VISTA MEDICAL TECHNOLOGIES INC, S-1, 1999-09-07

VISTA MEDICAL TECHNOLOGIES INC
S-1, 1999-09-07
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 7, 1999
REGISTRATION NO. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

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

DELAWARE 3845 94-3184035
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Identification
Code Number) Number)

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

5451 AVENIDA ENCINAS, SUITE A
CARLSBAD, CALIFORNIA 92008
(760) 603-9120
(Address, including zip code and telephone number, including area code,
of registrant's principal executive offices)

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

JOHN R. LYON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VISTA MEDICAL TECHNOLOGIES, INC.
5451 AVENIDA ENCINAS, SUITE A
CARLSBAD, CALIFORNIA 92008
(760) 603-9120
(Name, address, including zip code and telephone number, including area code, of
agent for service)

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

with copies to:
CRAIG S. ANDREWS, ESQ.
MICHAEL S. KAGNOFF, ESQ.
BROBECK, PHLEGER & HARRISON LLP
550 WEST "C" STREET, SUITE 1300
SAN DIEGO, CALIFORNIA 92101
(619) 234-1966
(619) 234-3848 (FAX)

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

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

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /

If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /

----------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value
$0.01 per share.................. 7,000,000 Shares $0.63 $4,410,000 $1,226
=============================================================================================================================

</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act based on the high and low
trading price for the common stock on September 1, 1999.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING
PURSUANT TO SAID SECTION 8(a) MAY DETERMINE.

<PAGE>

THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THE COMMON STOCK COVERED BY THIS PRELIMINARY PROSPECTUS MAY NOT BE
SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL
THE COMMON STOCK AND IT IS NOT SOLICITING AN OFFER TO BUY THE COMMON STOCK IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED SEPTEMBER 7, 1999

PRELIMINARY PROSPECTUS

7,000,000 SHARES

VISTA MEDICAL TECHNOLOGIES, INC.

COMMON STOCK
(PAR VALUE $.01 PER SHARE)

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

We are offering 7,000,000 shares of our common stock. This offering is not
being underwritten and thus all of the 7,000,000 shares offered will be
offered and sold by us. No underwriter has been or will be engaged by us in
connection with the sale of these shares.

We will determine the price to purchasers on or before the sale of the
shares. The net proceeds to us will be the purchase price less our expenses
of the offering. The purchase price may be equal or related to the market
price prevailing at that time or such other price as we may agree upon with
the purchasers.

Our common stock is traded on the Nasdaq National Market under the symbol
"VMTI." On September 1, 1999, the reported last sale price of our common
stock was $0.63 per share.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

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

Proceeds to
Price to Public Company
----------------------- -------------
<S> <C> <C>
Per share............................................ $ $
Total................................................ $ $

</TABLE>

The shares of common offered hereby are offered directly by us. It is
expected that delivery of certificates representing shares will be made
against payment on or about _______________. 1999.

The proceeds to us are based on proceeds before deducting expenses payable by
us estimated at $194,000.

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

The date of this Prospectus is September _____, 1999.

<PAGE>

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

TABLE OF CONTENTS

<TABLE>

<S> <C>
Prospectus Summary................................................................................................4
Risk Factors......................................................................................................8
Use of Proceeds..................................................................................................17
Price Range of Common Stock......................................................................................17
Dividend Policy..................................................................................................17
Capitalization...................................................................................................18
Dilution.........................................................................................................19
Selected Financial Data..........................................................................................20
Management's Discussion and Analysis of Financial Condition and Results of Operations............................21
Business.........................................................................................................27
Management.......................................................................................................44
Certain Transactions.............................................................................................53
Principal Stockholders...........................................................................................55
Description of Capital Stock.....................................................................................57
Shares Eligible for Future Sale..................................................................................60
Plan of Distribution.............................................................................................61
Legal Matters....................................................................................................61
Experts..........................................................................................................61
Where You Can Find More Information..............................................................................61
Index to Consolidated Financial Statements......................................................................F-1

</TABLE>

WE OWN OR HAVE RIGHTS TO TRADEMARKS OR TRADE NAMES THAT WE USE IN CONJUNCTION
WITH THE SALE OF OUR PRODUCTS AND SERVICES. "3D SCOPE," "DESIGN OF CONE,"
"STEREOSITE," "CARDIOCAMERA," "CARDIOVIEW," CARDOCONSOLE" AND "VISTA MEDICAL
TECHNOLOGIES & DESIGN" ARE REGISTERED TRADEMARKS WHICH WE OWN. WE HAVE
REGISTRATIONS PENDING FOR THE USE OF "MIM," "CARDIO-ZOOM," "INFOMATIX,"
"CARDIOCONTROLLER," "CARDIOGUIDE," AND "CARDIOLIGHT." WE ALSO MAKE REFERENCE
TO TRADEMARKS AND TRADE NAMES IN THIS PROSPECTUS WHICH BELONG TO OTHER
COMPANIES.

-3-
<PAGE>

PROSPECTUS SUMMARY

THIS SUMMARY CONTAINS BASIC INFORMATION ABOUT US AND THIS OFFERING. YOU
SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED
"RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES BEFORE
MAKING AN INVESTMENT DECISION ABOUT OUR COMMON STOCK.

VISTA MEDICAL TECHNOLOGIES, INC.

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

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

We believe that our visualization and information products also have
application in other surgical areas, including general surgery, gynecology,
urology and head, neck and spine. Our products can provide the surgeon with
enhanced depth perception when performing complicated, physically intricate
tasks, combined with the ability to view additional information in a
voice-controlled, picture-in-picture format, to facilitate real-time decision
making during surgery.

Our products are based on the following principles which we believe are
essential in advancing minimally invasive technologies:

- Three-dimensional view of the anatomy,

- High resolution images, managed electronically by the surgeon,

- Improved surgical access through miniaturization technology,

- Optimized ergonomics for the surgeon, to enhance performance, and,

- Integration of images and information.

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<PAGE>

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

- Develop applications for our technology which are specific to each
surgical or medical specialty which we target;

- Identify specific high-value procedures to facilitate our entry into
the general surgery market;

- Establish advanced visualization technologies as standard practice
in minimally invasive heart surgery;

- Promote our visualization solution for use in all types of heart
surgery;

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

- Develop original equipment manufacturer customers with volume sales
potential for endoscopic cameras; and

- Enter into strategic relationships which ensure distribution or
complement our technology resources.

To assist in implementing the clinical portions of our strategy, we have
established three clinical advisory boards made up of leading surgeons,
focused on heart surgery, head, neck and spine microsurgery and general
surgery and other specialties. Members of the advisory boards consult with us
exclusively in the field of visualization. The advisory boards are intended
to act as a clinical reference for us and to provide access to surgical
evaluation and training sites for our visualization products.

We were incorporated in the State of California as a wholly-owned subsidiary
of Kaiser Aerospace in July 1993, became an independent entity in July 1995
when several venture capital funds became investors, and reincorporated in
the State of Delaware in November 1996. Our principal executive offices are
located at 5451 Avenida Encinas, Suite A, Carlsbad, California 92008, and our
telephone number is (760) 603-9120.

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<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common stock offered by Vista Medical............ 7,000,000 shares
Shares to be outstanding after the offering...... 20,720,716 shares
Use of proceeds.................................. Working capital, funding the launch
of our visualization product line for
general surgery, general corporate
purposes and for general product
development.
Nasdaq National Market symbol.................... VMTI
</TABLE>

The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding as of June 30, 1999 and
does not include 1,372,374 shares of common stock issuable upon exercise of
options outstanding as of June 30, 1999 at a weighted average exercise price
of $2.91 per share under our stock option plans and 27,184 shares of common
stock issuable upon the exercise of warrants granted to Silicon Valley Bank
at an exercise price of $12.88 per share.

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<PAGE>

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- ---------------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- --------- ----------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................. $ 59 $ 1,719 $ 2,244 $ 4,141 $ 6,572 $ 4,314 $ 2,191
Cost and expenses:
Cost of sales................... 43 1,272 2,253 4,559 6,119 3,608 3,233
Research and development........ 1,328 1,904 3,880 6,875 5,480 3,187 1,997
Sales and marketing............. 291 834 2,057 5,011 5,953 3,446 1,893
General and administrative 758 1,034 3,103 5,498 5,039 2,859 1,235
Restructuring expense........... -- -- -- -- 940 940 --
-------- -------- --------- ----------- ------------- ------------ ------------
Total costs and expenses...... 2,420 (5,044) 11,293 21,944 23,531 14,040 8,358
-------- -------- --------- ----------- ------------- ------------ ------------
Loss from operations............... (2,361) (3,325) (9,049) (17,803) (16,959) (9,726) (6,167)
Minority interest in net loss of
consolidated partnership........ 270 -- -- -- -- -- --
License income..................... -- -- 1,493 -- -- -- --
Interest income.................... -- 51 117 926 900 583 158
Other gains (losses)............... -- -- -- -- (662) (638) 51
-------- -------- --------- ----------- ------------- ------------ ------------
Net loss........................... $(2,091) $(3,274) $ (7,439) $ (16,877) $ (16,720) $ (9,781) $ (5,958)
-------- -------- --------- ----------- ------------- ------------ ------------
-------- -------- --------- ----------- ------------- ------------ ------------
Basic and diluted loss per share... -- -- $ (37.01) $ (2.51) $ (1.26) $ (0.74) $ (0.44)
Shares used in computing basic and
diluted loss per share.......... -- -- 201,000 6,731,000 13,312,366 13,265,196 13,537,059
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------
AS
ACTUAL ADJUSTED
---------- ---------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.......................... $ 4,217 $ 8,433
Working capital............................................................ 6,944 11,160
Total assets............................................................... 11,400 15,616
Total debt................................................................. -- --
Accumulated deficit........................................................ (53,176) (53,176)
Total stockholders' equity................................................. 9,024 13,240
</TABLE>

For more information concerning the computation of basic and diluted loss per
share, see note 8 of notes to our consolidated financial statements.

The "as adjusted" column above gives effect to the sale of 7,000,000 shares
of common stock offered by us in this offering at an assumed offering price
of $0.63 per share, which is based on the average of the high and low price
of our common stock as reported on the Nasdaq National Market on September 1,
1999, and the application of the net proceeds therefrom, after deducting
offering expenses payable by us. For a description of how we intend to use
the proceeds of this offering, see "Use of Proceeds."

-7-
<PAGE>

RISK FACTORS

YOU SHOULD CONSIDER THE FOLLOWING FACTORS CAREFULLY IN EVALUATING AN
INVESTMENT IN OUR COMMON STOCK IN ADDITION TO THE OTHER INFORMATION IN THIS
REPORT. WE CAUTION YOU THAT THE STATEMENTS IN THIS PROSPECTUS THAT ARE NOT
DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS THAT ARE
SUBJECT TO RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS,
INCLUDING THOSE IDENTIFIED IN THIS SECTION AND ELSEWHERE IN THIS PROSPECTUS.
WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS
TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
ARISING AFTER THE DATE OF THIS PROSPECTUS. THE FOLLOWING DISCUSSION SHOULD BE
READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE
ACCOMPANYING NOTES.

RISKS RELATED TO OUR BUSINESS

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

Our existing working capital will not be sufficient to meet our present needs
past October 1999. If we are unable to raise sufficient funds in this
offering, we may be unable to continue operations. If this offering is not
consummated on the required schedule or on terms acceptable to us, we may be
required to curtail or significantly scale back our operating plans and
possibly relinquish rights to portions of our technology or products and
discontinue our operations.

Our liquidity and capital requirements will depend upon numerous factors,
including the following:

- The extent to which our products gain market acceptance;

- The progress and scope of product evaluations;

- The timing and costs of filing future regulatory submissions;

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

- The timing and costs of product introductions;

- The extent of our ongoing research and development programs;

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

- The costs of developing marketing and distribution capabilities.

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

-8-
<PAGE>

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

Since our formation in July 1993, and as of June 30, 1999, we had incurred
cumulative net losses of $53.2 million. We expect to incur substantial losses
for at least the next 12 months. We may never achieve or sustain profitability
in the future. Even if we achieve profitability, we may not be able to sustain
it on an ongoing basis.

WE ARE DEPENDENT ON MEDTRONIC, SOFAMOR DANEK AND OTHER DISTRIBUTION PARTNERS TO
SELL OUR PRODUCTS.

We do not have a sales force and are currently primarily dependent on our
agreements with Medtronic and Sofamor Danek for sales of the majority of
products derived from our core three-dimensional technology. The termination
or substantial modification of these relationships would jeopardize our
ability to achieve or sustain profitability. We have not yet concluded
agreements for distribution of our general surgical products and failure to
do so would also jeopardize our ability to achieve or sustain profitability.
Our heart surgery product line is sold by Medtronic's sales force in most of
the world's significant markets, including the United States, under the terms
of a sales agreement which we entered into with Medtronic in June 1998. Our
head, neck and spine products are sold worldwide via Sofamor Danek's sales
force, and other distributors in worldwide markets.

MEDTRONIC

Under our sales agreement with Medtronic, we appointed Medtronic as our
exclusive distributor for current and future visualization and information
systems for heart surgery in the United States, Europe, Japan and several
other significant geographical regions. In recent weeks, Medtronic has
expressed concerns about our ability to function as a going concern and that
our performance under our agreements with Medtronic will be disrupted by lack
of capital. We are currently in discussions with Medtronic regarding these
issues, but we may not be successful in addressing their concerns to a degree
sufficient to induce Medtronic to continue committing resources to selling
our products. If Medtronic's concerns cause a disruption in our distribution
relationship for any reason, we will need to support our heart customer base
by other means. This transition may not be achieved without operational
disruption and unplanned cost, or at all.

SOFAMOR DANEK

Under an exclusive distribution agreement with Sofamor Danek, we appointed
Sofamor Danek as our exclusive worldwide distributor for our current and
future visualization and information systems for neurosurgery, spinal
surgery, radiation delivery, otolaryngology and maxillofacial surgery, which
are known as our StereoSite systems. This agreement was modified in April
1999 to non-exclusive status as a partial mitigation of a sales shortfall
created when Sofamor Danek declined to purchase $1.6 million of StereoSite
systems within the required contractual time period. The amended agreement
has allowed us to pursue relationships with other distributors to sell the
StereoSite systems worldwide. Sofamor Danek was acquired by Medtronic in
January 1999. As a result, similar issues to those discussed above under
"Medtronic" exist in the Sofamor Danek relationship. In addition, we are
currently, and have been for several months, in the process of negotiating a
monetary settlement with Sofamor Danek, through Medtronic, to compensate us
for lost opportunities as a result of Sofamor Danek not purchasing our
products as contractually committed. No such compensation amount has been
agreed upon to date. We may not be able to be compensated for such lost
opportunities, a result which could have an adverse effect on our operations
and potential profitability.

We also entered into a cooperative technology agreement with Sofamor Danek
under which we agreed to work exclusively together in performing research and
development specifically designed to enhance StereoSite systems or integrate
StereoSite systems with Sofamor Danek's image guidance systems and other
products, including systems and instruments for spinal surgery. We may not be
successful in our efforts under this agreement.

-9-
<PAGE>

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

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

Development of additional components of the Series 8000 has not yet been
completed, additional versions of our StereoSite products have yet to be
finalized and the ORPC is in pre-production phase. Our development efforts
for these products may not be successful. In addition, other products under
development may not be shown to be safe or effective, capable of being
manufactured in commercial quantities at acceptable costs, acquire
appropriate regulatory clearances or be successfully marketed.

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

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

Most patients with heart disease first consult with a cardiologist, who then may
treat the patient with drugs or non-surgical interventions, such as angioplasty,
the insertion of a balloon-type device in a heart vessel, and intravascular
stents, or refer the patient to a heart surgeon for open-chest coronary artery
bypass surgery. Cardiologists may not recommend minimally invasive procedures
until such time, if at all, as such procedures can successfully be demonstrated
to be as safe and cost-effective as other accepted treatments. In addition,
heart surgeons may choose not to recommend minimally invasive procedures until
such time, if at all, as such procedures are proven to be as safe, effective and
technically viable as conventional, open-chest surgery methods, which have
become widely adopted by heart surgeons since the initial use of such surgery in
the mid-1950s.

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

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

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

-10-
<PAGE>

WE LACK COMMERCIAL MANUFACTURING EXPERIENCE AND THERE ARE SIGNIFICANT RISKS
ASSOCIATED WITH OUR SCALE-UP OF MANUFACTURING.

We lack long term experience in manufacturing our products in the quantities
that are necessary for us to achieve significant commercial sales. We may not be
able to establish or maintain reliable, high-volume manufacturing at
commercially reasonable costs. We may also require additional manufacturing
facilities if production volumes increase; acquisition of new manufacturing
facilities will likely involve relocation. The manufacture of our products
primarily involves the assembly of a number of sub-assemblies and components.
Companies such as ours often encounter difficulties in scaling up manufacturing
of products, which difficulties could include problems involving:

- quality control and assurance,
- component and service availability,
- adequacy of control policies and procedures,
- lack of qualified personnel,
- compliance with FDA regulations and the need for further FDA
approval of new manufacturing processes and facilities and
- other production constraints.

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

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

Any significant supply interruption, or inventory shortage or overage, would
negatively impact our ability to manufacture our products. We use and rely on
specific components and services used in our systems for which we have only a
single source of supply. The manufacture of our products in larger commercial
quantities will require a substantial increase in component supplies and will
likely necessitate the replacement of current suppliers or the addition of new
suppliers. The qualification of additional or replacement vendors for specified
components or services is a lengthy process. In addition, the substitution of
replacement vendors may entail re-engineering time and cost and could delay the
supply of our products.

