufacturing infrastructure the Company is making to accommodate the scale-up
for new product introductions in 1997.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of personnel expenses, fees paid to independent contractors,
certain purchased technology and development, and equipment and facilities costs
to support product development, prototyping and product evaluation. The
Company's research and development expenses were $533,000 for the quarter ended
March 31, 1996 and $1,514,000 for the quarter ended March 31, 1997. The increase
was primarily attributable to increases in staffing, contract research and
development expense and consulting fees related to development, prototyping and
evaluation of future products.

SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of the cost of sales and marketing personnel and independent
contractors, commissions, office facilities, travel and promotional events such
as trade shows, seminars and technical conferences, as well as the costs
associated with marketing programs necessary to support the expansion of the
Company's business. Sales and marketing expenses were $313,000 for the quarter
ended March 31, 1996 and $745,000 for the quarter ended March 31, 1997. The
increase was primarily attributable to increases in staffing and related
expenses, professional and consulting fees in connection with marketing programs
related to new products and commissions.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries and other related expenses of the administrative
and executive, finance and accounting, and information systems departments of
the Company and expenses associated with legal and accounting requirements.
General and administrative expenses were $399,000 for the quarter ended March
31, 1996 and $1,164,000 for the quarter ended March 31, 1997. The increase was
primarily attributable to increases in staffing and related expenses associated
with development of the Company's administrative infrastructure, increases in
legal and professional fees related to patents and other business development
efforts, and the amortization of deferred compensation. The Company recorded
noncash deferred compensation of $743,000 in connection with stock options
granted in January and February 1997. The unamortized balance of the deferred
compensation will be expensed over the five-year vesting periods of the options
and, therefore, will continue to impact the Company's operating results through
2001.

27
<PAGE>
INTEREST INCOME. Interest income was $34,000 in the quarter ended March 31,
1996 and $102,000 in the quarter ended March 31, 1997, with the increase due to
increasing average investment balances.

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

SALES. The Company had revenues from product sales of $59,000, $1,719,000
and $2,244,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. The increase in revenues from 1994 to 1995 was primarily
attributable to the introduction of endoscopic cameras by the Company. The
increase in revenue from 1995 to 1996 was attributable to the increased sales of
the Company's endoscopic cameras and the sale of surgical instruments and
sutures for which the Company acquired distribution rights during 1996. Sales to
individual customers exceeding 10% or more of revenues for the years ended
December 31, 1994, 1995 and 1996 were as follows: during 1994, two customers
accounted for 82% and 18% of revenues; during 1995, one customer accounted for
85% of revenues; during 1996, three customers accounted for 30%, 27% and 25% of
revenues. For the years ended December 31, 1994, 1995 and 1996, the same
customer accounted for 18%, 85% and 25% of revenues, respectively. The Company
believes that the loss of any of these customers would not have a material
adverse effect on the Company's business, operating results or financial
condition and that concentration of revenues to individual customers will likely
decrease in future periods as the Company introduces new products.

COST OF SALES. The Company's cost of sales were $43,000, $1,272,000 and
$2,253,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
The increase in cost of sales from 1994 to 1995 was related to the growth in
revenue from 1994 to 1995. The increase in cost of sales from 1995 to 1996 was
attributable to the increase in revenues from 1995 to 1996 as well as the
investment the Company made in its manufacturing infrastructure to accommodate
the scale-up for new product introductions. This investment includes personnel
expenses, consulting fees and facilities-related costs and was approximately
$208,000. The Company anticipates it will continue to make significant
investments in manufacturing infrastructure in 1997 and 1998 and expects this
investment to increase cost of sales during such time period.

RESEARCH AND DEVELOPMENT EXPENSES. The Company's research and development
expenses were $1,328,000, $1,904,000 and $3,880,000 for the years ended December
31, 1994, 1995 and 1996, respectively. The increase in research and development
expenses from 1994 to 1995 was primarily attributable to acquired in-process
research and development, increased staffing and contract research and
development expense performed by third parties. The increase in research and
development expenses from 1995 to 1996 was attributable to significant increases
in staffing, contract research and development expense, and consulting fees
related to development, prototyping and evaluation of future products. The
Company anticipates it will continue to devote substantial resources to research
and development and that research and development expenses, particularly the
costs associated with increased staffing, prototyping and product evaluation
will increase substantially in 1997 and beyond.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from
$291,000 in 1994 to $834,000 in 1995 and to approximately $2,057,000 in 1996.
The increase from 1994 to 1995 was primarily attributable to increased staffing
and consulting fees related to the introduction of new products and expansion of
the Company's product line. The increase from 1995 to 1996 was related to
significant increases in staffing and related expenses, commissions and
professional and consulting fees as the Company continued to build its sales
operations and expand its marketing activities in relation to future products.
The Company believes that its sales and marketing expenses will increase
substantially in 1997 and 1998 as it continues to build its sales force and
expand its marketing efforts in connection with commercialization of new
products.

28
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $758,000, $1,034,000 and $3,103,000 for the years ended December 31, 1994,
1995 and 1996, respectively. The increase from 1994 to 1995 was primarily
attributable to increased staffing and related costs associated with the growth
of the Company's business during this period. The increase from 1995 to 1996 was
primarily attributable to the continued development of corporate management and
related support functions, the addition of new facilities and expansion of
current facilities, expansion of the Company's information systems and the
amortization of deferred compensation. The Company recorded noncash deferred
compensation of approximately $2.5 million in connection with the grant of
certain stock options during 1996, of which approximately $447,000 was
recognized as an expense in 1996. The unamortized balance of the deferred
compensation will be expensed over the vesting periods of the options (typically
four or five years) and, therefore, will continue to impact the Company's
operating results through 2001. The Company also expects that its general and
administrative expenses will increase in the future as it expands its staffing,
information systems and other related infrastructure and as a result of
increases in expenses associated with being a public company.

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

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

TAXES. At December 31, 1996, the Company had federal and state tax net loss
carryforwards of approximately $8,494,000 and $5,146,000, respectively. The
federal and state tax loss carryforwards will expire in 2010 and 2000,
respectively, unless previously utilized. At December 31, 1996, the Company also
had federal and state research tax credit carryforwards of approximately
$135,000 and $143,000, respectively, which will expire in 2010 unless previously
utilized. The Company has provided a full valuation allowance on the deferred
tax assets as realization of such assets is uncertain.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1997, the Company had approximately $5,844,000 in cash, cash
equivalents and short-term investments. Since formation, the Company has
financed its operations and investments in equipment and inventories through
advances from Kaiser Aerospace totaling $5,379,000, net proceeds from licensing
of certain of the Company's technology for $1,000,000 and from the private sale
of common and preferred stock totaling approximately $23,055,000, of which
$3,004,000 was used to repay advances from Kaiser Aerospace (with the remaining
$2,375,000 in outstanding advances being satisfied by the issuance of Series A-1
Preferred Stock).

Net cash used in operating activities was approximately $2,288,000,
$3,567,000 and $6,937,000 for 1994, 1995 and 1996, respectively, and $1,603,000
and $4,123,000 for the quarters ended March 31, 1996 and 1997, respectively. The
increase in net cash used from operating activities each year and for the
quarterly periods has resulted primarily from increasing net losses during such
periods and investments in inventories associated with expansion of the
Company's product line.

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<PAGE>
Net cash used in investing activities was approximately $94,000, $298,000
and $1,239,000 for 1994, 1995 and 1996, respectively, and $92,000 and $353,000
for the quarters ended March 31, 1996 and 1997, respectively. The increase in
net cash used in investing activities each year and for the quarterly periods
has resulted primarily from the purchase of short-term investments and the
purchase of property and equipment related to increased staffing, expansion of
manufacturing capabilities and marketing demonstrations.

Cash flows from financing activities in 1994, 1995 and 1996 were $1,950,000,
$7,090,000 and $15,061,000, respectively and $3,000 and $36,000 for the quarters
ended March 31, 1996 and 1997, respectively. The increase in cash flows from
financing activities resulted primarily from increased advances from Kaiser
Aerospace in 1994 and primarily from the private sale of common and preferred
stock in 1995 and 1996. The increase in the quarter ended March 31, 1997 from
that of the quarter ended March 31, 1996 was due to increased exercises of
options to purchase common stock.

Capital expenditures for equipment to support the Company's expanded
operations were approximately $57,000, $81,000 and $1,221,000 for 1994, 1995 and
1996, respectively, and $92,000 and $353,000 for the quarters ended March 31,
1996 and 1997, respectively. The Company expects its capital expenditures to
continue to grow as it expands its manufacturing base and scope of operations in
future periods. At March 31, 1997, the Company had commitments for capital
expenditures of approximately $1,250,000 relating primarily to custom injection
molded tooling required for certain of the Company's products and for prototype
systems to be used for evaluation and demonstration purposes.

The Company is currently negotiating with a lender to secure a $10.0 million
credit line. There can be no assurances that the Company will be successful in
negotiating such a credit line on favorable terms, if at all.

The Company expects it will continue to incur substantial expense in
additional research and development activities, production scale up, continued
establishment of its sales force and marketing organization and administrative
support activities. The Company anticipates that the net proceeds from this
Offering and the interest income thereon, together with its existing cash, cash
equivalents and short-term investments, will be sufficient to fund its
operations through 1998. Certain circumstances, however, including slow rate of
market acceptance of the Company's products, the Company's inability to scale up
manufacturing or delay in further regulatory approvals, would accelerate the
Company's use of proceeds from the Offering. Therefore the Company may require
additional funds to support its operating requirements or for other purposes.
Accordingly, the Company may, from time to time, seek to raise such additional
funds through public or private equity financings, debt financings or from other
sources. There can be no assurance that additional financing will be available
at all or that, if available, such financing would be obtainable on terms
acceptable to the Company.

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<PAGE>
BUSINESS

OVERVIEW

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

BACKGROUND

MINIMALLY INVASIVE SURGERY

The development and subsequent widespread adoption of minimally invasive
surgical approaches have revolutionized many surgical fields, including general
surgery, orthopedics, gynecology and urology. Minimally invasive surgical
procedures are performed through strategically placed ports or mini-incisions in
a patient's body thereby avoiding the larger incisions used in traditional open
surgery. A minimally invasive approach is most advantageous in cases in which
significant trauma results from gaining surgical access to an affected organ or
site. Notable examples of minimally invasive surgical procedures include
laparoscopic procedures in the field of general surgery and arthroscopic
procedures in the field of orthopedic surgery, many of which have become the
standard of care and have achieved significant procedure volumes rapidly. For
example, according to Medical Data International, an independent research
organization, the number of laparoscopic surgical procedures performed annually
in the United States increased from approximately 84,000 in 1990 to more than an
estimated 2.4 million in 1995. Minimally invasive procedures are designed to be
as efficacious as conventional surgery, but with substantially reduced trauma.
Minimally invasive procedures are designed to reduce pain and suffering, speed
recovery, shorten the length of hospital stays and decrease many of the costs
associated with patient care. This movement toward minimally invasive surgery
has been driven by advances in both device technology and surgical technique, as
well as patient demand.

MINIMALLY INVASIVE MICROSURGERY

Minimally invasive microsurgery ("MIM") is an extension of minimally
invasive surgery, characterized by greater complexity and precision. MIM
procedures have been made possible primarily by recent advances in medical
technology. MIM is usually performed in very confined areas of the body,
involves critical anatomical structures, and often requires dissection and
reconstruction as well as excision. As a result, the Company believes that in
order for MIM procedures to be extensively adopted, surgeons must have access to
enhanced visualization and specialized instruments. Examples of MIM are emerging
procedures in cardiothoracic surgery and head, neck and spine ("HNS") surgery.

CARDIOTHORACIC SURGERY

CONVENTIONAL TREATMENTS. Cardiovascular disease, the leading cause of death
in the United States, is typically treated with drugs, various surgical
procedures or both. The two principal types of cardiovascular disease are
coronary artery disease and valvular heart disease. Methods of accessing the
heart for treatment include surgically opening the chest, threading a
balloon-tipped catheter through a major artery or, most recently, gaining
surgical access via a small incision in the chest. Conventional cardiology
procedures include angioplasty, atherectomy and inserting coronary stents;
conventional surgical procedures include coronary artery bypass graft ("CABG")
and valve replacement or repair.

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Angioplasty, atherectomy and inserting coronary stents involve the use of a
balloon-tipped catheter which is threaded into the heart through an artery in a
patient's leg. Although these procedures are less invasive than conventional
CABG, a major drawback is the high rate of restenosis or renarrowing of the
blood vessel at the treatment site. Traditional CABG and valve replacement or
repair procedures typically involve a sternotomy, whereby a surgeon makes a 12
to 18 inch incision in the patient's chest, the sternum is cut in half with a
bone saw, and the rib cage is then spread open with a steel retractor to perform
the grafting procedures or to replace or repair the heart valves. According to
the results of a recent study, approximately one-third of all angioplasties
experience restenosis or renarrowing of the blood vessel at the treatment site
within seven months while the Company believes most traditional CABG procedures
remain effective for more than a decade.

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

CARDIOTHORACIC MIM. The application of minimally invasive techniques to
cardiothoracic surgery is commonly regarded as a revolutionary development in
modern surgery. Minimally invasive CABG and valve replacement or repair
procedures avoid the trauma caused by sternotomy and promise to significantly
decrease pain and trauma and shorten recovery times. The minimally invasive
approaches to surgical intervention are evolving and include methods performed
on either a beating or arrested heart. While few agree on the ultimate form of
the emerging techniques and practices, nearly all of those involved believe that
minimally invasive procedures will change the future practice of cardiothoracic
surgery, just as laparoscopy has revolutionized general surgery. However,
cardiothoracic MIM requires the surgeon to perform technically challenging
procedures, including working on tiny delicate structures (such as a one
millimeter heart vessel) with highly restricted access through small incisions.
The Company believes that a current limitation to widespread adoption of
cardiothoracic MIM is the restricted visibility through the minimal incisions
currently used. While new retractor systems are being introduced to open the
incision and therefore improve the surgeon's access and ability to visualize the
anatomy directly, restricted visibility, particularly for more complex cases,
remains an issue. In addition, the objective of minimizing the incision size
("keyhole" access) to reduce trauma can only be achieved effectively with
visualization, as has been demonstrated in other minimally invasive
applications. As a result of these factors, the development of cardiothoracic
MIM will require enhanced visualization, as well as specialized instruments and
surgeon training in the new techniques.

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

HEAD, NECK AND SPINE (HNS) SURGERY

CONVENTIONAL HNS TREATMENTS. Conventional head, neck and spine procedures
are often invasive and involve a lengthy and painful recovery. Neurosurgical
procedures involving the brain and spinal cord have traditionally been performed
under microscopic visualization to facilitate the delicate manipulations and
extreme precision which are required. More recently, the visualization system
often includes

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neuroendoscopes in combination with microscopes. The Company estimates there
were approximately 315,000 neurosurgical and skull base procedures, 430,000
surgical sinus procedures and 650,000 spinal procedures performed in the United
States in 1995.

