VISTA MEDICAL TECHNOLOGIES INC, 424B3, 2000-04-07

VISTA MEDICAL TECHNOLOGIES INC
424B3, 2000-04-07
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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PROSPECTUS

5,654,411 SHARES

VISTA MEDICAL TECHNOLOGIES, INC.

COMMON STOCK
(PAR VALUE $.01 PER SHARE)

-----------

We are offering 5,654,411 shares of our common stock. This offering is not
being underwritten and thus all of the 5,654,411 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.

The purchase price of our common stock in this offering will be $0.85 per
share. The net proceeds to us will be the purchase price less our expenses of
the offering.

Our common stock is traded on the Nasdaq SmallCap Market under the symbol
"VMTI." On March 24, 2000, the reported last sale price of our common stock was
$1.50 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.

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<TABLE>
<CAPTION>
Proceeds to
Price to Public Company
------------------- ------------
<S> <C> <C>
Per share............................................ $ 0.85 $ 0.81
Total................................................ $ 4,806,249 $4,591,249
</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 April 7, 2000.

The proceeds to us are based on proceeds before deducting expenses payable by us
estimated at $215,000.
- -------------------------

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The date of this Prospectus is April 4, 2000

<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>
TABLE OF CONTENTS
<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.........................................................................................................25
Management.......................................................................................................42
Related Party Transactions.......................................................................................50
Principal Stockholders...........................................................................................52
Description of Capital Stock.....................................................................................55
Shares Eligible for Future Sale..................................................................................58
Plan of Distribution.............................................................................................59
Legal Matters....................................................................................................59
Experts..........................................................................................................59
Where You Can Find More Information..............................................................................59
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," "CARDIOCONTROLLER,"
"INFOMATIX" AND "VISTA MEDICAL TECHNOLOGIES & DESIGN" ARE REGISTERED TRADEMARKS
WHICH WE OWN. WE ALSO MAKE REFERENCE TO TRADEMARKS AND TRADE NAMES IN
THIS PROSPECTUS WHICH BELONG TO OTHER COMPANIES.

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

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.

However, while minimally invasive techniques have become the standard of care in
certain high volume general surgical procedures, such as gall bladder removal,
the adoption rate has been considerably slower for more complex procedures. We
believe that the development of the various technologies required to drive
renewed growth in general surgery is now being undertaken by several companies
and that our advanced visualization and information technology will contribute
to increasing adoption by providing the surgeon with enhanced depth perception
to facilitate the performance of complicated, physically intricate tasks during
complex minimally invasive procedures. An example of such a procedure, and the
first in general surgery to be specifically targeted by us, is laparoscopic
gastric bypass, a surgical treatment for weight control, in which we believe our
3-D visualization uniquely enhances procedure performance.

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:

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<PAGE>

- 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.

Our business strategy is to become the leading developer and marketer of
advanced visualization and information systems for complex minimally invasive
procedures in general surgery, heart, head, neck and spine surgery 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............ 5,654,411 shares
Shares to be outstanding after the offering...... 19,449,936 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 SmallCap 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 December 31, 1999 and does
not include 1,999,993 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999 at a weighted average exercise price of
$1.79 per share under our stock option plans and 74,264 shares of common stock
issuable upon the exercise of warrants granted to Silicon Valley Bank and EGS
Securities Corp. at an average exercise price of $5.05 per share.

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<PAGE>

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................. $ 1,719 $ 2,244 $ 4,141 $ 6,572 $ 5,516
Cost and expenses:
Cost of sales................... 1,272 2,253 4,559 6,119 7,521
Research and development........ 1,904 3,880 6,875 5,480 3,229
Sales and marketing............. 834 2,057 5,011 5,953 2,890
General and administrative 1,034 3,103 5,499 5,039 2,178
Restructuring expense........... -- -- -- 940 690
------- ---------- --------- ---------- -----------
Total costs and expenses...... 5,044 11,293 21,944 23,531 16,508
------- ---------- --------- ---------- -----------
Loss from operations............... (3,325) (9,049) (17,803) (16,959) (10,992)
License income..................... -- 1,493 -- -- --
Interest income.................... 51 117 926 900 218
Other gains (losses)............... -- -- -- (662) 51
------- ---------- --------- ---------- -----------
Net loss........................... $(3,274) $ (7,439) $ (16,877) $ (16,720) $ (10,723)
------- ---------- --------- ---------- -----------
------- ---------- --------- ---------- -----------
Basic and diluted loss per share... $(88.49) $ (37.01) $ (2.51) $ (1.26) $ (0.79)
Shares used in computing basic and
diluted loss per share.......... 37,000 201,000 6,731,000 13,312,366 13,594,328
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------
AS
ACTUAL ADJUSTED
----------- ------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.......................... $ 1,658 $ 6,249
Working capital............................................................ 2,972 7,563
Total assets............................................................... 7,367 11,958
Total debt................................................................. -- --
Accumulated deficit........................................................ (57,941) (57,941)
Total stockholders' equity................................................. 4,584 9,175
</TABLE>

The "as adjusted" column above gives effect to the sale of 5,654,411 shares
of common stock offered by us in this offering at an offering price of $0.85
per share, 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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<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 April 2000. 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.

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<PAGE>

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

On February 10, 2000, our common stock ceased to be quoted on the Nasdaq
National Market and began to be quoted on the Nasdaq SmallCap Market as a result
of Nasdaq's concern about our ability to maintain continued compliance with some
of the Nasdaq National Market requirements for continued quotation. We presented
Nasdaq with a compliance plan to address this and other concerns in an effort to
ensure that our common stock would continue to be quoted on the Nasdaq SmallCap
Market. The compliance plan consisted of obtaining additional capital, a process
in which we are currently engaged, and effecting a reverse split of our common
stock. We cannot assure you, however, that we will be successful in our
compliance plan, or that even if successful, Nasdaq will continue to allow our
common stock to be quoted on the Nasdaq SmallCap Market. If we are unable to
maintain our status on the Nasdaq SmallCap Market, there may not continue to be
an active trading market for our common stock. If this occurs, you may not be
able to sell your shares quickly or at the market price if trading in our stock
is not active.

