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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                ----------------

                                    FORM 10-K

(MARK ONE)

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                        FOR THE TRANSITION PERIOD FROM TO
                         COMMISSION FILE NUMBER 0-27588

                                  VITALCOM INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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                  DELAWARE                                           3662                                        33-0538926
      (STATE OR OTHER JURISDICTION OF                    (PRIMARY STANDARD INDUSTRIAL                         (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                    CLASSIFICATION CODE NUMBER)                       IDENTIFICATION NUMBER)
</TABLE>

                              15222 DEL AMO AVENUE
                            TUSTIN, CALIFORNIA 92780
                                 (714) 546-0147
          (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)

                         SECURITIES REGISTERED PURSUANT
                          TO SECTION 12(b) OF THE ACT:
                                      NONE

                         SECURITIES REGISTERED PURSUANT
                          TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK, PAR VALUE $0.0001 PER SHARE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                 Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or any amendment to this
Form 10-K. [X]

The aggregate market value of the stock held by non-affiliates of the
Registrant, based upon the closing sale price of the common stock on March 16,
2001 as reported on the Nasdaq Small Cap Market, was approximately $4,196,895.
Shares of common stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of March 16, 2001, there were 8,266,419 shares outstanding of the issuer's
common stock.

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                                  VITALCOM INC.

                                TABLE OF CONTENTS

                                     PART I


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Item 1.  Business                                                                                        3
Item 2.  Properties                                                                                     11
Item 3.  Legal Proceedings                                                                              11
Item 4.  Submission of Matters to a Vote of Security Holders                                            11


                                 PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholder Matters                      12
Item 6.  Selected Financial Data                                                                        13
Item 7.  Management's Discussion and Analysis of Results of Operations and Financial Condition          14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                     20
Item 8.  Financial Statements and Supplementary Data                                                    20
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           20


                                PART III

Item 10. Directors and Executive Officers of the Registrant                                             34
Item 11. Executive Compensation                                                                         36
Item 12. Security Ownership of Certain Beneficial Owners and Management                                 38
Item 13. Certain Relationships and Related Transactions                                                 39


                                 PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               40
         Signatures                                                                                     42
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                                     PART I

THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS MADE WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING
STATEMENTS INCLUDE, AMONG OTHERS, STATEMENTS USING TERMINOLOGY SUCH AS "MAY",
"WILL", "EXPECTS", "PLANS", "ESTIMATES" OR "ANTICIPATES" OR THE NEGATIVE THEREOF
OR OTHER TERMINOLOGY REGARDING BELIEFS, PLANS, EXPECTATIONS, OR INTENTIONS
REGARDING THE FUTURE. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, AND IT IS IMPORTANT TO BE AWARE THAT THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS. AMONG THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE FACTORS
CONTAINED UNDER ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" BELOW. ALL FORWARD-LOOKING STATEMENTS AND
RISK FACTORS CONTAINED IN THIS REPORT ON FORM 10-K ARE MADE AS OF THE DATE OF
THIS REPORT, BASED ON INFORMATION THAT IS AVAILABLE TO US AS OF THE DATE OF THIS
REPORT, AND WE ASSUME NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT OR
RISK FACTOR. YOU SHOULD ALSO CAREFULLY REVIEW THE RISK FACTORS AND OTHER
INFORMATION SET FORTH IN OTHER DOCUMENTS AND REPORTS THAT WE FILE FROM TIME TO
TIME WITH THE SECURITIES AND EXCHANGE COMMISSION.


ITEM 1.    BUSINESS

GENERAL

Our solutions provide information that help large healthcare organizations
improve care quality and more efficiently manage the care process, helping to
reduce care-related expenditures. Our solutions include an advanced technical
infrastructure based upon three fundamentals: (1) collection of time critical
patient information through an open, wireless network; (2) data analysis using
sophisticated software to reduce false alarms, provide a common look/feel and
patient history analysis; and (3) real-time data distribution using LAN, WAN,
wireless, and Internet based technologies. In addition to creating the technical
infrastructure, we use information gathered from a clinical assessment process
to recommend care process changes that optimize the value of the technology and
help to standardize monitoring quality across the health system, and improve the
flow of critical patient information to care providers. The result is faster
access to information critical to making informed care decisions, and an
improved ability to manage patient flow problems including bottlenecks and
transfers, which can lead to improved care satisfaction, and reduced costs.

Our solution called PatientNet(TM), collects patient monitoring or life support
data from our proprietary ECG monitors and other manufacturers' bedside devices,
sending the data over a RF network to a mission control-style central
surveillance room. Trained technicians manning the mission control central
surveillance room evaluate information acquired from ambulatory and
point-of-care monitors for 48 to 56 patients each. In case of a patient
emergency or other significant event, technicians use an integrated paging
system to immediately contact the appropriate caregiver. Because the networks
continuously distribute real-time patient information to patient viewers located
throughout the healthcare enterprise, caregivers have immediate access to a
patient's status. We believe that our PatientNet system enables hospitals to
shorten patient stays in costly intensive care units, increase medical staff
productivity, reduce costly patient transfers and improve facility utilization.
Since its introduction in 1991, our Enterprise-wide Monitoring Systems have been
installed in more than 100 acute care facilities, with the largest network
providing central surveillance of up to 300 patients located in multiple
buildings. Our direct sales force sells the PatientNet system to large acute
care hospitals and integrated health delivery networks ("IHDNs").

Our original equipment manufacturer ("OEM") channel sells central monitoring
systems as well as individual components for use in equipment manufacturers'
and/or integrators' monitoring products. OEM products that we offer acquire data
from our ambulatory ECG monitor and from the OEM customer's bedside monitoring
devices or life support equipment. The central monitoring system and display
software for each OEM customer is developed specifically to meet the
specifications of a client.

PENDING ACQUISITION OF VITALCOM BY DATA CRITICAL CORPORATION

On March 12, 2001, we entered into a definitive agreement to merge with a wholly
owned subsidiary of Data Critical Corporation, a leading provider of wireless
patient monitoring systems. Under the merger agreement, VitalCom will become a
wholly owned subsidiary of Data Critical, and our shareholders will receive 0.62
shares of Data Critical common stock for each share of VitalCom common stock
held. This exchange ratio is fixed, and will not be adjusted to reflect any
increase or decrease in the market value of our common stock, or any increase or
decrease in the market value of Data Critical's common stock, that may occur
between the date on which the merger agreement was signed and the effective date
of the merger. Consummation of the merger is conditioned on approval by the
respective stockholders of both companies, as well as certain other events.
However, certain of our stockholders, who hold an aggregate of approximately 61%
of our outstanding common stock, have entered into voting agreements with Data
Critical. Under these voting agreements they have agreed to vote in favor of the
proposed merger. These stockholders have also granted Data Critical irrevocable
proxies to vote their shares in favor of the merger.



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We believe the proposed merger, if completed, will integrate the technologies of
two hospital wireless market leaders and will result in a broader alarm
notification and networking portfolio of products for the combined companies and
their partners and customers. The proposed merger involves certain significant
risks. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Risk Factors" below)

INDUSTRY BACKGROUND

Market-driven and governmental reform initiatives have produced significant
pressures on healthcare providers to control costs, resulting in managed care
and provider capitation arrangements that shift the economic risk of healthcare
delivery from payors to providers. In order to manage this risk, healthcare
providers are changing the way in which they operate and are increasingly
focusing on controlling the cost of delivering care.

These cost control pressures are forcing hospitals to find ways to deliver care
with fewer resources. Additionally, as an increasing number of patients receive
care in lower-cost, outpatient settings the overall acuity level of patients
remaining in the hospital increases. Consequently, acute care hospitals and
IHDNs are faced with delivering quality care to more acutely ill patients using
fewer resources. In response, hospitals are increasingly turning to
technological innovation for assistance.

Historically, specific technological solutions have included patient bedside
monitors and life support equipment to assist in caring for acutely ill
patients. In high-acuity departments such as intensive care units ("ICUs"),
coronary care units ("CCUs") or "step-down" units, this equipment is typically
hard-wired to a central monitoring station. This departmental approach can be
very costly to establish and maintain, and creates a reliance on a single
vendor's monitoring hardware. In addition, dedicating equipment to individual
departments necessitates that patients be transferred in and out of the
monitored beds that are available, creating additional transfer costs and
disrupting the continuity of patient care. Lastly, the departmental approach
completely bypasses the opportunity for enterprise-wide resource sharing and
consolidation.

Outside of these specialty departments, remote bedside equipment is used to
monitor and support patients. In this setting, a patient's physiological
information is only available at the patient bedside, rather than where that
information can be readily available to caregivers. Additionally, caregivers in
these areas are subject to high patient/caregiver ratios, have limited time to
observe patient monitors and are often required to respond to false alarms that
result in the unproductive and costly use of the medical staff's time. We
believe that these existing patient monitoring solutions do not sufficiently
address the needs of hospitals to manage their increasing patient acuity in a
cost-effective manner.

THE VITALCOM SOLUTION

Our PatientNet system enables large acute care hospitals and IHDNs to respond to
cost control pressures in the healthcare industry by reengineering
labor-intensive care delivery processes to reduce costs and to raise care
quality levels with enterprise-wide monitoring care standards. Principal
benefits of the our solution include:

        -       reducing patient stays in costly ICU and CCU departments through
                central surveillance of patients in less labor-intensive
                settings.

        -       increasing productivity of medical staff through the use of
                technicians located in a centralized monitoring room.
                Technicians are trained to monitor up to 48 to 56 patients each
                and notify caregivers when patients experience a medically
                significant event, through standard paging technology.