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

THE VISTA MEDICAL SOLUTION. In the HNS MIM area, the Company's products
incorporate 3-D visualization into a small diameter endoscope which provides the
surgeon with the critical element of depth perception missing from conventional
endoscopes. In addition, the endoscopic image in the head-mounted display worn
by an assistant surgeon who is operating directly across from the principal
surgeon can be electronically reversed in order to align the assistant's
movements with those of the principal surgeon. The Company can also retrofit
surgical microscopes, so that both the principal surgeon and assistants can view
the case simultaneously on their head-mounted displays in 3-D, with superior
comfort and ergonomic positioning.

BUSINESS STRATEGY

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

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

DEVELOP MIM APPLICATIONS THROUGH SPECIALTY-FOCUSED BUSINESS UNITS BY
LEVERAGING THE COMPANY'S TECHNOLOGY PLATFORM. The Company approaches its target
markets via its focused business units, the CardioThoracic Surgery division and
the HNS Microsurgery division. The business units concentrate on the specific
requirements of their target markets, with dedicated clinical marketing

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<PAGE>
programs, clinical advisory boards, sales forces and customer support teams for
the introduction and support of the Company's products. The Company's strategy
is to optimize its fundamental technology platform for each of these medical
specialties and to develop appropriate partnership and distribution systems both
in the United States and international markets.

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

INCREASE THE SURGEON'S REAL-TIME ACCESS TO CRITICAL DATA. The surgeon's
access to critical monitoring and diagnostic data, on demand, in real time and
integrated with the anatomical image, enhances procedure performance. The
Company's head-mounted display, incorporating picture-in-picture capability, is
designed to give the surgeon this real-time access to critical information
integrated with the anatomical images generated by the Company's camera systems.

ENTER INTO STRATEGIC RELATIONSHIPS WHICH COMPLEMENT COMPANY RESOURCES. The
Company intends to leverage its position in both technology and distribution by
forming strategic alliances with partners. In November 1996, the Company and
Medtronic, Inc. ("Medtronic"), a leading cardiac company, entered into a
strategic alliance providing for the distribution and co-promotion of the
Company's current and future visualization and information systems for cardiac
surgery, including the Vista Systems. Medtronic will co-promote the product line
in the United States and Canada and act as the Company's exclusive distributor
in Europe, the Middle East (excluding Afghanistan and Pakistan) ("Middle East")
and Africa. In February 1997, the Company entered into an agreement with
Heartport, Inc. ("Heartport"), a leading company developing minimally invasive
technology for heart surgery. Vista Medical will sell four Series 8000 systems
to Heartport, for use in the Heartport Research and Training Center in Salt Lake
City, Utah. The Company has also formed strategic partnerships with Cogent Light
Technologies ("Cogent Light") and GDE Systems, Inc. ("GDE") to incorporate light
source and information technologies, respectively, into its products. The
Company expects to pursue additional strategic relationships.

ADVANCED VISUALIZATION PRINCIPLES AND PRODUCT PLATFORM

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

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

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

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

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

- INFORMATION INTEGRATION. The surgeon's access to 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.

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

HEAD-MOUNTED DISPLAY

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

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

THREE-DIMENSIONAL IMAGE ACQUISITION

Vista Medical believes that 3-D visualization capability is critical in MIM
procedures such as cardiothoracic and neurosurgical procedures. The Company's
technology for stereo visualization consists of the following proprietary
elements: the optical system, the stereo camera and the stereo processor. The

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<PAGE>
3-D endoscopic optical system employed by Vista Medical was originally developed
and patented by a noted optical designer, Mr. H. McKinley, and is licensed
exclusively to the Company for medical applications. The system is designed to
replicate the exact view that the surgeon would have if the procedures were
being performed open and he or she had direct sight of the anatomy. The Company
believes that the McKinley optical system will provide it with a significant and
enduring competitive advantage because it provides natural depth perception, and
it can be packaged with twin cameras in a very compact design. The twin cameras
acquire the image in a manner analogous to a human's two eyes.

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

INFORMATION MANAGEMENT

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

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

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PRODUCT LINES

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

SERIES 8000 ADVANCED VISUALIZATION AND INFORMATION SYSTEM

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

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

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

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

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

CardioGuide Flexible, steerable, disposable guidance system for CardioCamera.

CardioConsole Console for rack mounting of all Series 8000 modules.

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

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

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

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

(2) The Company expects to introduce the Cardio3DScope and the CardioRecorder in
future versions of the Series 8000. The Cardio3DScope recently received
510(k) clearance to market from the FDA. The CardioRecorder is currently
under development by an OEM supplier.

Of the components listed in the table above, CardioView, CardioCamera,
CardioController, CardioLight and CardioConsole are necessary for Series 8000
commercialization. 510(k) clearances to market the first four components have
been received, and 510(k) clearance to market is not necessary for the
CardioConsole component. The Company expects the Series 8000 to be commercially
available later this year. The Company anticipates filing a required 510(k)
pre-market notification for the CardioGuide in third quarter 1997.

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STEREOSITE SYSTEMS FOR MICROSCOPY AND ENDOSCOPY

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

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

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

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

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

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

The Company anticipates filing a required 510(k) pre-market notification for
the processor component of the HMD for the StereoSite systems in third quarter
1997. The processor component will incorporate enhanced software capabilities.
All other required 510(k) clearances to market for the StereoSite system have
been received. The Company believes that there is a predicate device which can
be relied upon for regulatory clearance of the HMD/Processor component, which
predicate device was developed by the Company and Kaiser Aerospace. The Company
expects the StereoSite systems to be commercially available in first quarter
1998, subject to receipt of required regulatory approvals.

OTHER PRODUCTS

RELATED CARDIOTHORACIC AND HNS PRODUCTS. The Company's CardioThoracic
Surgery division is the exclusive North American distributor of instruments
manufactured by Delacroix-Chevalier, a French corporation, and sutures
manufactured by Peters, a French corporation, which are particularly appropriate
for the minimally invasive approach. The Company's HNS Microsurgery division is
the United States distributor of a line of hand instruments for functional
endoscopic sinus surgery, including instruments developed by Dr. Hiroshi
Moriyama of Jikei University, Tokyo.

ENDOSCOPIC CAMERA. Endoscopic cameras are the state-of-the-art in
two-dimensional endoscopic imaging. The Company currently manufactures a
compact, high resolution endoscopic camera under its own label and for OEM
customers and strategic partners. This product has historically accounted for a
significant portion of the Company's revenues. The Company's endoscopic camera
is also referred to as a three-chip camera. "Three-chip" refers to the
allocation of a chip to each of the primary colors--red, green and blue. This
results in superior color reproduction relative to a standard "single chip"
camera, where one chip serves for all three primary colors.

ELECTRONIC ZOOM LAPAROSCOPE (EZL). The EZL represents a new generation of
laparoscopes in which the camera is placed on the distal end of the endoscope
and then inserted inside the body. The EZL incorporates Vista Medical's unique
proprietary zoom feature, which allows a surgeon to manipulate the image by
zooming in and out at the touch of a button, while remaining in focus and
without

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<PAGE>
moving the scope. This capability is not available in any other currently
marketed endoscope and the Company is currently seeking a strategic partner with
distribution capability in laparoscopy. The Company may also utilize the zoom
technology in future products for the CardioThoracic Surgery and HNS
Microsurgery divisions.

STRATEGIC ALLIANCES

The Company intends to leverage its position in both technology and
distribution by forming strategic alliances with corporations and research
institutions with respect to the development, regulatory approval and marketing
of certain of its products. The Company has entered into strategic partnering
arrangements as follows:

MEDTRONIC

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

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

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

In connection with entering into the co-promotion agreement, Medtronic made
a $10 million equity investment in the Company and received 2,000,000 shares of
Series C Preferred Stock, which will be automatically converted into 1,500,000
shares of Common Stock in connection with this Offering. In addition, Vista
Medical and Medtronic entered into a Supplemental Rights Agreement in connection
with entering into the co-promotion agreement, pursuant to which Medtronic
received a first offer purchase right in certain proposed transactions and a
right to designate an observer to attend meetings of the Board of Directors.
Each of these rights terminate upon the closing of the Offering.

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<PAGE>
HEARTPORT

In February 1997, the Company entered into a Supply and Services Agreement
with Heartport, a leading company developing minimally invasive technology for
heart surgery. Vista Medical will sell four Series 8000 systems to Heartport,
for use in the Heartport Research and Training Center in Salt Lake City, Utah.
The four systems are scheduled to be delivered by approximately September 1997
or as soon as possible thereafter. Heartport has agreed to use the Series 8000
in its training centers, to promote that its training courses utilize the Series
8000 and to endorse the Series 8000 as the preferred 3-D video visualization and
information solution for minimally invasive heart surgery. Until December 31,
1999, the Company will maintain and support the four systems at the Heartport
Research and Training Center and will collaborate with Heartport with the goal
of ensuring that the Series 8000 is compatible with technology used in the
performance of Heartport's Port-Access procedures. During the period ending
December 31, 2003, the Company has also agreed to provide the Vista Systems to
hospitals, clinics or similar sites in North America whose surgeons have been
trained at the Heartport Research and Training Center, without discrimination
and on the best available terms and conditions the Company offers to any other
similarly situated customers of the Company. In connection with the agreement,
the Company issued to Heartport a warrant to purchase up to 100,000 shares of
Common Stock, exercisable at any time after this Offering and prior to March 31,
2001, at a price of $6.67 per share.

GDE SYSTEMS

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

COGENT LIGHT

The Company and Cogent Light formed a strategic alliance in March 1996,
pursuant to a memorandum of understanding, to cooperate in the development of
products for minimally invasive cardiac surgery which incorporate Cogent Light's
proprietary light fiber delivery technology. Pursuant to the memorandum of
understanding, Cogent Light is currently providing its single fiber and
MicroBundle technologies exclusively for incorporation into the Series 8000,
including CardioCamera, CardioLight and Cardio3DScope. The memorandum of
understanding stipulates that Vista Medical will incorporate only a Cogent Light
source in its cardiac surgical instrumentation, for example, CardioLight,
provided such light source meets all of Vista Medical's performance
requirements. The parties retain rights to their respective intellectual
property, with new developments under the alliance being jointly owned and
cross-licensed to each party.

KAISER AEROSPACE

The Company was founded as a wholly-owned subsidiary of Kaiser Aerospace in
July 1993, and became an independent entity in July 1995 with the addition of
several venture capital funds as investors. Substantially all of the shares
originally issued to Kaiser Aerospace were subsequently

40
<PAGE>
transferred to Foster City Partners, a partnership which includes senior
executives of Kaiser Aerospace, in June 1996. Foster City Partners remained a
significant stockholder participating pro-rata in a further investment round in
July 1996. See "Certain Transactions."

In July 1995, the Company entered into a Technology Strategic Alliance:
Memorandum of Understanding (the "Technology Strategic Alliance") and a
Manufacturing Supply Agreement with Kaiser Electro-Optics, a subsidiary of
Kaiser Aerospace. The Technology Strategic Alliance provides that the Company
and Kaiser Electro-Optics will cooperate in joint development programs related
to the HMD as appropriate to be negotiated on an arms-length and
project-by-project basis for an unspecified term. The Company contracts with
Kaiser Electro-Optics for development and manufacturing services related to the
Company's HMD, including initial production quantities for the HMD. The
Manufacturing Supply Agreement provides that Kaiser Electro-Optics will be the
Company's preferred supplier for a three-year period for not less than 75% of
its requirements for the optical subassembly of the Company's HMD, provided that
pricing and other terms are competitive and mutually agreed upon.

UROHEALTH

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

MARKETING AND SALES

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

TRAINING. The introduction of new technology requires training for both
surgeons and operating room personnel. VCS intends to begin training programs in
the third quarter of 1997 and expects to be able to train up to 250 surgeons on
an annual basis. VCS will also provide the visualization equipment for training
programs organized by Medtronic, Heartport and other cardiac surgery companies.
The VCS training format will involve one or two day sessions at selected
locations where surgeons will have the opportunity to use the Series 8000 in a
laboratory environment. Operating room personnel will receive in-service
training from company representatives when equipment is installed. VHNS intends
to utilize a similar format specifically designed for HNS surgeons. See
"--Strategic Alliances."

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<PAGE>
CLINICAL EVALUATION. VCS and VHNS product lines have been developed with
frequent input from the Clinical Advisory Boards of each division. This
evaluation phase will progress into a publication phase with the Company's
advisors publishing results of their experience in leading publications and
speaking at major clinical conferences. The Company supports such research,
although it has no control over the content or timing of any publication or
presentation, because impartial education of the general clinical audience is a
key component in establishing procedure and equipment acceptance. As part of
their strategy, VCS and VHNS also intend to continue to support seminars and
symposiums and participate in industry trade shows.

SALES FORCE. VCS and VHNS will have separate sales forces, consisting of a
combination of direct and independent sales representatives. VCS currently
markets its products through four direct and 30 independent representatives and
is in the process of hiring up to eight additional direct sales people to
support the introduction of the Series 8000. In addition, Medtronic will
co-promote the Series 8000 in conjunction with Medtronic's own proprietary
products for minimally invasive cardiac surgery in the U.S. and Canada. VHNS
will market its products through a similar combination of direct and independent
sales representatives. VHNS currently has two sales managers, one based in the
United States and the other in Europe.

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

INTERNATIONAL SALES. The Company markets its products internationally
through independent distributors and has entered into a strategic relationship
with Medtronic for the distribution of the Vista Systems in Europe, the Middle
East and Africa. See "-- Strategic Alliances -- Medtronic."

MANUFACTURING

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

The Company lacks experience in manufacturing its products under
development, including the Series 8000, in the quantities that would be
necessary to achieve significant commercial sales. The manufacture of the
Company's products primarily involves the assembly of a number of sub-assemblies
and components either by the Company directly or by contract manufacturers.
Companies such as Vista Medical often encounter difficulties in scaling up
manufacturing of products, which could include problems involving quality
control and assurance, component and service availability, adequacy of

42
<PAGE>
control policies and procedures, lack of qualified personnel, compliance with
FDA regulations and the need for further FDA review and possible approval of new
manufacturing processes and facilities or other production constraints. There
can be no assurance that reliable, high-volume manufacturing can be established
or maintained at commercially reasonable costs. The Company will also require
additional manufacturing facilities as production volumes increase; acquisition
of new manufacturing facilities will likely involve relocation. Any of these
factors could have a material adverse effect on the Company's business,
financial condition and results of operation.

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

The Company has, and will continue to consider as appropriate, the internal
manufacture of sub-assemblies currently provided by third party subcontractors,
as well as the implementation of new design and production processes which
further reduce costs.

COMPETITION

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

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

GOVERNMENT REGULATION

43
<PAGE>
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.

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

The Company has received 510(k) clearance to market the following product
lines in the United States: (i) 3-D video endoscope (April 1997); (ii) mini
cameras (April 1997); (iii) illumination system (April 1997); (iv) head mounted
display (September 1996); (v) additional cardiothoracic indications for the 3-D
scope (July 1996); (vi) sinus telescopes (October 1995); (vii) video endoscope
with zoom (January 1995); (viii) stereo viewing system (November 1994); (ix)
dental camera (November 1994); (x) three-chip (endoscopic) video camera (June
1994); and (xi) 3-D scope (December 1992). All 510(k) clearances to market
necessary for Series 8000 commercialization have been received. The Company
anticipates filing a required 510(k) pre-market notification for the processor
component of the HMD for the StereoSite systems in third quarter 1997. All other
required 510(k) clearances to market for the StereoSite system have been
received. Internationally, the Company's three-chip video camera and the

44
<PAGE>
zoom endoscope have qualified for the CE mark under the Electromagnetic
Compatibility Directive for sale in Europe.