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

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

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

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

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

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

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

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

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<PAGE>

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

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

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

Even if the clinical safety and effectiveness of minimally invasive 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.

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,

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<PAGE>

- 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 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.

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<PAGE>

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 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

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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 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

-13-
<PAGE>

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.

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.

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.

-14-
<PAGE>

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.

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 April 2000 without
additional funding, and may be forced to discontinue our operations.

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

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

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

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

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

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

-15-
<PAGE>

FUTURE OFFERINGS COULD DILUTE YOUR INTEREST IN YOUR STOCK.

Stock purchased in this offering will incur substantial and immediate dilution
in net tangible book value of $0.38 per share. To the extent that currently
outstanding options and warrants are exercised or converted, there will be
further dilution in your shares. 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.

-16-
<PAGE>

USE OF PROCEEDS

We anticipate that our net proceeds from this offering will be approximately
$4.6 million after deducting our estimated offering expenses.

Of the $4.6 million net proceeds from this offering, we intend to use
approximately $2.7 million for working capital, $0.8 million to fund the launch
of our visualization product line for general surgery, the ORPC, $0.6 million
for general corporate purposes and $0.5 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

From the date of our initial public offering in July 1997 until February 9,
2000, our common stock was traded on the Nasdaq National Market, under the
symbol VMTI. It has been traded on the Nasdaq SmallCap Market since February 10,
2000 under the same symbol. The following table sets forth the range of
quarterly intra-day high and low sales prices of our common stock on the Nasdaq
Stock 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................................ $2.09 $1.38 $11.50 $3.38 -- --
Quarter ended September 30........................... $1.69 $0.38 $5.06 $1.50 $18.50 $8.88
Quarter ended December 31............................ $1.03 $0.31 $3.63 $2.00 $15.50 $8.88
</TABLE>

On March 24, 2000, the closing price of our common stock as reported on the
Nasdaq SmallCap Market was $1.50 per share. As of March 13, 2000 there were
approximately 145 holders of record of our 13,805,493 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

-17-
<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
December 31, 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 December 31, 1999. The number does not include 1,999,993
shares of common stock issuable upon exercise of options outstanding as of
December 31, 1999 at a weighted average exercise price of $1.79 per share under
our stock option plans and 74,264 shares of common stock issuable upon the
exercise of warrants granted to Silicon Valley Bank and EGS Securities Corp. at
an average exercise price of $5.05 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."

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------
ACTUAL AS ADJUSTED
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments....................... $ 1,658 $ 6,249
========== ==========
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; 13,795,525 shares issued and outstanding actual and
19,449,936 shares as adjusted...................................... 138 194
Additional paid-in capital.............................................. 63,042 67,577
Notes receivable stockholders........................................... (78) (78)
Deferred compensation................................................... (577) (577)
Accumulated deficit..................................................... (57,941) (57,941)
---------- ----------
Total stockholders' equity......................................... 4,584 9,175
---------- ----------
Total capitalization............................................... $ 4,584 $ 9,175
========== ==========
</TABLE>

-18-
<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
December 31, 1999 was $4,479,767, or $0.32 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 December 31, 1999. After giving effect to the sale of the 5,654,411 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 $9,071,016 million, or $0.47 per share of common stock. This
represents an immediate increase in net tangible book value of $0.15 per
share to existing stockholders and immediate dilution in net tangible book
value of $0.38 per share to new investors. The following table illustrates
this calculation on a per share basis:

<TABLE>

<S> <C>
Public offering price per share.......................................... $0.85
Net tangible book value per share at December 31, 1999.............. 0.32
Increase per share attributable to new investors.................... 0.15
Pro forma net tangible book value per share after this offering.......... 0.47
---------
Dilution per share to new investors ..................................... $0.38
=========
</TABLE>

The following table summarizes, on a pro forma basis as of December 31, 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 $0.85 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 December 31, 1999. The number does not
include 1,999,993 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999 at a weighted average exercise price of
$1.79 per share under our stock option plans and 74,264 shares of common stock
issuable upon the exercise of warrants granted to Silicon Valley Bank and EGS
Securities Corp. at an average exercise price of $5.05 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 .............. 13,795,525 71% $63,083,955 93% $4.57
New investors....................... 5,654,411 29% $ 4,806,249 7% $0.85
---------- ------ ------------ -------
Total.......................... 19,449,936 100% $67,890,204 100%
========== ====== ============ =======
</TABLE>