        -       standardizing quality across the health system by having all
                patients monitored 24 x 7 by trained technicians in the mission
                control-style monitoring room.

        -       distributing patient physiological information to patient
                viewing stations throughout the facility for convenient and
                immediate access by caregivers.

        -       reducing costly patient transfers and improving overall facility
                utilization by allowing flexible bed configurations using
                wireless technology.

        -       improving asset utilization with our wireless OpenNet
                application interfacing to third party products through
                programmable interfaces. Our OpenNet application includes
                interfaces with monitoring devices from Agilent ("Agilent"
                formerly Hewlett Packard, Inc.), Protocol Systems, Inc.,
                ("Protocol") Datascope Corporation ("Datascope") and Critikon
                Inc. ("Critikon") and life support equipment from the Nellcor
                Puritan Bennett division of Mallincrodt Inc. ("Mallincrodt").



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        -       facilitating the implementation of telemedicine with our
                SiteLink(TM) application which allows a tertiary hospital to
                link its PatientNet system to remote facilities located even
                hundreds of miles away.

PRODUCTS

Enterprise-wide Monitoring Solutions Our PatientNet system provides the basic
infrastructure for current and future product offerings. In 1991, we introduced
our computer network for ECG data providing acquisition, interpretation and
distribution of patient ECG information. The OpenNet application introduced in
the first half of 1996 expanded our network capability to multi-parameter
applications by wirelessly collecting patient information from other
manufacturers' patient monitoring and life support equipment. In November 1997,
we introduced our SiteLink application, which allows a tertiary hospital to link
its PatientNet system to one at a remote facility via fractional T-1 lines or
other common wide area network infrastructures. In July 2000, we announced a new
patent pending suite of products--the "PatientNet Wireless Network(TM)", to be
sold by our direct sales force and through our OEM channels. These new products
utilize elements of micro-cellular telephone technology and wireless LAN
technology to obtain physiological data from patients in a highly secure and
reliable data link and transport that data back to a central control center
using standard Ethernet protocols and architecture. In addition, the wireless
network transmits in the 608-614 WMTS (Wireless Medical Telemetry Service)
protected medical band, which the FCC in 2000 dedicated for exclusive use by
medical telemetry and radio astronomy.

Our PatientNet system utilizes the following key components: RF technology;
personal computer-based central station and proprietary display software;
proprietary clinical analysis software and a proprietary network including
real-time remote display and paging. Our RF technology collects patient
physiological data from our proprietary ECG ambulatory transmitters and other
manufacturers' multi-parameter bedside monitoring equipment and other
manufacturers' life support equipment and transmits that data in real-time to
the mission control-style monitoring room for interpretation and distribution. A
central surveillance station consists of multiple, networked personal computers
and color monitors. The central surveillance station is capable of
simultaneously displaying up to several hundred patients' physiological data.
One trained technician is capable of monitoring up to six or seven personal
computers, each of which receives, interprets and displays real-time
physiological patient data, alarm settings and equipment status for up to eight
patients using our proprietary software. In the event that our proprietary
software detects a medically significant event, it responds with an audio or
visual alarm and prompts the technician to issue a pager call to the responsible
caregiver. Our proprietary software also stores up to 24 hours of real-time
physiological patient information for subsequent review.

ECG Applications. Our PatientNet system interprets and distributes patient
information acquired from an ambulatory digital telemetry transmitter,
approximately the size of a television remote control, that collects the
information through sensors attached to the patient's chest. Our proprietary
analysis software displays patient ECG information, including heart rate and
waveform, alarm settings and equipment status for interpretation by a trained
technician. In addition, our proprietary clinical analysis software includes
algorithms to analyze patient cardiac arrhythmia, such as asystole and
ventricular fibrillation. The most recent version of our analysis software
received clearance from the Food and Drug Administration ("FDA") in January
1995.

Multi-Parameter OpenNet Applications. Our OpenNet application uses programmable
interfaces and wireless technology to acquire, interpret and distribute
multi-parameter physiological patient information, such as blood/oxygen
saturation, respiration, temperature, end-tidal CO2 and blood pressure from
patient monitoring and life support equipment of other vendors. The software and
wireless component of the OpenNet technology have been available since March
1996. Our OpenNet application includes interfaces with bedside monitoring
devices from Agilent (Hewlett Packard), GE Marquette Medical Systems, Inc.,
Protocol, Datascope and Critikon. In November 1997 we received FDA approval for
additional OpenNet connections to other bedside monitors and to ventilators. The
ventilator feature allows clinicians to receive, display, interpret, distribute
and archive respiratory data of ventilated patients, with the first interface to
Mallincrodt's Series 7200 Ventilator.

SiteLink(TM) Application. Our SiteLink application allows a tertiary hospital to
link its PatientNet system to a remote facility, even hundreds of miles away, in
real-time, using standard wide-area networking technology. Monitoring
technicians at the tertiary facility provide 24-hour surveillance for their own
site in addition to surveillance at the remote site. The tertiary facility pages
caregivers if a patient at the remote facility is in distress and then can also
provide clinical consultations (telemedicine) to caregivers at the remote site.
Physicians can receive access to their patients from either location. We
received FDA clearance in November 1997 for our SiteLink application, which
currently is installed and running in five different locations.

NetServer Interconnectivity Application. In 1998 we placed into market
acceptance testing our first connection to the clinical patient record database
of a healthcare information system. A healthcare information system is comprised
of centralized and departmental systems for financial, practice, resource,
enterprise and clinical management that includes a repository for patient
history. Our PatientNet system obtains admit and discharge information, such as
name and patient identification number, from the healthcare information system
and also transfers clinical patient information in numeric form from our own ECG
transmitters and other manufacturers' monitoring and ventilator equipment to the
healthcare information system.



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PatientBrowser Application. In March 2000, we introduced PatientBrowser(TM),
which allows physicians and caregivers to access waveforms and retrospective
physiological information for one patient at a time from virtually any location.
The patient information accessible via this web-based application is password
protected, encrypted and/or binary encoded to ensure confidentiality of patient
information and enables caregivers to view current and retrospective patient
information via a dial up connection to the Internet, or directly via the
hospital's Intranet.

The PatientNet Wireless Network. In July 2000 we announced a new patent pending
suite of products--the "PatientNet Wireless Network(TM)". These new products
utilize elements of micro-cellular telephone technology and wireless LAN
technology to obtain physiological data from patients in a highly secure and
reliable data link and transport that data back to a central control center
using standard Ethernet protocols and architecture. The wireless suite of
products transmit in the 608-614 WMTS protected medical band and include these
components:

The DT-4500 Ambulatory ECG and Instrument transceiver: The DT-4500 is a small,
waterproof, lightweight, self-contained dual function ambulatory ECG and medical
device interface transceiver worn by the patient. It is capable of
bi-directional data communication. This provides the capability to remotely
control the DT-4500 (and other interfaced devices which support remote control)
from the central station, interactive remote viewing terminals (IRVS) and other
VitalCom wireless hand held PDA's (Personal Data Assistants). The DT-4500
provides true multi-parameter capabilities, including ambulatory ECG data and
other medical device data in real time directly to the central station where it
is analyzed for arrhythmia, stored for full disclosure and distributed in
real-time throughout the enterprise to wherever it is needed.

The DT-7000 Multiport Instrument Transceiver: The DT-7000 is a small,
lightweight instrument transceiver, which wirelessly communicates patient
information from a variety of medical devices to the central station. The
DT-7000 is capable of bi-directional data communication, providing the
capability to remotely control third party medical devices (which support remote
control) from the central station, interactive remote viewing terminals (IRVS)
and other wireless hand held PC's.

The WMTS Low Profile Access Point Antenna and DR-10000 Access Point: The Low
Profile Access Point is an omni-directional antenna is used in conjunction with
our DR-10000 Access Point to form the PatientNet Real-Time Wireless Local Area
Network infrastructure. Antennas can be scaled from small patient care wards to
enterprise-wide coverage. Each access point continuously monitors the incoming
signal from the antenna for signal drop out or fade, and automatically adjusts
either power output of the DT-4500 Ambulatory or DT-7000 Instrument Transceiver
and/or switches to an antenna that offers a stronger and more stable signal. The
WMTS Low Profile Access Point Antenna, together with the DR-10000 Access Point,
support signal roaming similar to micro-cellular phone technology, thus allowing
a seamless movement of the patient throughout the hospital while maintaining
good signal presentation.


OEM Products

Our OEM products are sold on a private-label basis to equipment manufacturers
and integrators, many of which manufacture patient monitoring or medical devices
and have multi-year working relationships with us. Our OEM products are
typically used in the emergency room, post-surgical, cardiac rehabilitation and
other discrete care units within a hospital. These departmental products are
custom programmed to provide specialized analysis or display formats required by
a particular department specialty and to allow equipment manufacturers and
integrators to deliver a product that satisfies the patient monitoring and
reporting requirements of their customers. The OEM products use many of the same
components that are used in our Enterprise-wide Monitoring Systems, allowing for
economies of scale in development, manufacturing and inventory management. When
our OEM customers offer networks, they are typically smaller in size than the
Enterprise-wide Monitoring System networks sold by our direct sales force.

Our OEM products include central workstations, proprietary analysis software, RF
products and network solutions, but currently do not include the ability to
accept multi parameter information from other vendors' systems. During 1998, we
expanded our product offering to one OEM customer to include the hardware and
software capable of real-time distribution on an enterprise-wide basis. This OEM
can sell the redistribution capability in the small (under 200 beds) hospital
market. We believe that our work with OEM customers helps us better understand
the clinical procedures and technical protocols used to create the OpenNet
connections with our OEM customers and other vendors.