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

PATENTS AND PROPRIETARY RIGHTS

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<PAGE>
patents and nine pending foreign applications covering various aspects of its
devices and systems. The Company intends to file additional patent applications
in the future. The failure for such patents to issue could have a material
adverse effect on the Company's business, financial condition and results of
operations.

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

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

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

46
<PAGE>
period of time, and usually before the grant of the patent, patent applications
in foreign countries are published. While publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and the
filing of related patent applications, such publication may enable the Company's
competitors to ascertain what areas of research or development the Company is
engaged in prior to the Company's receipt of patent protection in the United
States or foreign countries relating to such research or development.

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

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<PAGE>
CLINICAL ADVISORY BOARDS

The Company has established two Clinical Advisory Boards made up of leading
surgeons, one focused on minimally invasive cardiac surgery, the other focused
on HNS microsurgery and a number of other specialties. Members of the Clinical
Advisory Boards consult with the Company exclusively in the field of
visualization, but may also consult with other non-competing instrumentation
companies and are employed elsewhere on a full-time basis. The Clinical Advisory
Boards are intended to act as a clinical reference for the Company and to
provide access to potential training sites for the Company's visualization
products. The Clinical Advisory Boards and their members are as follows:

CLINICAL ADVISORY BOARD: CARDIOTHORACIC SURGERY

<TABLE>
<CAPTION>
ADVISOR (1) INSTITUTION AND LOCATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Delos M. Cosgrove III, M.D.............................. The Cleveland Clinic Foundation, Cleveland, OH
Federico Benetti, M.D................................... Fundacion Benetti, Rosario, Argentina
Alain Carpentier, M.D................................... Hopital Broussais, Paris, France
O. Howard Frazier, M.D.................................. Texas Heart Institute, Houston, TX
Laman Gray, M.D......................................... University of Louisville, Louisville, KY
Renee S. Hartz, M.D..................................... Tulane University, New Orleans, LA
Urban Lonn, M.D......................................... University Hospital, Linkoping, Sweden
William Northrup, III, M.D.............................. Minneapolis Heart, Minneapolis, MN
M. Clive Robinson, M.D.................................. University of Kentucky, Lexington, KY
William Santamore, Ph.D................................. University of Louisville, Louisville, KY
Meredith Scott, M.D..................................... Florida Hospital, Orlando, FL
Hani Shennib, M.D....................................... Montreal General Hospital, Montreal, Canada
Albert Starr, M.D....................................... St. Vincent Hospital, Portland, OR
Gus J. Vlahakes, M.D.................................... Massachusetts General Hospital, Boston, MA
John Wain, M.D.......................................... Massachusetts General Hospital, Boston, MA
</TABLE>

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

(1) Each of the listed advisors specializes in cardiac surgery, with the
exceptions of Dr. John Wain, who specializes in thoracic surgery, and Dr.
William Santamore, who is a cardiovascular researcher.

CLINICAL ADVISORY BOARD: HNS MICROSURGERY AND OTHER SPECIALTIES

<TABLE>
<CAPTION>
ADVISOR ADVISORY FOCUS INSTITUTION AND LOCATION
- ------------------------------ ------------------------------- -------------------------------------------------
<S> <C> <C>
Desmond H. Birkett, M.D. 3-D endoscopic surgery Lahey Clinic, Woburn, MA
Richard D. Bucholz, M.D. Neuro-navigational surgery St. Louis University School of Medicine, St.
Louis, MO
James T. Caillouette, M.D. Information Technology Hoag Hospital, Newport Beach, CA
John Coller, M.D. Telemedicine Lahey Clinic, Woburn, MA
John Diaz Day, M.D. Skull base surgery Allegheny General Hospital, Pittsburgh, PA
Michael Levy, M.D. Neurosurgery University of California, Los Angeles, Los
Angeles, CA
Douglas Olsen, M.D. Spine surgery Vanderbilt University School of Medicine,
Nashville, TN
John H. Payne, Jr., M.D. Telemedicine Kaiser Permanente Hospital, Honolulu, HI
Stanley Shapshay, M.D. ENT/Sinus surgery New England Medical Center, Boston, MA
</TABLE>

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<PAGE>
HUMAN RESOURCES

As of May 31, 1997, the Company had 64 full-time employees, of whom 10 hold
advanced degrees. None of the Company's employees is represented by a collective
bargaining agreement, nor has the Company experienced work stoppages. The
Company believes its relations with its employees are good.

FACILITIES

The Company's facilities consist of approximately 6,500 square feet of
office space located in Carlsbad, California, in which the Company's executive
offices and the HNS Microsurgery division are located, pursuant to a lease which
expires in November 1998. In addition, the Company maintains a facility of
approximately 22,500 square feet in Westborough, Massachusetts in which the
Company's development and manufacturing operations and the CardioThoracic
Surgery division are located, pursuant to several leases which expire at various
points in time beginning in May 1999 and ending in October 2001. The Company
believes that suitable additional space will be available to it, when needed, on
commercially reasonable terms.

LEGAL PROCEEDINGS

As of the date of this Prospectus, the Company is not a party to any legal
proceedings. Notwithstanding the foregoing, from time to time, Vista Medical may
be involved in litigation.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company as of May 31, 1997, are
as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
James C. Blair (1)................................... 58 Chairman of the Board and Director
John R. Lyon......................................... 51 President, Chief Executive Officer and Director
Koichiro (Ken) Hori.................................. 61 Senior Vice President, Advanced Technology
Nancy M. Briefs...................................... 42 Vice President and General Manager, CardioThoracic
Surgery division
Allen Newman......................................... 46 Vice President and General Manager, Head, Neck &
Spine Microsurgery division
Clifford F. Potocky.................................. 50 Vice President and General Manager, Oktas division
Robert J. De Vaere................................... 39 Chief Financial Officer and Director of Finance and
Administration
Olav B. Bergheim..................................... 47 Director
Nicholas B. Binkley (1).............................. 51 Director
Daniel J. Holland (2)................................ 61 Director
Larry M. Osterink (2)................................ 56 Director
</TABLE>

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

(1) Member of Compensation Committee.

(2) Member of Audit Committee.

JAMES C. BLAIR. Dr. Blair has served as Chairman of the Board and a
Director of the Company since July 1995. Dr. Blair has been a General Partner of
Domain Associates ("Domain"), a venture capital management company, since 1985.
From 1969 to 1985, Dr. Blair was an officer of three investment banking and
venture capital firms. Dr. Blair is a director of Amylin Pharmaceuticals, Inc.,
Aurora Biosciences Corp., CoCensys Inc., Dura Pharmaceuticals, Inc., Gensia
Sicor, Inc. and Trega Biosciences Inc., all biopharmaceutical companies. Dr.
Blair is a graduate of Princeton University and holds a Ph.D. from the
University of Pennsylvania.

JOHN R. LYON. Mr. Lyon co-founded the Company in July 1993 and has served
as President since July 1993, as Chief Executive Officer since December 1996 and
as a director of the Company since July 1995. Prior to co-founding Vista
Medical, Mr. Lyon served for three years with Cooper Companies, as President of
the International Division within Cooper's Health Care Group from January 1991
through December 1992, and as President of CooperSurgical, a manufacturer and
distributor of minimally invasive surgical products, from January 1992 through
January 1993. Mr. Lyon also was employed by Kaiser Aerospace in a business
development role from February 1993 until the Company was founded in July 1993.
Mr. Lyon holds a B.A. from the University of Durham, United Kingdom.

KOICHIRO (KEN) HORI. Mr. Hori co-founded Vista Medical and served as
Executive Vice President and Chief Technical Officer prior to being appointed
Senior Vice President, Advanced Technology in December 1996. Mr. Hori also
served as a director of the Company from July 1995 to December 1996. Prior to
co-founding the Company, Mr. Hori served as President of Technology for Imaging,
which was subsequently acquired by Bristol-Myers Squibb, from December 1985 to
May 1992 and then founded Oktas, Inc. in November 1992 and served as its
President until December 1996. Oktas, Inc. was a wholly-owned subsidiary of the
Company from July 1995 through December 1996, when it was legally dissolved as a
separate entity and its assets were transferred to the Company. Mr. Hori earned
his B.S.E.E. from Tokyo's Nihon University College of Science and Engineering.

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<PAGE>
NANCY M. BRIEFS. Ms. Briefs joined the Company as a consultant in May 1995
and has served as Vice President and General Manager of the Company's
CardioThoracic Surgery division since December 1995. Prior to joining Vista
Medical, from August 1993 through April 1995, Ms. Briefs served as Vice
President of Marketing and Sales at American Surgical Technologies Corporation
("AST"), a company that developed and received approval for the first
three-dimensional endoscope before its assets were acquired by Vista Medical in
July 1995. Previously, Ms. Briefs served as Director of Worldwide Marketing and
Corporate Accounts at Stryker Corp.'s Endoscopy Division from January 1990
through August 1992, where she was responsible for both the arthroscopy and
laparoscopy business units. She holds a B.A. and B.S. from Emporia State
University in Kansas and an M.B.A. in Marketing from Golden Gate University in
San Francisco.

ALLEN NEWMAN. Mr. Newman joined Vista Medical in June 1994 and served as
the Company's Vice President, Business Development until being appointed Vice
President and General Manager of the Company's Head, Neck & Spine Microsurgery
division in December 1996. Prior to joining the Company, Mr. Newman served as
president of Newman Medical, a medical consultancy, from October 1992 through
June 1994. Previously, he served as Vice President of Business Development at
Birtcher Medical Systems from March through October 1992 and in various sales
and management positions at Karl Storz Endoscopy America from 1982 through
February 1992, serving as Vice President, Sales and Marketing from 1989. Mr.
Newman holds a B.A. from California State University (Sonoma) and graduated from
the Medical Marketing Program of the John E. Anderson Graduate School of
Business at the University of California, Los Angeles ("UCLA").

CLIFFORD F. POTOCKY. Mr. Potocky joined Vista Medical in January 1996 and
has served as the Company's Vice President and General Manager of its Oktas
division since December 1996. Prior to joining Vista Medical, Mr. Potocky worked
at Frigitronics from 1974 through October 1995, in a variety of positions,
including Executive Vice President, Vice President-Director of Engineering and
Product Manager/Product Engineer. Frigitronics, a subsidiary of Starr Surgical,
Inc., was acquired and became CooperSurgical in 1990, specializing in
cryosurgery and other minimally invasive medical devices. Mr. Potocky holds a
B.S. from the University of Massachusetts.

ROBERT J. DE VAERE. Mr. De Vaere has served as Chief Financial Officer
since December 1996 and as Director of Finance and Administration for the
Company since January 1996. From January 1991 until joining Vista Medical, Mr.
De Vaere served in various financial roles at several of Kaiser Aerospace's
business units, most recently as Director of Finance and Business Management at
Kaiser Electro-Optics. Mr. De Vaere holds a B.S. from UCLA.

OLAV B. BERGHEIM. Mr. Bergheim has served as a Director of the Company
since August 1996. Mr. Bergheim has been a Venture Partner of Domain Associates
since October 1995. From April to July 1995, Mr. Bergheim was Executive
Vice-President of Coram Healthcare and from 1977 to 1995 served in various
management capacities with Baxter Healthcare Corporation in Europe and the
United States. From 1992 to 1995, Mr. Bergheim was President of Baxter's
Cardiovascular Group. Mr. Bergheim is a director of Fusion Medical Technologies,
Inc. Mr. Bergheim graduated from the University of Oslo with a Masters degree in
Industrial Pharmacy.

NICHOLAS B. BINKLEY. Mr. Binkley has served as a Director of the Company
since July 1995. In June 1993, Mr. Binkley was one of the founding principals of
Forrest Binkley & Brown L.P., the managing general partner of SBIC Partners,
L.P., a private equity investment fund licensed as a small business investment
company by the U.S. Small Business Administration. From 1977, Mr. Binkley served
in a variety of senior executive positions at Security Pacific Corporation
("SPC"), including Chairman and Chief Executive Officer of Security Pacific
Financial Services System, SPC's non-banking subsidiary, from 1981, and Vice
Chairman of the Board of Directors of SPC from 1991. In April 1992, Mr. Binkley
became Vice Chairman of the Board of Directors of BankAmerica Corporation
("BankAmerica"), following the merger of SPC into BankAmerica, serving in such
capacity until his resignation in May 1993.

51
<PAGE>
Mr. Binkley is a graduate of The Colorado College and holds a masters degree
from Johns Hopkins School of Advanced International Studies.

DANIEL J. HOLLAND. Mr. Holland has served as a Director of the Company
since July 1995. Mr. Holland is a General Partner of One Liberty Fund III, a
venture capital fund organized in 1995. He served as President of Morgan,
Holland Ventures Corporation until 1995 when he was appointed Senior Officer of
OneLiberty Ventures, Inc. (formerly Morgan, Holland Ventures Corporation). He
has also served as a Managing General Partner of Morgan, Holland Fund and
Morgan, Holland Fund II since 1981 and 1988, respectively. Mr. Holland holds a
B.S. in mechanical engineering from The Massachusetts Institute of Technology
and an MBA from Harvard Business School.

LARRY M. OSTERINK. Dr. Osterink has been a Director of the Company since
July 1995. Since 1993, Dr. Osterink has served as President of Medical Optics
Inc., a subsidiary of Kaiser Aerospace. From 1984 to 1992, Dr. Osterink was
President of Kaiser Electro-Optics Inc. and from 1979 to 1984 he was General
Manager of the Industrial Laser Division of SpectraPhysics Inc. Dr. Osterink
graduated from Michigan State University and holds a Ph.D. in Electrical
Engineering from Stanford University.

Members of the Board currently hold office and serve until the next annual
meeting of the stockholders of the Company or until their respective successors
have been elected. The Board is currently comprised of six directors. Under the
Company's Restated Bylaws, beginning with the next annual meeting of
stockholders the Company's Board will be classified into three classes of
directors serving staggered three-year terms, with one class of directors to be
elected at each annual meeting of stockholders. The classification of directors
has the effect of making it more difficult to change the composition of the
Board. See "Description of Capital Stock -- Possible Anti-takeover Effect of
Certain Charter Provisions."

All executive officers are appointed annually by and serve at the discretion
of the Board. All of the Company's executive officers are employed by the
Company at will.

Pursuant to the Company's 1997 Stock Option/Issuance Plan, which was adopted
by the Board in February 1997 and approved by the Company's stockholders in
February 1997, directors who are not officers or employees of the Company will
receive periodic option grants beginning with the next annual meeting of
stockholders. See "-- Benefit Plans."

COMMITTEES OF THE BOARD OF DIRECTORS

The Company has a standing Compensation Committee currently composed of Dr.
Blair and Mr. Binkley. The Compensation Committee reviews and acts on matters
relating to compensation levels and benefit plans for executive officers and key
employees of the Company, including salary and stock options. The Committee is
also responsible for granting stock awards, stock options and stock appreciation
rights and other awards to be made under the Company's existing incentive
compensation plans. The Company also has a standing Audit Committee composed of
Mr. Holland and Dr. Osterink. The Audit Committee assists in selecting the
Company's independent auditors and in designating services to be performed by,
and maintaining effective communication with, those auditors.