-19-
<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, 1997, 1998 and 1999 and the consolidated balance
sheet data at December 31, 1998 and 1999 have been derived from our audited
consolidated financial statements which are included elsewhere in this
prospectus. The consolidated data presented below for the years ended December
31, 1995 and 1996 and at December 31, 1995, 1996 and 1997 are derived from
audited consolidated financial statements that are not included in this
prospectus. 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)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................ $ 1,719 $ 2,244 $ 4,141 $ 6,572 $ 5,516
Cost and expenses:
Cost of sales..................................... 1,272 2,253 4,559 6,119 7,521
Research and development.......................... 1,904 3,880 6,875 5,480 3,229
Sales and marketing............................... 834 2,057 5,011 5,953 2,890
General and administrative 1,034 3,103 5,499 5,039 2,178
Restructuring expense............................. -- -- -- 940 690
------- --------- ---------- ----------- -----------
Total costs and expenses........................ 5,044 11,293 21,944 23,531 16,508
------- --------- ---------- ----------- -----------
Loss from operations................................. (3,325) (9,049) (17,803) (16,959) (10,992)
License income....................................... -- 1,493 -- -- --
Interest income...................................... 51 117 926 900 218
Other gains (losses)................................. -- -- -- (662) 51
------- --------- ---------- ----------- -----------
Net loss............................................. $(3,274) $ (7,439) $ (16,877) $ (16,720) $ (10,723)
======= ========= ========== =========== ===========
Basic and diluted loss per share..................... $(88.49) $ (37.01) $ (2.51) $ (1.26) $ (0.79)
Shares used in computing basic and
diluted loss per share 37,000 201,000 6,731,000 13,312,366 13,594,328
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1999
DECEMBER 31, ----------------------
------------------------------------------------ AS
1995 1996 1997 1998 ACTUAL ADJUSTED
-------- -------- -------- ----------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments............... $ 3,399 $ 10,285 $ 24,113 $ 8,803 $ 1,658 $ 6,249
Working capital...................... 4,224 10,805 25,977 12,128 2,972 7,563
Total assets......................... 5,208 14,316 32,130 16,605 7,367 11,958
Total debt........................... -- -- -- -- -- --
Accumulated deficit.................. (6,181) (13,620) (30,498) (47,218) (57,941) (57,941)
Total stockholders' equity........... 4,707 12,961 29,866 14,666 4,584 9,175
</TABLE>

The "as adjusted" column above gives effect to the sale of 5,654,411 shares
of common stock offered by us in this offering at an offering price of $0.85
per share 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."

-20-

<PAGE>

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 earlier at "Risk Factors." While this outlook represents our current
judgment on the future direction of our business, such risks and uncertainties
could cause actual results to differ materially from any future performance
suggested below. We undertake no obligation to release publicly the results of
any revisions to these forward-looking statements to reflect events or
circumstances arising after the date of this prospectus. 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 have generated minimal revenues from
the sales of these products since our formation in July 1993. We expect to
continue to incur substantial losses for at least the next 12 months. As of
December 31, 1999, our accumulated deficit was approximately $57,941,000. We are
not certain that our development efforts will result in commercially available
products, that we will be successful in introducing the products under
development, or that required regulatory approval of products will continue to
be obtained in a timely manner, if at all.

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

OUR RESULTS OF OPERATIONS

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

SALES

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

-21-
<PAGE>

COSTS AND EXPENSES

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

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

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

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

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

OTHER INCOME AND LOSSES

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

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

TAXES

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

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<PAGE>

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

SALES

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

COSTS AND EXPENSES

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

RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses were
$5,480,000 and $6,875,000 for the years ended December 31, 1998 and 1997,
respectively. The decrease in research and development expenses was primarily
attributable to decreases in staffing and related supply and occupancy costs and
a decrease in contract services related to development efforts, both in the
second half of the year as major product launches were completed by the end of
the first half of 1998.

SALES AND MARKETING EXPENSES. Our sales and marketing expenses increased from
$5,011,000 in 1997 to $5,953,000 in 1998. The increase in sales and marketing
expense was attributable to the development and expansion of our cardiothoracic
surgery sales force in the first half of 1998 and increased marketing efforts
associated with commercialization of new products. During the second half of the
year sales and marketing expenses decreased as a result of transitioning all
sales, marketing and distribution efforts associated with our Series 8000 for
minimally invasive cardiac surgery in the United States to Medtronic following
an agreement announced at the end of June 1998.

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

RESTRUCTURING EXPENSES. We recorded restructuring charges during the second
quarter of 1998 of $940,000 and had no such charges for 1997. The restructuring
expenses related primarily to termination and severance payments to employees in
connection with transfer of sales and marketing responsibility in the United
States for our Series 8000 System for minimally invasive cardiac surgery to
Medtronic, termination and severance payments to employees in connection with a
general company restructuring and work force reduction, and write down of assets
related to a strategic decision to discontinue distribution of a line of cardiac
instruments and sutures earlier than previously planned.

OTHER INCOME AND LOSSES

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

We anticipate that our existing cash, cash equivalents and short-term
investments, and product revenues, will be sufficient to fund our operations
through April 2000. Substantial additional capital resources will be required
to fund continuing expenditures related to our research, development,
manufacturing and commercialization of new products beyond that point and we
estimate $3,500,000 in additional financing will be required to fund
operations through December 31, 2000. If we are not successful in our efforts
to raise the additional capital in this offering, we may be required to
curtail or cease operations. In addition, even if we do raise capital in this
offering certain circumstances, including slow rate of market acceptance of
our products or our inability to scale up manufacturing, would accelerate our
use of proceeds and require us to seek additional funds to support our
operating requirements. Accordingly, we may, from time to time, seek to raise
additional funds through public or private equity financings, debt financings
or from other sources. We cannot assure you that additional financing will be
available at all or, 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 1999, our investment portfolio included fixed-income securities
of $1.3 million. These securities are subject to interest rate risk and will
decline in value if interest rates increase. Due to the short duration of our
investment portfolio, an immediate 10 percent increase in interest rates would
have no material impact on our financial condition or results of operations

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

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BUSINESS

BACKGROUND

MINIMALLY INVASIVE SURGERY

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

MINIMALLY INVASIVE MICROSURGERY

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

APPLICATION OF OUR PRODUCTS TO DIFFERENT SURGICAL PROCEDURES

GENERAL SURGERY/GYNECOLOGY/UROLOGY

CONVENTIONAL TREATMENTS.