CUSTOMERS

We sell our PatientNet system to large acute care hospitals and IHDNs throughout
the United States through our direct sales force. We estimate that our potential
customer base includes more than 5,200 acute care hospitals and IHDNs in the
United States. As of December 31, 2000, we had direct sale installations of our
Enterprise-wide Monitoring Systems in more than 100 such hospitals and IHDNs. In
addition, we sell our OEM products to leading patient monitoring device
companies. In 1999, Quinton and Datascope accounted for


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approximately 24.0 % and 34.0%, respectively, of our total revenues and in 2000
Quinton and Datascope accounted for approximately 13.9% and 27.7%, respectively,
of our total revenues. The loss of or a significant reduction in sales to either
of these customers could have a material adverse effect on our business,
operating results and financial condition.


SALES AND MARKETING

Our sales force is organized by region and targets key hospitals and IHDNs
within each region. The sales cycle for Enterprise-wide Monitoring Systems has
typically been nine to eighteen months from initial contact to receipt of a
purchase order and generally involves multiple sales calls on hospital
purchasing, information technology, administrative and clinical personnel,
product demonstrations at select reference sites and on-site evaluations. We
market our PatientNet system through direct sales calls, product demonstrations
at select reference sites, on-site product evaluations, participation in trade
shows and advertising in trade publications.

Due to the long sales cycle and the fixed costs related to direct sales
expenses, a failure of such direct sales efforts to create an offsetting
increase in revenues and earnings would have a material adverse effect on our
business, operating results and financial condition. In addition, during our
long sales cycle for Enterprise-wide Monitoring Systems, we may expend
substantial time, effort and funds preparing a contract proposal or negotiating
a purchase order without any guarantee that we will complete the transaction.
Significant or ongoing failure to reach definitive agreements with direct sales
customers, which we have experienced in the past, would have a material adverse
effect on our business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General".

We sell our OEM products to leading patient monitoring device companies, many of
whom have had long-term working relationships with us. Our OEM sales team has
significant experience in the healthcare industry. We market our OEM products to
our customers through expansion of existing product offerings, sales calls and
participation in trade shows.

CUSTOMER SUPPORT

We provide a wide range of support services to purchasers of our PatientNet
system. Our support program includes pre-installation assistance in network
design and planning; a training and maintenance program for clinical and other
hospital staff prior to installation and follow-up on-site training after
installation; 24-hour telephone technical support and a consignment program
during the product warranty period for systems of 24 channels or more providing
for the consignment of one central station, including one spare transmitter per
eight beds. We provide a one or three-year warranty on the equipment and
software components of our PatientNet system. We will repair or replace at no
charge any device or software which we find to be defective during the warranty
period. We offer post warranty support programs for an annual fee including
extended hardware warranty, software maintenance and hardware and software
maintenance and upgrade programs.

TECHNOLOGY

We believe that we have developed expertise in the following core technologies:
R.F. communication products, real-time application software, clinical software
algorithms and networking software. We benefit from the expertise of our
research and development staff and our investment in these core technologies.
These core technologies allow our networks to acquire, interpret and distribute
physiological patient information throughout the facility in real-time.

Radio Frequency Communication Products. Our proprietary radio frequency
communication products transmit real-time physiological information from the
patient to the central surveillance station. These communication products
operate in four radio bands: VHF (174MHz to 216 MHz, shared with TV channels
7-13); UHF (450 MHz to 470 MHz shared with land mobile users); the 900 MHz radio
band (902 MHz to 928 MHz licensed for spread spectrum operations); and WMTS
(608-614 MHz band dedicated to medical telemetry use). We have developed
over-sampling, interleaving and digital packet algorithms providing a
deterministic method for reliable radio frequency transmissions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors".

Real-time Application Software. We have a substantial investment in real-time
application software. This includes modules for displaying physiological patient
information such as real-time patient waveforms, the continuous storage of
patient information, trending of physiological parameters, event storage and
reporting, a pager interface and alarm handling. This software enables the
display of physiological data at the central station as well as on standard
desktop computer resources connected to a hospital's Intranet or connected to a
web server via Internet.

Clinical Software Algorithms. We have invested substantial energy in developing
clinical analysis software to evaluate ECG information received from our
transmitters and other patient monitors to report clinically significant events.
The heart beat detector uses three types of sophisticated analysis techniques to
differentiate the patient's heartbeat from various sources of noise. These
include linear digital filtering, nonlinear transforms and decision rule
algorithms. These algorithms detect and classify each heartbeat


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for every patient on the system and detect cardiac arrhythmia events such as
asystole or ventricular fibrillation. Our clinical software has received all
required FDA approvals.

Real-time Networking Software. We have invested in developing proprietary
network algorithms that enable simultaneous viewing of real-time physiological
patient information on multiple remote viewing stations. These algorithms
provide a deterministic method of handling network data collisions as well as
providing the minimal latency required for real-time physiological patient
information. Our implementation allows for the use of industry standard network
interface controllers, hubs and routers.

PRODUCT DEVELOPMENT

Our research and development strategy is to focus on expanding the capabilities
of existing products and developing new products. We introduced our first
OpenNet applications in 1996, permitting information from other manufacturers'
multi-parameter patient monitoring to be displayed and distributed on our
Enterprise-wide Monitoring System. Interfaces with bedside monitoring devices
from Protocol, Datascope and Critikon were introduced in 1996. In November 1997
we received FDA clearance for additional OpenNet connectors to bedside monitors
not covered in a previous FDA clearance and connections to ventilators. The
ventilator connection allows clinicians to receive, display, interpret,
distribute and archive respiratory data of ventilated patients. The first
ventilator interface is to Mallincrodt's Series 7200 Ventilator. We received FDA
clearance in November 1997 for a product application, SiteLink(TM), which
enables our Enterprise-wide Monitoring Systems at a tertiary hospital to be
linked to remote facilities, even hundreds of miles away, in real-time, via a
dedicated T-1 phone line. Monitoring technicians at the tertiary hospital
provide 24-hour surveillance to the remote site, paging caregivers if a patient
at the remote facility is in distress. During 1998, we placed into market
acceptance testing our first connection between Enterprise-wide Monitoring
System and a hospital's clinical patient record software. We introduced our new
RF communications product in 2000, which is a microcellular spread-spectrum
system. This system enables us to provide a product that is scaleable and can
provide wireless monitoring throughout an entire enterprise. The system operates
in the 608-614 MHz protected spectrum. Additionally, we have introduced data
access products that allow users to view patient physiological data in near
real-time via Internet, or Intranet.

We continually evaluate trends in the healthcare industry and, based on our
perceptions of market requirements, may outsource development of selected
products or technologies or may accelerate development of certain products while
deferring or canceling development of others. The completion of the development
of new or enhanced products involves significant expenditures without knowing
whether such products will achieve the intended benefits of cost reductions and
productivity gains or whether such products will receive market acceptance.

For the years ended December 31, 2000, 1999 and 1998, total research and
development expenditures were approximately $7.2 million, $5.7 million and $4.7
million, respectively, and represented 42.0%, 35.2% and 22.5% of revenues,
respectively. We expect to continue to allocate significant resources to these
efforts. There can be no assurance, however, that such research and development
efforts will be successful. Any failure of our OpenNet technology or other
products under development, including other Health Care Information System
"HCIS" connectivity products, to achieve their intended benefits or market
acceptance would have a material adverse effect on our business, operating
results and financial condition.


BACKLOG

Our backlog as of December 31, 2000, 1999 and 1998 was $2.9 million, $3.4
million and $1.1 million, respectively. Backlog consists of purchase orders for
products and services deliverable within twelve months and represents orders
from both hospitals and OEM customers. Purchase orders from our OEM customers
are generally cancelable at any time without penalty. Our backlog is not large
enough to assure that our revenue targets for a particular quarter will be met.
Therefore, we do not consider backlog to be a significant indication of future
performance, and sales in any quarter are dependent on orders booked and shipped
during that quarter and are not predictable with any degree of certainty.

MANUFACTURING

Our manufacturing operations consist primarily of final assembly and test and
quality control of materials, components, subassemblies and systems. We rely on
subcontractors for printed circuit board and component assembly. We obtained and
maintain ISO 9001/EN 29001 certification and are required to operate under the
Quality System Regulation (previously called the Good Manufacturing Practices)
of the FDA. Some of our products utilize components available in the short term
from only a single or limited number of sources. Certain of these components,
such as some devices manufactured by Intel, Burr-Brown Corporation, Motorola
Semiconductor Products, Inc. and Maxim Integrated Products, Inc., have been
available only on an allocation basis in the past and could be in scarce supply
again in the future. In addition, from time to time, certain components,
subassemblies and systems used by us are discontinued by manufacturers,
requiring us to replace the component, subassembly or system with an equivalent
product, or if no such equivalent can be identified to modify and re-validate
the product design. While such allocation restrictions and


                                       8
<PAGE>   9

discontinuances have not had a significant adverse effect on us to date, any
inability to obtain such components on a timely basis or at commercially
reasonable prices or to redesign the product in a timely manner could have a
material adverse effect on our business, operating results and financial
condition until alternative sources could be developed or design and
manufacturing changes could be completed. We do not have long-term supply
agreements with our component suppliers or subcontractors. Our manufacturing
facility is located at our headquarters in Tustin, California.