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

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

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

Medical devices are regulated in the United States primarily by the FDA and, to
a lesser extent, by state agencies. Sales of medical device products outside the
United States are subject to foreign regulatory requirements that vary from
country to country. Generally, medical devices require pre-market clearance or
pre-market approval prior to commercial distribution. A determination that
information available on the medical device is not sufficient to grant the
needed clearance or approval will delay market introduction of the product. In
addition, material changes or

-11-
<PAGE>

modifications to, and changes in intended use of, medical devices also are
subject to FDA review and clearance or approval. The FDA regulates the
research, testing, manufacture, safety, effectiveness, labeling, storage,
record keeping, promotion and distribution of medical devices in the United
States and the export of unapproved medical devices from the United States to
other countries. The time required to obtain approvals required by foreign
countries may be longer or shorter than that required for FDA clearance, and
requirements for licensing may differ from FDA requirements. The current
regulatory environment in Europe for medical devices differs significantly
from that in the United States. For additional information concerning the
regulatory framework under which we operate, please see "Business--Government
Regulation."

WE EXPECT TO ENCOUNTER RAPID TECHNOLOGICAL CHANGE AND SIGNIFICANT COMPETITION.

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

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

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

WE EXPECT FLUCTUATIONS IN OUR OPERATING RESULTS.

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

- timing and results of product evaluations,
- delays associated with the FDA and other regulatory approval
processes,
- demand for and utilization of our products,
- changes in our pricing policies or those of our competitors,
- changes in third-party payment guidelines,
- the number, timing and significance of product enhancements and
new product announcements by us or our competitors,
- our ability to develop, introduce and market new and enhanced
versions of our products on a timely basis,
- customer order deferrals in anticipation of enhancements or of
new product introductions by us or our competitors,
- product quality problems,
- personnel changes and
- the level of international sales.

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

Our profitability is directly related to the level of payments for the surgical
procedures in which our products are involved, either by Medicare or private
insurance companies. We could be adversely affected by changes in payment
policies of government or private health care payors, particularly to the extent
any such changes affect payment for the procedure in which our products are
intended to be used. It is a continuing trend in U.S. health care for such
payments to be under continual scrutiny and downward pressure. We believe that
reimbursement in the

-12-
<PAGE>

future will be subject to increased restrictions, both in the United States
and in foreign markets and that the overall escalating cost of medical
products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce
the cost of products and services, including products which we offer.

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

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

WE HAVE LIMITED EXPERIENCE MARKETING OUR PRODUCTS OVERSEAS AND MAY NOT BE
SUCCESSFUL IN EXPANDING INTO INTERNATIONAL MARKETS.

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

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

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

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

Our future success will depend, in part, on our ability to continue to develop
patentable products, enforce our patents and obtain patent protection for our
products both in the United States and in other countries. The patent positions
of medical device companies, however, are generally uncertain and involve
complex legal and factual questions. Patents may never issue from any patent
applications owned by or licensed to us. Even if patents do issue, the

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<PAGE>

claims allowed may not be sufficiently broad to protect our technology. In
addition, issued patents owned by or licensed to us may be challenged,
invalidated or circumvented, or the rights granted thereunder may not provide
us with competitive advantages.

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

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

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

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

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

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

-14-
<PAGE>

Members of our clinical advisory boards consult with us exclusively in the field
of visualization, but are free to consult with other non-competing
instrumentation companies and are employed elsewhere on a full-time basis. As a
result, they only spend a limited amount of time on our business. Although we
have entered into consulting agreements, with terms ranging from 12 months to
two years, including confidentiality provisions with each of the members of our
clinical advisory boards, the consulting and confidentiality agreements between
us and each of the members of our clinical advisory boards may be terminated or
breached. In addition, such agreements may not be renewed upon termination.

IF WE OR OUR SUPPLIERS FAIL TO BE YEAR 2000 COMPLIANT, IT COULD CAUSE
INTERRUPTIONS IN OUR SUPPLY OF PRODUCTS AND GENERATE SUBSTANTIAL EXPENSES FOR
OUR BUSINESS.

We recognize the need to ensure our operations will not be adversely impacted by
the inability of our systems to process data having dates on or after January 1,
2000. Processing errors due to software failure arising from calculations using
the year 2000 date are a recognized risk. We are currently addressing the risk,
with respect to the availability and integrity of our financial systems and the
reliability of our operating systems, and are in the process of communicating
with suppliers, customers, financial institutions and others with whom we
conduct business transactions to assess whether they are year 2000 compliant. We
currently have no contingency plans in place. We expect to develop contingency
plans during the third quarter of 1999 and have those plans in place during the
fourth quarter of 1999.

We currently estimate that the cost of the year 2000 initiative will not exceed
$150,000, a portion of which, such as the business enterprise software, was
scheduled for upgrade irrespective of the year 2000 issue. For additional
information on our year 2000 initiatives, please see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000."

RISKS RELATED TO THIS OFFERING

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

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

- actual or anticipated fluctuations in our operating results,
- changes in financial estimates by securities analysts,
- announcements of technological innovations,
- new products or new contracts by us or our competitors,
- regulatory announcements,
- developments with respect to patents or proprietary rights,
- conditions and trends in the medical device and other technology
industries,
- adoption of new accounting standards affecting the medical device
industry, and
- general market conditions.

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

-15-
<PAGE>

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

The common stock is being offered directly by us to a limited number of
investors. We will not engage any broker-dealers or underwriters to sell the
common stock offered by this prospectus. We are not experts in selling stock. As
a result, we may not be as successful as a professional broker-dealer in
marketing the common stock. In fact, we may not be able to sell the stock at
all. If we are unable to locate and negotiate terms of a sale satisfactory to
us, we will only be able to fund our operations through October 1999 without
additional funding, and may be forced to discontinue our operations.

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

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

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

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

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

Our charter documents contain provisions that may make it more difficult or
discourage a change in control. This may adversely affect the market price of
our common stock. For a discussion of the provisions in our charter documents
which may have the effect of preventing a change of control, please see
"Description of Capital Stock -- Possible Anti-Takeover Effect of Charter
Provisions."

FUTURE OFFERINGS COULD DILUTE YOUR INTEREST IN YOUR STOCK.

If the net proceeds of this offering, together with available funds and cash
generated from operations, are insufficient to satisfy our cash needs, we may be
required to sell additional equity or convertible debt securities. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. Please see "Dilution" for a description of how an
issuance of stock can cause dilution.

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<PAGE>

USE OF PROCEEDS

Assuming an offering price of $0.63 per share, which is based on the average
of the high and low sales prices per share of common stock on September 1,
1999 as reported on the Nasdaq National Market, we anticipate that our net
proceeds from this offering will be approximately $4.2 million after
deducting our estimated offering expenses.

Of the $4.2 million net proceeds from this offering, we intend to use
approximately $2.0 million for working capital, $0.8 million to fund the
launch of our visualization product line for general surgery, the ORPC, $0.8
million for general corporate purposes and $0.6 million for general product
development purposes. If we are unable to raise the full amount anticipated,
we will have to revise our plans and spend less than anticipated with respect
to general product development first, general corporate funding second and
the launch of our new product line for general surgery third.

The amounts we actually spend for each purpose may vary significantly
depending upon numerous factors, including the progress of our product
development, the regulatory status of these products, the timing of
regulatory approvals, technological advances, our products' commercial
potential 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.
We will require substantial additional funds other than those raised in this
offering to conduct our existing operations in the future. We anticipate that
the net proceeds from this offering and the interest income from these
proceeds, together with our existing cash, cash equivalents and short-term
investments, and product revenues will be sufficient to fund our operations
through 2000. Until we can apply the proceeds from this offering as we have
described above, we intend to invest the money in short-term investment-grade
securities.

PRICE RANGE OF COMMON STOCK

Since our initial public offering in July 1997, our common stock has been
traded on the Nasdaq National Market under the symbol VMTI. The following
table sets forth the range of quarterly intra-day high and low sales prices
of our common stock on the Nasdaq National Market since the initial public
offering.

<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- -----------------
HIGH LOW HIGH LOW HIGH LOW
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended March 31............................... $3.31 $2.00 $13.13 $8.00 -- --

Quarter ended June 30................................ $3.19 $1.38 $11.50 $3.38 -- --

Quarter ended September 30........................... -- -- $5.06 $1.50 $18.50 $8.88

Quarter ended December 31............................ -- -- $3.63 $2.00 $15.50 $8.88

</TABLE>

On September 1, 1999, the closing price of our common stock as reported on
the Nasdaq National Market was $0.63 per share. As of August 15, 1999 there
were approximately 3,200 holders of record of our 13,720,716 shares of
outstanding common stock.

DIVIDEND POLICY

We have never declared or paid dividends on our stock. We do not anticipate
paying any cash dividends in the foreseeable future. Our board of directors
has discretion to determine whether any future payments of dividends will be
made. In making these determinations, the board will take into account
several factors, including our

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<PAGE>

financial condition, operating results, current and anticipated cash needs
and plans for expansion. For a discussion of our immediate and short-term
cash needs, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

CAPITALIZATION

The following table shows our capitalization and other related information as
of June 30, 1999:

- on an actual basis; and

- on an as adjusted basis to give effect to the issuance of the
common stock offered by us under this prospectus, as described
under "Use of Proceeds." It is important that you read this
table in conjunction with the financial statements and the
accompanying notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," which
appear elsewhere in this prospectus.

The common stock share number used in the following table is based on shares
outstanding as of June 30, 1999. The number does not include 1,372,374 shares
of common stock issuable upon exercise of options outstanding as of June 30,
1999 at a weighted average exercise price of $2.91 per share under our stock
option plans and 27,184 shares of common stock issuable upon the exercise of
warrants granted to Silicon Valley Bank at an exercise price of $12.88 per
share. For a description of our stock option plans, see "Management--Benefit
Plans" and for a description of the warrants, see "Description of Capital
Stock."

AS OF JUNE 30, 1999
------------------------------
ACTUAL AS ADJUSTED
------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments....................... $ 4,217 $ 8,433
------------- ---------------
Long-term obligations less current portion.............................. $ -- $ --
Stockholders' equity:...................................................
Convertible preferred stock, $.01 par value; 5,000,000 shares
authorized actual and as adjusted; no shares issued and outstanding
actual and as adjusted............................................. -- --

Common stock, $.01 par value; 35,000,000 shares authorized actual
and as adjusted; 13,694,434 shares issued and outstanding actual and
20,694,434 shares as adjusted...................................... 137 207

Additional paid-in capital.............................................. 62,919 67,065
Notes receivable stockholders........................................... (78) (78)
Deferred compensation................................................... (778) (778)
Accumulated deficit..................................................... (53,176) (53,176)
------------- ---------------
Total stockholders' equity......................................... 9,024 13,240
------------- ---------------
Total capitalization............................................... $ 9,024 $ 13,240
------------- ---------------

</TABLE>

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<PAGE>

DILUTION

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share you pay
in this offering, and the net tangible book value per share of our common
stock immediately after this offering. Our net tangible book value at June
30, 1999 was $8,900,496, or $0.65 per share of common stock. Net tangible
book value per share is equal to our total tangible assets minus total
liabilities divided by the number of shares of common stock outstanding at
June 30, 1999. Assuming an offering price of $0.63 per share, after giving
effect to the sale of the 7,000,000 shares of common stock offered by this
prospectus and deducting our estimated offering expenses, our pro forma net
tangible book value would have been approximately $13,116,496 million, or
$0.63 per share of common stock. This represents an immediate decrease in net
tangible book value of $0.02 per share to existing stockholders and no
dilution per share to new investors. The following table illustrates this
calculation on a per share basis:

<TABLE>
<S> <C> <C>
Public offering price per share.................................... $0.63
Net tangible book value per share at June 30, 1999............ 0.65
Decrease per share attributable to new investors.............. (0.02)
Pro forma net tangible book value per share after this offering.... 0.63
--------

Dilution per share to new investors ............................... $0.00
--------
--------
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1999, the
differences between the existing stockholders and new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid to us, and the average price per share paid. The
information presented is based upon the assumed offering price of $0.63 per
share, before deducting the estimated offering expenses of this offering.

The common stock share number used for existing stockholders in the table
below is based on shares outstanding as of June 30, 1999. The number does not
include 1,372,374 shares of common stock issuable upon exercise of options
outstanding as of June 30, 1999 at a weighted average exercise price of $2.91
per share under our stock option plans and 27,184 shares of common stock
issuable upon the exercise of warrants granted to Silicon Valley Bank at an
exercise price of $12.88 per share. For a description of our stock option
plans, see "Management--Benefit Plans" and for a description of the warrants,
see "Description of Capital Stock."

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders .............. 13,694,434 66% $63,055,036 93% $4.60
New investors....................... 7,000,000 34% $ 4,410,000 7% $0.63
---------- ----------- ----------- -----------
Total.......................... 20,694,434 100% $67,465,036 100%
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------

</TABLE>

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<PAGE>

SELECTED FINANCIAL DATA

In the tables below, we provide you with our selected consolidated financial
data. The selected consolidated statement of operations information for the
fiscal years ended December 31, 1996, 1997 and 1998 and the six months ended
June 30, 1998 and 1999 and the consolidated balance sheet data at December
31, 1997 and 1998 and June 30, 1999 have been derived from our audited and
unaudited consolidated financial statements which are included elsewhere in
this prospectus. The consolidated data presented below for the years ended
December 31, 1994 and 1995 and at December 31, 1994, 1995 and 1996 are
derived from audited consolidated financial statements that are not included
in this prospectus. In our opinion, all adjustments necessary for a fair
presentation of the information have been made to our unaudited financial
statements. You should read this information in conjunction with the section
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................. $ 59 $ 1,719 $ 2,244 $ 4,141 $ 6,572 $ 4,314 $ 2,191
Cost and expenses:
Cost of sales................... 43 1,272 2,253 4,559 6,119 3,608 3,233
Research and development........ 1,328 1,904 3,880 6,875 5,480 3,187 1,997
Sales and marketing............. 291 834 2,057 5,011 5,953 3,446 1,893
General and administrative...... 758 1,034 3,103 5,498 5,039 2,859 1,235
Restructuring expense........... -- -- -- -- 940 940 --
-------- ------- -------- ---------- ----------- ----------- ---------
Total costs and expenses...... 2,420 (5,044) 11,293 21,944 23,531 14,040 8,358
-------- ------- -------- ---------- ----------- ----------- ---------
Loss from operations............... (2,361) (3,325) (9,049) (17,803) (16,959) (9,726) (6,167)
Minority interest in net loss of
consolidated partnership........ 270 -- -- -- -- -- --
License income..................... -- -- 1,493 -- -- -- --
Interest income.................... -- 51 117 926 900 583 158
Other gains (losses)............... -- -- -- -- (662) (638) 51
-------- ------- -------- ---------- ----------- ----------- ---------
Net loss........................... $ (2,091) $(3,274) $ (7,439) $ (16,877) $ (16,720) $ (9,781) $ (5,958)
-------- ------- -------- ---------- ----------- ----------- ---------
-------- ------- -------- ---------- ----------- ----------- ---------
Basic and diluted loss per share... -- -- $ (37.01) $ (2.51) $ (1.26) $ (0.74) $ (0.44)
Shares used in computing basic and
diluted loss per share.......... -- -- 201,000 6,731,000 13,312,366 13,265,196 13,537,059

DECEMBER 31, JUNE 30, 1999
---------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED
-------- -------- -------- -------- -------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.......................... $ 9 $ 3,399 $ 10,285 $ 24,113 $ 8,803 4,217 8,433
Working capital...................... (76) 4,224 10,805 25,977 12,128 6,944 11,160
Total assets......................... 475 5,208 14,316 32,130 16,605 11,400 15,616
Total debt........................... 3,243 -- -- -- -- -- --
Accumulated deficit.................. (2,907) (6,181) (13,620) (30,498) (47,218) (53,176) (53,176)
Total stockholders' equity........... (2,906) 4,707 12,961 29,866 14,666 9,024 13,240

</TABLE>

For more information concerning the computation of basic and diluted loss per
share, see note 8 of notes to our consolidated financial statements. The "as
adjusted" column above gives effect to the sale of 7,000,000 shares of common
stock offered by us in this offering at an assumed offering price of $0.63
per share, which is based on the average of the high and low price of our
common stock as reported on the Nasdaq National Market on September 1, 1999,
and the application of the net proceeds therefrom, after deducting offering
expenses payable by us. For a description of how we intend to use the
proceeds of this offering, see "Use of Proceeds."

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion may contain predictions, estimates and other forward-looking
statements that involve a number of risks and uncertainties, including those
discussed under "Risks Factors." While this outlook represents our current
judgement on the future direction of the business, such risks and
uncertainties could cause actual results to differ materially from any future
performance suggested below. We undertake no obligation to release publicly
the results of any revisions to these forward-looking statements to reflect
events or circumstances arising after the date of this prospectus. Numbers
referenced in this section which are at least 1,000,000 may have been rounded
up to the nearest ten thousand. You should read the following discussion in
conjunction with our consolidated financial statements and the accompanying
notes.

OVERVIEW OF OUR BUSINESS

We develop, manufacture and market products that provide information to
doctors performing minimally invasive heart, head, neck and spine, general
surgical and other selected microsurgical procedures. We also market
endoscopic cameras and have generated minimal revenues from the sales of our
products since our formation in July 1993. We expect to continue to incur
substantial losses for at least the next 12 months. As of June 30, 1999, our
accumulated deficit was approximately $53.18 million. We are not certain that
our development efforts will result in commercially available products, that
we will be successful in introducing the products under development, or that
required regulatory approval of products will continue to be obtained in a
timely manner, if at all.

At December 31, 1998 and August 15, 1999, we had 76 and 55 employees,
respectively. On July 14, 1999, we announced that we had taken steps to
reduce staffing levels and operating expenses to reduce cash burn and
conserve capital. We expect that these measures will reduce our staffing
levels further to approximately 35 employees by the end of September 1999. We
expect staffing levels to stabilize at this level for approximately the next
12 months. Our expectation is based on the fact that significant development
work on our core platform technology is now complete and on strategic
decisions to partner rather than develop an independent distribution
capability.