Minimally invasive procedures are well accepted in general surgery, gynecology
and urology. For less complex procedures such as gallbladder removal or tubal
ligation, minimally invasive endoscopic techniques have become the standard of
care, being used in approximately 90% of cases. For more complex procedures,
however, the penetration rate of minimally invasive 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 development of the general technology required to drive
renewed growth in complex minimally invasive procedures for general surgery is
now being undertaken by many companies in fields complementary to ours, for
example in surgical robotics, electrosurgery and surgical instrument design. We
believe that our advanced visualization and information technology will
contribute to this renewed growth by providing the surgeon with enhanced depth
perception when performing complicated, physically intricate tasks, and will
provide the surgeon with the ability to view additional information in a
voice-controlled, picture-in-picture format, to facilitate real-time decision
making during a procedure. We believe that conventional two dimensional
visualization systems compromise the ability of a surgeon to maneuver,
especially in complex reconstructive surgery, and that our natural
three-dimensional picture will provide the surgeon with an advantage in these
cases.

HEART SURGERY

CONVENTIONAL TREATMENTS

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

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

MINIMALLY INVASIVE HEART MICROSURGERY

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

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THE VISTA MEDICAL SOLUTION.

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

HEAD, NECK AND SPINE SURGERY

CONVENTIONAL HEAD, NECK AND SPINE SURGICAL TREATMENTS.

Conventional head, neck and spine procedures are often invasive and involve a
lengthy and painful recovery. Procedures involving the brain and spinal cord
have traditionally been performed under a microscope in order for the surgeon to
ensure extreme precision with the delicate tasks required. More recently,
surgeons have used neuroendoscopes, or scopes which are inserted into the body,
in combination with microscopes. We estimate that there were approximately
317,000 brain and skull base procedures, 432,000 surgical sinus procedures and
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. Our head-mounted display enables the image seen by the
assistant surgeon who is operating directly across from the principal surgeon to
be electronically reversed in order to align the assistant's movements with
those of the principal surgeon. Our visualization technology, which is also
compatible with the majority of operating room microscopes, also gives the
surgeon hands-free, voice activated control of multiple video images to assist
in precise and rapid decision-making. With our technology, both the principal
surgeon and assistants can view the case simultaneously on their head-mounted
displays in 3-D, with superior comfort and ergonomic positioning.

OUR BUSINESS STRATEGY

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

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

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

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

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

We believe that our technology is applicable to all types of heart surgery,
whether minimally invasive or conventional open heart, where enhancement of the
surgeon's view is particularly critical, such as 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.

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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

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 performed significant additional development work, and have
proprietary rights, in the surgical head mounted display design. Our head
mounted display, which we believe is the

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first specifically designed for surgical use, provides 3-D visualization of
small delicate body structures, has the capability of integrating relevant
data and presents the image seen by the surgeon in the most correct,
intuitive and ergonomic way. Wearing the head mounted display, the surgeon
can also perform surgery "in-line"--meaning with the eyes, hands, instruments
and subject in line. In-line surgery cannot be performed when the surgeon is
observing the anatomy on a remotely-positioned video monitor.

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

THREE-DIMENSIONAL IMAGE ACQUISITION

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

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platform. We believe that our technology will demonstrate that real-time
access to relevant information, along with enhanced visualization, is a
critical requirement of performing minimally invasive microsurgery and other
surgical procedures. We anticipate incorporating appropriate elements of this
software package into future products.

PRODUCT LINES

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

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

The most recent application of our platform technology is complex procedures in
general surgery. Our first public demonstration of this platform was in October
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:

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

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

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

Stereo Camera High resolution stereo image processor.
Controller

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

Endoscopy Cart Cart which holds the Advanced System for Laparoscopy.

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

SERIES 8000 ADVANCED VISUALIZATION AND INFORMATION SYSTEM FOR HEART SURGERY

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

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

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

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

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

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

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

CardioConsole Console for rack mounting of all Series 8000 modules.

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

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

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

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

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

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

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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:

RICHARD WOLF, GMBH

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

MEDTRONIC

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

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

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

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

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

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

HEARTPORT

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

SOFAMOR DANEK

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

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

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

We had also entered into a cooperative technology agreement with Sofamor Danek,
under which we agreed to work exclusively together in performing research and
development specifically designed to enhance StereoSite systems or integrate
StereoSite systems with Sofamor Danek's image guidance systems and various
other products, including systems and instruments for spinal surgery. This
agreement has also been terminated in March 2000 by mutual agreement as part of
the termination agreement described in the section "Strategic Alliances
- -Medtronic."

OEC MEDICAL SYSTEMS

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

GDE SYSTEMS

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

COGENT LIGHT

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

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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 up-front payment and royalties based on sales.

IMAGYN MEDICAL TECHNOLOGIES

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

LICENSE AGREEMENTS

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

MCKINLEY OPTICS, INC.

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

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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 December 31, 1999, we had exclusive ownership rights
to 15 issued United States patents, 9 pending United States patent applications
and 4 pending foreign applications covering various aspects of our devices and
systems. Furthermore, as of the same date, we had exclusive rights in the
medical field to five issued United States patents, one pending United States
patent application, 11 issued foreign patents and 8 pending foreign
applications covering various aspects of our devices and systems. In 1998 we
additionally obtained from Carl Zeiss non-exclusive rights to three issued
United States patents and four pending foreign applications. We intend to file
additional patent applications in the future. The failure of such patents to
issue could damage our ability to protect our proprietary information.

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

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

Patent applications in the United States are maintained in secrecy until a
patent issues, and patent applications in foreign countries are maintained in
secrecy for a period of time after filing. After such period of time, and
usually before the grant of the patent, patent applications in foreign
countries are published. While publication of

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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.

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

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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

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.

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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 training programs in minimally invasive
gastric bypass in January 2000 in conjunction with the Alvarado Center for
Surgical Weight Control. We began company sponsored heart training programs in
the third quarter of 1997. In June 1998 we transferred responsibility for this
training to Medtronic and in March 2000 we took back responsibility for this
training as a result of the termination of our sales agreement with Medtronic.