INTELLECTUAL PROPERTY

We rely on a combination of patent, copyright, trade secret and trademark laws,
confidentiality procedures and contractual provisions to protect our proprietary
rights. We seek to protect our software, circuitry documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. We have several patents on certain aspects of the
transmitter technology used in our products. We cannot assure that any of our
proprietary products or technologies can be patented, that any issued patent
will provide us with any competitive advantages or will not be challenged by
third parties, or that the patents of others will not have an adverse effect on
our ability to do business. Despite our efforts to protect our proprietary
rights, unauthorized parties might attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. Restricting
unauthorized use of our products is difficult, and although we are unable to
determine the extent to which unauthorized copying of our software products
exists, such copying could be a potential problem. We believe, however, that we
lead our competitors in certain technological developments, and that this lead
affords us some protection due in part to regulatory requirements related to
technological advances. Nevertheless, we cannot assure that our protective
measures for proprietary rights will be adequate or that our competitors will
not independently develop similar or superior technology, duplicate our products
or otherwise circumvent our intellectual property rights.

COMPETITION

Our Enterprise-wide Monitoring Systems compete with systems offered by a number
of competitors, including Seimans Medical (formerly Agilent, formerly part of
the Hewlett-Packard Company), SpaceLabs, Inc., GE Marquette Medical Systems,
Inc. and Protocol, substantially all of which have significantly greater
financial, technical, research and development and marketing resources than
those available to us. In addition, many of these competitors have long-standing
relationships with acute care hospitals and IHDNs. Furthermore, consolidation in
the healthcare industry and the emergence of IHDNs has resulted in larger
healthcare providers that consolidate their purchasing with a small number of
preferred vendors with whom they have had long-standing relationships. There can
be no assurance that we will be able to sell to such hospitals or IHDNs or that
we will be able to compete successfully with such vendors, and any inability to
do so would have a material adverse effect on our business, operating results
and financial condition.

Our OpenNet connections may face competition in the future from patient
monitoring companies, life support device companies and general-purpose data
network providers. Such potential competitors may elect to enter this market and
compete with us using significantly greater financial, technical, research and
development and marketing resources than are available to us. In addition, our
success in selling our multi-parameter OpenNet connections to hospitals and
IHDNs will depend to a large extent on its ability to interface with patient
monitoring and life support devices of other vendors. Any action on the part of
such other vendors to make such interfacing more difficult or impossible could
have a material adverse effect on our business, operating results and financial
condition.

The market for our OEM products is also intensely competitive. Our OEM customers
are patient monitoring and life support device companies, many of which have
significantly greater financial, technical, research and development and
marketing resources than those available to us. There can be no assurance that
current OEM customers will not elect to design and manufacture patient
monitoring and system components currently supplied by us or elect to contract
with other OEM suppliers. Any such election by one or more of such companies
would have a material adverse effect on our business, operating results and
financial condition.

In addition, we may in the future elect to incorporate in our OEM products the
hardware and software for larger networks and expand the number of OEM customers
with the hardware and software required for real-time redistribution of
information to remote viewing stations for use in specialty departments of
hospitals for which our OEM customers design and sell their products. Although
we believe that our OEM customers would not compete with our Enterprise-wide
Monitoring Systems because the Enterprise-wide Monitoring Systems are sold to
hospitals and IHDNs who elect to install larger, more dispersed systems, we
could face competition with our OEM customers to the extent hospitals forego
purchasing our facility-wide Enterprise-wide Monitoring Systems for the smaller
departmental systems of our OEM customers.

We believe that the principal competitive factors in our markets are system
features, product reliability, customer service and support, FDA regulatory
compliance expertise, existing relationships with hospitals and IHDNs, company
reputation, price and effectiveness of sales and marketing efforts. In addition,
we believe that the ability to identify the evolving needs of the healthcare
industry and the ability to develop innovative products to meet such needs are
important competitive factors. We believe that we compete favorably with respect
to these factors but there can be no assurance that we will continue to compete
favorably.



                                       9
<PAGE>   10

GOVERNMENT REGULATION

Certain of our products are regulated in the United States as medical devices by
the FDA under the Federal Food, Drug, and Cosmetic Act and require implementing
regulations and pre-market notification clearance or approval by the FDA prior
to commercialization. In addition, certain material changes or modifications to
the intended use, labeling or manufacturing of cleared or approved medical
devices are also subject to FDA clearance or approval. The FDA regulates the
development, testing, safety, labeling, storage, record keeping, advertising,
production and distribution of medical devices in the United States.
Noncompliance with applicable requirements can result in civil or criminal
penalties, recall or seizure of products, or total or partial suspension of
production.

Generally, before a new medical device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance by
filing a 510(k) pre-market notification or obtaining approval of a pre-market
approval ("PMA") application. If a medical device manufacturer or distributor
can establish that a device is "substantially equivalent" to a legally marketed
device for which the FDA has not called for PMA's, the manufacturer or
distributor may seek clearance from the FDA to market the device by filing a
510(k) pre-market notification. The 510(k) pre-market notification may need to
be supported by appropriate data establishing the claim of substantial
equivalence to the satisfaction of the FDA.

If a manufacturer or distributor of a medical device cannot establish
substantial equivalence, the proposed device must be approved through a PMA
application, which must be supported by statistical analysis of clinical data.
The PMA application approval process can be expensive, uncertain and lengthy. To
date we have received clearance on all of our products under the 510(k) process
and have not been required to file a PMA application. The FDA has published a
proposed rule that would require over forty devices, including those using
arrhythmia software produced by our competitors, and us following a notice
period, to receive PMA approvals or be discontinued for sale. A petition has
been filed by some industry participants, including us, in response to the
notice, to formally request that the FDA reclassify arrhythmia software devices
from Class III devices to Class II devices. This petition is currently under FDA
review. If the FDA reclassifies arrhythmia software devices to Class II, our
products will not require any additional clearances. However, if the FDA does
not reclassify the arrhythmia software devices and publishes its final rule,
such software devices would be subject to the lengthy and expensive PMA process,
which could interrupt or terminate the sales of our and/or our competitors'
arrhythmia software devices. Any such interruption or termination could have a
material adverse effect on our business, financial condition and results of
operations. We are required to adhere to applicable FDA regulations including
the new Quality System Regulations (previously called the Good Manufacturing
Practices), which include testing, control, and documentation requirements and
the Medical Device Reporting Regulations. Failure to receive or delays in
receipt of FDA clearance or approvals, including the need for extensive clinical
trials or additional data as a prerequisite to clearance or approval, would have
a material adverse effect on our business, operating results and financial
condition. Changes in existing regulations or adoption of new governmental
regulations or policies could prevent or delay required regulatory approvals of
our products.

Our RF transmitter devices are subject to regulation by the Federal
Communication Commission ("FCC"), and applicable approvals must be obtained
before shipment of such products. We believe that all of our products designated
for sale in the United States meet applicable FCC regulations, including those
pertaining to electromagnetic emissions. The FCC approval process starts with
the collection of test data that demonstrates that a product meets the
requirements stated in the FCC regulations. This data is then included as part
of a report and application that is submitted to the FCC requesting approval.
The FCC may grant approval, request additional information, or withhold
approval. Any failure of our products to conform to governmental regulations or
any delay or failure to obtain required FCC approvals in the future, if any,
could cause the delay or loss of sales of our products and therefore have a
material adverse effect on our business, financial condition and result of
operations.

Our proprietary communication products transmit real-time physiological
information from the patient to the central surveillance station. These
communication products currently operate in the following radio bands: UHF 608
MHz to 614 MHz band; VHF (174 MHz to 216 MHz, shared with TV channels 7-13); UHF
(450 MHz to 470 MHz, shared with land mobile users); and the 900 MHz radio band
(902 MHz to 928 MHz licensed for spread spectrum operation). The majority of our
RF products use the vacant television frequencies in the VHF band. The FCC is
requiring all television stations to implement digital broadcasting transmission
for High Definition Television (HDTV). Some major metropolitan areas were
required to implement HDTV by December 31, 1998 and other markets will be
required to implement by December 31, 2006. In order to implement HDTV the FCC
has granted each TV channel an additional 6 MHz channel for digital broadcasting
until the transition period ends, at which time the broadcaster would return one
of the two channels. As TV stations use the additional 6 MHz channel for the
digital broadcasting transition, which may take years, they may overlap into the
radio spectrum which has been used for medical RF applications. Customers of our
lower power RF communication products may begin seeing more interference in the
future. This interference may result in us having to re-tune our RF transmitters
to other channels in order to reduce interference. In the event of high
interference our customers may need to purchase equipment to transmit in the UHF
frequency range. In 1998 the FCC expanded the usable UHF frequencies for medical
RF from the licensed 450 MHz to 470 MHz band to the previously unlicensed 470
MHz to 668 MHz frequency range. With VHF frequency ranges available for medical
RF use potentially becoming more limited and the UHF frequency ranges expanding,
our competitors who have historically focused their RF products in what was the
more limited UHF band, may now have a competitive


                                       10
<PAGE>   11

advantage compared to us, until such time as we expand our UHF RF product
offerings. Any such competitive advantage of our competitors and any additional
development costs associated with expanding our UHF RF product offerings could
have a material adverse effect on our business, operating results and financial
condition. Additionally, future regulatory changes could significantly affect
our operations by diverting our development efforts, making current products
obsolete or increasing the opportunity for additional competition which could
have a material adverse effect on our business, operating results and financial
condition.