OUR RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE SIX MONTHS ENDED
JUNE 30, 1999

SALES. We had revenue from product sales of $2.19 million for the six- months
ended June 30, 1999, compared to revenues from product sales and distribution
fees of $4.31 million for the same period in 1998. The decrease in revenues
for the six-month period was due to a reduction in sales of StereoSite
systems and associated distribution fees paid by Sofamor Danek, our
distributor for the head neck and spine surgery market, and a reduction in
sales of our Series 8000 Advanced Visualization and Information System, which
we refer to as the Series 8000, for minimally invasive heart surgery during
the 1999 period compared to the corresponding period of 1998. The decrease
was partially offset by higher sales of original equipment manufacturer
products including initial deliveries to a second original equipment
manufacturer customer during the second quarter of 1999, by product
deliveries to a second distributor for the head, neck and spine surgical
market during the second quarter of 1999, and by product sales to OEC Medical
for the medical imaging market during the 1999 period. Sales to individual
customers exceeding 10% or more of revenues in the six-months ended June 30
were as follows: during 1998, two customers accounted for 48% and 18% of
revenues, respectively, and during 1999, four customers accounted for 44%,
21%, 15% and 12% of revenues, respectively.

COST OF SALES. Our cost of sales was $3.23 million for the six-months ended
June 30, 1999 and $3.61 million for the six-months ended June 30, 1998. The
decrease for the six-month period was primarily due to lower product sales
levels during the 1999 period and no costs related to the launch of the
StereoSite product in 1999 as compared to 1998, partially offset by the
inventory reserves added during the second quarter of 1999.

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RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses were
$2.00 million for the six-months ended June 30, 1999, compared to $3.19
million for the corresponding period in 1998. The decrease in research and
development expenses was primarily attributable to decreases in staffing and
related supply and occupancy costs and a decrease in contract services
related to development efforts.

SALES AND MARKETING EXPENSES. Our sales and marketing expenses were $1.89
million for the six-months ended June 30, 1999, and $3.45 million for the
six-months ended June 30, 1998. The decrease in sales and marketing expenses
for the six-month period reflects the transition of all sales, marketing and
distribution efforts associated with our Series 8000 product for minimally
invasive heart surgery in the United States to Medtronic following an
agreement announced at the end of June 1998.

GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses
were $1.24 million for the six-months ended June 30, 1999, compared to $2.86
million for the corresponding period in 1998. The decrease for this period
was primarily due to a reduction in staffing and related expenses following a
restructuring at the end of the second quarter of 1998, a reduction in
deferred compensation expense and lower professional, legal and consulting
service fees.

RESTRUCTURING EXPENSES. We had no restructuring charges in the six-month
period ended June 30, 1999 and charges associated with restructuring expenses
of $940,000 for the six-month period ended June 30, 1998. The restructuring
expenses in the 1998 period related primarily to termination and severance
payments to employees in connection with transfer of sales and marketing
responsibility in the U.S. for our Series 8000 product for minimally invasive
heart surgery to Medtronic, termination and severance payments to employees
in connection with a general company restructuring and work force reduction,
and write-down of assets related to a strategic decision to discontinue
distribution of a line of heart instruments and sutures earlier than
previously planned.

INTEREST INCOME. Our net interest income was $158,000 for the six-month
period ended June 30, 1999, compared to $583,000 for the corresponding period
in 1998. This decrease for the six-month periods was due primarily to
decreasing average investment balances of our excess cash.

OTHER GAINS. We had other gains of $51,000 for the six-month period ended
June 30, 1999 and had no such gains for the six-months ended June 30, 1998.
The gains for the six-month period ended June 30, 1999 relate to sale of
securities we received in connection with an earlier license agreement signed
in 1996 with Imagyn Medical Technologies, Inc., formerly Urohealth Systems,
Inc.

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

SALES. We had revenues from product sales and distribution fees of $4.14
million and $6.57 million for the years ended December 31, 1997 and 1998,
respectively. The increase in revenues from 1997 to 1998 was primarily due to
sales of our Series 8000 product for minimally invasive heart surgery
launched in September 1997, and sales of StereoSite systems and associated
distribution fees paid by Sofamor Danek, our strategic partner and exclusive
distributor for the head, neck and spine surgical market. Sales to individual
customers exceeding 10% or more of revenues in the years ended December 31,
were as follows: during 1997, three customers accounted for 25%, 19% and 10%
of revenues during 1998 three customers accounted for 34%, 25% and 13% of
revenues.

COST OF SALES. Cost of sales were $4.56 million and $6.12 million for the
years ended December 31, 1997 and 1998, respectively. The increase in cost of
sales was primarily due to increased costs corresponding to the growth in
revenues partially offset by lower manufacturing scale-up expenses incurred
in 1998 versus 1997 to accommodate new product launches targeted at heart and
head, neck and spine surgical markets with our Series 8000 and StereoSite
systems, respectively.

RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses were
$6.88 million and $5.48 million for the years ended December 31, 1997 and
1998, respectively. The decrease in research and development expenses was
primarily attributable to decreases in staffing and related supply and
occupancy costs and a decrease in contract

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services related to development efforts, both in the second half of the year
as major product launches were completed by the end of the first half of 1998.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from
$5.01 million in 1997 to $5.95 million in 1998. The increase in sales and
marketing expense was attributable to the development and expansion of our
heart surgery sales force in the first half of 1998 and increased marketing
efforts associated with commercialization of new products. During the second
half of the year sales and marketing expenses decreased as a result of
transitioning all sales, marketing and distribution efforts associated with
our Series 8000 for minimally invasive heart surgery in the United States to
Medtronic following an agreement announced at the end of June 1998.

GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses
were $5.50 million and $5.04 million for the years ended December 31, 1997
and 1998, respectively. The decrease was primarily due to a reduction in
staffing and related expenses following a second quarter restructuring, a
reduction in deferred compensation expense and lower professional, legal and
consulting service fees partially offset by increased costs associated with
being a public company for the full year of 1998 compared to a half year in
1997.

RESTRUCTURING EXPENSES. We recorded restructuring charges during the second
quarter of 1998 of $940,000 and had no such charges for 1997.

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

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

TAXES

At December 31, 1998, we had federal and state tax loss carryforwards of
approximately $37.10 million and $31.20 million, respectively. The federal
and state tax loss carryforwards will expire in 2010 and 2000, respectively,
unless previously utilized. At December 31, 1998, we also had federal and
state research tax credit carryforwards of approximately $1.40 million and
$780,000, respectively, which will expire in 2010 unless previously utilized.
We have provided a full valuation allowance on the deferred tax assets as
realization of such assets is uncertain.

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

SALES. We had revenues from product sales of $2.24 million and $4.14 million
for the years ended December 31, 1996 and 1997, respectively. The increase in
revenues from 1996 to 1997 was primarily due to sales of our Series 8000
product for minimally invasive heart surgery launched in September 1997,
revenues associated with a line of heart instruments and sutures for which we
acquired distribution rights in the second half of 1996, and increased
original equipment manufacturer sales of our endoscopic cameras during 1997
compared to 1996. Sales to individual customers exceeding 10% or more of
revenues in the years ended December 31, were as follows: during 1996 three
customers accounted for 30%, 27% and 25% of revenues; during 1997, three
customers accounted for 25%, 19% and 10% of revenues, respectively.

COST OF SALES. Cost of sales were $2.25 million and $4.56 million for the
years ended December 31, 1996 and 1997, respectively. The increase in cost of
sales was primarily due to increased costs corresponding to the growth in
revenues and manufacturing scale-up expenses we incurred to accommodate new
product launches targeted at heart and head, neck and spine surgical markets
including the Series 8000 product.

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RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses were
$3.88 million and $6.88 million for the years ended December 31, 1996 and
1997, respectively. The increase in research and development expenses was
attributable to continued development and expansion of our research and
development organization focused on development, prototyping and evaluation
of new products and consisted of increases in staffing and related supply and
occupancy costs. Contracted research and development effort also contributed
to the increase.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from
$2.06 million in 1996 to $5.01 million in 1997. The increase in sales and
marketing expenses was attributable to the development and expansion of our
sales force, increased marketing efforts associated with commercialization of
new products, and commissions and other expenses related to revenues
associated with a line of heart instruments and sutures for which we acquired
distribution rights in the second half of 1996.

GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses
were $3.10 million and $5.50 million for the years ended December 31, 1996
and 1997, respectively. The increase was primarily due to increases in
staffing and related expenses associated with the continued development of
our administrative infrastructure, amortization of deferred compensation in
connection with the grant of some stock options in 1996 and early 1997,
expansion of our information and communication systems, increases in legal
and professional fees associated with business development efforts, and costs
associated with being a public company. We recorded noncash deferred
compensation of approximately $3.50 million in connection with the grant of
some stock options during 1996 and 1997, of which approximately $1.10 million
and $447,000 were recognized as an expense in 1997 and 1996, respectively.
The unamortized balance of the deferred compensation will be expensed over
the vesting periods of the options, typically four or five years, and,
therefore, will continue to impact our operating results through 2001.

LICENSE INCOME. We had license income of $1.49 million in 1996 and no income
from licensing of technology in 1997. The license income in 1996 related to a
perpetual license to some of our technology and patents unrelated to our main
products and markets. No other technology is being developed with the purpose
of being licensed and we do not anticipate any future licensing arrangements
of any of our core technology for medical applications.

INTEREST INCOME. Interest income increased from $117,000 in 1996 to $926,000
in 1997, due primarily to increasing average investment balances of excess
cash following our initial public offering in July 1997.

LIQUIDITY AND CAPITAL RESOURCES

We completed our initial public offering in July 1997, raising approximately
$32.7 million net of offering costs. Prior to our initial public offering, we
satisfied our liquidity requirements from the private sale of common and
preferred stock, through advances from a related party, and from the proceeds
from licensing some of our technology.

In October 1997, we completed a $10.0 million Loan and Security Agreement to
finance the placement with customers of our Series 8000 systems on a pay per
procedure basis rather than through an upfront capital payment. On June 29,
1998, we announced a new distribution agreement with Medtronic, under which
Medtronic will distribute our Series 8000 products for us in the United
States. The terms of that agreement call for Medtronic to pay us for units
placed with hospitals and then receive a percentage of the gross margins
generated by procedure fees. This agreement effectively replaced the Loan and
Security Agreement which expired in October 1998 without us drawing down on
the loan. If we were to have borrowed funds pursuant to the Loan Agreement,
we could have borrowed up to $10.0 million at one time with an interest rate
of prime plus one and one half percent.

Net cash used in operating activities for the six months ended June 30, 1999
was $4.50 million compared to net cash used of $8.33 million for the
corresponding six-month period in 1998. The decrease in net cash used in
operating activities was primarily attributable to decreasing net losses and
lower accounts receivable balances and inventory purchases during the 1999
period partially offset by lower non-cash expense for depreciation and
amortization and no customer advance payments in 1999 compared to 1998.

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Net cash used in operating activities was approximately $6.94 million, $15.50
million and $14.27 million in 1996, 1997 and 1998. The increase in net cash
used in operating activities between 1996 and 1997 was primarily attributable
to increasing net losses during the period and investment in inventories
associated with expansion of our product line. The decrease in net cash used
in operating activities between 1997 and 1998 was primarily attributable to
lower inventory purchases and higher non-cash expenses for depreciation and
amortization and asset write-downs during 1998 offset by increasing payments
on accounts payable and increasing accounts receivable balances.

Net cash provided by investing activities was $587,000 for the six months
ended June 30, 1999 compared to $7.74 million of net cash provided in the
same period in 1998. The decrease in net cash provided by investing
activities in 1999 was primarily attributable to declining balances of short
term investments reaching maturity partially offset by decreasing purchases
of property and equipment.

Net cash used in investing activities was approximately $1.24 million and
$20.03 million in 1996 and 1997 and net cash provided by investing activities
was approximately $14.30 million in 1998. The increase in net cash used in
investing activities between 1996 and 1997 was primarily attributable to the
purchase of short-term investments and the purchase of property and equipment
related to increased staffing, expansion of manufacturing capabilities, and
marketing demonstrations. The net cash provided by investing activities in
1998 was primarily attributable to the maturities of short term investments
offset by purchases of property and equipment.

Net cash provided by financing activities was $64,000 for the six-months
ended June 30, 1999 compared to $185,000 for the same period in 1998. The
decrease in net cash provided by financing activities during the 1999 period
was primarily attributable to a reduction in purchases of stock by employees
through our employee stock purchase plan and a lower level of stock option
exercises.

Cash flows from financing activities were $15.06 million, $32.73 million and
$265,000 in 1996, 1997 and 1998, respectively. The cash flows from financing
activities in 1996 were primarily attributable to the private sale of
preferred stock, cash flows from financing activities in 1997 were primarily
attributable to proceeds from our initial public offering and cash flows from
financing activities in 1998 were attributable to proceeds from the purchase
of stock by employees through our employee stock purchase plan and the
exercise of stock options.

We anticipate that the net proceeds from this offering and the interest
income thereon, together with our existing cash, cash equivalents and
short-term investments and product revenues will be sufficient to fund our
operations through the year 2000. Some circumstances, however, including slow
rate of market acceptance of our products or our inability to scale up
manufacturing, would accelerate our use of proceeds from this offering and
require us to seek additional funds to support our operating requirements.
Accordingly, we may, from time to time, seek to raise additional funds
through public or private equity financings, debt financings or from other
sources. Additional financing may not be available at all or that, if
available, that we could obtain financing on terms acceptable to us. Should
we be unable to raise sufficient funds, we may be required to curtail our
operating plans and possibly relinquish rights to portions of our technology
or products.

YEAR 2000

We recognize the need to ensure our operations will not be adversely impacted
by the inability of our systems to process data having dates on or after
January 1, 2000. Processing errors due to software failure arising from
calculations using the year 2000 date are a recognized risk. We are currently
addressing the risk, with respect to the availability and integrity of our
financial systems and the reliability of our operating systems, and are in
the process of communicating with suppliers, customers, financial
institutions and others with whom we conduct business transactions to assess
whether they are year 2000 compliant.

We established a year 2000 compliance Team in 1998 made up of members of all
of our company's functional organizations and our implementation of a full
year 2000 Compliance Program is ongoing. Our Chief Financial Officer is the
officer responsible for the year 2000 compliance program and the individual
who leads the year 2000 Compliance Team reports directly to the Chief
Financial Officer.

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Central to our year 2000 compliance program is a matrix we have developed of
all of our operations and business activities. This matrix, which is
constantly updated, provides the status of all of our year 2000 compliance
efforts in terms of level of assessment, conversion, testing, and completion
and identifies responsibility for each item. In this way, we are able to
prioritize our efforts and provide visibility of the Compliance Program to
all Compliance Team members and management.

Thus far we have completed the assessment phase of all of our operations and
business activities. We have determined that our products are Year 2000
compliant and during the second quarter of 1999 completed conversion, testing
and implementation of all remaining non compliant mission critical business
systems. During the first quarter of 1999, we installed a year 2000 compliant
version of our business enterprise software and completed the majority of the
testing required of the system. During the second quarter of 1999, we
completed testing of the system and were fully operational on it by the end
of the quarter.

Furthermore, as a result of our assessment of other, less critical systems,
we believe we have identified adequate remedies for those which have been
identified as currently non-year 2000 compliant. Specific examples of
non-compliant systems would include desktop personal computers and
applications software where compliant versions are readily available from the
current suppliers as well as others. We currently have no contingency plans
in place. We expect to develop contingency plans during the third quarter of
1999 and have those plans in place during the fourth quarter of 1999.

We currently estimate that the cost of our year 2000 initiatives will not
exceed $150,000, a portion of which, such as the business enterprise
software, was scheduled for upgrade regardless of the year 2000 issue and
approximately $45,000 of which was expended in 1998. Additionally,
approximately $25,000 was expended in each of the first two quarters of 1999
for a total of approximately $95,000 expended to-date. We do not, therefore,
expect the year 2000 initiatives to be material to our results of operations
or financial position.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 1998, our investment portfolio included fixed-income
securities of $8.6 million. These securities are subject to interest rate
risk and will decline in value if interest rates increase. Due to the short
duration of our investment portfolio, an immediate 10 percent increase in
interest rates would have no material impact on our financial condition or
results of operations.

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

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BUSINESS

BACKGROUND

MINIMALLY INVASIVE SURGERY

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

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

MINIMALLY INVASIVE MICROSURGERY

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

APPLICATION OF OUR PRODUCTS TO DIFFERENT SURGICAL PROCEDURES

HEART SURGERY

CONVENTIONAL TREATMENTS

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

According to data published by the American Heart Association, there were
approximately 759,000 open heart surgical procedures performed in the United
States in 1996. Worldwide we believe that there are more than 1.05 million of
these procedures performed each year.

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MINIMALLY INVASIVE HEART MICROSURGERY

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

THE VISTA MEDICAL SOLUTION.

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

GENERAL SURGERY/GYNECOLOGY/UROLOGY

CONVENTIONAL TREATMENTS.

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

MINIMALLY INVASIVE MICROSURGERY.

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

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THE VISTA MEDICAL SOLUTION.

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

HEAD, NECK AND SPINE SURGERY

CONVENTIONAL HEAD, NECK AND SPINE SURGICAL TREATMENTS.

Conventional head, neck and spine procedures are often invasive and involve a
lengthy and painful recovery. Procedures involving the brain and spinal cord
have traditionally been performed under a microscope in order for the surgeon to
ensure extreme precision with the delicate tasks required. More recently,
surgeons have used neuroendoscopes, or scopes which are inserted into the body,
in combination with microscopes. We estimate that there were approximately
317,000 brain and skull base procedures, 432,000 surgical sinus procedures and
651,000 spinal procedures performed in the United States in 1998.