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

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COMPETITION

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

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

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

CLINICAL ADVISORY BOARDS

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

EMPLOYEES

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

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. During the third
quarter of 1999, a restructuring and workforce reduction led us to close part
of our Westborough facilities. We believe that suitable additional space will
be available to us, when needed, on commercially reasonable terms.

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 January 31, 2000 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
NAME AGE POSITION(S) THAT 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
John (Jed) Kennedy........... 42 Vice President and General Manager, --
Westborough Operations
Allen Newman................. 49 Senior Vice President --
Robert J. De Vaere........... 42 Chief Financial Officer, Vice President --
of Finance and Administration and
Secretary
Olav B. Bergheim............. 49 Director 2000
Nicholas B. Binkley (1)...... 54 Director 2002
Daniel J. Holland (2)........ 64 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., 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.

JED KENNEDY. Mr. Kennedy joined Vista Medical in January 1997 as Vice
President of Research and Development until being appointed Vice
President/General Manager of Westborough Operations in January 2000. Prior to
joining Vista Mr. Kennedy held various positions in Manufacturing, Quality
Engineering and Product Development at Smith & Nephew Endoscopy from 1984
through January 1997. From 1996 through January 1997 he was the Group
Director of Product Development responsible for managing all Divisional
Product Development activities. From 1993 through 1996, Mr. Kennedy was
Director, Research and Development responsible for the management of four

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<PAGE>

technology product development groups. Prior to 1984 he held various
engineering positions at Honeywell's Electro-Optics and Avionics divisions.
Mr. Kennedy received a BS Manufacturing Engineering from Boston University in
1979.

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. He was appointed Senior Vice President in January 2000. 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., Fore Flow Corporation, VenPro Corporation, Chimeric
Therapies, Inc. and 3F Therapeutics, all privately-held companies. 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 is a
director of MatrixOne, Inc. and several privately-held companies. 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.

-43-
<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, 1997, 1998 and 1999 by our Chief
Executive Officer and three 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.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

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................................ 1999 $199,451 $ -- 50,000 $ --
President, Chief Executive 1998 $206,346 $ -- 20,000 --
Officer and Director 1997 $164,423 $50,000 20,000 --

Koichiro Hori............................... 1999 $141,322 $ -- -- $ --
Senior Vice President 1998 $142,500 $ -- 10,000 --
Advanced Technology 1997 $130,000 $25,000 10,000 --

Allen Newman................................ 1999 $153,726 $ -- 30,000 $ --
Senior Vice President 1998 $155,385 $ 2,500 10,000 --
1997 $139,616 $35,000 10,000 --

Robert J. DeVaere........................... 1999 $133,639 $ -- 30,000 $ --
Chief Financial Officer, Vice President of 1998 $134,808 $ 2,500 22,000 --
Finance and Administration and Secretary 1997 $117,654 $30,000 16,250 --
</TABLE>

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

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<PAGE>

$100,000 during the year ended December 31, 1999. 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.

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- ------------------------------------------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE 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.......................... 50,000 10.8% $0.63 09/28/2009 $19,810 $50,203
Koichiro Hori......................... -- -- -- -- -- --
Allen Newman.......................... 30,000 6.5 0.63 09/28/2009 11,886 30,122
Robert J. DeVaere..................... 30,000 6.5 0.63 09/28/2009 11,886 30,122
</TABLE>

OPTION EXERCISES AND HOLDINGS

The following table describes the value of options exercised during 1999 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,
1999, as of December 31, 1999. 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, 1999, which was $0.63, minus
the exercise price.

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

NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS
SHARES OPTIONS AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
ACQUIRED ON VALUE -------------------------------- ------------------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ---------------- ----------- ---------------- --------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
John R. Lyon.............. -- -- 260,500 75,500 $100,943 $ 0
Koichiro Hori............. 48,750 $23,888 11,000 0 2,150 0
Allen Newman.............. -- -- 142,500 42,500 54,825 0
Robert DeVaere............ -- -- 17,567 54,433 0 0
</TABLE>

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, 1999. Mr. Lyon, our President and Chief
Executive Officer, participated in the deliberations of the Compensation
Committee regarding executive compensation during 1999, but did not take part
in the deliberations regarding his own compensation.

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<PAGE>

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.

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

- an employee stock purchase plan

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

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<PAGE>

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 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

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<PAGE>

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 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.

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 September 30, 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.

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<PAGE>

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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<PAGE>

RELATED PARTY 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 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.

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.

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

-50-
<PAGE>

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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<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of January 31, 2000, 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.

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). 1,873,320 13.6% 9.6%
One Palmer Square
Princeton, NJ 08542
SBIC Partners, L.P............................. 1,633,625 11.8% 8.4%
201 Main Street, Suite 2302
Fort Worth, TX 76102
Medtronic Asset Management, Inc................ 1,600,000 11.6% 8.2%
7000 Central Avenue NE
Minneapolis, MN 55432
Foster City Partners........................... 1,551,944 11.2% 8.0%
950 Tower Lane, Suite 800
Foster City, CA 94404
Biotechnology Investments Limited (BIL)........ 926,736 6.7% 4.8%
Post Office Box 58
St. Julian's Court
St. Peter Port
Guernsey, Channel Islands
One Liberty Fund III, L.P...................... 646,915 4.7% 3.3%
1 Liberty Square, 2nd Floor
Boston, MA 02109
James C. Blair (2)............................. 1,878,320 13.6% 9.7%
John R. Lyon (3)............................... 446,058 3.2% 2.3%
Olav B. Bergheim (4)........................... 24,500 * *
Nicholas B. Binkley (5)........................ 1,644,125 11.9% 8.5%
Daniel J. Holland (6).......................... 672,415 4.9% 3.5%
Larry Osterink (7)............................. 144,500 1.0% *