During 1998 we joined a task force created by the American Hospital Association
(AHA) and the FDA called the Medical Telemetry Task Force (the "Task Force")
along with other medical RF users, organizations, and vendors, including certain
of our competitors. The purpose of the Task Force was to respond to potential
interference problems from HDTV, land mobile users and low power television to
wireless patient monitoring devices by recommending both rule making language
and specific spectrum allocation to the FCC. The Task Force's mission was to
identify protected spectrum candidates for future medical telemetry use,
evaluate use and make recommendations to the FCC. As such the Task Force
petitioned the FCC to allocate the UHF 608 MHz to 614 MHz band, currently
reserved for radio astronomy, for medical use on a primary basis. In June 2000
the FCC approved this new rule which recommends that hospitals and independent
health care networks evaluate whether or not their medical telemetry systems are
at risk and take appropriate measures to reduce that risk. The FCC also
recommends that the best way to accomplish this is to use telemetry systems
operating in the new WMTS frequency bands. We have spent considerable amounts on
research and development of this new product. If hospitals and independent
health care networks decide not to move their wireless telemetry systems to the
new band, this could have a material adverse effect on our business, operating
results and financial condition. In addition, development of RF transmitter and
receiver products is expensive and is diverting research and development
resources from other projects resulting in higher costs and delayed projects.
Any resulting competitive advantage of our competitors and any additional
development costs associated with expanding our UHF RF product offerings could
have a material adverse effect on our business, operating results and financial
condition. Additionally, future regulatory changes could significantly affect
our operations by diverting our development efforts, making current products
obsolete or increasing the opportunity for additional competition, which could
have a material adverse effect on our business, operating results and financial
condition.

EMPLOYEES

As of December 31, 2000, we had approximately 131 full-time employees, of which
29 were in customer service, marketing and sales, 36 were in research and
development, 52 were in manufacturing, quality assurance and regulatory affairs
and 14 were in administration. None of our employees is covered by a collective
bargaining agreement, we have experienced no work stoppages and we believe that
its relationship with its employees is good.

ITEM 2.  PROPERTIES

Our headquarters are located in Tustin, California and consist of approximately
46,000 square feet. We lease these facilities under a lease expiring in June
2005, with an option to extend through June 2010. We believe that this facility
will be adequate to satisfy our anticipated business requirements.

ITEM 3.  LEGAL PROCEEDINGS

We are not a party to any material legal proceedings. No such proceedings were
terminated during the fourth quarter of 2000.

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

 Not applicable.


                                       11
<PAGE>   12

                                     PART II

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

Market and Market Price for Common Stock. Our common stock is traded over the
counter under the symbol "VCOM". Since September 28, 1999, our common stock has
been quoted on the Nasdaq Small Cap Market. Prior to that time, our common stock
was quoted on the Nasdaq National Market.

The following table sets forth, for the periods indicated, the high and low
sales prices of our common stock, as reported by the Nasdaq National Market up
until September 27, 1999, and thereafter as reported by the Nasdaq Small Cap
Market.


<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED
                              ------------------------------------------------------------
                              MARCH 31         JUNE 30      SEPTEMBER 30       DECEMBER 31
                              --------         -------      ------------       -----------
<S>                           <C>              <C>          <C>                <C>
1999
  High ....................    $3.000          $2.250            $2.375          $3.500
  Low......................     1.156           1.063             1.750           0.750
2000
  High.....................     8.375           3.375             3.250           5.250
  Low......................     1.563           1.125             1.313           1.000
</TABLE>

Holders. As of March 16, 2001, the approximate number of holders of record of
our common stock, according to the records of our transfer agent, was 43.

Dividends. We have never paid cash dividends on our common stock and do not
currently have any plans to pay such dividends in the foreseeable future. Our
dividend policy is reviewed from time to time by our Board of Directors in light
of the Company's earnings and financial condition and such other business
considerations as the Board of Directors considers relevant.

UNREGISTERED SALES OF THE REGISTRANT'S EQUITY SECURITIES DURING LAST FISCAL YEAR

Common Stock Contributions to 401(k) Plan. At December 31, 2000 the Company was
obligated to issue 167,516 shares of Common Stock to employees as a matching
contribution to the 401(k) Plan for the year 2000. This stock match was made in
the first quarter of 2001 in the Company's treasury stock.


                                       12
<PAGE>   13

ITEM 6.  SELECTED FINANCIAL DATA

The selected financial data set forth below for the periods and the dates
indicated is derived from the audited financial statements of the Company. The
statement of operations data for each of the three fiscal years in the period
ended December 31, 2000, and the balance sheet data at December 31, 1999 and
2000, has been derived from the audited financial statements included herein
which have been audited by Deloitte and Touche LLP Independent auditors. The
Company's statements of operations data for the fiscal years ended December 31,
1996 and 1997 and balance sheet data as of December 31, 1996, 1997 and 1998,
have been derived from audited financial statements, not included herein, also
audited by Deloitte and Touche LLP, independent auditors. The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and Notes thereto included elsewhere in this report on Form 10-K. Historical
results of operations are not necessarily indicative of future results.

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                     --------------------------------------------------------------------
                                                       1996           1997           1998           1999           2000
                                                     --------       --------       --------       --------       --------
                                                                      (In thousands, except per share data)
<S>                                                  <C>            <C>            <C>            <C>            <C>
STATEMENTS OF OPERATIONS DATA:
Revenues ......................................      $ 18,372       $ 21,794       $ 20,859       $ 16,290       $ 17,202
Cost of revenues ..............................         9,680         11,477          9,562          7,589          8,513
                                                     --------       --------       --------       --------       --------
Gross profit ..................................         8,692         10,317         11,297          8,701          8,689
                                                     --------       --------       --------       --------       --------
Operating expenses:
  Sales and marketing .........................         9,515          8,562          6,794          6,128          6,061
  Research and development ....................         5,434          4,816          4,698          5,729          7,220
  General and administrative ..................         2,507          2,536          2,158          2,358          2,227
  Restructuring charges .......................           481
                                                     --------       --------       --------       --------       --------
          Total operating expenses ............        17,937         15,914         13,650         14,215         15,508
                                                     --------       --------       --------       --------       --------
Operating loss ................................        (9,245)        (5,597)        (2,353)        (5,514)        (6,819)
                                                     --------       --------       --------       --------       --------
Other income, net .............................           975            973            890            759            479
                                                     --------       --------       --------       --------       --------
Loss before provision (benefit) for
  Income taxes ................................        (8,270)        (4,624)        (1,463)        (4,755)        (6,340)
Provision (benefit) for income taxes ..........        (1,902)            26             25             36             36
                                                     --------       --------       --------       --------       --------
Net loss ......................................      $ (6,368)      $ (4,650)      $ (1,488)      $ (4,791)      $ (6,376)
                                                     ========       ========       ========       ========       ========
Net loss per basic common share (1) ...........      $  (0.90)      $  (0.58)      $  (0.18)      $  (0.60)      $  (0.79)
                                                     ========       ========       ========       ========       ========
Net loss per diluted common share (1) .........      $  (0.90)      $  (0.58)      $  (0.18)      $  (0.60)      $  (0.79)
                                                     ========       ========       ========       ========       ========
Weighted average basic common shares (1) ......         7,084          8,001          8,148          8,046          8,020
                                                     --------       --------       --------       --------       --------
Weighted average diluted common shares(1) .....         7,084          8,001          8,148          8,046          8,020
                                                     ========       ========       ========       ========       ========
</TABLE>



<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                  -----------------------------------------------------------
                                                    1996         1997         1998         1999         2000
                                                  -------      -------      -------      -------      -------
                                                                         (IN THOUSANDS)
<S>                                               <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Cash equivalents and short-term investments       $20,120      $18,157      $15,830      $12,380      $ 3,657
Working capital ............................       23,980       19,965       19,249       14,144        8,049
Total assets ...............................       31,921       26,708       24,223       18,686       13,939
Long-term debt, excluding current portion ..           82           60           32
Total stockholders' equity .................       26,973       22,521       21,462       16,105       10,224
</TABLE>



(1)     See Note 1 of the Notes to the Financial Statements for a description of
        shares used in calculating net loss per share.


                                       13
<PAGE>   14

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

RESULTS OF OPERATIONS

The following table sets forth the percentage of total revenues represented by
certain items from our statements of operations for the periods indicated:

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                  ----------------------------------
                                                   1998          1999          2000
                                                  ------        ------        ------
<S>                                               <C>           <C>           <C>
Revenue ....................................       100.0%        100.0%        100.0%
Cost of revenues ...........................        45.8          46.6          49.5
                                                  ------        ------        ------
Gross profit ...............................        54.2          53.4          50.5
                                                  ------        ------        ------
Operating expenses:
  Sales and marketing ......................        32.6          37.6          35.2
  Research and development .................        22.5          35.2          42.0
  General and administrative ...............        10.3          14.5          12.9
                                                  ------        ------        ------
          Total operating expenses .........        65.4          87.3          90.1
                                                  ------        ------        ------
Operating loss .............................       (11.2)        (33.9)        (39.6)
Other income, net ..........................         4.3           4.7           2.8
                                                  ------        ------        ------
Loss before provision for income taxes .....        (6.9)        (29.2)        (36.8)
Provision for income taxes .................         0.1           0.2           0.2
                                                  ------        ------        ------
Net loss ...................................        (7.0)%       (29.4)%       (37.0)%
                                                  ======        ======        ======
</TABLE>


Total Revenues. Total revenues consist of revenue from sales of Enterprise-wide
Monitoring Systems and support, and OEM products, together with fees for
installation and servicing of Enterprise-wide Systems. Total revenues increased
5.6% to $17.2 million in 2000 from $16.3 million in 1999. Total revenues
decreased 21.9% to $16.3 million in 1999 from $20.9 million in 1998. Revenues
from Enterprise-wide Monitoring Systems increased 59.8% to $8.2 million in 2000
from $5.1 million in 1999. Revenues from Enterprise-wide Monitoring Systems
decreased 41.4% to $5.1 million in 1999 from $8.8 million in 1998. Revenues from
OEM products decreased 19.0% to $8.1 million in 2000 from $11.1 million in 1999.
Revenues from OEM products decreased 7.7% to $11.1 million in 1999 from $12.1
million in 1998. The increase in Enterprise-wide Monitoring Systems revenues in
2000 was primarily due to two new large hospital customers who purchased our
newly developed WMTS wireless network product. The decrease in Enterprise-wide
Monitoring Systems revenues in 1999 was primarily due to delays in the signing
of sales agreements with hospitals, as hospitals diverted their capital spending
to address other vendors' Year 2000 issues. Additionally, these delays were
caused by the extended analysis of our new product offerings and after-sales
support programs by prospective customers. The decrease in OEM product revenues
in 2000 was due to a continued slow down of a large OEM customer as they
reorganized their cardiac rehabilitation sales force, and our later than
expected roll-out of our new WMTS wireless network products which created some
year-end product shipment delays. The decrease in OEM product sales in 1999
resulted from a shift in sales strategy by a large OEM customer following its
sale to new investors.