EXECUTIVE COMPENSATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following table sets forth the aggregate compensation paid by the
Company to the President and Chief Executive Officer and to each of the most
highly compensated executive officers who in 1996

52
<PAGE>
earned over $100,000 (the "Named Executive Officers") for services rendered in
all capacities to the Company for the year ended December 31, 1996:

SUMMARY COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
-------------------------------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (2) BONUS (3) OPTIONS/SARS (#) COMPENSATION
- ---------------------------------------- --------- ----------- ----------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
John R. Lyon ........................... 1996 $ 149,510 $ 75,000 246,000 $ --
President, Chief Executive Officer and
Director
Koichiro Hori .......................... 1996 129,754 32,400 75,000 --
Senior Vice President,
Advanced Technology
Allen Newman ........................... 1996 129,696 32,200 135,000 --
Vice President and General
Manager, HNS Microsurgery
division
Nancy M. Briefs ........................ 1996 118,582 32,000 135,000 --
Vice President and General
Manager, CardioThoracic
Surgery division
Clifford F. Potocky .................... 1996 99,414 16,000 78,750 19,685(4)
Vice President and General
Manager, Oktas division
</TABLE>

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

(1) Pursuant to Instruction to Item 402(b) of Regulation S-K promulgated by the
Securities and Exchange Commission (the "Commission"), information with
respect to fiscal years prior to 1996 has not been included as the Company
was not a reporting company pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
information has not been previously reported to the Commission in response
to a filing requirement.

(2) Includes amounts deferred pursuant to the Company's 401(k) Plan.

(3) Includes cash payments for bonuses accrued for and related to 1995 and 1996
services.

(4) Reimbursement for per diem and temporary living expenses.

STOCK OPTIONS

The following table sets forth information concerning stock option grants
made to each of the Named Executive Officers for the year ended December 31,
1996. The Company granted no stock appreciation rights ("SARs") to Named
Executive Officers during 1996.

53
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- -------------------------------------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM (3)
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------
NAME GRANTED (1) FISCAL YEAR PER SHARE (2) DATE 5% 10%
- ------------------------------ ----------- --------------- --------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
John R. Lyon.................. 11,250 1.0% $ 0.80 12/12/2006 $ 5,660 $ 14,344
234,750 20.0 0.20 05/21/2006 29,527 74,826
Koichiro Hori................. 75,000 6.4 0.20 05/21/2006 9,433 23,906
Allen Newman.................. 7,500 0.6 0.80 12/12/2006 3,773 9,562
127,500 10.9 0.20 05/21/2006 16,037 40,640
Nancy M. Briefs............... 7,500 0.6 0.80 12/12/2006 3,773 9,562
127,500 10.9 0.20 05/21/2006 16,037 40,640
Clifford F. Potocky........... 3,750 0.3 0.80 12/12/2006 1,887 4,781
45,000 3.8 0.20 05/21/2006 5,660 14,344
30,000 2.6 0.20 02/15/2006 3,773 9,562
</TABLE>

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

(1) In accordance with the terms of the 1995 Stock Option Plan under which these
options were granted, 50% of the shares subject to each option will
immediately vest in the event the Company is acquired by a merger or asset
sale, unless the Company's repurchase rights with respect to those shares
are transferred to the acquiring entity. The other 50% of the shares vest if
employee is terminated without cause within two years of the merger or asset
sale. The grant dates for the above options are as follows:

<TABLE>
<CAPTION>
NAME OPTIONS GRANTED (#) GRANT DATE
- ----------------------------------------------------------- -------------------- -----------
<S> <C> <C>
John R. Lyon............................................... 11,250 12/12/96
234,750 05/21/96
Koichiro Hori.............................................. 75,000 05/21/96
Allen Newman............................................... 7,500 12/12/96
127,500 05/21/96
Nancy M. Briefs............................................ 7,500 12/12/96
127,500 05/21/96
Clifford F. Potocky........................................ 3,750 12/12/96
45,000 05/21/96
30,000 02/15/96
</TABLE>

(2) The exercise price per share of options granted represented the fair market
value of the underlying shares of Common Stock on the dates the respective
options were granted as determined by the Board, considering all relevant
factors. The exercise price may be paid in cash or in shares of Common Stock
valued at fair market value on the exercise date or a combination of cash or
shares or any other form of consideration approved by the Board. After the
effective date of the Registration Statement of which this Prospectus is a
part, the fair market value of shares of Common Stock will be determined in
accordance with certain provisions of the Plan based on the closing selling
price per share of a share of Common Stock on the date in question on the
primary exchange or national market system on which the Company's common
stock is listed or reported. If shares of the Common Stock are not listed or
admitted to trading on any stock exchange nor traded on the Nasdaq National
Market, then the fair market value shall be determined by the Plan
Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.

(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Commission. The price used for computing this
appreciation is the exercise price of the

54
<PAGE>
options, not the price of Common Stock in this Offering. There is no
assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% or 10% levels or at any other
defined level.

OPTION EXERCISES AND HOLDINGS

The following table provides information concerning option exercises during
1996 by the Named Executive Officers and the value of unexercised options held
by each of the Named Executive Officers as of December 31, 1996. No SARs were
exercised during 1996 or outstanding as of December 31, 1996.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT DECEMBER
SHARES 31, 1996
ACQUIRED ON VALUE --------------------------------
NAME EXERCISE (#) REALIZED (1) EXERCISABLE (2) UNEXERCISABLE
- ---------------------------------- ------------ ------------ --------------- --------------
<S> <C> <C> <C> <C>
John R. Lyon...................... 168,750 $0 246,000 0
Koichiro Hori..................... -- -- 75,000 0
Allen Newman...................... 75,000 0 135,000 0
Nancy M. Briefs................... 75,000 0 135,000 0
Clifford F. Potocky............... -- -- 78,750 0

VALUE OF UNEXERCISED IN-THE-
MONEY OPTIONS
AT DECEMBER 31, 1996 (3)
-------------------------------
NAME EXERCISABLE (2) UNEXERCISABLE
- ---------------------------------- --------------- -------------
<S> <C> <C>
John R. Lyon...................... $140,850 $0
Koichiro Hori..................... 45,000 0
Allen Newman...................... 76,500 0
Nancy M. Briefs................... 76,500 0
Clifford F. Potocky............... 45,000 0
</TABLE>

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

(1) "Value realized" is calculated on the basis of the fair market value of the
Common Stock on the date of exercise minus the exercise price and does not
necessarily indicate that the optionee sold such stock.

(2) The options are immediately exercisable; however, any shares purchased upon
exercise may be subject to rights of repurchase on the part of the Company
which lapse at various times over the next five years.

(3) "Value" is defined as fair market price of the Common Stock at fiscal
year-end ($0.80) less exercise price.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the year ended December 31, 1996, the Compensation Committee of the
Company's Board established the levels of compensation for the Company's
executive officers. The members of the Company's Compensation Committee are Dr.
Blair and Mr. Binkley. See "Certain Transactions." Mr. Lyon, the Company's
President and Chief Executive Officer, participated in the deliberations of the
Compensation Committee regarding executive compensation that occurred during
1996, but did not take part in the deliberations regarding his own compensation.

EMPLOYMENT ARRANGEMENTS

The Company has not entered into any employment contracts or arrangements
with any of its Named Executive Officers.

Fifty percent of the unvested shares subject to options outstanding to the
Company's executive officers will immediately vest if the Company is acquired by
a merger or asset sale, unless the Company's repurchase rights with respect to
those shares are transferred to the acquiring entity. The other 50% of the
shares vest if the employee is terminated without cause within two years of the
merger or asset sale. See "Benefit Plans -- 1997 Stock Option/Stock Issuance
Plan."

55
<PAGE>
DIRECTOR COMPENSATION

The Company reimburses its directors for all reasonable and necessary travel
and other incidental expenses incurred in connection with their attendance at
meetings of the Board. Directors are not currently compensated for serving on
the Board. However, under the 1997 Stock Option/Issuance Plan, as amended, (the
"Plan") which was adopted in February 1997 and amended in March and May 1997,
beginning with the first annual meeting of stockholders following this Offering,
each non-employee director who is first elected to the Board will automatically
receive an option to purchase 15,000 shares of Common Stock for the first year
of the director's Board term and 5,000 shares of Common Stock for each
additional year remaining on the director's Board term following the automatic
option grant. Each director who is currently serving on the Board will receive
an option to purchase 5,000 shares of Common Stock for each additional year for
which he is elected as a director. These options will have an exercise price
equal to 100% of the fair market value of the Common Stock on the grant date.
The grant of 15,000 shares will become exercisable in equal monthly installments
over four years of Board service completed by the director following such grant,
and the grants of 5,000 shares will become exercisable at the end of one year of
Board service completed by the director following the date of grant. See "--
Benefit Plans -- 1997 Stock Option/Issuance Plan."

Under the Company's 1995 Stock Option Plan (the "Predecessor Plan"), each
non-employee director received a fully vested option to purchase 4,500 shares of
Common Stock in December 1996, and Mr. Lyon received an option to purchase
11,250 shares of Common Stock of the Company. The option grant to Mr. Lyon vests
over five years, subject to acceleration upon a change of control. Fifty percent
of the shares subject to Mr. Lyon's option will immediately vest in the event
the Company is acquired by a merger or asset sale, unless the Company's
repurchase rights with respect to those shares are transferred to the acquiring
entity. The other 50% of the shares will immediately vest if Mr. Lyon is
terminated without cause within two years of the merger or asset sale.

BENEFIT PLANS

1997 STOCK OPTION/STOCK ISSUANCE PLAN

The Plan serves as the successor equity incentive program to the Predecessor
Plan. The Plan became effective on February 28, 1997 upon adoption by the Board
and approval by the stockholders. 2,820,000 shares of Common Stock have been
authorized for issuance under the Plan. This share reserve is comprised of (i)
the shares that remain available for issuance under the Predecessor Plan,
including the shares subject to outstanding options thereunder, plus (ii) an
additional increase of 1,417,489 shares. However, in no event may any one
participant in the Plan receive option grants or direct stock issuances for more
than 300,000 shares in the aggregate per calendar year.

Outstanding options under the Predecessor Plan were incorporated into the
Plan upon its adoption, and no further option grants will be made under the
Predecessor Plan. The incorporated options will continue to be governed by their
existing terms, unless the Plan Administrator (described below) elects to extend
one or more features of the Plan to those options. However, except as otherwise
noted below, the outstanding options under the Predecessor Plan contain
substantially the same terms and conditions summarized below for the
Discretionary Option Grant Program in effect under the Plan.

The Plan is divided into three separate components: (i) the Discretionary
Option Grant Program under which eligible individuals in the Company's employ or
service (including officers and other employees, non-employee Board members and
independent consultants) may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock at an exercise price not less
than 85% of their fair market value on the grant date, (ii) the Stock Issuance
Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 100% of their fair market value at the time
of issuance or as a bonus tied to the performance of services and (iii) the
Automatic Option Grant Program

56
<PAGE>
under which option grants will automatically be made at periodic intervals to
eligible non-employee Board members to purchase shares of Common Stock at an
exercise price equal to 100% of their fair market value on the grant date.

The Board or a committee appointed by the Board (the "Plan Administrator")
will administer the Discretionary Option Grant and Stock Issuance Programs. The
Plan Administrator, subject to the provisions of the plan, will have complete
discretion to determine which eligible individuals will receive option grants or
stock issuances, the time or times at which such option grants or stock issuance
are to be made, the number of shares subject to each such grant or issuance, the
vesting schedule to be in effect for the option grant or stock issuance, the
maximum term for which any granted option is to remain outstanding and whether
an option will be granted as an incentive stock option or a non-statutory stock
option under the Federal tax laws. The administration of the Automatic Option
Grant Program will be self-executing in accordance with the express provisions
of such Program and no Plan Administrator will exercise any discretionary
functions with respect to any option grants or stock issuances made under the
Program.

Under the Automatic Option Grant Program, at each Annual Stockholders
Meeting, beginning with the next Annual Stockholders Meeting, each individual
who (i) is elected or re-elected to serve as a non-employee Board member or (ii)
was appointed as a non-employee Board member since the last Annual Stockholders
Meeting (and whose Board term does not expire at such Meeting) will receive an
option grant to purchase shares of Common Stock. The number of shares subject to
the option will be equal to 15,000 shares for the first year that the optionee
is elected to the Board and 5,000 shares for each additional year served by such
optionee following the automatic option grant. Each option granted pursuant to
the Automatic Option Grant Program will have an exercise price equal to the fair
market value per share of Common Stock on the grant date and will have a maximum
term of 10 years, subject to earlier termination following the optionee's
cessation of Board service. The grant of 15,000 shares will vest in successive
equal monthly installments over forty-eight months of Board service completed by
the optionee measured from the date the optionee is first elected to the Board
of Directors, and the grants of 5,000 will vest at the end of each additional
year of Board service completed by the optionee. In addition, the option shares
will become fully vested upon (i) certain changes in the ownership or control of
the Company or (ii) the death or disability of the optionee while serving as a
Board member. The automatic options may only be exercised to the extent vested.

Payment of the exercise price for the shares of Common Stock subject to
option grants made under the Plan may be made in cash or in shares of Common
Stock valued at fair market value on the exercise date. The optionee may elect
to make payment for the option shares upon exercise through a same-day sale
program, which enables the optionee to purchase the option shares without making
any cash payment. In addition, the Plan Administrator may provide financial
assistance to one or more optionees in the exercise of their outstanding options
by allowing such individuals to deliver a full-recourse, interest-bearing
promissory note in full payment of the exercise price and associated withholding
taxes incurred in connection with such exercise.

In the event that the Company is acquired by merger or asset sale, the
unvested portion of each outstanding option under the Discretionary Option Grant
Program that is not to be assumed by the successor corporation will
automatically vest in full. Similarly, unless the Company assigns the repurchase
rights associated with any unvested shares under the Stock Issuance Program to
the successor corporation, such unvested shares will vest in full. Any
outstanding options assumed by the successor corporation and shares that remain
subject to repurchase rights assigned to the successor corporation will not vest
immediately, but will vest in accordance with their original vesting schedule.
The Plan Administrator will have the authority under the Discretionary Option
Grant and Stock Issuance Programs to grant options and to structure repurchase
rights so that the shares subject to those options or repurchase rights will
automatically vest in the event the individual's service is terminated, whether
involuntarily or through a resignation for good reason, within a specified
period (not to exceed 18

57
<PAGE>
months) following (i) a merger or asset sale in which those options are assumed
or those repurchase rights are assigned, (ii) a hostile change in control of the
Company effected by a successful tender offer for more than 50% of the
outstanding voting stock or by proxy contest for the election of Board members
or (iii) the sale, transfer or disposition of all or substantially all of the
Company's assets (each a "Corporate Transaction"). The Plan Administrator will
also have the discretion to provide for the automatic acceleration of options
and the lapse of any repurchase rights upon (i) a hostile change in control of
the Company effected by a successful tender offer for more than 50% of the
Company's outstanding voting stock or by proxy contest for the election of Board
members or (ii) the termination of the individual's service, whether
involuntarily or through a resignation for good reason, within a specified
period (not to exceed 18 months) following such a hostile change in control. The
unvested portion of the options currently outstanding under the Predecessor Plan
will accelerate and such options will terminate and cease to be exercisable upon
an acquisition of the Company by merger or asset sale, unless those options are
assumed by the acquiring entity. The unvested portion of any options assumed by
the successor corporation will automatically accelerate upon the involuntary
termination of the optionee's service within 18 months following the occurrence
of a Corporate Transaction in which the options are assumed or replaced by the
successor corporation.