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<PAGE>

Koichiro Hori (8).............................. 264,406 1.9% 1.4%
Allen Newman (9)............................... 224,733 1.6% 1.2%
Robert J. De Vaere (10)........................ 85,478 * *
All directors and executive officers as a group
(9 persons) (11)............................ 5,364,535 37.5% 26.9%
</TABLE>
- -------------------
* Less than 1%

(1) Includes 1,767,787 shares beneficially owned by Domain Partners III,
L.P., 24,161 shares beneficially owned by Domain Partners, II L.P.,
61,872 shares beneficially owned by DP III Associates, L.P. and 19,500
shares beneficially owned by Domain Associates 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. 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 BIL. Pursuant to a contractual agreement, Domain Associates
L.L.C. is the U.S. venture capital advisor to BIL. Domain Associates
L.L.C. has neither voting nor investment power over BIL and Dr. Blair
and Domain Associates L.L.C. disclaim beneficial ownership of the BIL
shares.

(2) Includes 5,000 shares issuable upon exercise of options exercisable
within 60 days of January 31, 2000. Also includes 1,767,787 shares
beneficially owned by Domain Partners III, L.P., 24,161 shares
beneficially owned by Domain Partners, II L.P., 61,872 shares
beneficially owned by DP III Associates, L.P. and 19,500 shares
beneficially owned by Domain Associates 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. 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 BIL. Pursuant to a contractual agreement, Domain Associates
L.L.C. is the U.S. venture capital advisor to BIL. Domain Associates
L.L.C. has neither voting nor investment power over BIL and Dr. Blair
and Domain Associates L.L.C. disclaim beneficial ownership of the BIL
shares.

(3) Includes 265,000 shares issuable upon exercise of options exercisable
within 60 days of January 31, 2000.

(4) Includes 5,000 shares issuable upon exercise of options exercisable
within 60 days of January 31, 2000. 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.

(5) Includes 6,500 shares issuable upon exercise of options exercisable
within 60 days of January 31, 2000. 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"). SBIC Partners is
the beneficial owner of all shares of the Company's Common Stock
registered in its name. Forrest Binkley & Brown L.P., a Texas limited
partnership ("FBB"), is the managing general partner of SBIC Partners,
and Forrest Binkley & Brown Venture Co., a Texas corporation ("Venture
Co."), is the sole general partner of FBB. Mr. Binkley is a limited
partner of FBB, and is an executive officer, director and shareholder
of Venture Co. Mr. Binkley disclaims beneficial ownership with respect
to all shares of Common Stock owned by SBIC Partners, except to the
extent of his pecuniary interest therein.

(6) Includes 1,000 shares owned by Mr. Holland and 24,500 shares issuable
upon exercise of options exercisable within 60 days of January 31,
2000. 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.

(7) Includes 24,500 shares issuable upon exercise of options exercisable
within 60 days of January 31, 2000.

-53-
<PAGE>

(8) Includes 11,000 shares issuable upon exercise of options exercisable
within 60 days of January 31, 2000.

(9) Includes 145,000 shares issuable upon exercise of options exercisable
within 60 days of January 31, 2000.

(10) Includes 20,979 shares issuable upon exercise of options exercisable
within 60 days of January 31, 2000.

(11) Includes 507,479 shares issuable upon exercise of options exercisable
within 60 days of January 31, 2000. See also footnotes 1, 2, 5 and 6.

-54-
<PAGE>

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 March 13, 2000, there were 13,805,493 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 March 13, 2000, there were two warrants outstanding to purchase a total
of 74,264 shares of common stock. One warrant for 27,184 shares is held by
Silicon Valley Bank and is currently exercisable at $12.88 per share. The
second warrant for 47,080 shares is held by EGS Securities Corp. and is
currently exercisable at $0.53 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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<PAGE>

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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<PAGE>

- 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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<PAGE>

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 December 31, 1999--19,449,936 shares of common stock will
be outstanding. Of the 19,449,936 outstanding shares, the 5,654,411 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 March 13, 2000, options to purchase a total of 1,963,533 shares of our
common stock were outstanding and immediately exercisable, of which 991,534
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 194,499 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.

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<PAGE>

PLAN OF DISTRIBUTION

The common stock is being offered directly by us to a limited number of
investors. We have determined the price of the common stock through
negotiations between us and the purchasers which took place after
effectiveness of the registration statement of which this prospectus is a
part. We did not accept any investor funds prior to effectiveness of the
registration statement. The price negotiated between us and the purchasers of
the common stock 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 shares being offered under this prospectus.

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 $215,000.

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, 1998 and 1999 and for each of the three years in the period
ended December 31, 1999, appearing in this prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report 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 herein and are included in reliance
upon such report given on 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

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<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.

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<PAGE>

<TABLE>
<CAPTION>
VISTA MEDICAL TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

Consolidated Financial Statements

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

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

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

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

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

</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, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

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

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

/s/ Ernst & Young LLP

San Diego, California
January 31, 2000

F-2

<PAGE>

VISTA MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

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

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable..................................................... $ 552,441 $ 985,520
Accrued compensation................................................. 300,807 205,481
Accrued liabilities.................................................. 1,085,009 1,591,276
-------------------- ------------------
Total current liabilities.............................................. 1,938,257 2,782,277
Commitments
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares--35,000,000
Issued and outstanding shares--13,572,101 in 1998,
13,795,525 in 1999.............................................. 135,721 137,955
Additional paid-in capital........................................... 62,856,201 63,042,737
Notes receivable from stockholders................................... (78,375) (78,375)
Deferred compensation................................................ (1,030,420) (576,738)
Unrealized gain/loss in investments.................................. 1,211 --
Accumulated deficit.................................................. (47,217,848) (57,941,134)
-------------------- ------------------
Total stockholders' equity............................................. 14,666,490 4,584,445
-------------------- ------------------
Total liabilities and stockholders' equity............................. $ 16,604,747 $ 7,366,722
=================== =================

</TABLE>
See accompanying notes.