Gross Profit. Cost of goods sold includes material, direct labor, overhead and,
for Enterprise-wide Monitoring Systems, installation expenses. Our overall gross
margin during any given period depends on our sales mix during that period, as
certain products generate a higher gross margin than do others. Gross margins
were 50.5%, 53.4%, and 54.2% in 2000, 1999 and 1998, respectively. The decrease
in gross margin in 2000 compared to 1999 was due primarily to the greater than
expected costs related to the shipment and installation of our new WMTS wireless
network products in the third and fourth quarters. The inability to control
these costs in the future would have a material adverse effect on our business,
operating results and financial condition. The decrease in gross margin in 1999
compared to 1998 was due to the lower percentage of Enterprise-wide Monitoring
Systems in the sales mix, which historically have generated higher gross margins
than OEM products.

Sales and Marketing Expenses. Sales and marketing expenses include payroll,
commissions and related personnel costs attributable to Enterprise-wide
Monitoring Systems and OEM sales and marketing personnel, travel and
entertainment expenses, and other promotional expenses. Sales and marketing
expenses decreased 1.1% to $6.06 million in 2000 from $6.1 million in 1999.
Sales and marketing expenses decreased 9.8%, to $6.1 million in 1999 from $6.8
million in 1998. The decrease in sales and marketing expenses in 2000 from 1999
was primarily due to a reduction in sales support. The decrease in sales and
marketing expenses in 1999 from 1998 was primarily due to lower sales personnel
salaries associated with the reduction in the number of direct sales
representatives, as well as reduced commissions and travel expenses resulting
from the reduced revenue volumes in 1999.

Research and Development Expenses. Research and development expenses include
payroll and related costs attributable to research and development personnel,
prototyping expenses and other costs. Research and development expenses
increased 26.0% to $7.2 million in 2000 from $5.7 million in 1999. Research and
development expenses increased 22.0% to $5.7 million in 1999 from $4.7 million
in 1998. Research and development expenses increased in 2000 from 1999 due to a
continued increase in third party


                                       14
<PAGE>   15

contractor expenses related to the development and introduction of the Company's
new WMTS wireless technology products which began shipping in the third and
fourth quarters of 2000. Research and development expenses increased in 1999
from 1998 due to higher third party contractor expenses related to our
development of prototype hardware products.

General and Administrative Expenses. General and administrative expenses include
accounting, finance, MIS, human resources, general administration, executive
officers and professional fee expenses. General and administrative expenses
decreased 5.5% to $2.2 million in 2000 from $2.4 million in 1999. General and
administrative expenses increased 9.2% to $2.4 million in 1999 from $2.2 million
in 1998. The decrease in general and administrative expenses in 2000 from 1999
was primarily due to a reduction in headcount of one person. The increase in
general and administrative expenses in 1999 in comparison to 1998 was primarily
due to higher salaries and employee benefits expenses related to an increased
headcount, as well as increased professional fees.

Other Income, Net. Other income, net consists primarily of interest income
earned on short-term investments and cash equivalents, net of payments for
outstanding indebtedness. Other income, net decreased 36.8% to $479,216 in 2000
from $758,555 in 1999. Other income, net, in 1999 decreased 14.7% to $758,555
compared to $889,621 in 1998. The decrease in both years was due to lower income
derived from the decline in short-term investments and cash in comparison to the
prior year.

Provision for Income Taxes. We paid minimal state taxes in 2000, 1999 and 1998
due to our net loss position. Our utilization of our credit carry forwards
depends upon future income and may be subject to an annual limitation, required
by the Internal Revenue Code of 1986 and similar state provisions (see Note 9 of
the Notes to the Financial Statements).


LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations (including capital expenditures) through net
proceeds from our February 1996 initial public offering, a bank line of credit
and long-term debt. We issued 2,300,000 shares of common stock in our February
1996 initial public offering, raising $25.6 million, net of expenses. At
December 31, 2000, we had $6.2 million in cash, cash equivalents, and restricted
cash, compared to $12.4 million at December 31, 1999.

At December 31, 2000, our principal sources of liquidity consisted of $6.2
million of cash, cash equivalents, and restricted cash and $5.0 million of
available credit facilities. In March 2000, the Company renewed a secured
lending arrangement (the "Agreement") with Silicon Valley Bank, providing for up
to $5.0 million in total borrowings bearing interest at the bank's prime rate
plus .50%. As a compensating balance, we have agreed to maintain at least
$2,500,000 in a money market fund designated by the bank. The bank does not have
a security interest in any of our assets until we borrow under the line of
credit. The Agreement, which would have expired in March 2001, has been extended
for an additional 60 days while we arrange to secure a new lending arrangement
with the bank. The Agreement imposes financial covenants that require that we
maintain minimum liquidity levels and total liabilities to tangible net worth
ratios, as well as specified annual and quarterly net loss (after taxes)
amounts. We had no outstanding borrowings with the bank under the Agreement as
of December 31, 2000 and, as of that date, we were in compliance with all
covenants under the Agreement except for a profitability covenant for which we
have received a waiver.

We used $5.7 million of cash in operating activities in 2000, compared to $2.3
million and $2.2 million in 1999 and 1998, respectively, primarily resulting
from net losses in 2000, 1999, and 1998 of $6.4 million, $4.8 million, and $1.5
million, respectively. During 2000, accounts receivable increased $1.4 million
due to shipments in the fourth quarter, while accounts payable increased $1.0
million to purchase inventory related to those shipments. During 1999, the net
loss of $4.8 million and the uses of cash were partially offset by the $2.3
million decrease in account receivable. During 1998, the net loss of $1.5
million and uses of cash were partially offset by the $735,338 in non-cash
adjustments provided by depreciation and amortization of fixed assets and
intangible assets, and $420,600 through the reduction in inventories.

We generated a net of $1.8 million in cash from investing activities in 2000,
compared to cash used of $385,604 and cash generated of $347,293 in 1999 and
1998, respectively. The net amount generated in 2000 resulted from $5.3 million
provided by the sale of short-term investments, offset by an increase in
restricted cash of $2.5 million and $925,998 used for the purchase of capital
equipment and other assets, the majority of which were purchased for use in the
development and production of our new suite of WMTS wireless network products.
The cash used in 1999 and 1998 was primarily for the purchase of capital
equipment, and the purchases of short-term investments.

We generated a net of $432,727 of cash in financing activities in 2000. Cash
generated from financing activities was primarily due to $461,523 in net
proceeds from (i) the exercise of stock options, and (ii) common stock sold
through our employee stock purchase plan. We used $665,021 and generated
$144,949 of cash from financing activities in 1999 and 1998, respectively. The
primary use of cash from financing activities in 1999 was the repurchase of
363,550 shares of our common stock at a total cost of $740,154. The primary
source of cash from financing activities in 1998 was the net proceeds from the
issuance of common stock to our employee stock purchase plan.

                                       15
<PAGE>   16

Our principal commitment at December 31, 2000 consisted of our lease of our
office and manufacturing facility in Tustin, California.

We believe that existing cash resources, cash flows from operations, if any, and
line of credit facilities will be sufficient to fund our operations for at least
the next twelve months.


NEW ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. Under SFAS 133, certain contracts that were formerly
considered derivatives may now meet the definition of a derivative. We have
adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not
have a significant impact on our financial position, results of operations, or
cash flows.

In December 1999, Staff Accounting Bulletin No. 101 ("SAB 101) was issued to
provide the view of the staff of the Financial Accounting Standards Board
("FASB") concerning the application of generally accepted accounting principles
to revenue recognition in financial statements. SAB 101 is effective no later
than the fourth fiscal quarter of fiscal years beginning after December 15,
1999. We adopted this statement during the fourth quarter of the year ended
December 31, 2000. The adoption of the statement did not have a material impact
on our results of operations.

In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), Accounting for
Certain Transactions Involving Stock Compensation. FIN 44 is an interpretation
of Accounting Principal Board's Opinion No. 25 Accounting for Stock Issued to
Employees (APB 25). Among other matters, FIN 44 clarifies the application of APB
25 regarding the definition of employee for purposes of applying APB 25, the
criteria for determining whether a plan qualifies as non-compensatory and the
accounting consequences of modifications to the terms of previously issued stock
options or similar awards. We adopted the provisions of FIN 44 in the third
quarter of 2000. The adoption of FIN 44 did not have a material impact on the
Company's results of operations.

EUROPEAN MONETARY UNION

Within Europe, the European Economic and Monetary Union (the "EMU") introduced a
new currency, the euro, on January 1, 1999. The new currency is in response to
the EMU's policy of economic convergence to harmonize trade policy, eliminate
business costs associated with currency exchange and to promote the free flow of
capital, goods and services.