HEAD, NECK AND SPINE MINIMALLY INVASIVE MICROSURGERY.

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

THE VISTA MEDICAL SOLUTION.

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

OUR BUSINESS STRATEGY

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

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

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

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

Our strategy for entering the general surgery market involves identification of
high value procedures where our visualization technology uniquely enhances
procedure performance. The first of these is laparoscopic gastric bypass, a
surgical technique which addresses extreme obesity. We have been working closely
with surgeons pioneering the approach and have sponsored the first of a planned
series of training courses for surgeons interested in learning the technique.
Extreme obesity affects approximately 3% of adults in the United States.

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

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

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

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

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

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

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

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

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

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

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ADVANCED VISUALIZATION PRINCIPLES AND OUR PRODUCT PLATFORM

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

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

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

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

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

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

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

We have incorporated these principles into our visualization products.

HEAD-MOUNTED DISPLAY

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

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<PAGE>

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

THREE-DIMENSIONAL IMAGE ACQUISITION

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

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

INFORMATION MANAGEMENT

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

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

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<PAGE>

PRODUCT LINES

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

SERIES 8000 ADVANCED VISUALIZATION AND INFORMATION SYSTEM FOR HEART SURGERY

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

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

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

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

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

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

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

CardioConsole Console for rack mounting of all Series 8000 modules.
</TABLE>

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

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

The most recent application of our platform technology is complex procedures in
general surgery. Our first public demonstration of this platform was in October
1998, principally targeted at two emerging procedures - minimally invasive
gastric bypass to control obesity and the abdominal approach to facilitate
minimally invasive spinal surgery. Our general surgical system is designed on
modular principles and consists of the following major components:

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<PAGE>

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

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

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

Stereo Camera High resolution stereo image processor.
Controller

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

Endoscopy Cart Cart which holds the Advanced System for Laparoscopy.
</TABLE>

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

STEREOSITE SYSTEMS FOR MICROSCOPY AND ENDOSCOPY

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

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

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

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

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

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

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<PAGE>

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

OEM ENDOSCOPIC CAMERAS

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

STRATEGIC ALLIANCES

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

MEDTRONIC

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

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

In recent weeks, Metronic has expressed concern about our ability to function
as a going concern. For a description of these concerns, please see "Risk
Factors--We are dependent on Medtronic, Sofamor Danek and other distribution
partners to sell our products."

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

In connection with entering into the original agreement, Medtronic made a
$10.0 million equity investment in us and received 2,000,000 shares of our
Series C preferred stock, which were automatically converted into 1,500,000
shares of our common stock at our initial public offering of our common stock
in July 1997.

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<PAGE>

HEARTPORT

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

SOFAMOR DANEK

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

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

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

OEC MEDICAL SYSTEMS

In January 1999, we entered into a purchasing agreement with OEC Medical
Systems, Inc., under which our head mounted display systems will be purchased
by OEC and sold to their customers in conjunction with their fluoroscopy
equipment in the medical imaging market. The agreement, which ran through
August 1999, but has provisions for renewal, calls for OEC to place purchase
orders for head mounted display systems with us which are to be governed by
the terms of the agreement. In conjunction with the signing of this
agreement, OEC placed an initial purchase order with us for a quantity of
basic and advanced head mounted display systems with deliveries extending
through September 1999. We do not anticipate that discussion regarding
renewal, if any do occur, will occur until at least after final deliveries
are made on the initial order.

GDE SYSTEMS

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<PAGE>

In February 1997, GDE Systems, a leading military electronics and information
management company, granted us an exclusive worldwide license to software,
documentation and trademarks of GDE for use in the medical field. Since 1993,
GDE's subsidiary, Healthcom, had been adapting the software licensed to us to
provide high-speed, image-based information processing and networking
capabilities specifically for medical applications. In connection with the
license, we issued to GDE shares of our common stock with a value based on
the initial public offering price, of $250,000 and will pay GDE a royalty on
revenues derived from any products based upon or derived from the GDE
software. We also made a non-refundable payment of $250,000 in December 1998
as a combination of royalty payments earned through such date and a royalty
advance creditable against future royalties. Under this license agreement, we
hired three of GDE's software development engineers. GDE has a right of first
refusal to license our improvements to the software for use in non-medical
markets, subject to the payment of a royalty to us.

COGENT LIGHT

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

KAISER AEROSPACE

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

IMAGYN MEDICAL TECHNOLOGIES

In December 1996, Urohealth Systems, Inc., which subsequently changed its
name to Imagyn Medical Technologies in 1997, entered into a license agreement
with us under which we exclusively licensed visual instrument technology
developed principally for the field of gynecology, which we call the Newman
technology, to Imagyn for use in gynecology, urology and general surgery on a
worldwide basis. Imagyn will pay us a sliding royalty based on sales of
products incorporating the Newman technology, subject to defined maximums and
minimums. The agreement may be terminated if there is an uncured material
breach or insolvency by either party. In connection with the license
agreement, the parties entered into a consulting agreement whereby we agreed
to use our reasonable efforts to provide the services of Allen Newman, one of
our officers, as a consultant to Imagyn on a limited basis. We previously
licensed the exclusive rights to the Newman technology from Mr. Newman in
September 1994. Our license agreement with Mr. Newman was amended in December
1996 to permit the sublicense of the Newman technology to Imagyn. In
connection with the amendment of our license agreement with Mr. Newman, we
paid Mr. Newman an additional sum of money and agreed to pay him a percentage
of the royalties received from Imagyn

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<PAGE>

for sales of disposable products manufactured under the sublicense. In May
1999, Imagyn filed a petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code and in June 1999 filed a plan of reorganization in connection
with the petition. Imagyn has not yet commercialized products based on the
Newman technology, which we believe to be related to their financial
condition. We are communicating with Imagyn concerning their performance
under the license agreement and the prospects for commercialization of the
products.

LICENSE AGREEMENTS

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

MCKINLEY OPTICS, INC.

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

FUJI

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

CARL ZEISS

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

INTELLECTUAL PROPERTY PROTECTION

We rely on a combination of technical leadership, patent, trade secret,
copyright and trademark protection and nondisclosure agreements to protect
our proprietary rights. As of June 30, 1999, we had exclusive ownership
rights to 15 issued United States patents, 12 pending United States patent
applications and 28 pending foreign applications covering various aspects of
our devices and systems. Furthermore, as of the same date, we had exclusive
rights in the medical field to five issued United States patents, one pending
United States patent application, 11 issued foreign patents and 10 pending
foreign applications covering various aspects of our devices and systems. In
1998 we additionally obtained from Carl Zeiss non-exclusive rights to three
issued United States patents and four pending foreign applications. We intend
to file additional patent applications in the future. The failure of such
patents to issue could damage our ability to protect our proprietary
information.

Our future success will depend, in part, on our ability to continue to
develop patentable products, enforce our patents and obtain patent protection
for our products both in the United States and in other countries. The patent
positions of medical device companies, however, are generally uncertain and
involve complex legal and factual questions.

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<PAGE>

We are not certain that patents will issue from any patent applications owned
by or licensed to us or that, if patents do issue, the claims allowed will be
sufficiently broad to protect our technology. In addition, there can be no
assurance that any issued patents owned by or licensed to us will not be
challenged, invalidated or circumvented, or that the rights granted
thereunder will provide us with competitive advantages.

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

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

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

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<PAGE>

REGULATION

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

DEVICE CLASSES

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

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

DEVICE APPROVAL

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

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

INVESTIGATIONAL DEVICE EXEMPTION APPLICATION

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<PAGE>

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

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

FOREIGN REQUIREMENTS

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

MARKETING AND SALES

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

TRAINING

The introduction of new technology requires training for both surgeons and
operating room personnel. We began company sponsored heart training programs in
the third quarter of 1997. In June 1998 responsibility for training was
transferred to Medtronic, to be carried out in conjunction with their extensive
training programs for heart surgery. Training programs for surgeons in other
disciplines such as the minimally invasive gastric bypass procedure, are being
developed in conjunction with the planning for product launch.

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<PAGE>

CLINICAL EVALUATION

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

INTERNATIONAL SALES

We have entered into a strategic relationship with Medtronic for the
distribution of our Series 8000 product in Europe, the Middle East and Africa,
Japan, India and Australia. For a description of that relationship, please see
"--Strategic Alliances--Medtronic." The StereoSite systems will be distributed
internationally by Sofamor Danek and other distributors. We intend to follow the
same formula with our general surgery product line.

COMPETITION

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

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

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

CLINICAL ADVISORY BOARDS

We have established three clinical advisory boards made up of leading surgeons,
one focused on minimally invasive heart surgery, another focused on head, neck
and spine microsurgery and a third general advisory board focused on several
other specialties. We have also formed a research advisory board to conduct
specific research in the development of techniques applicable to the use of
video assistance in minimally invasive heart surgery. Members of the clinical
advisory boards consult with us exclusively in the field of visualization, but
are free to consult with other non-competing instrumentation companies and are
employed elsewhere on a full-time basis. Our clinical advisory boards are
intended to act as a clinical reference for us and to provide access to
potential training sites for our visualization products.

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<PAGE>

EMPLOYEES

As of August 15, 1999, we had 55 full-time employees, of whom four hold advanced
degrees. None of our employees is represented by a collective bargaining
agreement, nor have we experienced work stoppages. We believe our relations with
our employees are good.

FACILITIES

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

LEGAL PROCEEDINGS

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

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<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Our directors and executive officers and their ages as of August 15, 1999 are
set forth in the table below. Our board of directors is divided into three
classes serving staggered three-year terms.

<TABLE>
<CAPTION>
YEAR OF ANNUAL MEETING THAT
NAME AGE POSITION(S) TERM AS DIRECTOR EXPIRES
- ----------------------------- ----- -------------------------------------- ---------------------------
<S> <C> <C> <C>
James C. Blair (1)........... 60 Chairman of the Board and Director 2001

John R. Lyon................. 53 President, Chief Executive Officer and 2001
Director

Koichiro (Ken) Hori.......... 63 Senior Vice President, Advanced --
Technology

Allen Newman................. 48 Vice President and General Manager, --
Head, Neck & Spine Microsurgery

Robert J. De Vaere........... 41 Chief Financial Officer and Director of --
Finance and Administration

Olav B. Bergheim............. 49 Director 2000

Nicholas B. Binkley (1)...... 53 Director 2002

Daniel J. Holland (2)........ 63 Director 2000

Larry M. Osterink (2)........ 59 Director 2002
</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 Managing Member of Domain
Associates, L.L.C., 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. 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 Vista Medical 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

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<PAGE>

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.

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 Head, Neck & Spine Microsurgery 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.

ROBERT J. DE VAERE. Mr. De Vaere has served as Chief Financial Officer since
December 1996 and as Vice President 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 the University of
California, Los Angeles.

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,
L.L.C. 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,
including Chairman and Chief Executive Officer of Security Pacific Financial
Services System, Security Pacific's non-banking subsidiary, from 1981, and Vice
Chairman of the Board of Directors of Security Pacific from 1991. In April 1992,
Mr. Binkley became Vice Chairman of the Board of Directors of BankAmerica
Corporation, following the merger of Security Pacific into BankAmerica, serving
in such capacity until his resignation in May 1993. Mr. Binkley is a director of
Golden State Vintners, Inc. and several privately - held companies. 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 One
Liberty 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. Dr. Osterink has been Executive Vice President of Clinicon Corporation
since January 1998. From 1993 until 1998, Dr. Osterink 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.

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<PAGE>

Our board of directors is currently comprised of six members. The directors are
divided into three classes with overlapping three-year terms. A director serves
in office until his or her respective successor is duly elected and qualified
unless the director resigns or by reason of death or other cause is unable to
serve in the capacity of director.

All executive officers are appointed annually by and serve at the discretion of
the Board. All of our executive officers are employed by us at will.

Under our current stock option/stock issuance plan, directors who are not our
officers or employees will receive periodic option grants which began with the
1998 annual meeting of stockholders. For a description of the provisions of our
stock option/stock issuance plan governing these grants, please see "-- Benefit
Plans."

BOARD COMMITTEES

The compensation committee is 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 our incentive compensation plans. The audit committee is
currently composed of Mr. Holland and Dr. Osterink. The audit committee assists
in selecting our 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 shows the compensation received for services rendered to us
during the years ended December 31, 1998, 1997 and 1996 by our Chief Executive
Officer and four other most highly compensated executive officers who earned
more than $100,000 during that year. The amounts under the salary column include
amounts deferred under our 401(k) Plan. The amounts under the bonus column
include cash payments for bonuses accrued for and related to 1995 and 1996
services.

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARD
------------------------------- ----------------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) COMPENSATION
- ------------------------------------------------ ------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
John R. Lyon................................ 1998 $206,346 $ -- 20,000 $ --
President, Chief Executive 1997 $164,423 $50,000 20,000 --
Officer and Director 1996 $149,510 $75,000 246,000 --

Koichiro Hori............................... 1998 $142,500 $ -- 10,000 $ --
Senior Vice President 1997 $130,000 $25,000 10,000 --
Advanced Technology 1996 $129,754 $32,400 75,000 --

Allen Newman................................ 1998 $155,385 $ 2,500 10,000 $ --
Vice President and General 1997 $139,616 $35,000 10,000 --
Manager, head, neck and spine surgical 1996 $129,696 $32,200 135,000 --
Microsurgery

Nancy M. Briefs............................. 1998 $159,384 $ -- -- $ --
Vice President and General 1997 $139,577 $38,000 10,000 --
Manager, CardioThoracic Surgery 1996 $118,582 $32,000 135,000 --

Robert J. DeVaere........................... 1998 $134,808 $ 2,500 22,000 $ --
Chief Financial Officer, Vice President of 1997 $117,654 $30,000 16,250 --
Finance 1996 $ 90,006 $16,000 35,625 --
and Administration and Secretary
</TABLE>

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<PAGE>

STOCK OPTIONS

The following table describes the options to acquire shares of our common stock
that have been granted to each of the Chief Executive Officer and four other
most highly compensated executive officers who earned more than $100,000 during
the year ended December 31, 1998. The exercise price per share of the options
granted represented the fair market value of the underlying shares of common
stock on the dates the options were granted. The 5% and 10% assumed annual rates
of compounded stock price appreciation are required by rules of the Securities
and Exchange Commission. The price used for computing this appreciation is the
exercise price of the options. The actual stock price appreciation over the
10-year option term may not be at the assumed 5% or 10% levels or at any other
defined level.

<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
- ------------------------------------------------------------------------------------------------- ASSUMED ANNUAL
NUMBER OF RATES OF STOCK
SECURITIES % OF OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED FISCAL YEAR SHARE (1) DATE 5% 10%
- ----- ---------- ------------ --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
John R. Lyon.......................... 20,000 7.2% $2.25 12/08/2008 $28,300 $71,718

Koichiro Hori......................... 10,000 3.6 2.25 12/08/2008 14,150 35,859

Allen Newman.......................... 10,000 3.6 2.25 12/08/2008 14,150 35,859

Nancy M. Briefs...................... -- -- -- -- -- --

Robert J. DeVaere..................... 10,000 3.6 5.06 06/08/2008 31,822 80,643
12,000 4.3 2.25 12/08/2008 16,980 43,031
</TABLE>

OPTION EXERCISES AND HOLDINGS

The following table describes the value of options exercised during 1998 by the
Chief Executive Officer and four other most highly compensated executive
officers who earned more than $100,000 during the year ended December 31, 1998,
as of December 31, 1998. In the following table, "value realized" is calculated
on the basis of the fair market value of our common stock on the date of
exercise minus the exercise price and does not necessarily mean that the person
exercising the option sold the stock. Options shown as exercisable are
immediately exercisable. However, we have rights to repurchase shares of common
stock when those options are exercised. These rights lapse at varying times over
the next five years. "Value" in the following table means the fair market price
of our common stock at December 31, 1998, which was $2.94, minus the exercise
price.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
ACQUIRED ON VALUE ---------------------------- -----------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ------------ -------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
John R. Lyon.............. -- -- 250,000 36,000 $667,290 $13,800
Koichiro Hori............. -- -- 77,5000 17,500 205,500 6,900
Allen Newman.............. -- -- 137,000 18,000 365,400 6,900
Nancy M. Briefs........... -- -- 99,875 -0- 259,998 -0-
Robert DeVaere............ -- -- 8,417 33,583 8,025 8,280
</TABLE>

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<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Neither member of the Compensation Committee was an employee or officer of us
during the year ended December 31, 1998. Mr. Lyon, our President and Chief
Executive Officer, participated in the deliberations of the Compensation
Committee regarding executive compensation during 1998, but did not take part in
the deliberations regarding his own compensation.

EMPLOYMENT ARRANGEMENTS AND CHANGE IN CONTROL AGREEMENTS

Under an agreement dated December 28, 1998, we agreed to continue to pay Mr.
Lyon his salary, and to continue to provide health care benefits, for 12 months
if he is terminated following a change in control. Under similar agreements
dated December 28, 1998, we also agreed to continue to pay Messrs. DeVaere, Hori
and Newman their salaries, and to continue to provide health care benefits, for
nine months in such a case.

If we are acquired by merger or asset sale, and the party that acquires us does
not assume repurchase rights tied to our stock options, 50% of the unvested
shares subject to options which our executive officers own will immediately
vest. The other 50% of the shares vest if an executive officer is terminated
without cause within two years of the merger or asset sale.

Under agreements dated July 20, 1999, we agreed to pay Messrs. Lyon, DeVaere,
Hori, Newman and some of our key managers an amount equal to three months salary
and to provide paid medical and dental insurance for the same time period if we
are unsuccessful in raising capital to fund ongoing operations and we are forced
to wind down operations and dissolve effective September 30, 1999.