F-3

<PAGE>

<TABLE>
<CAPTION>
VISTA MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
---------------------------------------------------
1997 1998 1999
------------------ ------------- ----------------
<S> <C> <C> <C>
Sales $ 4,141,082 $ 6,572,473 $ 5,516,104
Costs and expenses:
Cost of sales........................................ 4,559,521 6,119,108 7,520,480
Research and development............................. 6,875,069 5,479,788 3,229,330
Sales and marketing.................................. 5,010,953 5,953,102 2,890,436
General and administrative........................... 5,498,820 5,039,183 2,177,517
Restructuring expense................................ -- 939,919 690,269
-------------- --------------- ----------------
Total cost and expenses................................. 21,944,363 23,531,100 16,508,032
-------------- --------------- ----------------

Loss from operations.................................... (17,803,281) (16,958,627) (10,991,928)

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

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

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

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

</TABLE>
See accompanying notes.

F-4

<PAGE>

VISTA MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Convertible Notes
preferred stock Common stock Additional Receivable
----------------------- ----------------- Paid-in From
Shares Amount Shares Amount Capital Stockholders
----------------------- ------------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996... 11,574,252 $ 115,742 538,224 $ 5,382 $ 28,615,223 $ (93,375)

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) (115,742) 8,680,679 86,807 28,935 --
Issuance of stock under
employee stock purchase plan -- -- 7,085 71 54,129 --
Issuance of common stock for
technology license.......... -- -- 27,777 278 249,715 --
Deferred compensation.......... -- -- -- -- 946,640 --
Amortization of deferred
compensation................ -- -- -- -- -- --
Unrealized gain (loss) on
investments................. -- -- -- -- -- --
Net loss....................... -- -- -- -- -- --
-------------- ---------- ---------- --------- ------------ ------------
Balance at December 31, 1997... -- $ -- 13,407,038 $ 134,071 $ 62,531,513 $ (78,375)
============== ========== ============ ========= ============ =============

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.......... (946,640) -- -- --
Amortization of deferred
compensation................ 1,066,115 -- -- 1,066,115
Unrealized gain (loss) on
investments................. -- (416,313) -- (416,313) (416,313)
Net loss....................... -- -- (16,877,038) (16,877,038) (16,877,038)
------------- ----------- ----------------- ----------- --------------
Balance at December 31, 1997... (1,942,074) $ (416,313) $ (30,497,510) $ 29,731,312 $(17,293,351)
============= ============ ================ ============ ==============

</TABLE>

F-5

<PAGE>

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

Balance at December 31, 1998.. -- $ -- 13,572,101 $ 135,721 $ 62,856,201 $ (78,375)
============= ========= =========== ========= ============= ============

Exercise of stock options for
cash....................... -- -- 178,158 1,781 41,086 --
Issuance of stock under
employee stock purchase
plan....................... -- -- 45,266 453 47,622 --

Issuance of warrant in
connection with offering... -- -- -- -- 10,828 --
Deferred compensation -
issuance of options to
consultants................ -- -- -- -- 87,000 --
Amortization of deferred
compensation............... -- -- -- -- -- --
Adjustments to unrealized
gain (loss) on
investments resulting
from realization of loss
on investment.............. -- -- -- -- -- --
Net loss ..................... -- -- -- -- -- --
-------------- -------- ----------- ---------- ------------ --------------

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

Deferred Unrealized Accumulated Comprehensive
Compensation Gain (Loss) Deficit Total Income
------------- ----------- ------------- ------------ -----------------
<S> <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......... 213,058 -- -- 139,417
Amortization of deferred
compensation............... 698,596 -- -- 698,596
Adjustments to unrealized
gain (loss) on investments
resulting from realization
of loss on investment...... -- 417,524 -- 417,524 417,524
Net loss...................... -- -- (16,720,338) (16,720,338) (16,720,338)
------------- ---------- ------------- ------------- --------------

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

Exercise of stock options for
cash....................... -- -- -- 42,867
Issuance of stock under
employee stock purchase
plan....................... -- -- -- 48,075

Issuance of warrant in
connection with offering... -- -- -- 10,828
Deferred compensation -
issuance of options to
consultants................ (87,000) -- -- --
Amortization of deferred
compensation............... 540,682 -- -- 540,682
Adjustments to unrealized
gain (loss) on
investments resulting
from realization of loss
on investment.............. -- (1,211) -- (1,211) (1,211)
Net loss ..................... -- -- (10,723,286) (10,723,286) (10,723,286)
------------- --------- ------------- ------------- -------------

Balance at December 31, 1999 $ (576,738) $ -- $(57,941,134) 4,584,445 (10,724,497)
============= ========== ============== =========== ==============

</TABLE>

See accompanying notes.