On January 1, 1999, the participating countries adopted the euro as their local
currency, initially available for currency trading on currency exchanges and
non-cash transactions such as banking. The existing local currencies, or legacy
currencies, will remain legal tender through January 1, 2002. Beginning on
January 1, 2002, euro-denominated bills and coins will be issued for cash
transactions. For a period of up to six months from this date, both legacy
currencies and the euro will be legal tender. On or before July 1, 2002, the
participating countries will withdraw all legacy currencies and exclusively use
the euro.

Our transactions are recorded in U.S. Dollars and we do not currently anticipate
future transactions being recorded in the Euro. Based on the lack of
transactions recorded in the Euro, we do not believe that the Euro will have a
material effect on our financial position, results of operations or cash flows.
In addition, we have not incurred and do not expect to incur any significant
costs from the continued implementation of the Euro, including any currency
risk, which could materially affect our business, financial condition or results
of operations.

RISK FACTORS

Dependence on Increased Market Acceptance of Enterprise-wide Monitoring Systems.
Since 1995, our sales levels for our Enterprise-wide Monitoring Systems have
been lower than expected, which, together with investments and expense levels
that are incurred based on the expectation of higher sales, has resulted in net
losses in each year since 1995 and has had a material adverse effect on our
business, operating results and financial condition. If we are not successful in
increasing sales levels of our Enterprise-wide Monitoring Systems in future
periods, our business, operating results and financial condition will continue
to be materially adversely affected. In addition, although our Enterprise-wide
monitoring products have been installed in more than 100 hospitals, there is no
assurance that our products will achieve the hospital penetration necessary to
increase sales.

Fixed Exchange Ratio in Proposed Merger with Data Critical. On March 12, 2001,
we agreed to merge with Data Critical. Under the terms of the merger agreement,
upon effectiveness of the merger, our stockholders will receive 0.62 shares of
Data Critical common stock for each share of VitalCom common stock held. This
exchange ratio is fixed, and will not be adjusted to reflect any


                                       16
<PAGE>   17

increase or decrease in the market value of our common stock, or any increase or
decrease in the market value of Data Critical's common stock, that may occur
between the date on which the merger agreement was signed and the effective date
of the merger. As a result, pending the completion of the merger, the market
price of our common stock will be significantly impacted by the market value of
Data Critical's common stock, as it may fluctuate from time to time.

Risks Related to the Proposed Merger with Data Critical is Not Completed. The
completion of the proposed merger with Data Critical is subject to the
satisfaction of a number of conditions, including approval by our stockholders
and the stockholders of Data Critical. Accordingly, there can be no assurance
that the proposed merger will be completed. The proposed merger has required
and, until completion of the merger will continue to require, substantial time
and effort on the part of our management, which has diverted, and will continue
to divert, some of their attention from their normal duties. In addition, it is
possible, in light of the public announcement of our proposed merger with Data
Critical, that some of our customers, prospective customers and/or employees may
feel uncertain concerning our plans for the future in the event that the merger
is not completed. The diversion of management time and attention caused by the
proposed merger, and any uncertainty pertaining to our future plans in the minds
of our customers, prospective customers and/or employees as the result of the
failure to complete the merger following its public announcement, could have a
material adverse effect on our business, financial condition and results of
operations. Moreover, we have incurred and, pending completion of the merger
will continue to incur, substantial accounting, legal and other expenses related
to the merger. In the event that the merger is not completed, except under
certain limited circumstances, we will not be able to recover any portion of
those expenses. Additional information concerning the proposed merger and its
related risks will be contained in a joint proxy statement/prospectus that we
intend to prepare with Data Critical and send to our stockholders prior to the
special meeting of our stockholders at which approval of the merger will be
sought.

Introduction of New Product -- WMTS PatientNet Wireless Network in the UHF
608-614 MHz band for the e-Hospital. During 1998 we joined a task force created
by the American Hospital Association (AHA) and the FDA called the Medical
Telemetry Task Force (the "Task Force") along with other medical RF users,
organizations, and vendors, including certain of our competitors. The purpose of
the Task Force was to respond to potential interference problems from HDTV, land
mobile users and low power television to wireless patient monitoring devices by
recommending both rule making language and specific spectrum allocation to the
FCC. The Task Force's mission was to identify protected spectrum candidates for
future medical telemetry use, evaluate use and make recommendations to the FCC.
As such the Task Force petitioned the FCC to allocate the UHF 608 MHz to 614 MHz
band, currently reserved for radio astronomy, for medical use on a primary
basis. In June 2000 the FCC approved this new rule which recommends that
hospitals and independent health care networks evaluate whether or not their
medical telemetry systems are at risk and take appropriate measures to reduce
that risk. The FCC also recommends that the best way to accomplish this is to
use telemetry systems operating in the new WMTS frequency bands. We have spent
considerable amounts on research and development of this new product. If
hospitals and independent health care networks decide not to move their wireless
telemetry systems to the new band, this could have a material adverse effect on
our business, operating results and financial condition. In addition,
development of RF transmitter and receiver products is expensive and is
diverting research and development resources from other projects resulting in
higher costs and delayed projects. Any resulting competitive advantage of our
competitors and any additional development costs associated with expanding our
UHF RF product offerings could have a material adverse effect on our business,
operating results and financial condition. Additionally, future regulatory
changes could significantly affect our operations by diverting our development
efforts, making current products obsolete or increasing the opportunity for
additional competition, which could have a material adverse effect on our
business, operating results and financial condition.

Customer Concentration. Our OEM product sales, which represented approximately,
57.9%, 68.6%, and 52.2% of our total net revenues in 1998, 1999 and 2000,
respectively, have historically been to a small number of OEM customers. In
1998, Quinton Instrument Company ("Quinton") and Datascope Corporation
("Datascope") accounted for approximately 19.7% and 22.6%, respectively, of our
total revenues. In 1999, Quinton and Datascope accounted for approximately 24.0%
and 34.0%, respectively. In 2000, Quinton and Datascope accounted for
approximately 13.9% and 27.7% respectively. The loss of, or a reduction in sales
to, either of these customers would have a material adverse effect on our
business, operating results and financial condition.

Fluctuations in Quarterly Results. Our quarterly operating results have
fluctuated in the past and may fluctuate significantly from quarter to quarter
in the future as a result of a number of factors, including, but not limited to,
the size and timing of orders; the length of the sales cycle; our success in
expanding our sales and marketing programs and the effects of changes in sales
force alignment; the ability of our customers to obtain budget allocations for
the purchase of our products; changes in pricing policies or price reductions by
us or our competitors; mix of sales between Enterprise-wide Monitoring Systems
and OEM products; the timing of new product announcements and introductions by
us or our competitors; deferrals of customer orders in anticipation of new
products or product enhancements; our ability to develop, introduce and market
new products and product enhancements; market acceptance of new products or
product enhancements; our ability to control costs; the availability of
components; costs associated with responding to software "bugs" or errors;
regulatory compliance and timing of regulatory clearances; changes in government
regulations and other regulatory developments; and general economic factors.



                                       17
<PAGE>   18

Our products are generally shipped as orders are received and, accordingly, we
have historically operated with limited backlog. As a result, sales in any
quarter are dependent on orders booked and shipped in that quarter and are not
predictable with any degree of certainty. Further, a large percentage of any
quarter's shipments have historically been booked in the last weeks of the
quarter. In addition, a significant portion of our expenses is relatively fixed,
and the amount and timing of increases in such expenses are based in large part
on our expectations for future revenues. If revenues are below expectations in
any given quarter, the adverse effect may be magnified by our inability to
maintain gross margins and to decrease spending to compensate for the revenue
shortfall. This dynamic has contributed to our net losses in the past. Further,
we have sometimes experienced seasonal variations in operating results, with
sales in the first quarter being lower than in the preceding fourth quarter due
to customer budget cycles and sales remaining relatively flat during the third
quarter.

Transfer of Securities from the Nasdaq National Market to the Nasdaq SmallCap
Market and Possible Delisting of Securities from the Nasdaq Small Cap Market.
Our common stock was traded on the Nasdaq National Market from the date of our
initial public offering until September 27, 1999. On September 28, 1999, trading
was moved to the Nasdaq Small Cap Market because the Company did not meet the
National Market continued listing requirement that the market value of publicly
held shares must be at least $5 million. The Nasdaq Small Cap Market's continued
listing standards require the Company to have (i) at least 500,000 shares
publicly held; (ii) a market value of publicly held shares of at least $1
million; (iii) net tangible assets of at least $2 million; (iv) at least 300
shareholders of round lots; (v) at least two market makers, and (vi) a minimum
bid price of at least $1 per share. If we fail to comply with these listing
standards, trading of our common stock on the Nasdaq Small Cap Market could be
terminated, which could adversely affect the ability or willingness of investors
to purchase our securities and therefore would severely adversely affect the
market liquidity for our securities.

Lengthy Sales Cycle. The decision by a healthcare provider to replace or
substantially upgrade its clinical information systems typically involves a
major commitment of capital and an extended review and approval process, and
this review and approval process is becoming more complex, more financially
oriented and increasingly subject to overall integration into the hospital's
information systems planning. The sales cycle for our Enterprise-wide Monitoring
Systems has typically been nine to eighteen months from initial contact to
receipt of a purchase order. During this period, we expend substantial time,
effort and funds preparing a contract proposal and negotiating a purchase order
without any guarantee that we will complete the transaction. Any significant or
ongoing failure to reach definitive agreements with customers has in the past
and may in the future have a material adverse effect on our business, operating
results and financial condition.