Stock appreciation rights may be issued in tandem with option grants made
under the Discretionary Option Grant Program. The holders of these rights will
have the opportunity to elect between the exercise of their outstanding stock
options for shares of Common Stock or the surrender of those options for an
appreciation distribution from the Company equal to the excess of (i) the fair
market value of the vested shares of Common Stock subject to the surrendered
option over (ii) the aggregate exercise price payable for such shares. The
appreciation distribution may be made in cash or in shares of Common Stock.
There are currently no outstanding stock appreciation rights.

The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or a different number of option shares with an exercise
price per share based upon the fair market value of the Common Stock on the new
grant date.

The Board may amend or modify the Plan at any time. The Plan will terminate
10 years from its effective date unless otherwise terminated by the Board prior
to such date.

EMPLOYEE STOCK PURCHASE PLAN

The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board on February 19, 1997 and was subsequently approved by the
stockholders on February 20, 1997. The Purchase Plan is designed to allow
eligible employees of the Company to purchase shares of Common Stock, at
semi-annual intervals, through periodic payroll deductions under the Purchase
Plan. A reserve of 200,000 shares of Common Stock has been established for this
purpose.

The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
under the Purchase Plan will commence on the effective date of a Registration
Statement on Form S-8 covering the shares of Common Stock issuable under the
Purchase Plan (which the Company intends to file on the effective date of this
Offering) and will terminate no later than the last business day in March 1999.

Individuals who are eligible employees on the start date of any offering
period may enter the Purchase Plan on that start date or on any subsequent
semi-annual entry date (April 1 or October 1 each year). Individuals who become
eligible employees after the start date of the offering period may join the
Purchase Plan on any subsequent semi-annual entry date within that period.

Payroll deductions may not exceed 10% of the participant's base salary for
each semi-annual period of participation, and the accumulated payroll deductions
will be applied to the purchase of shares on the

58
<PAGE>
participant's behalf on each semi-annual purchase date (the last business day of
March and September each year, with the first purchase date to occur on the last
business day of September 1997) at a purchase price per share not less than 85%
of the LOWER of (i) the fair market value of the Common Stock on the
participant's entry date into the offering period or (ii) the fair market value
of the Common Stock on the semi-annual purchase date. Should the fair market
value of the Common Stock on any semi-annual purchase date be less than the fair
market value of the Common Stock on the first day of the offering period, then
the current offering period will automatically end and a new 24-month offering
period will begin, based on the lower fair market value.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

The Company's Second Restated Certificate of Incorporation eliminates,
subject to certain exceptions, directors' personal liability to the Company or
its stockholders for monetary damages for breaches of fiduciary duties. The
Second Restated Certificate of Incorporation does not, however, eliminate or
limit the personal liability of a director for (i) any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (iv) any transaction from which the director derived an improper personal
benefit.

The Company's Restated Bylaws provide that the Company shall indemnify its
directors and executive officers to the fullest extent permitted under the
Delaware General Corporation Law and may indemnify its other officers, employees
and other agents as set forth in the Delaware General Corporation Law. In
addition, the Company has entered into indemnification agreements with its
directors and officers. The indemnification agreements contain provisions that
require the Company, among other things, to indemnify its directors and
executive officers against certain liabilities (other than liabilities arising
from intentional or knowing and culpable violations of law) that may arise by
reason of their status or service as directors or executive officers of the
Company or other entities to which they provide service at the request of the
Company and to advance expenses they may incur as a result of any proceeding
against them as to which they could be indemnified. The Company believes that
these provisions and agreements are necessary to attract and retain qualified
directors and officers. The Company has obtained an insurance policy covering
directors and officers for claims that such directors and officers may otherwise
be required to pay or for which the Company is required to indemnify them,
subject to certain exclusions.

59
<PAGE>
CERTAIN TRANSACTIONS

Since its formation in July 1993, the Company has issued, in private
placement transactions, shares of its Preferred Stock as follows (not adjusted
for the three-for-four reverse stock split): 8,094,340 shares of Series A-1
Preferred Stock at a price of $1.325 per share in July 1995; 154,581 shares of
Series A-3 Preferred Stock at a price of $1.325 per share in September 1995;
1,325,331 shares of Series B Preferred Stock at a price of $4.00 per share in
July 1996; and 2,000,000 shares of Series C Preferred Stock at a price of $5.00
per share in November 1996. The purchasers of Preferred Stock include, among
others, the following executive officers and holders of more than five percent
of the Company's outstanding stock and their respective affiliates (all shares
of Preferred Stock are convertible into Common Stock on a three-for-four basis):

<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, DIRECTORS AND 5% ------------------------------------------------ TOTAL
STOCKHOLDERS SERIES A-1 SERIES A-3 SERIES B SERIES C CONSIDERATION
- --------------------------------------------- ----------- ----------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Funds advised by Domain Associates (1)....... 2,113,207 32,215 326,341 -- $ 4,148,048
SBIC Partners, L.P. (2)...................... 1,886,792 -- 291,375 -- 3,665,499
Foster City Partners (3)..................... 1,792,453 -- 276,807 -- 3,482,228
Biotechnology Investments Limited............ 1,056,604 15,875 163,170 -- 2,073,715
One Liberty Fund III, L.P. (4)............... 747,170 -- 115,385 -- 1,451,540
Koichiro Hori................................ 264,151 -- 8,244 -- 382,976
Nancy M. Briefs.............................. -- -- 50,000 -- 200,000
Medtronic Asset Management, Inc. (5)......... -- -- -- 2,000,000 10,000,000
</TABLE>

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

(1) Includes Domain Partners III, L.P., DP III Associates, L.P. and Domain
Partners II, L.P., associated with Dr. Blair.

(2) Associated with Mr. Binkley.

(3) Includes shares of Series A-1 Preferred Stock originally issued to Kaiser
Aerospace and subsequently transferred to Foster City Partners in June 1996.
Does not include 750 shares of Common Stock held by Kaiser Aerospace.

(4) Associated with Mr. Holland.

(5) A wholly-owned subsidiary of Medtronic.

Holders of Preferred Stock are entitled to certain registration rights with
respect to the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock -- Registration Rights."

Vista Medical was founded as a wholly-owned subsidiary of Kaiser Aerospace
in July 1993. Kaiser Aerospace financed the initial operations of the Company
through cash advances aggregating $5.4 million.

In July 1995, the Company raised approximately $8 million from various
venture capital funds, including funds which are principal stockholders of the
Company and/or are affiliated with directors of the Company, in a private
placement of its Series A-1 Preferred Stock. The Company repaid its indebtedness
to Kaiser Aerospace by permitting Kaiser Aerospace to cancel $2.4 million of
indebtedness owed by the Company as payment for shares of Series A-1 Preferred
Stock and by repaying an additional $3 million debt owed to Kaiser Aerospace
with funds received pursuant to the private placement transaction. See "Business
- -- Strategic Alliances -- Kaiser Aerospace." As part of this Series A-1
Preferred Stock financing, the Company also acquired Oktas, Inc. as its
wholly-owned subsidiary pursuant to the receipt of all of the outstanding shares
of Oktas, Inc. as payment for shares of Series A-1 Preferred Stock received by
Mr. Koichiro Hori, the founder and sole shareholder of Oktas, Inc. and currently
an executive officer of the Company.

60
<PAGE>
In July 1995, the Company entered into a Technology Strategic Alliance and a
Manufacturing Supply Agreement with Kaiser Electro-Optics, a subsidiary of
Kaiser Aerospace. The Technology Strategic Alliance provides that the Company
and Kaiser Electro-Optics will cooperate in joint development programs related
to the HMD as appropriate to be negotiated on an arms-length and
project-by-project basis for an unspecified term. The Company contracts with
Kaiser Electro-Optics for development and manufacturing services related to the
Company's HMD, including initial production quantities for the HMD. The
Manufacturing Supply Agreement provides that Kaiser Electro-Optics will be the
Company's preferred supplier for a three-year period for not less than 75% of
its requirements for the optical subassembly of the Company's HMD, provided that
pricing and other terms are competitive and mutually agreed upon.

In July 1996, the Company raised approximately $4.3 million in cash from
Foster City Partners, various venture capital funds, including funds which are
principal stockholders of the Company and/or affiliated with directors of the
Company, and other accredited investors in a private placement of its Series B
Preferred Stock. The Company repaid its indebtedness to certain of the venture
capital funds by permitting such funds to cancel approximately $0.8 million of
indebtedness owed by the Company as consideration for shares of Series B
Preferred Stock.

In September 1995, the Company purchased substantially all of the assets of
AST, which was engaged in the business of designing, developing, marketing and
supporting stereoscopic endoscopes. The purchase price for such assets consisted
of $25,000 and 154,581 shares of Series A-3 Preferred Stock of Vista Medical,
which is non-voting stock. Pursuant to its rights under the purchase agreement,
AST assigned its rights to receive the consideration payable by Vista Medical to
various venture capital funds, including funds which are principal stockholders
of the Company and/or are affiliated with directors of the Company. The
Company's acquisition of the assets of AST was accounted for using the purchase
method of accounting with the assets being recorded at their estimated fair
values at the date of acquisition.

In September 1994, the Company entered into a license agreement with Allen
Newman, currently an executive officer of the Company, under which Mr. Newman
granted the Company an exclusive license to use the Newman Technology. In
December 1996, the Company and Urohealth entered into a license agreement under
which the Company exclusively sublicensed the Newman Technology to Urohealth for
use in gynecology, urology and general surgery on a worldwide basis. In
connection with the license agreement, the parties entered into a consulting
agreement whereby Vista Medical agreed to use its reasonable efforts to provide
the services of Mr. Newman as a consultant. The Newman license agreement was
amended in December 1996 to permit the Company to sublicense the Newman
Technology to Urohealth. In connection with the amendment of the Newman license
agreement, the Company paid Mr. Newman $200,000 and agreed to pay Mr. Newman 50%
of the royalties received from Urohealth. Previously, the Company made advance
royalty payments of $37,500 to Mr. Newman in connection with the execution of
the initial license agreement.

In November 1996, Vista Medical and Medtronic entered into a strategic
alliance providing for the distribution and co-promotion of the Vista Systems.
In connection with entering into a co-promotion agreement, Medtronic made a $10
million equity investment in the Company and received 2,000,000 shares of Series
C Preferred Stock, which will be automatically converted into 1,500,000 shares
of Common Stock in connection with this Offering. In addition, Vista Medical and
Medtronic entered into a Supplemental Rights Agreement in connection with
entering into the co-promotion agreement, pursuant to which Medtronic received a
first offer purchase right in certain proposed transactions and a right to
designate an observer to attend meetings of the Board of Directors. Each of
these rights terminate upon the closing of the Offering.

In May 1996, the Company loaned certain officers of the Company an aggregate
of $63,750 in connection with the exercise of certain stock options by such
officers.

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<PAGE>
All of the Company's officers are employed by the Company at will. The
Company has entered into indemnification agreements with each of its directors
and executive officers. See "Management -- Limitations on Liability and
Indemnification Matters."

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company expects that all future transactions
between the Company and its officers, directors and principal stockholders and
their affiliates will be approved in accordance with the Delaware General
Corporation Law by a majority of the Board, as well as by a majority of the
independent and disinterested directors of the Board, and will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.

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<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of May 31, 1997, and as adjusted to reflect the
sale of the shares of the Common Stock offered hereby by the Company, by (i) all
those known by the Company to be beneficial owners of more than 5% of its
outstanding Common Stock, (ii) each director of the Company, (iii) each of the
Named Executive Officers of the Company and (iv) all directors and executive
officers of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED (2)
NUMBER OF --------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES (1) PRIOR TO OFFERING AFTER OFFERING
- ------------------------------------------------------------------ ----------- ------------------- -----------------
<S> <C> <C> <C>
Funds advised by Domain Associates (3) ........................... 1,873,320 20.1% 14.1%
One Palmer Square
Princeton, NJ 08542
SBIC Partners, L.P. .............................................. 1,633,625 17.6% 12.3%
201 Main Street, Suite 2302
Fort Worth, TX 76102
Foster City Partners ............................................. 1,551,944 16.7% 11.7%
950 Tower Lane, Suite 800
Foster City, CA 94404
Medtronic Asset Management, Inc. ................................. 1,500,000 16.1% 11.3%
7000 Central Avenue NE
Minneapolis, MN 55432
Biotechnology Investments Limited (B.I.L.). ...................... 926,736 10.0% 7.0%
Post Office Box 58
St. Julian's Court
St. Peter Port
Guernsey, Channel Islands
One Liberty Fund III, L.P. ....................................... 646,915 7.0% 4.9%
1 Liberty Square, 2nd Floor
Boston, MA 02109
James C. Blair (3)................................................ 1,873,320 20.1% 14.1%
John R. Lyon (4).................................................. 414,750 4.3% 3.1%
Olav B. Bergheim (5).............................................. 19,500 * *
Nicholas B. Binkley (6)........................................... 1,640,125 17.6% 12.3%
Daniel J. Holland (7)............................................. 666,415 7.2% 5.0%
Larry Osterink (8)................................................ 1,692,194 18.2% 12.7%
Koichiro Hori (9)................................................. 279,296 3.0% 2.1%
Nancy M. Briefs (10).............................................. 247,500 2.6% 1.8%
Allen Newman (11)................................................. 210,000 2.2% 1.6%
Clifford F. Potocky (12).......................................... 78,750 * *
All directors and executive officers as a group (11 persons)
(13)............................................................. 7,185,600 71.8% 51.3%
</TABLE>

- ----------------
* Less than 1%

(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them. Share ownership in each
case includes shares issuable upon exercise of certain outstanding options
as described in the footnotes below. The address for those individuals for
which an address is not otherwise indicated is: 5451 Avenida Encinas, Suite
A, Carlsbad, California 92008.

(2) Percentage of ownership is calculated pursuant to Commission Rule
13d-3(d)(1).

63
<PAGE>
(3) Includes 1,767,787 shares beneficially owned by Domain Partners III, L.P.,
24,161 shares beneficially owned by Domain Partners, II L.P., 61,872 shares
beneficially owned by DP III Associates, L.P. and 19,500 shares beneficially
owned by Domain Associates. Dr. Blair is a general partner of One Palmer
Square Associates, II, L.P., which is the general partner of Domain Partners
II, L.P., and he is also a general partner of One Palmer Square Associates,
III, L.P., the general partner of Domain Partners III, L.P. and DP III
Associates. Dr. Blair has an indirect beneficial ownership of these shares.
Dr. Blair is a general partner of Domain Associates. Excludes 926,736 shares
beneficially owned by BIL. Pursuant to a contractual agreement, Domain
Associates is the U.S. venture capital advisor to BIL. Domain Associates has
neither voting nor investment power over BIL and Dr. Blair and Domain
Associates disclaim beneficial ownership of the BIL shares.

(4) Includes 246,000 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1997.