F-6

<PAGE>

<TABLE>
<CAPTION>
VISTA MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1998 1999
---------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................................... $(16,877,038) $(16,720,338) $(10,723,286)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization............................... 1,260,707 2,380,772 1,053,674
Amortization of premium on short-term investments........... 129,631 128,346 (301)
Stock issued for services rendered.......................... 20,010 -- --
Non-cash restructuring charges.............................. 139,417 --
Amortization of deferred compensation....................... 1,066,115 698,596 540,682
Amortization of deferred interest expense related to stock
warrants................................................ -- 26,964 10,828
Write-down for impairment on available for sale
securities............................................... -- 662,090 --
Common stock received/issued in exchange for license
agreement................................................ 249,993 -- --
Gain on sale of securities.................................. -- -- (50,625)
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable........................................ 4,503 (230,617) (424,876)
Inventories................................................ (2,132,142) (1,009,317) 1,704,797
Other currents assets...................................... (125,464) 104,421 (111,954)
Accounts payable........................................... 609,471 (664,723) 433,080
Accrued compensation....................................... 290,200 (215,936) (95,326)
Accrued liabilities........................................ 9,868 523,680 506,266
--------------- ---------------- ---------------
Net cash flows used for operating activities.................. (15,494,146) (14,176,645) (7,157,041)
INVESTING ACTIVITIES
Purchase of short-term investments............................ (23,689,018) (2,291,745) (113,299)
Maturities of short-term investments.......................... 7,080,000 17,770,944 1,000,000
Sale of equity securities..................................... -- -- 81,535
Increase in patent and other assets........................... -- (250,000) --
Purchase of property and equipment............................ (3,415,457) (1,020,397) (159,031)
--------------- ---------------- ---------------
Net cash flows (used for) provided by investing activities.... (20,024,475) 14,208,802 809,205
FINANCING ACTIVITIES
Payments on shareholder notes receivable...................... 15,000 -- --
Issuance of common stock, net................................. 32,712,594 265,145 90,942
--------------- ---------------- ---------------
Net cash flows provided by financing activities............... 32,727,594 265,145 90,942
Net increase (decrease) in cash and cash equivalents.......... (2,791,027) 297,302 (6,256,894)
Cash and cash equivalents at beginning of year................ 10,119,529 7,328,502 7,625,804
--------------- ---------------- ---------------
Cash and cash equivalents at end of year...................... $ 7,328,502 7,625,804 $ 1,368,910
=============== ================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................ -- 776 --
=============== ================ ===============
</TABLE>

See accompanying notes.

F-7

<PAGE>

VISTA MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1999

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS ACTIVITY

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

LIQUIDITY

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

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES

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

REVENUE RECOGNITION

Revenues from product sales are recognized when products are shipped.

F-8
<PAGE>

Notes to Consolidated Financial Statements (continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

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

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

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

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

</TABLE>

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

CONCENTRATION OF CREDIT RISK

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

INVENTORIES

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

PROPERTY AND EQUIPMENT

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

F-9

<PAGE>

Notes to Consolidated Financial Statements (continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PATENTS

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

IMPAIRMENT OF LONG-LIVED ASSETS

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

RESTRUCTURING EXPENSES

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

STOCK-BASED COMPENSATION

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

NEW ACCOUNTING STANDARDS

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

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

F-10

<PAGE>

Notes to Consolidated Financial Statements (continued)

2. BALANCE SHEET COMPONENTS

Inventories consists of the following:

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

Property and equipment consists of the following:

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

Patents and other assets consists of the following:

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

Accrued liabilities consists of the following:

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

F-11
<PAGE>

Notes to Consolidated Financial Statements (continued)

3. MAJOR CUSTOMERS

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

4. COMMITMENTS

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

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

5. STOCKHOLDERS' EQUITY

1995 STOCK OPTION PLAN

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

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

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

1997 STOCK OPTION PLAN/ STOCK ISSUANCE PLAN

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

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

F-12
<PAGE>

Notes to Consolidated Financial Statements (continued)

The following tables summarizes stock option activity under the Plan:

<TABLE>
<CAPTION>
NUMBER OF PRICE PER WEIGHTED AVERAGE
SHARES SHARE PRICE PER SHARE
---------------- ------------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1996 1,245,801 $ .20 - $ .80 $.32

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

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

Granted 1,075,000 $ .41 - $ .63 $.51
Exercised (178,158) $ .20 - $ 2.44 $.24
Canceled (431,730) $ .20 - $11.38 $3.17
---------------- ------------------- --------------
Balance at December 31, 1999 1,999,993 $ .20 - $14.38 $1.79
---------------- ------------------- --------------
---------------- ------------------- --------------
</TABLE>

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

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

F-13
<PAGE>

Notes to Consolidated Financial Statements (continued)

1997 EMPLOYEE STOCK PURCHASE PLAN

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

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1998 1999
---------------- ----------------- ----------------
<S> <C> <C> <C>
Adjusted pro forma net loss $ (17,047,180) $ (17,083,126) $ (10,827,615)
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Adjusted pro forma net loss per share $ (2.53) $ (1.28) $ (0.80)
---------------- ----------------- ----------------
---------------- ----------------- ----------------
</TABLE>

6. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1998 and 1999 are shown
below. A valuation allowance of $23,305,000 at December 31, 1999 has been
recognized to offset the deferred tax assets, as realization of such assets is
uncertain.

<TABLE>
<CAPTION>
December 31,
1998 1999
------------------ -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $ 14,990,000 $ 18,212,000
Research and development credits 2,000,000 2,454,000
Capitalized research and development 640,000 839,000
Depreciation 310,000 288,000
Inventory reserve 193,000 1,062,000
Other, net 487,000 450,000

--------------- ----------------
Total deferred tax assets 18,620,000 23,305,000
Valuation allowance for deferred tax assets (18,620,000) (23,305,000)

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

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

F-14
<PAGE>

Notes to Consolidated Financial Statements (continued)

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

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

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

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

7. TRANSACTIONS WITH RELATED PARTIES

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

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

MEDTRONIC

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

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

F-15
<PAGE>

Notes to Consolidated Financial Statements (continued)

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

SOFAMOR DANEK

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

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

8. SUBSEQUENT EVENTS (UNAUDITED)

MEDTRONIC

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

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

SOFAMOR DANEK

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

F-16
<PAGE>

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5,654,411 SHARES

VISTA MEDICAL
TECHNOLOGIES, INC.

COMMON STOCK
(PAR VALUE $.01 PER SHARE)

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