DIRECTOR COMPENSATION

We reimburse our directors for all reasonable and necessary travel and other
incidental expenses incurred in connection with their attendance at meetings of
the board. Under our present stock option/stock issuance plan, each non-employee
director who is first elected to our board of directors will automatically
receive an option to purchase 15,000 shares of our 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. Each person who is
currently serving as a director 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 a 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.

Under our previous stock option plan, which was replaced by our present stock
option/issuance plan, each non-employee director received a fully vested option
to purchase 4,500 shares of our common stock in December 1996, and Mr. Lyon
received an option to purchase 11,250 shares. 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 if we are
acquired by a merger or asset sale, unless our 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 a merger or asset sale.

BENEFIT PLANS

We have adopted:

- a stock option/stock issuance plan, and

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- an employee stock purchase plan

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<PAGE>

1997 STOCK OPTION/STOCK ISSUANCE PLAN

INTRODUCTION. Our stock option/stock issuance plan is intended to serve as the
successor equity incentive program to our previous stock option plan. Our
current stock option/stock issuance plan was adopted by the board and
subsequently approved by the shareholders in February 1997. The plan became
effective upon its adoption by the board. All outstanding options under our
previous plan are incorporated into our current plan, and no further option
grants will be made under our previous plan. The incorporated options continue
to be governed by their existing terms, unless the plan administrator elects to
extend one or more features of the previous to those options.

SHARE RESERVE. We are authorized to issue up to 2,820,000 shares of our common
stock under the stock option/stock issuance plan. This share reserve consists,
in part, of shares that may still be issued under the previous stock option plan
and shares which are subject to options under that plan. We cannot grant
options, stock appreciation rights or issue shares that total more than 300,000
shares, to any one participant in a given calendar year.

PROGRAMS. Our stock option/stock issuance plan is divided into three separate
programs:

- - the discretionary option grant program under which eligible
employees, officers, board members and independent
consultants, may be granted options to purchase shares of our
common stock at an exercise price determined by the plan
administrator at an exercise price of not less than 85% of
fair market value on the grant date,

- - the stock issuance program under which those individuals may
be issued shares of common stock directly through the purchase
of the shares at a price, not less than 100% of fair market
value at issuance, and

- - the automatic option grant program 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 the fair market value of
those shares on the grant date.

CHANGE IN CONTROL. Our stock option/stock issuance plan includes provisions
which allow for accelerated vesting of outstanding option grants and stock
issuances if we have a change in control. Some of those provisions include:

- - If we are 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 company will automatically vest in full. Similarly,
unless we assign the repurchase rights associated with any
unvested shares under the stock issuance program to that
company, such unvested shares will vest in full. Any
outstanding options assumed by the successor company and
shares that remain subject to repurchase rights assigned to
the successor company will not vest immediately, but will vest
in accordance with their original vesting schedule.

- - The plan administrator may, under the discretionary option grant and
stock issuance programs, grant options and structure repurchase rights
so that the shares subject to those options or repurchase rights will
automatically vest if the individual's service is terminated, whether
involuntarily or through a resignation for good reason, within a period
of not more than 18 months following a corporate transaction. A
corporate transaction, for purposes of our stock option/stock issuance
plan is a merger or asset sale in which those options are assumed or
those repurchase rights are assigned, a hostile change in control
through a successful tender offer for more than 50% of the our
outstanding voting stock or by proxy contest for the election of our
board members or the sale, transfer or disposition of all or
substantially all of our assets.

- - The plan administrator may also provide for the automatic acceleration
of options and the lapse of any repurchase rights upon a hostile change
in control through a successful tender offer for more

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than 50% of our outstanding voting stock or by proxy contest for the
election of our board members or the termination of the individual's
service, whether involuntarily or through a resignation for good
reason, within a period of not more than 18 months following such a
hostile change in control. The unvested portion of any options
assumed by the successor company will automatically accelerate upon
the involuntary termination of the option holder's service within 18
months following the occurrence of a corporate transaction described
above in which the options are assumed or replaced by the successor
company.

ADMINISTRATION. The discretionary option grant program and the stock issuance
program are by our board of directors or our compensation committee of the board
of directors. This committee determines who receives option grants or stock
issuances, the timing of the grants or issuances, the number of shares subject
to each grant or issuance, whether an option is an incentive stock option or a
non-statutory stock option under the Federal tax laws, the vesting schedules and
how long the option may remain outstanding. The automatic option-grant program
is self-executing.

PLAN FEATURES. Our stock option/stock issuance plan includes the following
features:

- - The exercise price for any options granted under the plan may
be paid in cash or in shares of common stock valued at fair
market value on the exercise date. The option may also be
exercised through a same-day sale program without any cash
outlay by the option holder.

- - The compensation committee may cancel outstanding options
under the discretionary option grant program and in return
grant new options with an exercise price per share based upon
the fair market value of our common stock on the new grant
date.

- - Stock appreciation rights may be issued under the
discretionary option grant program. These rights will provide
the holders with the election to surrender their outstanding
options for an an amount equal to the fair market value of the
vested shares of common stock subject to the surrendered
option minus the exercise price payable for those shares. We
may make the payment in cash or in shares of common stock.

AUTOMATIC OPTION GRANT PROGRAM. Upon becoming a board member, non-employee board
members automatically receive an option grant for 15,000 shares on the date he
or she joins the board, unless he or she has not previously been employed by us.
In addition, after that initial grant, on the date of each annual shareholders
meeting, each non-employee board member who has served as a non-employee board
member since the date of the last annual shareholders meeting will automatically
be granted an option to purchase 5,000 shares of common stock.

Each automatic grant will have a term of ten years, unless the options terminate
earlier if the board member ceases board service. The initial 15,000 share
option will vest in successive equal monthly installments over 48 months of
board service. The shares subject to 5,000 share automatic option grant will
vest at the end of each additional year of board service completed by the
director.

AMENDMENT. Our board may amend or modify the stock option/stock issuance plan at
any time. The plan will terminate 10 years from its effective date unless
terminated earlier by the board.

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EMPLOYEE STOCK PURCHASE PLAN

INTRODUCTION. Our employee stock purchase plan was adopted by our board and was
subsequently approved by our stockholders in February 1997. The purchase plan is
designed to allow eligible employees to purchase shares of common stock, at
semi- annual intervals, through periodic payroll deductions.

SHARE RESERVE. A reserve of 200,000 shares of common stock has been established
for this purpose.

PURCHASE PERIODS. The purchase plan will be implemented in a series of
successive offering periods, each with a maximum duration of 24 months. The most
recent offering period started on March 31, 1999.

ELIGIBLE EMPLOYEES. Eligible employees on the start date of any offering period
may enter the purchase plan on that start date or on 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 the next April 1 or October 1
within that period.

PAYROLL DEDUCTIONS. 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
participant's behalf on each semi-annual purchase date - the last business day
of March and September each year. The purchase price per share cannot be less
than 85% of the lower of the fair market value of the common stock on the
participant's entry date into the offering period or the fair market value of
the common stock on the semi-annual purchase date - April 1 or October 1. 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

Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. However, such liability is not limited
for:

- - a breach of the director's duty of loyalty to us or our stockholders,

- - acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,

- - unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided by Delaware law or

- - any transaction from which the director derived an improper personal
benefit.

In addition, our bylaws require us to indemnify our directors and officers, and
allow us to indemnify our other employees and agents, to the fullest extent
permitted by law. We have also entered into agreements to indemnify our
directors and executive officers. We believe that these provisions and
agreements are necessary to attract and retain qualified directors and executive
officers. At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent where indemnification will be required or
permitted. We are not aware of any threatened litigation or proceeding that
might result in a claim for such indemnification. Insofar as indemnification for
liabilities arising under the Securities act may be permitted to directors,
officers or persons controlling our company under the foregoing provisions, we
have been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.

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CERTAIN TRANSACTIONS

Our registration statement on Form S-1 under which we completed our initial
public offering was declared effective on July 2, 1997. As part of the IPO, each
four shares of our preferred stock automatically converted into three shares of
common stock and all outstanding warrants to purchase shares of our preferred
stock automatically converted into the right to acquire a number of shares of
common stock, adjusted for the three-for-four reverse stock split, at the same
exercise price.

Holders of converted preferred stock are entitled to registration rights with
respect to the common stock issued upon conversion of the preferred stock.

In September 1994, we entered into a license agreement with Allen Newman,
currently one of our executive officers, under which Mr. Newman granted us an
exclusive license to use some of his technology. In December 1996, we entered
into a license agreement with Urohealth Systems, Inc. under which we 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 under which we agreed
to provide Mr. Newman's services as a consultant to Urohealth. The Newman
license agreement was amended in December 1996 to permit us to sublicense the
Newman technology to Urohealth. In connection with the amendment of the Newman
license agreement, we paid Mr. Newman $200,000 and agreed to pay Mr. Newman 50%
of the royalties received from Urohealth. Previously, we made advance royalty
payments of $37,500 to Mr. Newman in connection with the initial license
agreement.

In November 1996, we issued 2,000,000 shares of our Series C preferred stock at
a price of $5.00 per share to Medtronic in connection with the strategic
alliance which we entered into with them providing for the distribution and
co-promotion of our current and future visualization and information systems for
heart surgery, including the Series 8000. For an in-depth discussion of our
relationship with Medtronic and a description of this strategic alliance, please
see "Business - Strategic Alliances," and "Risk Factors - We are dependent on
Medtronic, Sofamor Danek and other distribution partners to sell our products."

In January 1998, we entered into an exclusive distribution agreement appointing
Sofamor Danek, a subsidiary of Medtronic, as our exclusive worldwide distributor
for current and future visualization and information systems for StereoSite
Systems. In April 1999 our distribution agreement with Sofamor Danek was amended
to become non-exclusive to allow us to appoint additional distributors. We also
entered into a cooperative technology agreement with Sofamor Danek. For an
in-depth discussion of our relationship with Sofamor Danek and a description of
the agreements with Sofamor Danek, please see "Business - Strategic Alliances,"
and "Risk Factors - We are dependent on Medtronic, Sofamor Danek and other
distribution partners to sell our products.

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

We believe that all of the transactions set forth above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. We expect that all future transactions between us and our 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 us than could be obtained from
unaffiliated third parties.

Our certificate of incorporation eliminates, subject to various exceptions,
directors' personal liability to us or our stockholders for monetary damages for
breaches of fiduciary duties. The certificate of incorporation does not,
however, eliminate or limit the personal liability of a director for any breach
of the director's duty of loyalty to us or our stockholders, acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or any transaction from which the director derived an improper personal benefit.

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<PAGE>

Our bylaws provide that we must indemnify our directors and executive officers
to the fullest extent permitted under the Delaware General Corporation Law and
may indemnify our other officers, employees and other agents as set forth in the
Delaware General Corporation Law. In addition, we have entered into
indemnification agreements with our directors and officers. The indemnification
agreements contain provisions that require us, among other things, to indemnify
our directors and executive officers against various 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 or other entities to which they provide service at our request and to
advance expenses they may incur as a result of any proceeding against them as to
which they could be indemnified. We believe that these provisions and agreements
are necessary to attract and retain qualified directors and officers. We have
obtained an insurance policy covering directors and officers for claims that
such directors and officers may otherwise be required to pay or for which we are
required to indemnify them, subject to various exclusions.

As of the date of this prospectus, there is no pending litigation or proceeding
involving any of our directors, officers, employees or other agents as to which
indemnification is being sought, nor are we aware of any pending or threatened
litigation that may result in claims for indemnification by any director,
officer, employee or other agent.

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PRINCIPAL STOCKHOLDERS

The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of August 15, 1999, as adjusted to
reflect the sale of common stock offered in this offering, by:

- - each person, or group of affiliated persons, known by us to
own beneficially more than 5% of our outstanding common stock,

- - each director,

- - our Chief Executive Officer and four other most highly compensated
executive officers, and

- - all directors and executive officers as a group.

Except as indicated in the footnotes to the following table, the persons named
in the table have sole voting and investment power with respect to all shares of
our common stock shown as beneficially owned by them, subject to community
property laws, where applicable. Share ownership in each case includes shares
issuable upon exercise of outstanding options as described in the footnotes
below. Percentage of ownership in the following table is calculated under the
Securities and Exchange Commission's Rule 13d-3(d)(1). The address for those
individuals for which an address is not otherwise indicated is: 5451 Avenida
Encinas, Suite A, Carlsbad, California 92008.

<TABLE>

PERCENTAGE PERCENTAGE
BENEFICIALLY BENEFICIALLY
OWNED OWNED
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES (PRE-OFFERING) (POST-OFFERING)
- ----------------------------------------------- ---------------- -------------- ---------------
<S> <C> <C> <C>
Funds advised by Domain Associates, L.L.C. (1). 1,878,320 13.2% 8.8%
One Palmer Square
Princeton, NJ 08542

SBIC Partners, L.P............................. 1,633,625 11.4% 7.7%
201 Main Street, Suite 2302
Fort Worth, TX 76102

Medtronic Asset Management, Inc................ 1,600,000 11.2% 7.5%
7000 Central Avenue NE
Minneapolis, MN 55432

Foster City Partners........................... 1,551,944 10.9% 7.3%
950 Tower Lane, Suite 800
Foster City, CA 94404

Biotechnology Investments Limited (BIL)........ 926,736 6.5% 4.4%
Post Office Box 58
St. Julian's Court
St. Peter Port
Guernsey, Channel Islands

Dimensional Fund Advisors...................... 750,100 5.3% 3.5%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401

One Liberty Fund III, L.P...................... 646,915 4.5% 3.0%
1 Liberty Square, 2nd Floor
Boston, MA 02109

James C. Blair (1)............................. 1,878,320 13.2% 8.8%

John R. Lyon (2)............................... 425,319 3.0% 2.0%

Olav B. Bergheim (3)........................... 24,500 * *

Nicholas B. Binkley (4)........................ 1,644,125 11.5% 7.7%

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Daniel J. Holland (5).......................... 672,415 4.7% 3.2%

Larry Osterink (6)............................. 144,500 1.0% *

Koichiro Hori (7).............................. 284,630 2.0% 1.3%

Allen Newman (8)............................... 217,159 1.5% 1.0%

Robert J. De Vaere (9)......................... 76,655 * *

All directors and executive officers as a group
(9 persons) (10)............................ 5,367,623 37.6% 25.2%

</TABLE>

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

(1) Includes 5,000 shares issuable upon exercise of options exercisable
within 60 days of August 15, 1999. Also includes 1,767,787 shares
beneficially owned by Domain Partners III, L.P., 19,161 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, L.L.C. 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, L.P. Dr. Blair has an
indirect beneficial ownership of these shares. Dr. Blair is a managing
member of Domain Associates, L.L.C. Excludes 926,736 shares
beneficially owned by Biotechnology Investments Limited. Under a
contractual agreement, Domain Associates, L.L.C. is the U.S. venture
capital advisor to Biotechnology Investments Limited. Domain
Associates, L.L.C. has neither voting nor investment power over
Biotechnology Investments Limited and Dr. Blair and Domain Associates,
L.L.C. disclaim beneficial ownership of the Biotechnology Investments
Limited shares.

(2) Includes 251,791 shares issuable upon exercise of options exercisable
within 60 days of August 15, 1999.

(3) Includes 5,000 shares issuable upon exercise of options exercisable
within 60 days of August 15, 1999. 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.

(4) Includes 6,500 shares issuable upon exercise of options exercisable
within 60 days of August 15, 1999. Also includes 4,000 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 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, is the
managing general partner of SBIC Partners, and Forrest Binkley & Brown
Venture Co., a Texas corporation, is the sole general partner of
Forrest Binkley & Brown. Mr. Binkley is a limited partner of Forrest
Binkley & Brown, 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.

(5) Includes 1,000 shares owned by Mr. Holland and 24,500 shares issuable
upon exercise of options exercisable within 60 days of August 15, 1999.
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.

(6) Includes 24,500 shares issuable upon exercise of options exercisable
within 60 days of August 15, 1999.

(7) Includes 80,334 shares issuable upon exercise of options exercisable
within 60 days of August 15, 1999.

(8) Includes 140,334 shares issuable upon exercise of options exercisable
within 60 days of August 15, 1999.

(9) Includes 14,688 shares issuable upon exercise of options exercisable
within 60 days of August 15, 1999.

(10) Includes 552,647 shares issuable upon exercise of options exercisable
within 60 days of August 15, 1999. See also footnotes 3, 6 and 7.

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DESCRIPTION OF CAPITAL STOCK

GENERAL

We are authorized to issue 35,000,000 shares of common stock, $.01 par value per
share and 5,000,000 shares of undesignated preferred stock, $.01 par value per
share. The following describes our capital stock but does not purport to be
complete and is subject to and qualified in its entirety by our certificate of
incorporation and our bylaws, and by the provisions of applicable Delaware law.

COMMON STOCK

As of August 15, 1999, there were 13,720,716 shares of our common stock
outstanding which were held of record by approximately 3,200 stockholders.
Holders of common stock are entitled to one vote for each share held of record
on all matters to be voted on by 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 any dividends as may be declared by
the board out of funds legally available for that purpose. All outstanding
shares of common stock are fully paid and nonassessable.

PREFERRED STOCK

Our board has the authority, without action by the stockholders, to designate
and issue up to 5,000,000 shares of preferred stock in one or more series and to
fix the rights, priorities and preferences. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until our board determines the specific rights of
the holders of such preferred stock. However, the effects might include, among
other things, restricting dividends on the common stock, diluting the voting
power of the common stock, impairing the liquidation rights of the common stock
and delaying or preventing a change in control without further action by our
stockholders. We have no present plans to issue any preferred stock.

WARRANTS

As of August 15, 1999, there was one warrant outstanding to purchase a total of
27,184 shares of common stock. The warrant is held by Silicon Valley Bank and is
currently exercisable at $12.88 per share.