(5) Mr. Bergheim is employed by Domain Associates as a Venture Partner. Mr.
Bergheim has no beneficial ownership of any of the shares owned by funds
advised by Domain Associates.

(6) Includes 1,500 shares issuable upon exercise of options exercisable within
60 days of May 31, 1997. Also includes 5,000 shares beneficially owned by
The Binkley Family Trust, of which Mr. Binkley is a trustee, and 1,633,625
shares beneficially owned by SBIC Partners, L.P., a Texas limited
partnership ("SBIC Partners"). SBIC Partners is the beneficial owner of all
shares of the Company's Common Stock registered in its name. Forrest Binkley
& Brown L.P., a Texas limited partnership ("FBB"), is the managing general
partner of SBIC Partners, and Forrest Binkley & Brown Venture Co., a Texas
corporation ("Venture Co."), is the sole general partner of FBB. Mr. Binkley
is a limited partner of FBB, and is an executive officer, director and
shareholder of Venture Co. Mr. Binkley disclaims beneficial ownership with
respect to all shares of Common Stock owned by SBIC Partners, except to the
extent of his pecuniary interest therein.

(7) Includes 19,500 shares issuable upon exercise of options exercisable within
60 days of May 31, 1997. Also includes 646,915 shares beneficially owned by
One Liberty Fund III, L.P. Mr. Holland is a general partner of One Liberty
Partners III, L.P., which is a general partner of One Liberty Fund III, L.P.
Mr. Holland disclaims beneficial ownership with respect to all shares of
Common Stock owned by One Liberty Fund III, L.P.

(8) Includes 19,500 shares issuable upon exercise of options exercisable within
60 days of May 31, 1997. Also includes 1,551,944 shares beneficially owned
by Foster City Partners and 750 shares beneficially owned by Kaiser
Aerospace. Dr. Osterink, president of a subsidiary of Kaiser Aerospace,
disclaims beneficial ownership of the shares owned by Foster City Partners
and Kaiser Aerospace.

(9) Includes 75,000 shares issuable upon exercise of options exercisable within
60 days of May 31, 1997.

(10) Includes 135,000 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1997. Also includes 37,500 shares beneficially
owned by Delaware Charter Guarantee & Trust TTEE FBO Nancy Briefs (the
"Briefs Trust"). Ms. Briefs is a beneficiary of the Briefs Trust.

(11) Includes 135,000 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1997.

(12) Includes 78,750 shares issuable upon exercise of options exercisable within
60 days of May 31, 1997.

(13) Includes 714,000 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1997. See also footnotes 3, 6, 7 and 8.

64
<PAGE>
DESCRIPTION OF CAPITAL STOCK

Upon completion of the Offering, the Company will be authorized to issue
35,000,000 shares of Common Stock, $.01 par value per share, of which 13,297,528
shares will be issued and outstanding, and 5,000,000 shares of undesignated
Preferred Stock, $.01 par value per share, of which no shares will be issued and
outstanding.

COMMON STOCK

At May 31, 1997, there were 9,297,528 shares of Common Stock outstanding and
held of record by approximately 74 stockholders. The holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of the stockholders. Subject to preferences that may be applicable to any
outstanding shares of Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board out of funds
legally available. See "Dividend Policy." All outstanding shares of Common Stock
are fully paid and nonassessable.

PREFERRED STOCK

After completion of the Offering, the Board will have the authority, without
further action by the stockholders, to issue up to 5,000,000 shares of Preferred
Stock in one or more series and to fix the rights, priorities, preferences,
qualifications, limitations and restrictions, including dividend rights,
conversion rights, voting rights, terms of redemption, terms of sinking funds,
liquidation preferences and the number of shares constituting any series or the
designation of such series, which could decrease the amount of earnings and
assets available for distribution to holders of Common Stock or adversely affect
the rights and powers, including voting rights, of the holders of the Common
Stock. The issuance of Preferred Stock could have the effect of delaying or
preventing a change in control of the Company or make removal of management more
difficult. Additionally, the issuance of Preferred Stock may have the effect of
decreasing the market price of the Common Stock and may adversely affect the
voting and other rights of the holders of Common Stock.

WARRANTS

In February 1997, in connection with the agreement with Heartport, the
Company issued to Heartport a warrant to purchase up to 100,000 shares of Common
Stock, exercisable at any time after the closing of this Offering and prior to
March 31, 2001 at a price of $6.67 per share. The warrant contains provisions
for the adjustment of the exercise price and the aggregate number of shares
issuable upon exercise of the warrant under certain circumstances, including
stock dividends, stock splits, reorganizations, reclassifications or
consolidations. The holder of the warrant is entitled to certain registration
rights with respect to the Common Stock issued or issuable upon exercise
thereof. See "-- Registration Rights."

REGISTRATION RIGHTS

The holders of approximately 8,780,679 shares of Common Stock or their
permitted transferees (the "Holders") are entitled to certain rights with
respect to the registration of such shares under the Securities Act. Under the
terms of agreements between the Company and such Holders, if the Company
proposes to register any of its securities under the Securities Act for its own
account, such Holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein, provided, among other
conditions, that the underwriters of any such offering have the right to limit
the number of shares included in such registration. In addition, Holders of at
least 40% of approximately 8,780,679 shares of Common Stock with demand
registration rights may require the Company to prepare and file a registration
statement under the Securities Act with respect to the shares entitled to demand
registration rights, and the Company is required to use its best efforts to
effect such registration,

65
<PAGE>
subject to certain conditions and limitations. The Company is not obligated to
effect more than two of these stockholder-initiated registrations nor to effect
such a registration within 90 days following an offering of the Company's
securities, including the Offering made hereby. The Holders of approximately
8,780,679 shares of Common Stock may also request the Company to register such
shares on Form S-3 provided the shares registered have an aggregate market value
of at least $7.5 million. The Company is not obligated to effect more than two
of these registrations pursuant to Form S-3 per year. Generally, the Company is
required to bear the expense of all such registrations. The registration rights
of the Holders expire on the seventh anniversary of the effective date of this
Offering or, if earlier, for an individual Holder, at such time after the
Offering as all shares held by such Holder can be sold within any three-month
period pursuant to Rule 144. All rights of the Holders to require registration
of the resale of their shares in connection with this Offering have been waived.

POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS

SECOND RESTATED CERTIFICATE OF INCORPORATION AND RESTATED BYLAWS

The Company's Second Restated Certificate of Incorporation authorizes the
Board to establish one or more series of undesignated Preferred Stock, the terms
of which can be determined by the Board at the time of issuance. See "--
Preferred Stock." The Second Restated Certificate of Incorporation also provides
that all stockholder action must be effected at a duly called meeting of
stockholders and not by a consent in writing. The Company's Restated Bylaws
provide that the Company's Board will be classified into three classes of
directors beginning at the next annual meeting of stockholders. See "Management
- -- Executive Officers and Directors." In addition, the Restated Bylaws do not
permit stockholders of the Company to call a special meeting of stockholders;
only the Company's Chief Executive Officer, President, Chairman of the Board or
a majority of the Board are permitted to call a special meeting of stockholders.
The Restated Bylaws also require that stockholders give advance notice to the
Company's secretary of any nominations for director or other business to be
brought by stockholders at any stockholders' meeting and require a supermajority
vote of members of the Board and/or stockholders to amend certain Bylaw
provisions. These provisions of the Second Restated Certificate of Incorporation
and the Restated Bylaws could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. Such provisions may
also have the effect of preventing changes in the management of the Company.

DELAWARE TAKEOVER STATUTE

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder (defined as any person or entity that is the beneficial owner of at
least 15% of a corporation's voting stock) for a period of three years following
the time that such stockholder became an interested stockholder, unless: (i)
prior to such time, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder's
becoming an interested stockholder; (ii) upon consummation of the transaction
that resulted in the stockholder's becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding, for purposes of
determining the number of shares outstanding, those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) at or subsequent to such time, the business combination is approved by
the Board and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested stockholder.

66
<PAGE>
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, lease, exchange, mortgage, transfer, pledge or other disposition involving
the interested stockholder and 10% or more of the assets of the corporation;
(iii) subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder; (iv) any transaction involving the corporation that has
the effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Boston EquiServe.

67
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have 13,297,528 shares of
Common Stock outstanding (assuming no exercise of options or other convertible
securities or issuances of Common Stock subsequent to March 31, 1997). The
4,000,000 shares sold in this Offering will be freely tradeable without
restriction or further registration under the Securities Act, except that any
shares purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act ("Affiliates"), may generally be sold only in
compliance with certain of the limitations of Rule 144 described below.

The remaining approximately 9,298,000 shares of Common Stock are deemed
"Restricted Shares" under Rule 144. Of the Restricted Shares, approximately 750
shares may be eligible for sale in the public market immediately after this
offering pursuant to Rule 144(k) under the Securities Act. Approximately
7,548,000 additional Restricted Shares may be eligible for sale in the public
market in accordance with Rule 144 or Rule 701 under the Securities Act
beginning 90 days after the date of this Prospectus. The holders of
approximately 7,514,000 of these Restricted Shares have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the date
of this Prospectus without the prior written consent of Goldman, Sachs & Co.
Goldman, Sachs & Co. may, in its sole discretion, and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements.

Upon expiration of the lock-up agreements 180 days after the date of this
Prospectus, approximately 9,489,000 shares of Common Stock (including shares
issued or issuable upon the exercise of vested options and warrants outstanding
as of May 31, 1997) will become available for sale in the public market; the
remaining 100,000 shares will become eligible for sale under Rule 144 at various
dates thereafter as the holding period provisions of Rule 144 are satisfied.

In general, under Rule 144 as recently amended, beginning approximately 90
days after the effective date of the Registration Statement of which this
Prospectus is a part, a stockholder, including an Affiliate, who has
beneficially owned his or her restricted securities (as that term is defined in
Rule 144) for at least one year from the later of the date such securities were
acquired from the Company or (if applicable) the date they were acquired from an
Affiliate, is entitled to sell, within any three-month period, a number of such
shares that does not exceed the greater of 1% of the then outstanding shares of
Common Stock (approximately 133,000 immediately after the Offering) or the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule 144(k),
if a period of at least two years has elapsed between the later of the date
restricted securities were acquired from the Company or (if applicable) the date
they were acquired from an Affiliate of the Company, a stockholder who is not an
Affiliate of the Company at the time of sale and has not been an Affiliate of
the Company for at least three months prior to the sale is entitled to sell the
shares immediately without compliance with the foregoing requirements under Rule
144.

Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted prior
to this Offering) are also restricted securities and, beginning 90 days after
the date of this Prospectus, may be sold by stockholders other than an Affiliate
of the Company subject only to the manner of sale provisions of Rule 144 and by
an Affiliate under Rule 144 without compliance with its one-year holding period
requirement.

Prior to this Offering, there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. The Company is unable to estimate
the number of shares that may be sold in the public market pursuant to Rule 144,
since this will depend on the market price of the Common Stock, the personal
circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of the Common Stock of the Company in the public market

68
<PAGE>
could adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital through an offering of its equity securities.

In addition, the Company intends to register on the effective date of this
Offering a total of 2,820,000 shares of Common Stock subject to outstanding
options or reserved for issuance under the Company's 1997 Stock Option/Stock
Issuance Plan and 200,000 shares of Common Stock reserved for issuance under its
1997 Employee Stock Purchase Plan. Further, upon expiration of such lock-up
agreements, holders of approximately 8,780,679 shares of Common Stock will be
entitled to certain registration rights with respect to such shares. If such
holders, by exercising their registration rights, cause a large number of shares
to be registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Common Stock.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Diego, California. Partners of
such firm own 7,500 shares of the Common Stock. Certain legal matters will be
passed upon for the Underwriters by McDermott, Will & Emery.

EXPERTS

The consolidated financial statements of Vista Medical Technologies, Inc. at
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996 appearing in this Prospectus and the Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and in the Registration
Statement and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission the Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
and the Common Stock offered hereby, reference is hereby made to such
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respect by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of all of any part thereof may be obtained
at prescribed rates from the Commission's Public Reference Section at such
addresses. Also, the Commission maintains a World Wide Web site on the Internet
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. Upon approval of the Common Stock for quotation on the Nasdaq
National Market, such reports, proxy and information statements and other
information also can be inspected at the office of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.

69
<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, 1995 and 1996 and at March 31, 1997
(unaudited).......................................................................... F-3

Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 (unaudited) and 1997 (unaudited)...... F-4

Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994,
1995 and 1996 and the three months ended March 31, 1997 (unaudited).................. F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 (unaudited) and 1997 (unaudited)...... F-6

Notes to Consolidated Financial Statements............................................ F-7
</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, 1995 and 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Vista Medical Technologies, Inc. at December 31, 1995 and 1996 and the results
of its consolidated operations and its cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.

ERNST & YOUNG LLP

San Diego, California
January 30, 1997,
except for Note 9, as to which the date is
March 3, 1997

F-2
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31, MARCH 31, MARCH 31,
-------------------------------- 1997 1997
1995 1996 (UNAUDITED) (UNAUDITED)
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 3,234,175 $ 10,119,529 $ 5,679,477
Short-term investments............................ 165,000 165,000 165,000
Accounts receivable............................... 568,854 526,119 770,344
Inventories....................................... 685,456 1,212,825 1,729,892
Other current assets.............................. 70,445 136,400 479,763
--------------- --------------- --------------
Total current assets................................ 4,723,930 12,159,873 8,824,476
Property and equipment, net......................... 187,874 1,082,103 1,341,136
Patents and other assets............................ 296,083 1,073,741 1,060,112
--------------- --------------- --------------
TOTAL ASSETS........................................ $ 5,207,887 $ 14,315,717 $ 11,225,724
--------------- --------------- --------------
--------------- --------------- --------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 350,058 $ 607,639 $ 674,183
Accrued compensation.............................. 147,410 226,543 183,663
Accrued liabilities............................... 2,970 520,584 413,079
--------------- --------------- --------------
Total current liabilities........................... 500,438 1,354,766 1,270,925
Commitments
Stockholders' equity:
Convertible preferred stock, $.01 par value:
Authorized shares--18,000,000 actual (5,000,000
pro forma)
Issued and outstanding shares-- 8,248,921 in
1995, 11,574,252 in 1996 and March 1997 (no
shares pro forma)............................. 82,490 115,742 115,742 --
Preference in liquidation--$26,231,145..........
Common stock, $.01 par value:
Authorized shares--25,000,000 actual (35,000,000
pro forma)....................................
Issued and outstanding shares-- 148,875 in 1995,
538,224 in 1996 and 616,849 in March 1997
(9,297,528 shares pro forma).................. 1,489 5,382 6,168 92,975
Additional paid-in capital........................ 10,834,428 28,615,223 29,412,801 29,441,736
Notes receivable from stockholders................ (29,625) (93,375) (93,375) (93,375)
Deferred compensation............................. -- (2,061,549) (2,547,994) (2,547,994)
Accumulated deficit............................... (6,181,333) (13,620,472) (16,938,543) (16,938,543)
--------------- --------------- -------------- ---------------
Total stockholders' equity.......................... 4,707,449 12,960,951 9,954,799 $ 9,954,799
--------------- --------------- -------------- ---------------
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $ 5,207,887 $ 14,315,717 $ 11,225,724
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>

See accompanying notes.

F-3
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
---------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................................. $ 59,362 $ 1,719,223 $ 2,243,756 $ 241,043 $ 829,218

Costs and expenses:
Cost of sales....................... 43,123 1,272,010 2,252,509 184,481 826,027
Research and development............ 1,327,608 1,903,618 3,880,069 532,726 1,513,868
Sales and marketing................. 291,169 834,518 2,056,767 312,930 744,661
General and administrative.......... 757,877 1,034,434 3,103,256 399,358 1,164,221
-------------- -------------- -------------- -------------- --------------
Total cost and expenses............... 2,419,777 5,044,580 11,292,601 1,429,495 4,248,777
-------------- -------------- -------------- -------------- --------------

Loss from operations.................. (2,360,415) (3,325,357) (9,048,845) (1,188,452) (3,419,559)

Minority interest in net loss of
consolidated partnership............. 269,706 -- -- -- --
License income........................ -- -- 1,493,000 -- --
Interest income....................... -- 51,407 116,706 34,869 101,488
-------------- -------------- -------------- -------------- --------------

Net loss.............................. $ (2,090,709) $ (3,273,950) $ (7,439,139) $ (1,153,583) $ (3,318,071)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------

Pro forma net loss per share.......... $ (0.86) $ (0.37)
-------------- --------------
-------------- --------------

Shares used in computing pro forma net
loss per share....................... 8,626,898 9,079,976
-------------- --------------
-------------- --------------
</TABLE>

See accompanying notes.

F-4
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED NOTES
STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- -------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
---------- --------- --------- --------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993...... -- $ -- 750 $ 8 $ 992 $ -- $ --
Net loss........................ -- -- -- -- --
---------- --------- --------- --------- ----------- ------------- --------------
BALANCE AT DECEMBER 31, 1994...... -- -- 750 8 992 -- --
Issuance of Series Aconvertible
preferred stock for cash....... 6,037,736 60,377 -- -- 7,897,585 -- --
Issuance of Series A convertible
preferred stock to retire
debt........................... 1,792,453 17,925 -- -- 2,357,075 -- --
Issuance of Series A convertible
preferred stock for the
assets......................... 154,581 1,546 -- -- 203,274 -- --
Issuance of Series A convertible
preferred stock for minority
partnership interest........... 264,151 2,642 -- -- 347,358 -- --
Exercise of stock options....... 148,125 1,481 28,144 (29,625) --
Net loss........................ -- -- -- -- -- -- --
---------- --------- --------- --------- ----------- ------------- --------------
BALANCE AT DECEMBER 31, 1995...... 8,248,921 82,490 148,875 1,489 10,834,428 (29,625) --
Issuance of Series B convertible
preferred stock for cash....... 1,279,331 12,792 -- -- 5,065,848 -- --
Issuance of Series B convertible
preferred stock for assets..... 46,000 460 -- -- 183,540 -- --
Issuance of Series C convertible
preferred stock for cash....... 2,000,000 20,000 -- -- 9,948,619 -- --
Exercise of stock options for
cash........................... -- -- 389,349 3,893 73,977 (63,750) --
Deferred compensation........... -- -- -- -- 2,508,811 -- (2,508,811)
Amortization of deferred
compensation................... -- -- -- -- -- -- 447,262
Net loss........................ -- -- -- -- -- -- --
---------- --------- --------- --------- ----------- ------------- --------------
BALANCE AT DECEMBER 31, 1996...... 11,574,252 115,742 538,224 5,382 28,615,223 (93,375) (2,061,549)
Exercise of stock options for
cash........................... -- -- 75,625 756 35,098 -- --
Issuance of stock for services
rendered....................... -- -- 3,000 30 19,980 -- --
Deferred compensation........... -- -- -- -- 742,500 -- (742,500)
Amortization of deferred
compensation................... -- -- -- -- -- -- 256,055
Net loss........................ -- -- -- -- -- -- --
---------- --------- --------- --------- ----------- ------------- --------------
BALANCE AT MARCH 31, 1997
(Unaudited)...................... 11,574,252 $ 115,742 616,849 $ 6,168 $29,412,801 $ (93,375) $ (2,547,994)
---------- --------- --------- --------- ----------- ------------- --------------
---------- --------- --------- --------- ----------- ------------- --------------

ACCUMULATED
DEFICIT TOTAL
------------- -----------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1993...... $ (816,674) $ (815,674)
Net loss........................ (2,090,709) (2,090,709)
------------- -----------
BALANCE AT DECEMBER 31, 1994...... (2,907,383) (2,906,383)
Issuance of Series Aconvertible
preferred stock for cash....... -- 7,957,962
Issuance of Series A convertible
preferred stock to retire
debt........................... -- 2,375,000
Issuance of Series A convertible
preferred stock for the
assets......................... -- 204,820
Issuance of Series A convertible
preferred stock for minority
partnership interest........... -- 350,000
Exercise of stock options....... -- --
Net loss........................ (3,273,950) (3,273,950)
------------- -----------
BALANCE AT DECEMBER 31, 1995...... (6,181,333) 4,707,449
Issuance of Series B convertible
preferred stock for cash....... -- 5,078,640
Issuance of Series B convertible
preferred stock for assets..... -- 184,000
Issuance of Series C convertible
preferred stock for cash....... -- 9,968,619
Exercise of stock options for
cash........................... -- 14,120
Deferred compensation........... -- --
Amortization of deferred
compensation................... -- 447,262
Net loss........................ (7,439,139) (7,439,139)
------------- -----------
BALANCE AT DECEMBER 31, 1996...... (13,620,472) 12,960,951
Exercise of stock options for
cash........................... -- 35,854
Issuance of stock for services
rendered....................... -- 20,010
Deferred compensation........... -- --
Amortization of deferred
compensation................... -- 256,055
Net loss........................ (3,318,071) (3,318,071)
------------- -----------
BALANCE AT MARCH 31, 1997
(Unaudited)...................... $(16,938,543) $ 9,954,799
------------- -----------
------------- -----------
</TABLE>

See accompanying notes.

F-5
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(2,090,709) $(3,273,950) $(7,439,139) $(1,153,582) $(3,318,071)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization...................... 20,328 36,138 351,256 32,796 107,747
Issuance of stock for services rendered............ -- -- -- -- 20,010
Amortization of deferred compensation.............. -- -- 447,262 -- 256,055
Acquired in-process research and development....... -- 350,000 -- -- --
Write-off of non recoverable patent costs.......... -- 28,733 -- -- --
Minority interest in partnership................... (269,706) -- -- -- --
Common stock received in exchange for license
agreement........................................ -- -- (693,000) -- --
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable.............................. 38,353 (568,264) 126,752 243,508 (244,225)
Inventories...................................... (17,755) (472,579) (405,706) (661,157) (517,067)
Other current assets............................. 976 (30,846) (64,105) (6,003) (343,363)
Accounts payable................................. 12,544 255,192 171,714 (155,226) 66,544
Accrued compensation............................. 14,841 108,750 79,133 -- (42,880)
Accrued liabilities.............................. 3,394 (424) 488,591 96,553 (107,505)
----------- ----------- ----------- ----------- -----------
Net cash flows used for operating activities......... (2,287,734) (3,567,250) (6,937,242) (1,603,111) (4,122,755)
INVESTING ACTIVITIES
Purchase of short-term investments................... -- (165,000) -- -- --
Increase in patent and other assets.................. (37,500) (51,975) (17,895) -- --
Purchase of property and equipment................... (56,509) (80,954) (1,220,888) (92,029) (353,151)
----------- ----------- ----------- ----------- -----------
Net cash flows used for investing activities......... (94,009) (297,929) (1,238,783) (92,029) (353,151)
FINANCING ACTIVITIES
Advances from a related party........................ 1,949,508 2,136,000 -- -- --
Repayment of advances to arelated party.............. -- (3,004,000) -- -- --
Issuance of common stock............................. -- -- 14,120 3,000 35,854
Issuance of convertible preferred stock, net......... -- 7,957,962 15,047,259 -- --
----------- ----------- ----------- ----------- -----------
Net cash flows provided by financing activities...... 1,949,508 7,089,962 15,061,379 3,000 35,854
Net (decrease) increase in cash and cash
equivalents......................................... (432,235) 3,224,783 6,885,354 (1,692,140) 4,440,052
Cash and cash equivalents at beginning of year....... 441,627 9,392 3,234,175 3,234,175 10,119,529
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year............. $ 9,392 $ 3,234,175 $10,119,529 $ 1,542,035 $ 5,679,477
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................... $ -- $ 1,711 $ 183 $ -- $ 70
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Debt obligation to related party converted to Series
A convertible preferred stock....................... $ -- $ 2,375,000 $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Exercise of stock options for stockholder notes
receivable.......................................... $ -- $ 29,625 $ 63,750 $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Common stock received in exchange for license
agreement........................................... $ -- $ -- $ 693,000 $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
ISSUANCE OF CONVERTIBLE PREFERRED STOCK IN
CONJUNCTION WITH ACQUISITIONS:
Oktas, Inc. (Series A)............................... $ -- $ 350,000 $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
American Surgical Technologies, Inc. (Series A)...... $ -- $ 204,820 $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Promedica, Inc. (Series B)........................... $ -- $ -- $ 184,000 $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>

See accompanying notes.

F-6
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997

AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS ACTIVITY

Vista Medical Technologies, Inc. ("the Company") was founded in July 1993 as
a wholly-owned subsidiary of Kaiser Aerospace and Electronics Corporation
("Kaiser Aerospace") to develop an advanced technology business concentrated on
visualization products for minimally invasive surgery. In July 1995, equity
securities were sold to outside investors, thereby reducing Kaiser Aerospace's
ownership of the Company. (See Note 6.)

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Oktas, Inc. In 1993, the Company acquired a 65%
interest in a partnership established to perform further research and
development related to certain of the Company's technology. This partnership is
included in the consolidated financial statements and because the Company
provided all the financial resources to the partnership, the Company has
recorded all losses in excess of the minority partners original contribution. In
1995, the minority partner, Oktas, Inc., was acquired by issuing shares of
Series A convertible preferred stock. On December 31, 1996, the partnership was
dissolved. The Company charged the $350,000 value of the preferred stock to
expense as acquired research and development. 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.

INTERIM FINANCIAL INFORMATION (UNAUDITED)

The financial statements for the three month periods ended March 31, 1996
and 1997 include all adjustments (consisting only of normal recurring
adjustments) which management considers necessary for a fair statement of the
financial position at such dates and the operating results and cash flows for
the periods. Results for interim periods are not necessarily indicative of
results for the entire year or any future periods.

REVENUE RECOGNITION

Revenue is recognized upon shipment of product.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents and short-term investments consist of money market funds
and a certificate of deposit. The Company considers all highly liquid
investments with maturities when purchased of three months or less to be cash
equivalents. The Company evaluates the financial strength of institutions at

F-7
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997

AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1996, the cost of cash
equivalents and short-term investments was equal to estimated fair value.
Accordingly, there were no unrealized gains or losses.

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 in the United States and
Asia. The Company provides for losses from uncollectible accounts and such
losses have not exceeded management's expectations.

INVENTORIES

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

PROPERTY AND EQUIPMENT

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

PATENTS

Capitalized patent costs are amortized over the lesser of the remaining
useful life of the related technology or the remaining patent life, 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. If the sum of expected
future net cash flows of an individual asset would be less than the carrying
amount of the asset, an impairment loss would be recognized.

STOCK OPTIONS

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which is effective for the year
ending December 31, 1996. SFAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under the
provisions of Accounting Principles Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES ("APB 25"), but requires pro forma disclosure in the footnotes to
the financial statements as if

F-8
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997

AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the measurement provisions of SFAS No. 123 had been adopted. The Company has
continued accounting for its stock-based compensation in accordance with the
provisions of APB 25.

ASSET IMPAIRMENT

In March 1995, the FASB issued SFAS No.121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the estimated undiscounted cash flows
to be generated by those assets are less than the assets' carrying amount. SFAS
121 also addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted the provisions of SFAS No. 121 effective
January 1, 1996. There was no effect of such adoption on the Company's financial
position or results of operations.

NEW ACCOUNTING STANDARD

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement 128 on the
calculation of fully diluted earnings per share, if applicable, for these
periods is not expected to be material.

NET LOSS PER SHARE

Historical net loss per share is calculated using the weighted average
number of common shares outstanding and common stock equivalents outstanding
during the periods presented. Common equivalent shares result from stock options
and preferred stock. For loss periods, common equivalent shares are excluded
from the computation as their effect would be antidilutive, except that the
Securities and Exchange Commission requires common and common share equivalents
issued during the twelve-month period prior to the initial filing of a proposed
public offering, to be included in the calculation as if they were outstanding
for all periods presented (using the treasury stock method and the assumed
initial public offering price).

Historical net loss per share information is as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss per share.......... $ (0.91) $ (1.39) $ (3.05) $ (0.46) $ (1.15)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Shares used in computing net
loss per share............. 2,292,382 2,356,502 2,440,507 2,489,176 2,893,585
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>

F-9
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997

AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY

Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of the preferred stock, which will automatically
convert to common stock immediately prior to the completion of the Company's
initial public offering, using the as converted method from the original date of
issuance.

If the offering contemplated by the Prospectus is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into 8,680,679 shares of common stock. Unaudited pro
forma stockholders' equity at March 31, 1997, as adjusted for the conversion of
preferred stock, is disclosed in the accompanying balance sheet.

2. BALANCE SHEET COMPONENTS

Inventories consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1995 1996 1997
----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Parts and supplies................................. $ 325,899 $ 567,707 $ 1,176,951
Work in process.................................... 127,307 286,099 228,287
Finished goods..................................... 232,250 359,019 324,654
----------- ------------- -------------
$ 685,456 $ 1,212,825 $ 1,729,892
----------- ------------- -------------
----------- ------------- -------------
</TABLE>

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1995 1996 1997
----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment............................ $ 63,610 $ 271,747 $ 430,428
Office computers, furniture and equipment.......... 121,068 352,911 448,235
Marketing demonstration equipment.................. 64,216 776,420 845,370
Leasehold improvements............................. -- 68,704 98,900
----------- ------------- -------------
248,894 1,469,782 1,822,933
Less: accumulated depreciation..................... (61,020) (387,679) (481,797)
----------- ------------- -------------
$ 187,874 $ 1,082,103 $ 1,341,136
----------- ------------- -------------
----------- ------------- -------------
</TABLE>

F-10
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997

AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

2. BALANCE SHEET COMPONENTS (CONTINUED)
Patents and other assets consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1995 1996 1997
----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Investment in common stock......................... $ -- $ 693,000 $ 693,000
Patents and other intangible assets, net........... 258,583 323,241 309,612
Prepaid royalties.................................. 37,500 57,500 57,500
----------- ------------- -------------
$ 296,083 $ 1,073,741 $ 1,060,112
----------- ------------- -------------
----------- ------------- -------------
</TABLE>

3. MAJOR CUSTOMERS

Sales to individual customers exceeding 10% or more of revenues for the
years ended December 31, 1994, 1995 and 1996 and the three months ended March
31, 1996 and 1997 were as follows: during 1994, two customers accounted for 82%
and 18% of revenues; during 1995, one customer accounted for 85% of revenues;
during 1996, three customers accounted for 30%, 27% and 25% of revenues; for the
three months ended March 31, 1996, three customers accounted for 62%, 20% and
12% of revenues; for the three months ended March 31, 1997, four customers
accounted for 27%, 18%, 17% and 10% of revenues.