REGISTRATION RIGHTS

Under the terms of an Investor Rights Agreement with some of our stockholders,
the holders of approximately 7,424,317 shares of our common stock hold
registration rights with respect to such shares. Under the terms of the
agreement, if we propose to register any of our stock under the Securities Act,
such holders are entitled to request that we register their shares, subject to
the underwriters' right to limit the number of shares included in such
registration. In addition, holders of at least 40% of shares with demand
registration rights may require us to register their shares under the Securities
Act subject to conditions and limitations. We are 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 our securities, including
this offering. These same holders may also request us to register such shares on
Form S-3 provided the shares registered have an aggregate market value of at
least $500,000 and if we are eligible to file on Form S-3. We are not obligated
to effect more than two of these registrations on Form S-3 per year. Generally,
we must bear the expense of all such registrations. These registration rights
expire on the seventh anniversary of our initial public offering or, at such
time as all shares held by a party can be sold within any three-month period
under Rule 144. All rights of the holders to require registration of the resale
of their shares in connection with this offering have been waived.

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POSSIBLE ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS

CERTIFICATE OF INCORPORATION AND BYLAWS

Our certificate of incorporation authorizes our board of directors 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. The 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. Our bylaws
provide that the board will be classified into three classes of directors. For a
description of this classification and to determine in which class each director
serves, please see "Management--Executive Officers and Directors." In addition,
our bylaws do not permit our stockholders to call a special meeting of
stockholders; only our chief executive officer, president, chairman of the board
or a majority of the board are permitted to call a special meeting of
stockholders. Our bylaws also require that stockholders give advance notice to
our 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 bylaw provisions. These
provisions could discourage potential acquisition proposals and could delay or
prevent a change in control. Such provisions may also have the effect of
preventing changes in our management.

DELAWARE TAKEOVER STATUTE

We are subject to Section 203 of the Delaware General Corporation Law which,
subject to various 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:

- - prior to such time, the board of directors of the corporation
approved either the business combination or the transaction
that resulted in the stockholder becoming an interested
stockholder;

- - upon consummation of the transaction that resulted in the
stockholder 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 by persons who are directors
and also officers and 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

- - 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.

Section 203 defines business combination to include:

- - any merger or consolidation involving the corporation and the
interested stockholder;

- - any sale, lease, exchange, mortgage, transfer, pledge or other
disposition involving the interested stockholder and 10% or
more of the assets of the corporation;

- - subject to exceptions, any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;

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- - 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

- - 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

Our transfer agent and registrar for the common stock is Boston EquiServe.

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SHARES ELIGIBLE FOR FUTURE SALE

The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market after this offering, or
the perception that such sales could occur. Such sales also might make it more
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate. After this offering--based upon shares outstanding as
of August 15, 1999--20,720,716 shares of common stock will be outstanding. Of
the 20,720,716 outstanding shares, the 7,000,000 shares of common stock sold in
this offering will be freely tradable upon sale, unless those shares are
purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act. In addition, the 4,000,000 shares of common stock that we sold
in our initial public offering and the shares which resulted from the exercise
of stock options which were covered by a registration statement on Form S-8 are
freely tradeable. The remaining 8,780,679 shares of our common stock were issued
and sold by us in reliance on exemptions from the registration requirements of
the Securities Act. These shares may be sold in the public market only if they
are registered or if they qualify for an exemption from registration, such as
Rule 144 or 701 under the Securities Act, which are summarized below and are
thus called "restricted shares."

STOCK PLANS

As of August 15,1999, options to purchase a total of 1,306,959 shares of our
common stock were outstanding and immediately exercisable, of which 690,059
shares are currently vested. Shares issued upon the exercise of stock options
granted under our stock option plans will be eligible for resale in the public
market from time to time subject to vesting and, in the case of some options,
the expiration of the lock-up agreements referred to above.

REGISTRATION RIGHTS

Holders of approximately 7,424,317 shares of common stock or warrants to
purchase common stock have registration rights, subject to conditions and
limitations. By exercising their registration rights and causing a large number
of shares to be registered and sold in the public market, these holders may
cause the price of the common stock to fall. In addition, any demand to include
such shares in our registration statements could have an adverse effect on our
ability to raise needed capital. For a description of these rights, please see
"Description of Securities--Registration Rights."

SUMMARY OF RULE 144

In general, under Rule 144, as currently in effect, an affiliate of us or a
person who has beneficially owned shares for at least one year is entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of common stock, which is
approximately 207,207 shares immediately after this 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 is filed, subject to
restrictions. In addition, a person who is not deemed to have been our affiliate
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from one of our affiliates, such
person's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate. Securities issued in
reliance on Rule 701, such as shares of common stock that may be acquired
pursuant to the exercise of some options granted prior to this offering, are
also restricted securities and may be sold by stockholders other than our
affiliates subject only to the manner of sale provisions of Rule 144 and by our
affiliates under Rule 144 without compliance with its one-year holding period
requirement.

-60-
<PAGE>

PLAN OF DISTRIBUTION

The common stock is being offered directly by us to a limited number of
investors. We will determine the price of the common stock through negotiations
between us and the purchasers which will take place after effectiveness of the
registration statement. We will not accept any investor funds prior to
effectiveness of the registration statement. The price of the common stock we
offer could be below the current market price. This would result in dilution to
existing stockholders. It could also have an adverse effect on the market for
our stock. We cannot be certain that we will be able to sell all of the shares
offered, and it is possible we will close this offering for less than the
7,000,000 shares being offered.

Our chief executive officer, with the assistance of other officers as needed,
will participate in the sale of the common stock to the investors. These
officers will not receive any compensation for these activities. They will not
be deemed to be brokers pursuant to Rule 3a4-1 under the Exchange Act. They will
seek to identify prospective investors from among institutional and other
potential investors known to have investments in the health-care or medical
device industry, as well as current stockholders who may be interested in
increasing their investment in us. No broker-dealers will participate as
potential investors.

On the closing date, all investor funds will be transmitted directly to us. Upon
receipt of such funds, we will instruct our transfer agent to deliver the shares
of common stock to the purchasers. The offering will not continue after the
closing date.

In order to comply with the securities laws of some states, if applicable, the
common stock will be sold in these jurisdictions only through registered or
licensed brokers or dealers.

We will pay all the expenses for the offering and the sale of the common stock
to the public. We estimate those expenses to be $194,000.

LEGAL MATTERS

Brobeck, Phleger & Harrison LLP, San Diego, California, is giving its opinion on
the validity of the shares you are purchasing in this offering.

EXPERTS

The consolidated financial statements of Vista Medical Technologies, Inc. at
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998, appearing elsewhere in this prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon, which contain an explanatory paragraph
describing conditions that raise substantial doubt about our ability to continue
as a going concern as described in Note 1 to the consolidated financial
statements appearing elsewhere in this prospectus and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. We have also filed with
the Securities and Exchange Commission a registration statement on Form S-1 to
register the shares of common stock being offered in this prospectus. This
prospectus, which forms part of the registration statement, does not contain all
of the information included in the registration statement. For further
information about us and the shares of common stock offered in this prospectus,
you should refer to the registration statement and its exhibits and our other
Securities and Exchange Commission filings. You may read and copy any documents
we file at the Securities and Exchange Commission's public reference rooms in

-61-
<PAGE>

Washington, D.C., New York and Chicago, Illinois. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the public
reference rooms. Our Securities and Exchange Commission filings are also
available to the public from the Securities and Exchange Commission's website at
http://www.sec.gov.

-62-
<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, 1997 and 1998 and at June 30, 1999 (unaudited)........... F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998
and the six months ended June 30, 1999 (unaudited) and 1998 (unaudited).............................. F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1997 and 1998 and the six months ended June 30, 1999 (unaudited)..................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998
and the six months ended June 30, 1999 (unaudited) and 1998 (unaudited).............................. F-7
Notes to Consolidated Financial Statements........................................................... F-8

</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of Vista Medical
Technologies, Inc. as of December 31, 1997 and 1998 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1997 and 1998 and the results of its
consolidated operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.

As discussed in Note 1 to the financial statements, Vista Medical Technologies,
Inc. has reported accumulated losses aggregating $47.2 million and lacks
sufficient working capital to enable the Company to fund operations through the
end of 1999, which raises substantial doubt about its ability to continue as a
going concern. Management's plans as to these matters are described in Note 1.
The 1998 financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.

/s/ Ernst & Young LLP

San Diego, California
January 31, 1999, except for Note 11,
as to which the date is April 19, 1999

F-2
<PAGE>

VISTA MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

DECEMBER 31,
------------------------------------- JUNE 30,
1997 1998 1999
---------------- ----------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 7,328,502 $ 7,625,804 $ 3,777,521
Short-term investments........................... 16,784,345 1,176,800 439,372
Accounts receivable, net......................... 521,616 752,233 952,053
Inventories, net................................. 3,344,967 4,354,338 4,060,216
Other current assets............................. 261,864 157,443 89,975
---------------- ----------------- ---------------
Total currents assets.............................. 28,241,294 14,066,618 9,320,137
Property and equipment, net........................ 3,327,283 2,056,535 1,709,119
Patents and other assets, net...................... 561,873 481,594 370,830
---------------- ----------------- ---------------
TOTAL ASSETS....................................... $ 32,130,450 $ 16,604,747 $ 11,400,086
---------------- ----------------- ---------------
---------------- ----------------- ---------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 1,217,110 $ 552,441 $ 1,054,410
Accrued compensation............................. 516,743 300,807 425,726
Accrued liabilities.............................. 665,285 1,085,009 896,124
---------------- ----------------- ---------------
Total current liabilities 2,399,138 1,938,257 2,376,260
Commitments
Stockholders' equity:
Convertible preferred stock, $.01 par value:
Authorized shares--5,000,000
No shares issued and outstanding.............. -- -- --
Common stock, $.01 par value:
Authorized shares--35,000,000..................
Issued and outstanding shares--13,407,038 in 1997,
13,572,101 in 1998 and 13,694,434 in June 1999 134,071 135,721 136,944
Additional paid-in capital....................... 62,531,513 62,856,201 62,919,318
Notes receivable from stockholders............... (78,375) (78,375) (78,375)
Deferred compensation............................ (1,942,074) (1,030,420) (777,742)
Unrealized gain/loss in investments.............. (416,313) 1,211 --
Accumulated deficit.............................. (30,497,510) (47,217,848) (53,176,319)
---------------- ----------------- ---------------
Total stockholders' equity......................... 29,731,312 14,666,490 9,023,826
---------------- ----------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $ 32,130,450 $ 16,604,747 $ 11,400,086
---------------- ----------------- ---------------
---------------- ----------------- ---------------

</TABLE>

See accompanying notes.

F-3
<PAGE>

VISTA MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, Six Months Ended June 30,
------------------------------------------------ ------------------------------
1996 1997 1998 1998 1999
--------------- -------------- -------------- ------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Sales $ 2,243,756 $ 4,141,082 $ 6,572,473 $ 4,314,241 $ 2,190,664
Costs and expenses:
Costs of sales..................... 2,252,509 4,559,521 6,119,108 3,608,035 3,232,868
Research and development........... 3,880,069 6,875,069 5,479,788 3,187,325 1,997,003
Sales and marketing................ 2,056,767 5,010,953 5,953,102 3,445,784 1,892,731
General and administrative......... 3,103,256 5,498,820 5,039,183 2,859,632 1,234,975
Restructuring expense.............. -- -- 939,919 939,919 --
--------------- -------------- -------------- ------------- --------------
Total cost and expenses............... 11,292,601 21,944,363 23,531,100 14,040,696 8,357,577
--------------- -------------- -------------- ------------- --------------

Loss from operations.................. (9,048,845) (17,803,281) (16,958,627) (9,726,455) (6,166,913)

License income........................ 1,493,000 -- -- -- --
Interest income....................... 116,706 926,243 900,379 583,047 157,818
Other losses.......................... -- -- (662,090) (638,000) 50,625

Net loss.............................. $ (7,439,139) $ (16,877,038) $ (16,720,338) $ (9,781,408) $ (5,958,470)
--------------- -------------- -------------- ------------- --------------
--------------- -------------- -------------- ------------- --------------
Basic and diluted loss per share...... $ (37.01) $ (2.51) $ (1.26) $ (0.74) $ (0.44)
--------------- -------------- -------------- ------------- --------------
--------------- -------------- -------------- ------------- --------------
Shares used in basic and diluted loss
per share computations............. 201,000 6,731,000 13,312,366 13,265,196 13,537,059
--------------- -------------- -------------- ------------- --------------
--------------- -------------- -------------- ------------- --------------

</TABLE>

See accompanying notes.

F-4

<PAGE>

VISTA MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Convertible Notes
preferred 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, 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..... -- -- 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....................... -- -- 150,273 1,503 61,901 -- --
Issuance of common stock for
services................... -- -- 3,000 30 19,980 -- --
Payments on notes receivable
from stockholders.......... -- -- -- -- -- 15,000 --
Issuance of common stock in
conjunction with the
initial public offering at
$9.00 per share............ -- -- 4,000,000 40,000 32,554,990 -- --
Conversion of convertible
preferred stock in
conjunction with the
initial public offering.... (11,574,252) (115,74) 8,680,679 86,807 28,935 -- --
Issuance of stock under
employee stock purchase
plan....................... -- -- 7,085 71 54,129 -- --
Issuance of common stock for
technology license......... -- -- 27,777 278 249,715 -- --
Deferred compensation......... -- -- -- -- 946,640 -- (946,640)
Amortization of deferred
compensation............... -- -- -- -- -- -- 1,066,115
Unrealized gain (loss) on
investments................ -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
------------- --------- ----------- --------- ------------ --------- ------------

Balance at December 31, 1997.. -- -- 13,407,038 134,071 62,531,513 (78,375) (1,942,074)
------------- --------- ----------- --------- ------------ --------- ------------
------------- --------- ----------- --------- ------------ --------- ------------

<CAPTION>
Unrealized Accumulated Comprehensive
Gain (Loss) Deficit Total Income
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.. $ -- $ (6,181,33) $ 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..... -- -- 14,120
Deferred compensation......... -- -- --
Amortization of deferred
compensation............... -- -- 447,262
Net loss...................... -- (7,439,139) (7,439,139) (7,439,139)
----------- ------------- ------------- -------------

Balance at December 31, 1996.. -- (13,620,472) 12,960,951 (7,439,139)
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
Exercise of stock options for
cash....................... -- -- 63,404
Issuance of common stock for
services................... -- -- 20,010
Payments on notes receivable
from stockholders.......... -- -- 15,000
Issuance of common stock in
conjunction with the
initial public offering at
$9.00 per share............ -- -- 32,594,990
Conversion of convertible
preferred stock in
conjunction with the
initial public offering.... -- -- --
Issuance of stock under
employee stock purchase
plan....................... -- -- 54,200
Issuance of common stock for
technology license......... -- -- 249,993
Deferred compensation......... -- -- --
Amortization of deferred
compensation............... -- -- 1,066,115
Unrealized gain (loss) on
investments................ (416,313) -- (416,313) (416,313)
Net loss...................... -- (16,877,038) (16,877,038) (16,877,038)
----------- ------------- ------------- -------------

Balance at December 31, 1997.. (416,313) (30,497,510) 29,731,312 (17,293,351)
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------

F-5
<PAGE>

Convertible Notes
preferred stock Common stock Additional Receivable
----------------------- ---------------------- Paid-in From Deferred
Shares Amount Shares Amount Capital Stockholders Compensation
------------ --------- ----------- --------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock options for
cash....................... -- -- 119,627 1,196 60,626 -- --
Issuance of stock under
employee stock purchase
plan....................... -- -- 45,436 454 202,870 -- --
Issuance of warrant in
connection with credit
facility................... -- -- -- -- 134,833 -- --
Deferred compensation......... -- -- -- -- (73,641) -- 213,058
Amortization of deferred
compensation............... -- -- -- -- -- -- 698,596
Adjustments to unrealized
gain (loss) on investments
resulting from realization
of loss on investment...... -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
------------ --------- ----------- --------- ------------ ------------ --------------

Balance at December 31, 1998.. 0 0 13,572,101 135,721 62,856,201 (78,375) (1,030,420)
------------ --------- ----------- --------- ------------ ------------ --------------
------------ --------- ----------- --------- ------------ ------------ --------------
Exercise of stock options for
cash (Unaudited)........... -- -- 101,775 1,018 28,374 -- --
Issuance of Stock under
employee stock purchase
plan (Unaudited)........... -- -- 20,558 206 34,743 -- --
Amortization of deferred
compensation (Unaudited)... -- -- -- -- -- -- 252,678
Unrealized gain(loss) on
Investments (Unaudited).... -- -- -- -- -- -- --
Net Loss (Unaudited).......... -- -- -- -- -- -- --

Balance at June 30, 1999
(Unaudited)................ 0 $ 0 13,694,434 $ 136,944 62,919,318 $ (78,375) $ (777,742)
------------ --------- ----------- --------- ------------ ------------ --------------
------------ --------- ----------- --------- ------------ ------------ --------------

Unrealized Accumulated Comprehensive
Gain (Loss) Deficit Total Income
----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>

Exercise of stock options for
cash....................... -- -- 61,822
Issuance of stock under
employee stock purchase
plan....................... -- -- 203,324
Issuance of warrant in
connection with credit
facility................... -- -- 134,833
Deferred compensation......... -- -- 139,417
Amortization of deferred
compensation............... -- -- 698,569
Adjustments to unrealized
gain (loss) on investments
resulting from realization
of loss on investment...... 417,524 -- 417,524 417,524
Net loss...................... -- (16,720,338) (16,720,338) (16,720,338)
----------- ------------- ------------- ---------------

Balance at December 31, 1998.. 1,211 (47,217,848) 14,666,490 (16,302,814)
----------- ------------- ------------- ---------------
----------- ------------- ------------- ---------------
Exercise of stock options for
cash (Unaudited)........... -- -- 29,392 --
Issuance of Stock under
employee stock purchase
plan (Unaudited)........... -- -- 34,949 --
Amortization of deferred
compensation (Unaudited)... -- -- 252,678 --
Unrealized gain(loss) on
Investments (Unaudited).... (1,211) -- (1,211) (1,211)
Net Loss (Unaudited).......... -- (5,958,471) (5,958,471) (5,958,471)

Balance at June 30, 1999
(Unaudited)................ $ 0 $ (53,176,319) $ 9,023,826 $(22,262,496)
----------- ------------- ------------- ---------------
----------- ------------- ------------- ---------------
</TABLE>

See accompanying notes.