4. COMMITMENTS

The Company leases its corporate facilities and certain equipment under
operating leases that expire on various dates through 2001. Annual future
minimum lease payments as of December 31, 1996 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------------
<S> <C>
1997............................................................................. $ 306,000
1998............................................................................. 307,000
1999............................................................................. 152,000
2000............................................................................. 110,000
2001............................................................................. 95,000
-----------
$ 970,000
-----------
-----------
</TABLE>

Rent expense was approximately $55,000, $75,000, $183,000, $28,000 and
$76,000 for the years ended December 31, 1994, 1995, 1996, and the three months
ended March 31, 1996 and 1997, respectively.

5. LICENSE INCOME

In December 1996, the Company granted to Urohealth Systems Inc.
("Urohealth") a perpetual license to certain of its technology and patents
unrelated to the Company's main products and markets.

F-11
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997

AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

5. LICENSE INCOME (CONTINUED)
In exchange for the license, the Company received $1,000,000 in cash and 110,000
shares of common stock valued at $693,000. The common stock received is
restricted stock of a publicly traded company with restrictions on the sale of
the stock for two years from the date of the agreement in accordance with the
provisions of Rule 144 under the Securities Act of 1933, as amended. No other
technology is being developed with the purpose of being licensed and the Company
does not anticipate any future licensing arrangements of any of its core
technology for medical applications. The license to Urohealth Systems, Inc.
("Urohealth") was a unique, non-recurring transaction that involved a license of
only that component of the Company's technology that it did not want to pursue.
For this reason, the license fees were treated as non-operating income. The
Company has recorded these shares at their estimated fair value to reflect the
trading restrictions. The licensed technology and patent rights were obtained by
the Company through a perpetual license and royalty agreement with an officer of
the Company. In connection with the license agreement with Urohealth, the
Company amended an existing license agreement with the officer to make its terms
consistent with the licensing agreement with Urohealth in exchange for $200,000.

6. STOCKHOLDERS' EQUITY

CHANGES IN CAPITALIZATION

In November 1996, the Company reincorporated in the State of Delaware which
was accomplished through a merger between the California corporation and its
wholly-owned Delaware subsidiary. Each share of convertible preferred stock was
exchanged for one share of convertible preferred stock of the Delaware
corporation. Each share of common stock in the California corporation was
exchanged for one share of common stock of the Delaware corporation.

CONVERTIBLE PREFERRED STOCK

In November 1996, the Company issued 2,000,000 shares of Series C
convertible preferred stock at $5.00 per share for net proceeds to the Company
of $9,968,619. The purchaser of the Series C convertible preferred stock entered
into a three year sales and distribution agreement with the Company for certain
of the Company's cardiovascular products.

Convertible preferred stock is as follows:

<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
-----------------------------------------
AGGREGATE DECEMBER 31, MARCH 31,
LIQUIDATION DESIGNATED -------------------------- -------------
SERIES PREFERENCE SHARES 1995 1996 1997
- ------------------ -------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
A-1............... $ 10,725,001 8,300,000 8,094,340 8,094,340 8,094,340
A-3............... 204,820 500,000 154,581 154,581 154,581
B................. 5,301,324 3,100,000 -- 1,325,331 1,325,331
C................. 10,000,000 2,000,000 -- 2,000,000 2,000,000
-------------- ------------- ----------- ------------- -------------
$ 26,231,145 13,900,000 8,248,921 11,574,252 11,574,252
-------------- ------------- ----------- ------------- -------------
-------------- ------------- ----------- ------------- -------------
</TABLE>

F-12
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997

AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
Each share of the convertible preferred stock is convertible at the option
of the holder into three quarters of a share of common stock. Conversion is
mandatory upon the closing of an underwritten public offering in which the
aggregate gross proceeds received by the Company are at least $15,000,000 with a
per share price of no less than $5.00. The conversion ratio is subject to
certain anti dilution adjustments, and the holders of each share of Series A-1,
B and C convertible preferred stock are entitled to one vote for each share of
common stock into which it would convert. Series A-3 convertible preferred stock
has no voting rights until the Series A-3 convertible preferred stock converts
to common stock.

The holders of convertible preferred stock are entitled to receive
non-cumulative dividends when and as declared by the Board of Directors at the
rate of 8% per annum. No dividends have been declared to date.

STOCK OPTION PLAN

The Company has 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 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 $2,508,811 of deferred compensation for options granted
during the year ended December 31, 1996, representing the difference between the
option exercise price and the deemed value for financial statement presentation
purposes. The Company is amortizing the deferred compensation over the vesting
period of the options. The Company recorded $447,262 of compensation expense
during the year ended December 31, 1996.

The Company recorded $743,000 of additional deferred compensation
representing the difference between the option exercise price and the deemed
value for financial statement presentation purposes for stock options granted in
January and February 1997.

F-13
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997

AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes stock option activity under the Plan:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
----------- -------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1994........................ -- $ -- $ --
Granted............................................. 655,322 $ .20 $ .20
-----
Exercised........................................... (148,125) $ .20 $ .20
-----
Canceled............................................ -- -- $ --
----------- -------------- -----
Balance at December 31, 1995........................ 507,197 $ .20 $ .20
Granted............................................. 1,173,888 $ .20 - $.80 $ .33
Exercised........................................... (389,349) $ .20 $ .20
Canceled............................................ (45,935) $ .20 $ .20
----------- -------------- -----
Balance at December 31, 1996........................ 1,245,801 $ .20 - $.80 $ .32
Granted............................................. 112,500 $ .80 - $4.00 $ 2.93
Exercised........................................... (75,625) $ .20 - $.80 $ .50
Canceled............................................ -- $ -- $ --
----------- -------------- -----
Balance at March 31, 1997 (Unaudited)............... 1,282,676 $ .20 - $4.00 $ .54
----------- -------------- -----
----------- -------------- -----
</TABLE>

At December 31, 1996, 157,806 options to purchase common shares were vested
and 232,335 options were available for future grant. At March 31, 1997, 195,309
options to purchase common shares were vested and 1,537,324 options were
available for future grant.

The weighted-average fair value of options granted during the year ended
December 31, 1996 and the three months ended March 31, 1997 was $0.09 and $0.76,
respectively. The weighted-average remaining contractual life at December 31,
1996 and March 31, 1997 is 9.24 and 9.04 years, 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 "minimal value" method for
option pricing with the following weighted-average assumptions: risk-free
interest rate range of 5.5% to 6.0%; dividend yield of 0%; and a
weighted-average expected life of the option of 2.5 to 5 years.

For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The effect
of applying SFAS 123 for purposes of providing

F-14
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997

AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
pro forma disclosures is not likely to be representative of the effects on
reported net income for future years. The Company's pro forma information is as
follows:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ --------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Adjusted pro forma net loss................... $ (3,279,659) $ (7,451,220) $ (3,326,605)
-------------- -------------- --------------
-------------- -------------- --------------
Adjusted pro forma net loss per share......... $ (0.66) $ (0.86) $ (0.37)
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

COMMON STOCK RESERVED

At December 31, 1996 and March 31, 1997, a total of 10,158,815 and
11,621,512 shares, respectively, of the Company's common stock have been
reserved for the conversion of preferred stock, the exercise of stock options
and warrants, for stock options available for future grant and for shares to be
issued in connection with the GDE license agreement at the initial public
offering price.

7. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1996 are shown below. A
valuation allowance has been recognized to offset the deferred tax assets, as
realization of such assets is uncertain.

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ --------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation.................................................. $ (6,000) $ (51,000)
Deferred tax assets:
Net operating loss carryforwards.............................. 529,000 3,197,000
Research and development credits.............................. 14,000 229,000
Other, net.................................................... 15,000 32,000
------------ --------------
Total deferred tax assets....................................... 558,000 3,458,000
Valuation allowance for deferred tax assets..................... (552,000) (3,407,000)
------------ --------------
Net deferred tax assets......................................... 6,000 51,000
------------ --------------
Net deferred taxes.............................................. $ -- $ --
------------ --------------
------------ --------------
</TABLE>

As the Company was part of a consolidated group prior to the change in
ownership in July 1995, all tax loss and tax credit carryforwards up to the date
of change in ownership have been reported by the

F-15
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997

AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

7. INCOME TAXES (CONTINUED)
previous consolidated group. All tax loss and tax credit carryforwards reflected
in the accompanying financial statements reflect activity only for the
seventeen-month period ending December 31, 1996.

At December 31, 1996, the Company has federal and state tax net loss
carryforwards of approximately $8,494,000 and $5,146,000, respectively. The
federal and state tax loss carryforwards will expire in 2010 and 2000,
respectively, unless previously utilized. The Company also has federal and state
research tax credit carryforwards of approximately $135,000 and $143,000
respectively, which will expire in 2010 unless previously utilized.

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.

8. TRANSACTIONS WITH RELATED PARTIES

Kaiser Aerospace financed the initial operations of the Company through cash
advances. In 1995 upon the closing of the Series A convertible preferred stock,
total advances by Kaiser Aerospace aggregated $5,379,000 which were settled in
full with cash payments of $3,004,000 and the issuance of Series A convertible
preferred stock valued at $2,375,000.

The Company has a technology strategic alliance and a manufacturing supply
agreement with a Kaiser Aerospace Subsidiary for the development and
manufacturing of certain of the Company's proprietary products. Under the terms
of the agreements, which expire in July 1998, Kaiser Aerospace will provide
development and consulting services and a minimum of 75% of certain of the
Company's product requirements provided certain competitive criteria are met.
Payments made to Kaiser under these arrangements totaled approximately $292,000,
$1,205,000 and $259,310 for the years ending December 31, 1995 and 1996, and the
three months ended March 31, 1997, respectively. At December 31, 1996 and March
31, 1997, the Company had approximately $1,335,000 and $1,641,000 in purchase
commitments to Kaiser under these agreements.

9. SUBSEQUENT EVENTS

REVERSE STOCK SPLIT

In February 1997, the Company's stockholders approved a three-for-four
reverse stock split of the Company's common stock. All share data has been
retroactively restated to reflect the reverse stock split.

INCREASE IN CAPITALIZATION

In February 1997, the Board of Directors approved an amendment to the
Articles of Incorporation increasing the number of authorized shares of common
stock to 35,000,000 shares and the authorized preferred stock to 5,000,000
shares.

F-16
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997

AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

9. SUBSEQUENT EVENTS (CONTINUED)
1997 STOCK OPTION PLAN/ STOCK ISSUANCE PLAN

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

1997 EMPLOYEE STOCK PURCHASE PLAN

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

NEW AGREEMENTS

In February 1997, the Company entered into an agreement with Heartport, Inc.
whereby the Company will sell four visualization and information systems used
for minimally invasive cardiothoracic surgery for use in Heartport's training
centers. In connection with the agreement the Company issued a warrant to
purchase up to 100,000 shares of common stock, exercisable until March 31, 2001
for a price of $6.67 per share. The Company will record a charge to cost of
sales for the value of the warrant upon shipment of the units.

In February 1997, the Company entered into an agreement whereby the Company
will receive an exclusive worldwide license to certain software, documentation
and trademarks of GDE Systems, Inc. In connection with the agreement, the
Company will issue to GDE Systems, Inc. $250,000 of the Company's common stock
valued at the initial public offering price. The Company is required to pay
future minimum royalties of $250,000 payable by December 31, 1998.

F-17
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for which Goldman, Sachs & Co. and Salomon Brothers Inc are
acting as representatives, has severally agreed to purchase from the Company,
the respective number of shares of Common Stock set forth opposite its name
below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Goldman, Sachs & Co.......................................................... 1,408,566
Salomon Brothers Inc......................................................... 1,408,566
Cowen & Company.............................................................. 92,572
Dain Bosworth Incorporated................................................... 92,572
Dillon, Read & Co. Inc. ..................................................... 133,716
Donaldson, Lufkin & Jenrette Securities Corporation.......................... 133,716
Fahnestock & Co. Inc. ....................................................... 92,572
Hambrecht & Quist LLC........................................................ 133,716
Jefferies & Company, Inc. ................................................... 92,572
Robertson, Stephens & Company LLC............................................ 133,716
Stephens Inc. ............................................................... 92,572
Tucker Anthony Incorporated.................................................. 92,572
Wedbush Morgan Securities.................................................... 92,572
---------------
Total.................................................................... 4,000,000
---------------
---------------
</TABLE>

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $0.35 per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.

The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 600,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 4,000,000 shares of Common
Stock offered in the Offering.

The Company has agreed that it will not, during the period beginning from
the date of this Prospectus and continuing to and including the date 180 days
after the date of this Prospectus, offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee stock
option plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) which are
substantially similar to the shares of Common Stock or which are convertible
into or exchangeable for securities which are substantially similar to the
shares of Common Stock, without the prior written consent of Goldman, Sachs &
Co., except for the shares of Common Stock offered in connection with the
Offering. Certain directors, officers and stockholders of the Company have
agreed not to offer, sell, contract to sell or otherwise dispose of any of such
securities held thereby for a period of 180 days after the date of this
Prospectus without the prior written consent of Goldman, Sachs & Co.

U-1
<PAGE>
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed 5% of the total number of shares of Common
Stock offered thereby.

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be negotiated among the Company and the
representatives of the Underwriters. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.

In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. Stabilizing transactions consist of
certain bids or purchases for the purposes of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Company in the Offering. The Underwriters
also may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock sold in the
Offering for their account may be reclaimed by the syndicate if such securities
are repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.

The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "VMTI."

The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.

U-2
<PAGE>
INSIDE BACK COVER

Background: Blue

Center: Vista Medical's HMD for surgery against a background of the clinical
specialities and procedures in which the Company is involved.

Text on bottom of page: Vista Medical believes that the management of
information under surgeon control is a key component in the development of
advanced visualization systems for minimally invasive microsurgery (MIM). The
HMD is designed to facilitate the display of critical diagnostic and monitoring
data integrated in real-time with the anatomical images generated by the
Company's camera systems. This capability will be enhanced by the recent
addition of high speed image-based information processing and networking
software to the Company's technology portfolio.

The Series 8000 product has been cleared to market in the U.S. by the FDA
with expected commercial availability later this year. The StereoSite systems
are under development, have not been cleared to market in the U.S. by the FDA
and are not commercially available.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 20
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Selected Financial Data................................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 31
Management................................................................ 50
Certain Transactions...................................................... 60
Principal Stockholders.................................................... 63
Description of Capital Stock.............................................. 65
Shares Eligible for Future Sale........................................... 68
Legal Matters............................................................. 69
Experts................................................................... 69
Additional Information.................................................... 69
Index to Financial Statements............................................. F-1
Underwriting.............................................................. U-1
</TABLE>

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

THROUGH AND INCLUDING JULY 27, 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

4,000,000 SHARES

VISTA MEDICAL
TECHNOLOGIES, INC.

COMMON STOCK
(PAR VALUE $.01 PER SHARE)

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

[LOGO]

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

GOLDMAN, SACHS & CO.

SALOMON BROTHERS INC

REPRESENTATIVES OF THE UNDERWRITERS

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