F-6
<PAGE>

VISTA MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30
-------------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ------------- -------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $(7,439,139) $(16,877,038) $(16,720,338) $(9,781,408) $ (5,958,470)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization................. 351,256 1,260,707 2,380,772 1,031,569 516,613
Amortization of premium on short-term
investments................................. -- 129,631 128,346 97,124 (301)
Stock issued for services rendered............ -- 20,010 -- -- --
Non-cash restructuring charges................ -- 139,417 -- --
Amortization of deferred compensation......... 447,262 1,066,115 698,596 517,481 252,678
Amortization of deferred interest expense
related to stock warrants................... -- -- 26,964 -- --
Loss on disposal of fixed assets.............. -- -- -- 290,410 --
Write-down for impairment on available for sale
securities.................................. -- -- 662,090 638,000 --
Common stock received in exchange for license
agreement................................... (693,000) 249,993 -- -- --
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable....................... (126,752) 4,503 (230,617) (746,329) (200,820)
Inventories............................... (405,706) (2,132,142) (1,009,371) (1,357,168) 294,122
Other currents assets..................... (64,105) (125,464) 104,421 325,275 158,378
Accounts payable.......................... 171,714 609,471 (664,669) 91,429 501,969
Accrued compensation...................... 79,133 290,200 (215,936) 227,996 124,919
Accrued liabilities....................... 488,591 9,868 523,680 339,578 (188,885)
------------ ------------- -------------- ------------ ------------
Net cash flows used for operating activities....... (6,937,242) (15,494,146) (14,176,645) (8,326,043) (4,499,797)
INVESTING ACTIVITIES
Purchase of short-term investments................. -- (23,689,018) (2,291,745) (724,366) (263,482)
Maturities of short-term investments............... -- 7,080,000 17,770,944 8,950,000 1,000,000
Increase in patent and other assets................ (17,895) -- (250,000) -- --
Purchase of property and equipment................. (1,220,888) (3,415,457) (1,020,397) (487,445) (149,343)
------------ ------------- -------------- ------------ ------------
Net cash flows (used for) provided by investing
activities......................................... (1,238,783) (20,024,475) 14,208,802 7,738,189 587,175
FINANCING ACTIVITIES
Payments on shareholder notes receivable........... -- 15,000 -- -- --
Issuance of common stock, net...................... 14,120 32,712,594 265,145 184,694 64,339
Issuance of convertible preferred stock, net....... 15,047,259 -- -- -- --
------------ ------------- -------------- ------------ ------------
Net cash flows provided by financing activities.... 15,061,379 32,727,594 265,145 184,694 64,339
Net (decrease) increase in cash and cash equivalents 6,885,354 (2,791,027) 297,302 (403,160) (3,848,283)
Cash and cash equivalents at beginning of period... 3,234,175 10,119,529 7,328,502 7,328,502 7,625,804
------------ ------------- -------------- ------------ ------------
Cash and cash equivalents at end of period......... $10,119,529 $ 7,328,502 7,625,804 $6,925,342 $ 3,777,521
------------ ------------- -------------- ------------ ------------
------------ ------------- -------------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest............................. $ 183 $ -- $ 776 $ -- $ --
------------ ------------- -------------- ------------ ------------
------------ ------------- -------------- ------------ ------------
Exercise of stock options for stockholder notes
receivable......................................... $ 63,750 $ -- $ -- $ -- $ --
------------ ------------- -------------- ------------ ------------
------------ ------------- -------------- ------------ ------------
Issuance of convertible preferred stock in
conjunction with acquisitions...................... $ 184,000 $ -- $ -- $ -- $ --
------------ ------------- -------------- ------------ ------------
------------ ------------- -------------- ------------ ------------
</TABLE>

See accompanying notes.

F-7
<PAGE>

VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998

(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 AND PERTAINING TO JUNE 30, 1999
AND THE SIX MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 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 and
develops, manufactures and markets proprietary 3-D visualization and
information systems that enable minimally invasive surgical solutions in
heart, head, neck and spine and other selected microsurgical procedures.
Vista Medical's visualization and information systems bring together
head-mounted display technology originally developed for applications in
military aerospace by Kaiser Aerospace and Electronics Corporation and
three-dimensional imaging capability from its acquisition of Oktas, Inc.

LIQUIDITY

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company believes that its
current cash, cash equivalents and short-term investments of $8.8 million as
of December 31, 1998, together with anticipated product revenues and interest
income, will be sufficient to meet its anticipated capital requirements
through August, 1999. Substantial additional capital resources will be
required to fund continuing expenditures related to the Company's research,
development, manufacturing and commercialization of new products, and
Management estimates $4,000,000 in additional financing will be required to
fund operations through December 31, 1999. The Company believes there may be
a number of alternatives available to meet the continuing capital
requirements of its operations, such as additional collaborative agreements
and public or private equity or debt financings, and is actively pursuing all
of these approaches. However, there can be no assurance that the requisite
fundings will be consummated in the necessary time frame or on terms
acceptable to the Company. Should the Company be unable to raise sufficient
funds, the Company may be required to curtail its operating plans and
possibly relinquish rights to portions of the Company's technology or
products.

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES

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

INTERIM FINANCIAL INFORMATION

The financial statements for the six month periods ended June 30, 1998 and
1999 include all adjustments (consisting only of normal recurring
adjustments) which management considers necessary for a fair statement of the
financial

F-8
<PAGE>

Notes to Consolidated Financial Statements (continued)

position at such dates and the operating results and cash flows for
the periods. Results of interim periods are not necessarily indicative of
results for the entire year or any future periods.

REVENUE RECOGNITION

Revenues from product sales are recognized when products are shipped.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

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

The Company has adopted Statement of Financial Accounting Standards No. 115,
"ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES," and has
classified its cash equivalents and short-term investments as
available-for-sale in accordance with that standard. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net
of tax, reported in a separate component of stockholders' equity. At December
31, 1998, the cost of cash equivalents and short-term investments compared to
estimated fair value resulted in unrealized gains of $1,211.

As of December 31, 1997 and 1998 and June 30, 1999, the Company's cash, cash
equivalents and short-term investments were classified as available-for-sale
and consisted of:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1998 JUNE 30, 1999
------------------------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Cash $ 573,223 $ 159,469 $ 53,649
Money market funds 3,789,419 7,499,558 3,741,244
Corporate bonds 16,588,437 1,018,577 --
Commercial paper 2,996,768 -- --
Certificates of deposit 165,000 125,000 422,000
---------------------------------------------------
$ 24,112,847 $ 8,802,604 $ 4,216,893
===================================================
</TABLE>
All of the Company's debt securities mature in 1999.

CONCENTRATION OF CREDIT RISK

The Company provides credit, in the normal course of business, to commercial
entities that meet specified credit requirements. The Company's principal
customers consist of original equipment manufacturers and distribution
partners. The Company provides for losses from uncollectible accounts and
such losses have historically not exceeded management's expectations. As of
December 31, 1998, one customer comprised $360,527 or 48% of the outstanding
trade receivables. As of June 30, 1999, three customers comprised $411,510,
$259,637 and $152,000 or 43%, 27% and 16% of the outstanding trade
receivables, respectively.

INVENTORIES

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

F-9
<PAGE>

Notes to Consolidated Financial Statements (continued)

PROPERTY AND EQUIPMENT

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

PATENTS

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

IMPAIRMENT OF LONG-LIVED ASSETS

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

RESTRUCTURING EXPENSES

The Company recorded charges associated with restructuring expenses of
$940,000 during 1998. The restructuring expenses related primarily to
termination and severance payments to employees in connection with transfer
of sales and marketing responsibility in the U.S. for the Company's Series
8000 System for minimally invasive heart surgery to Medtronic, Inc., and in
connection with a general Company restructuring and work force reduction. The
write down of assets was related to a strategic decision to discontinue
distribution of a line of heart instruments and sutures earlier than
previously planned. The Company has made payments totaling approximately
$255,000 and $36,000 during 1998 and the first six-months of 1999,
respectively, and has a remaining liability of approximately $13,000 at June
30, 1999.

STOCK-BASED COMPENSATION

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

NEW ACCOUNTING STANDARDS

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

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

F-10
<PAGE>

Notes to Consolidated Financial Statements (continued)

2. BALANCE SHEET COMPONENTS

Inventories consists of the following:

<TABLE>
<CAPTION>
December 31,
1997 1998 June 30, 1999
---------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Parts and materials $ 2,152,878 $ 3,913,529 $ 3,219,664
Work in process 662,237 334,812 1,157,870
Finished goods 704,852 1,039,997 1,357,021
---------------------------------------------------------
3,519,967 5,288,338 5,734,555
Less: reserves (175,000) (934,000) (1,674,341)
---------------------------------------------------------
$ 3,344,967 $ 4,354,338 $ 4,060,216
=========================================================
</TABLE>

Property and equipment consists of the following:

<TABLE>
<CAPTION>
December 31,
1997 1998 June 30, 1999
----------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Machinery and equipment $ 1,400,892 $ 1,532,121 $ 1,539,408
Office computers, furniture and equipment 839,533 982,999 991,346
Marketing demonstration equipment 2,199,736 3,110,576 3,244,285
Investment in leased assets 206,011 -- --
Leasehold improvements 239,067 279,940 279,940
----------------------------------------------------------
4,885,239 5,905,636 6,054,979
Less: accumulated depreciation (1,557,956) (3,849,101) (4,345,860)
----------------------------------------------------------
$ 3,327,283 $ 2,056,535 $ 1,709,119
==========================================================
</TABLE>

Patents and other assets consists of the following:

<TABLE>
<CAPTION>
December 31,
1997 1998 June 30, 1999
----------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Investment in common stock $ 271,562 $ 30,910 $ --
Patents and other intangible assets 378,685 378,685 378,685
Prepaid royalties 57,500 307,500 307,500
---------------------------------------------------------
707,747 717,095 686,185
Less: accumulated amortization (145,874) (235,501) (315,355)
---------------------------------------------------------
$ 561,873 $ 481,594 $ 370,830
==========================================================
</TABLE>

3. MAJOR CUSTOMERS

Sales to individual customers exceeding 10% or more of revenues in the years
ended December 31, were as follows: during 1996 Pilling Weck, Amco, Inc. and
Linvatec Corporation accounted for 30%, 27% and 25% of revenues,
respectively; during 1997, Linvatec Corporation, Medtronic, Inc. and Aesculap
AG accounted for 25%, 19% and 10% of revenues, respectively; during 1998,
Sofamor Danek Group, Inc., Medtronic, Inc. and Aesculap AG accounted for 34%,
25% and 13% of revenues, respectively. Sales to individual customers
exceeding 10% or more of revenues in the six months ended June 30, 1998 and
1999 were as follows: during 1998 Sofamor Danek Group, Inc. and Medtronic,
Inc. accounted for 48% and 18% of revenues, respectively, during 1999
Aesculap AG, Medtronic, Inc., OEC Medical Systems, Inc., and Richard Wolf
GmbH accounted for 44%, 21%, 15% and 12% of revenues respectively.

F-11
<PAGE>

Notes to Consolidated Financial Statements (continued)

4. COMMITMENTS

The Company leases its corporate facilities and certain equipment under
operating leases that expire on various dates through 2002. Annual future
minimum lease payments as of December 31, 1998 are as follows:

<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
------------------------

1999 440,000
2000 406,000
2001 287,000
2002 126,000
-----------
$1,259,000
===========
</TABLE>

Rent expense was approximately $183,000, $342,000, $501,646 and $282,000 for
the years ended December 31, 1996, 1997 and 1998, and the six months ended
June 30, 1999, respectively.

5. LICENSE INCOME AND INVESTMENT IN COMMON STOCK

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

The fair value of the common stock declined to $30,910 at December 31, 1998.
In accordance with SFAS 115, management of the Company has determined, based
on its judgment of available facts, that this is a permanent decline in the
fair value of this investment and, accordingly, recognized a loss of $662,090
to write-down the asset to fair value.

In March 1999 the Company sold the common stock and recognized a gain of
$51,000 on the sale.

6. LINE OF CREDIT

In October 1997, the Company signed a loan and security agreement with a
bank, subject to maximum advances of $10 million, at an annual interest rate
of 1.5% above the bank's prime rate (the prime rate was 8.5% at December 31,
1997). The line of credit expired in October 1998, and there were no amounts
outstanding under the line of credit at the time of expiration. In
conjunction with the line of credit agreement, the Company issued a warrant
expiring in October 2002, to purchase 27,184 shares of common stock at
$12.875 per share. The value of the warrant was determined to be
approximately $135,000.

7. STOCKHOLDERS' EQUITY

1995 STOCK OPTION PLAN

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

F-12
<PAGE>

Notes to Consolidated Financial Statements (continued)

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 $153,000 of deferred compensation for options granted
during the year ended December 31, 1998, representing the fair value of stock
options granted to Company consultants and advisors in 1998. These options
vest over four years and the Company is recognizing this compensation expense
over the vesting period.

1997 STOCK OPTION PLAN/ STOCK ISSUANCE PLAN

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

At December 31, 1998 and June 30, 1999, 1,090,844 and 1,151,576 options,
respectively, were available for future grant.

The following tables summarizes stock option activity under the Plan:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES PRICE PER SHARE PRICE PER SHARE
-------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 507,197 $.20 $ .20
Granted 1,173,888 $ .20 - $.80 $ .33
Exercised (389,349) $.20 $ .20
Canceled (45,935) $.20 $ .20
-------------------------------------------------------------
Balance at December 31, 1996 1,245,801 $ .20 - $.80 $ .32

Granted 447,500 $ .80 - $14.38 $8.94
Exercised (150,273) $ .20 - $.80 $ .42
Canceled (25,500) $.60 $ .60
-------------------------------------------------------------
Balance at December 31, 1997 1,517,528 $ .20 - $14.38 $2.85

Granted 356,000 $2.25 - $11.38 $3.32
Exercised (119,627) $ .20 - $ 4.00 $ .52
Canceled (219,020) $ .20 - $14.38 $4.59
-------------------------------------------------------------
Balance at December 31, 1998 1,534,881 $ .20 - $14.38 $2.80

Granted -- -- --
Exercised (101,775) $ .20 - $2.44 $ .29
Canceled (60,732) $2.44 - $11.31 $6.80
--------------------------------------------------------------

Balance at June 30, 1999 1,372,374 $ .20 - $14.38 $2.91
==============================================================
</TABLE>

F-13
<PAGE>

Notes to Consolidated Financial Statements (continued)

<TABLE>
<CAPTION>
EXERCISABLE STOCK
OUTSTANDING STOCK OPTIONS OPTIONS
---------------------------------------------------- ------------------------------
WEIGHTED--AVERAGE
REMAINING
CONTRACTUAL LIFE WEIGHTED--AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICE SHARES (MONTHS) EXERCISE PRICE SHARES EXERCISE PRICE
- ----------------------- ------- ----------------- ----------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$ .20 - $ .80 885,763 87 $ .29 498,929 $ .29
$ 2.25 - $ 2.44 259,563 118 $ 2.36 11,826 $ 2.44
$ 4.00 - $ 5.06 104,888 106 $ 4.55 10,346 $ 4.66
$ 9.88 151,667 104 $ 9.88 64,903 $ 9.88
$11.31 - $14.38 133,000 107 $ 12.02 33,979 $ 11.61
</TABLE>

The weighted average fair value of stock options granted during 1996, 1997
and 1998 was $0.09, $4.66 and $1.60, respectively. The weighted average
remaining life of the options at December 31, 1996, 1997, 1998 and June 30,
1999 was 111, 102, 93 and 87 months, respectively.

1997 EMPLOYEE STOCK PURCHASE PLAN

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

Adjusted pro forma information regarding net income is required by SFAS 123,
and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using the minimum value
method for option pricing for options granted prior to the initial public
offering and the "Black-Scholes" method for option pricing for options
granted subsequent to the initial public offering with the following
weighted-average assumptions: risk-free interest rate range of 5.5% to 6.0%;
dividend yield of 0%; volatility of 55% and a weighted average expected life
of the option of 2 to 5 years.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
1996 1997 1998 JUNE 30, 1999
----------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Adjusted pro forma net loss $ (7,451,220) $ (17,047,180) $ (17,083,126) $ (6,061,351)
----------------- --------------- ----------------- ----------------
----------------- --------------- ----------------- ----------------
Adjusted pro forma net loss per share $ (37.07) $ (2.53) $ (1.28) $ (0.45)
----------------- --------------- ----------------- ----------------
----------------- --------------- ----------------- ----------------
</TABLE>

F-14
<PAGE>

Notes to Consolidated Financial Statements (continued)

8. LOSS PER SHARE

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- --------------------------
1996 1997 1998 1999 1998
------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss $ (7,439,139) $(16,877,038) $(16,720,338) $(5,958,470) $(9,781,408)

Denominator:
Weighted-average common shares 201,000 6,731,000 13,312,000 13,537,000 13,265,000
------------- ------------- ------------- ------------ ------------
Denominator for basic and diluted per
share 201,000 6,731,000 13,312,000 13,537,000 13,265.000
------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------ ------------

Basic and diluted loss per share $ (37.01) $ (2.51) $ (1.26) $ (0.44) $ (0.74)
------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------ ------------
</TABLE>

All other potential common shares have been excluded from the diluted EPS
computation as they are antidilutive. The Company has not issued any common
shares or potential common shares that are considered nominal issuances under
the requirements of Staff Accounting Bulletin No. 98. The Company believes that
the preferred stock, which is excluded from the FAS 128 basic and diluted
computation as an antidilutive security, is an important component of the
capital structure in 1996 and 1997. Including the preferred stock as weighted
average shares outstanding would result in the following pro forma net loss per
share: $(1.06) in 1996, and $(1.52) in 1997.

9. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1997 and 1998 are shown
below. A valuation allowance of $18,620,000 at December 31, 1998 has been
recognized to offset the deferred tax assets, as realization of such assets is
uncertain.

<TABLE>
<CAPTION>
December 31,
1997 1998
---------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 8,840,000 $ 14,990,000
Research and development credits 600,000 2,000,000
Capitalized research and development 480,000 640,000
Depreciation 280,000 310,000
Other, net 470,000 680,000
---------------- -----------------

Total deferred tax assets 10,670,000 18,620,000
Valuation allowance for deferred tax assets (10,670,000) (18,620,000)
---------------- -----------------

Net deferred tax assets -- --
---------------- -----------------

Net deferred taxes $ -- $ --
---------------- -----------------
</TABLE>

As the Company was part of a consolidated group prior to the change in ownership
in July 1995, all tax loss and tax credit carryforwards up to the date of change
in ownership have been reported by the previous consolidated group. All tax loss
and tax credit carryforwards reflected in the accompanying financial statements
reflect activity only for the period beginning July 1995 and ending December 31,
1998.

F-15
<PAGE>

Notes to Consolidated Financial Statements (continued)

At December 31, 1998, the Company has federal and state tax net loss
carryforwards of approximately $37,100,000 and $31,200,000, respectively. The
federal and state tax loss carryforwards will begin to expire in 2010 and
2000, respectively, unless previously utilized. The Company also has federal
and state research tax credit carryforwards of approximately $1,400,000 and
$780,000, respectively, which will expire in 2010 unless previously utilized.

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

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

10. TRANSACTIONS WITH RELATED PARTIES

The Company has a technology strategic alliance and a manufacturing supply
agreement with a Kaiser Aerospace subsidiary, a significant shareholder of
the Company, for the development and manufacturing of certain of the
Company's proprietary products. Under the terms of the agreements, which were
amended in December 1997, and which expire in December 2002, Kaiser Aerospace
will provide development and consulting services and a minimum of 75% of
certain of the Company's product requirements provided certain competitive
criteria are met. Payments made to Kaiser under these arrangements totaled
approximately $1,205,000, $2,878,000, $3,020,000 and $481,000 for the years
ending December 31, 1996, 1997 and 1998, and the six months ending June 30,
1999, respectively. At December 31, 1998, and June 30, 1999, the Company had
the option to purchase $837,000 and $323,000, respectively, in product from
Kaiser under these agreements.

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

MEDTRONIC

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

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

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

F-16
<PAGE>

Notes to Consolidated Financial Statements (continued)

11. COLLABORATIVE AGREEMENTS

SOFAMOR DANEK

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

In January 1999, Medtronic, the Company's strategic partner in the heart surgery
market acquired Sofamor Danek, the Company's strategic partner in the head, neck
and spine market. In April 1999, the Company's distribution agreement with
Sofamor Danek was amended to become non-exclusive to allow the Company to
appoint additional distributors.

F-17
<PAGE>

=============================================================================

7,000,000 SHARES

VISTA MEDICAL
TECHNOLOGIES, INC.

COMMON STOCK
(PAR VALUE $.01 PER SHARE)

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

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

================================================================================

<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by us in connection with the sale of the
Common Stock being registered. All the amounts shown are estimates, except
for the registration fee, the Nasdaq National Market filing fee and the NASD
fee.

<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
SEC fees $1,226
- -----------------------------------------------------------------------------------------
Nasdaq National Market fee $17,500
- -----------------------------------------------------------------------------------------
Printing Expenses $7,500
- -----------------------------------------------------------------------------------------
Legal Fees and expenses $150,000
- -----------------------------------------------------------------------------------------
Accounting fees and expenses $10,000
- -----------------------------------------------------------------------------------------
Transfer Agent $2,500
- -----------------------------------------------------------------------------------------
Miscellaneous expenses $5,274
- -----------------------------------------------------------------------------------------
Total $194,000
- -----------------------------------------------------------------------------------------
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Section 145 of the Delaware General Corporation Law permits indemnification
of our officers and directors under certain conditions and subject to certain
limitations. Section 145 of the Delaware General Corporation Law also
provides that a corporation has the power to purchase and maintain insurance
on behalf of its officers and directors against any liability asserted
against such person and incurred by him or her in such capacity, or arising
out of his or her status as such, whether or not the corporation would have
the power to indemnify him or her against such liability under the provisions
of Section 145 of the Delaware General Corporation Law.

Article VII, Section (1) of our bylaws provides that the we shall indemnify
its directors and executive officers to the fullest extent not prohibited by
the Delaware General Corporation Law. The rights to indemnity thereunder
continue as to a person who has ceased to be a director, officer, employee or
agent and inure to the benefit of the heirs, executors and administrators of
the person. In addition, expenses incurred by a director or executive officer
in defending any civil, criminal, administrative or investigative action,
suit or proceeding by reason of the fact that he or she is or was a director
or officer of us (or was serving at the our request as a director or officer
of another corporation) shall be paid by us in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that he or she is not entitled to be indemnified by
us as authorized by the relevant section of the Delaware General Corporation
Law.

As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article V, Section (A) of our certificate of incorporation provides that a
director shall not be personally liable for monetary damages for breach of
fiduciary duty as a director, except for liability for any breach of the
director's duty of loyalty to us or our stockholders, for acts or omissions
not in good faith or acts or omissions that involve intentional misconduct or
a knowing violation of law, under Section 174 of the Delaware General
Corporation Law or for any transaction from which the director derived any
improper personal benefit.

We have entered into indemnification agreements with each of our directors
and executive officers. Generally, the indemnification agreements attempt to
provide the maximum protection permitted by Delaware law as it may be amended
from time to time. Moreover, the indemnification agreements provide for
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to us (except
to the extent the court determines he or she is fairly and reasonably
entitled to indemnity for expenses), for settlements not approved by us or
for settlements and expenses if the settlement is not approved by the court.
The indemnification agreements provide for us to advance to the individual
any and all reasonable expenses (including legal fees and

II-1
<PAGE>

expenses) incurred in investigating or defending any such action, suit or
proceeding. In order to receive an advance of expenses, the individual must
submit to us copies of invoices presented to him or her for such expenses.
Also, the individual must repay such advances upon a final judicial decision
that he or she is not entitled to indemnification.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since August 15, 1996, we have sold and issued the following unregistered
securities:

(1) From August 15, 1996 to August 15, 1999, we issued an aggregate of
1,040,875 options to purchase shares of our common stock with
exercise prices ranging from $0.20 to $14.38 per share under our
former stock option plan and our current stock option/stock issuance
plan and an aggregate of 410,431 shares of our common stock were
issued through the exercise of options granted under our former
stock option plan and the current stock option/stock issuance plan
for an aggregate exercise price of $156,067. For additional
information concerning these transactions, reference is made to the
information contained under the caption "Management--Benefit Plans"
in the form of the prospectus included in this Registration
Statement.

(2) On November 27, 1996, we issued an aggregate of 1,500,000 (after
giving effect to a 3 for 4 reverse split) shares of Series C
preferred stock to Medtronic Asset Management, Inc. for an aggregate
consideration of $10,000,000.00.

(3) On February 22, 1997, we issued a warrant to purchase 100,000 shares
of our common stock at an exercise price of $6.67 per share to
Heartport in consideration of Heartport entering into a Supply and
Services Agreement with us.

(4) On March 3, 1997, we issued an aggregate of 3,000 shares of common
stock to some of our employees in consideration for past services
rendered to us.

(5) On July 3, 1997, we issued 27,777 shares of our common stock to GDE at
a price of $9.00 per share in consideration of GDE entering into a
license agreement with us.

(6) On October 3, 1997, we issued a warrant to purchase 27,184 shares of
common stock at an exercise price of $12.88 per share to Silicon
Valley Bank in consideration of Silicon Valley Bank entering into a
Loan and Security Agreement with us.

The sales and issuances of securities in the above transactions were deemed
to be exempt under the Securities Act of 1933, as amended, by virtue of
Section 4(2) thereof and/or Regulation D and Rule 701 promulgated thereunder
as transactions not involving any public offering. The purchasers in each
case represented their intention to acquire the securities for investment
only and not with a view to the distribution thereof. Appropriate legends
were affixed to the stock certificates issued in such transactions. Similar
representations of investment intent were obtained and similar legends
imposed in connection with any subsequent transfers of any such securities.
We believe that all recipients had adequate access, through employment or
other relationships, to information about us to make an informed investment
decision.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

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

3.2(1) Restated Bylaws.

II-2
<PAGE>

4.1(1) Form of certificate for common stock.

5.1 Opinion of Brobeck, Phleger & Harrison LLP with respect
to the common stock being registered.

10.1(1) Asset Purchase Agreement between with AST, dated
September 15, 1995.

10.2(1) Asset Purchase Agreement with ProMedica Distribution,
Inc. and stockholders of ProMedica Distribution, Inc.,
dated July 26, 1996.

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

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

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

10.6*(1) Manufacturing Supply Agreement with Kaiser Electro-Optics,
Inc., dated July 19, 1995.

10.7*(1) Sales Agreement with Medtronic, Inc., dated November 27,
1996.

10.8*(1) Supply and Services Agreement with Heartport, dated
February 22, 1997.

10.9*(1) Supplemental Rights Agreement with Medtronic, Inc., dated
November 27, 1996.

10.10(1) Amended and Restated Investors' Rights Agreement with the
stockholders listed on Schedule A thereto, dated November
27, 1996.

10.11(1) Amendment to the Amended and Restated Investors' Rights
Agreement with Heartport and the stockholders listed on
Exhibit A thereto, dated February 22, 1997.

10.12(1) Letter Agreement regarding Investment Representations and
Registration Rights between us and Urohealth Systems, Inc.,
dated December 13, 1996.

10.13*(1) Consulting Agreement with Harry R. McKinley, dated
September 15, 1995, as amended.

10.14*(1) Consulting Agreement with Urohealth Systems, Inc., dated
December 13, 1996.

10.15(1) Form of Professional Services Agreement.

10.16(1) Form of Non-Disclosure Agreement for Proprietary or
Business Confidential Information.

10.17(1) Non-Competition, Non-Disclosure and Patent and Inventions
Assignment Agreement among Harry R. McKinley, McKinley
Optics, Inc. and AST, dated December 18, 1991.

10.18*(1) License and Development Agreement among Harry R. McKinley,
McKinley Optics, Inc. and AST, dated December 18, 1991, as
amended on June 28, 1994.

10.19*(1) License Agreement with Allen Newman, dated September 2,
1994, as amended December 13, 1996.

10.20*(1) Agreement to Amend License and Development Agreement with
Harry R. McKinley and McKinley Optics, Inc., dated
September 15, 1995.

II-3
<PAGE>

10.21*(1) License Agreement with Kaiser Aerospace, dated July 19,
1995.

10.22*(1) Technology Strategic Alliance: Memorandum of
Understanding with Kaiser Electro Optics, Inc., dated
July 19, 1995.

10.23*(1) Non-Exclusive License Agreement with Fuji Photo Film Co.,
Ltd. and Fuji Photo Film Optical Co., Ltd., dated June
25, 1996.

10.24(1) Memorandum of Understanding with Cogent Light
Technologies, dated March 27, 1996.

10.25*(1) License Agreement with Urohealth, dated December 13, 1996.

10.26*(1) License Agreement with HealthCom, Inc. and GDE Systems,
Inc., dated February 28, 1997.

10.27(1) Lease dated April 14, 1994, as amended by a certain First
Amendment to Lease dated March 29, 1996 and a Second
Amendment to Lease dated October 22, 1996 with Robert F.
Tambone, as Trustee of MAT Realty Trust, u/d/t dated June
4, 1986.

10.28(1) Standby Letter of Credit from Silicon Valley Bank, dated
August 9, 1996.

10.29(1) 1995 Stock Option Plan.

10.30(1) 1995 Stock Option Plan Form of Notice of Grant.

10.31(1) 1995 Stock Option Plan Form of Stock Option Agreement.

10.32(1) 1995 Stock Option Plan Form of Stock Purchase Agreement.

10.33(1) 1997 Stock Option/Stock Issuance Plan, as amended.

10.34(1) 1997 Stock Option/Stock Issuance Plan Form of Notice of
Grant.

10.35(1) 1997 Stock Option/Stock Issuance Plan Form of Stock
Option Agreement.

10.36(1) 1997 Stock Option/Stock Issuance Plan Form of Stock
Purchase Agreement.

10.37(1) 1997 Employee Stock Purchase Plan.

10.38(1) Form of Indemnification Agreement between us and each of
our directors.

10.39(1) Form of Indemnification Agreement between us and each of
our officers.

10.40(1) Form of Waiver of Registration Rights, dated February 28,
1997.

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

10.42(1) Stock Issuance Agreement dated March 3, 1997 with those
purchasers set forth in Schedule A.

10.43(2) Vista Medical Technologies, Inc. Third Amendment to
Lease, dated September 1, 1997.

10.44(3) Common Stock Purchase Warrant with Silicon Valley Bank,
dated October 23, 1997.

10.45(3) Second Amendment to the Amended and Restated Investor's
Rights Agreement with Silicon Valley Bank and the
Stockholders listed on Exhibit A thereto, dated October
22, 1997.

II-4
<PAGE>

10.46(3) Fourth Amendment to Lease, dated October 30, 1997.

10.47(3) Technology Strategic Alliance: Memorandum of
Understanding with Kaiser Electro Optics, dated December
9, 1997.

10.48(3) Amendment to Manufacturing Supply Agreement with Kaiser
Electro-Optics, dated December 9, 1997.

10.49(3) Amendment to License Agreement with Kaiser Aerospace,
dated December 8, 1997.

10.50*(3) License Agreement with Kaiser Aerospace, dated December
9, 1997.

10.51*(3) Exclusive Distribution Agreement with Sofamor Danek L.P.,
dated January 7, 1998.

10.52*(3) Cooperative Technology Agreement with Sofamor Danek
Group, Inc., dated January 7, 1998.

10.53(4) Amended and Restated Sales Agreement with Medtronic,
Inc., dated June 26, 1998 (with certain confidential
portions omitted).

10.54(5) Vista Medical Technologies, Inc., Industrial Real Estate
Lease with Ocean Point Tech Centre dated July 7, 1998.

10.55(6) Amendment Number One to License Agreement with Imagyn
Medical Technologies, Inc., dated October 2, 1998.

10.56(6) Employment Agreement with John Lyon dated December 28,
1998.

10.57(6) Employment Agreement with Koichiro Hori dated December
28, 1998.

10.58(6) Employment Agreement with Allen Newman dated December 28,
1998.

10.59(6) Employment Agreement with Robert DeVaere dated December
28, 1998.

10.60(7) Fifth Amendment to Lease dated April 30, 1999.

10.61(7) Sofamor Danek letter Amendment dated April 1999.

10.62 Agreement with John Lyon dated July 20, 1999.

10.63 Agreement with Koichiro Hori dated July 20, 1999.

10.64 Agreement with Allen Newman dated July 20, 1999.

10.65 Agreement with Robert DeVaere dated July 20, 1999.

23.1 Consent of Brobeck, Phleger & Harrison LLP (contained in
their opinion filed as Exhibit 5.1).

23.2 Consent of Ernst & Young LLP, Independent Auditors.

24.1 Power of Attorney.

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

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

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

II-5
<PAGE>

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

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

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

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

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

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

(b) Financial Statement Schedules included separately in the Registration
Statement.

All other schedules are omitted because they are not required, are not
applicable or the information is included in the Financial Statements or the
accompanying Notes.

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 14, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

II-6
<PAGE>

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.

II-7
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, County of
San Diego, State of California, on the 7th day of September, 1999.

VISTA MEDICAL TECHNOLOGIES, INC.

By: /s/ John R. Lyon
-------------------------------------
John R. Lyon
President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John R. Lyon and Robert J. DeVaere, or either
of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement and any registration statement related to this Registration
Statement and filed pursuant to Rule 462 under the Securities Act of 1933,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes may lawfully
do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>

/s/ John R. Lyon President, Chief Executive Officer and Director (Principal September 7, 1999
- ------------------------------- Executive Officer)
John R. Lyon

/s/ Robert J. De Vaere Vice President of Finance and Administration and Chief September 7, 1999
- ------------------------------- Financial Officer (Principal Financial and Accounting
Robert J. De Vaere Officer)

/s/ James C. Blair Chairman of the Board and Director September 7, 1999
- -------------------------------
James C. Blair

/s/ Olav B. Bergheim Director September 7, 1999
- -------------------------------
Olav B. Bergheim

/s/ Nicholas B. Binkley Director September 7, 1999
- -------------------------------
Nicholas B. Binkley

/s/ Daniel J. Holland Director September 7, 1999
- -------------------------------
Daniel J. Holland

/s/ Larry M. Osterink Director September 7, 1999
- -------------------------------
Larry M. Osterink

</TABLE>

II-8
<PAGE>

EXHIBIT INDEX

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

3.2(1) Restated Bylaws.

4.1(1) Form of certificate for common stock.

5.1 Opinion of Brobeck, Phleger & Harrison LLP with respect
to the common stock being registered.

10.1(1) Asset Purchase Agreement between with AST, dated
September 15, 1995.

10.2(1) Asset Purchase Agreement with ProMedica Distribution,
Inc. and stockholders of ProMedica Distribution, Inc.,
dated July 26, 1996.

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

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

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

10.6*(1) Manufacturing Supply Agreement with Kaiser
Electro-Optics, Inc., dated July 19, 1995.