Competition. Our Enterprise-wide Monitoring Systems compete with systems offered
by a number of competitors, including Agilent, SpaceLabs, Inc. and GE Marquette
Medical Systems, Inc., all of which have significantly greater financial,
technical, research and development and marketing resources than those available
to us. In addition, many of these competitors have longstanding relationships
with acute care hospitals and IHDNs. There can be no assurance that we will be
able to sell to such hospitals or IHDNs or that we will be able to compete
successfully with such vendors and any inability to do so could have a material
adverse effect on our business, operating results and financial condition. While
we are not aware of any competitive open system multi-parameter Enterprise-wide
Monitoring Systems currently available, our OpenNet applications may face
significant competition in the future from HCIS providers, patient monitoring
companies, life support device companies and general purpose data network
providers. Such potential competitors may elect to enter this market and compete
with us using significantly greater financial, technical, research and
development and marketing resources than are available to us. In addition, our
success in selling our multi-parameter OpenNet networks to hospitals and IHDNs
will depend to a large extent on our ability to interface with patient
monitoring and life support devices of other vendors. Any action on the part of
such other vendors to make such interfacing more difficult or impossible could
have a material adverse effect on our business, operating results and financial
condition. The market for our OEM products is also intensely competitive. We
sell to a range of patient monitoring and life support device companies, many
which have significantly greater financial, technical, research and development
and marketing resources than those available to the Company. There can be no
assurance that current OEM customers will not elect to design and manufacture
patient monitoring and system components currently supplied by us or elect to
contract with other OEM suppliers. Any such election by one or more of such
companies could have a material adverse effect on our business, operating
results and financial condition.

In addition, we may in the future elect to incorporate in our OEM products the
hardware and software for larger networks and expand the number of OEM customers
with the hardware and software required for real-time redistribution of
information to remote viewing stations for use in specialty departments of
hospitals for which our OEM customers design and sell their products. Although
we believe that our OEM customers would not compete with our Enterprise-wide
Monitoring Systems because the Enterprise-wide Monitoring Systems are sold to
hospitals and IHDNs who elect to install larger, more dispersed systems, we
could face competition with our OEM customers to the extent hospitals forego
purchasing our facility-wide Enterprise-wide Monitoring Systems for the smaller
departmental systems of our OEM customers.

Technological Change; Need to Develop New Products. Many aspects of the medical
equipment industry are undergoing rapid technological change, changing customer
needs, frequent new product introductions and evolving industry standards.
Historically, we derived substantially all of our revenue from sales of our
Enterprise-wide Monitoring Systems and OEM products. We believe that, as


                                       18
<PAGE>   19

the market for these products matures, our future success will depend upon our
ability to develop and introduce on a timely basis new products and product
enhancements that keep pace with technological developments and that address the
increasingly sophisticated needs of acute care hospitals and IHDNs. In addition,
the introduction of competing products embodying new technologies and the
emergence of new industry standards could render our existing products
unmarketable or obsolete. If we are unable to develop and introduce product
enhancements and new products in a timely and cost-effective manner in response
to changing market conditions or customer requirements, or if our new products
or product enhancements, such as SiteLink, do not achieve market acceptance, our
business, operating results and financial condition will be materially adversely
affected.

Uncertainty and Consolidation in Healthcare Industry. The healthcare industry is
subject to changing political, economic and regulatory influences that may
affect the procurement practices and operation of healthcare providers. Many
healthcare providers are consolidating to create larger hospitals and IHDNs.
This consolidation reduces the number of potential customers for our products,
and the increased bargaining power of these organizations could lead to
reductions in the amounts paid for our products. These larger hospitals and
IHDNs may concentrate their purchases on a small number of preferred vendors
with whom they have had longstanding relationships. There can be no assurance
that we will be able to sell to such hospitals or IHDNs or that we will be able
to compete successfully with such vendors. The impact of these developments in
the healthcare industry is difficult to predict and could have a material
adverse effect on our business, operating results and financial condition.

Government Regulation. The manufacturing, marketing and sales of medical
devices, including our products, are subject to extensive regulation by numerous
governmental authorities. In the United States, our products are subject to
regulation by the FDA. We have received clearance from the FDA to market our
current products through the 510(k) pre-market notification process. There can
be no assurance that a similar 510(k) clearance for any future product or
enhancement of an existing product will be granted or that the process will not
be lengthy. If we cannot establish that a product is "substantially equivalent"
to certain legally marketed devices, or if FDA regulatory changes currently
under consideration with respect to arrhythmia software are adopted, the 510(k)
clearance procedure will be unavailable and we will be required to utilize the
longer and more expensive pre-market approval ("PMA") process. Failure to
receive or delays in receipt of FDA clearances or approvals, including the need
for extensive clinical trials or additional data as a prerequisite to clearance
or approval, could have a material adverse effect on our business, operating
results and financial condition. Sales of medical devices and components outside
of the United States are subject to international regulatory requirements that
vary from country to country.

Our radio frequency transmitter devices are subject to regulation by the Federal
Communication Commission ("FCC"), and applicable approvals must be obtained
before shipment of those products. We believe that all of our products
designated for sale in the United States meet applicable FCC regulations,
including FCC regulations pertaining to electromagnetic emissions. The FCC
approval process starts with the collection of test data that demonstrates that
a product meets the requirements stated in the FCC's regulations. This data is
then included as part of a report and application that is submitted to the FCC
requesting approval. The FCC may grant approval, request additional information,
or withhold approval. Any failure of our products to conform to governmental
regulations or any delay in obtaining, or failure to obtain, required FCC
approvals in the future, if any, could cause the delay or loss of sales of our
products and therefore have a material adverse effect on our business, financial
condition and result of operations.

Limited Intellectual Property Protection. We rely on a combination of patent,
copyright, trade secret and trademark laws, confidentiality procedures and
contractual provisions to protect our intellectual property. We seek to protect
our software, circuitry documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. We cannot
assure that our protective measures for proprietary rights will be adequate or
that our competitors will not independently develop similar or superior
technology, duplicate our products or otherwise circumvent our intellectual
property rights. There can be no assurance that third parties will not in the
future claim infringement by us with respect to current or future products or
proprietary rights. Any such claims, regardless of their merit, could be time
consuming, result in costly litigation, delay or prevent product shipments or
require us to enter into costly royalty or licensing agreements. The impact of
any of these developments could have a material adverse effect on our business,
operating results and financial condition.

Risk of Product Liability Claims. Certain of our products provide applications
that relate to patient physiological status or other clinically critical
information. Any failure by our products to provide accurate and timely
information could result in product liability and warranty claims against us by
our customers or their patients. We maintain insurance against claims associated
with the use of our products, but there can be no assurance that our insurance
coverage would adequately cover any claim asserted against us. A successful
claim brought against us in excess of our insurance coverage or outside the
scope of our insurance coverage could have a material adverse effect on our
business, operating results and financial condition. Even unsuccessful claims
could result in the expenditure of funds in litigation and diversion of
management time and resources.

Dependence on Sole Source Components; Component, Assembly & Systems
Obsolescence. Certain of our products utilize components that are available in
the short term only from a single or a limited number of sources, have been
available only on an allocation basis in the past and could be in scarce supply
again in the future. Any inability to obtain components in the amounts needed on
a timely basis or at commercially reasonable prices could result in delays in
product introductions, interruption in product shipments or increases in product
costs, which could have a material adverse effect on our business, operating
results and financial


                                       19
<PAGE>   20

condition until alternative sources could be developed or design and
manufacturing changes could be completed. In addition, from time to time,
certain components, subassemblies and systems used by us are discontinued by
manufacturers, requiring us to replace the components, subassembly or system
with an equivalent product, or if no such equivalent can be identified, to
modify and re-validate the product design. Any inability to obtain such
components on a timely basis or at commercially reasonable prices or to redesign
the product in a timely manner could have a material adverse effect on our
business, operating results and financial condition until alternative sources
could be developed or design and manufacturing changes could be completed.

Risks Associated With Recent Management Changes. In recent years, we have had a
number of changes in our management team. These changes included our Chief
Executive Officer in 1997, Vice President, Research and Development in 1998,
Vice President, Sales and Chief Financial Officer in 1999, and Vice President,
Sales in 2000. These management changes have caused disruptions in our
day-to-day operations, have interrupted continuity in customer relationships and
have created delays in sales cycles and product release schedules. Although we
believe that our existing senior management will be successful in improving our
business, operating results and financial condition, there can be no assurance
that such changes will not have a material adverse effect on our business,
operating results and financial condition in future periods.

Dependence on Key Personnel. Our success depends to a large extent on our
ability to attract and retain key personnel. The loss of the services, either
temporarily or permanently, of any of the members of senior management or other
key employees, particularly in sales and marketing and research and development,
could have a material adverse effect on our business, operating results and
financial condition. In addition, our future success depends to a large extent
on our ability to attract and retain additional key management, sales and
marketing and research and development personnel. Competition for such personnel
is intense. There can be no assurance that we will be successful in attracting
and retaining such personnel, and the failure to do so could have a material
adverse effect on our business, operating results and financial condition.

Volatility of Stock Price. Due to all of the foregoing factors, it is likely
that without advance warning or notice, in some future quarter our operating
results will be below the expectations of market analysts and investors. This
may cause the market price of our common stock to fall. These risks are
impossible to fully determine at present, and should be considered in evaluating
our financial prospects and future growth.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our current policy is to not use derivative financial instruments. We do not
currently have any significant foreign currency exposure because we do not
transact business in foreign currencies. Our exposure to market risk for changes
in interest rates relates primarily to the increase or decrease in the amount of
interest income we can earn on our investments, if any, and on the increase or
decrease in the amount of interest expense we must pay on our outstanding debt
obligations. However, the risk associated with fluctuating interest expense is
limited to the exposure related to those debt obligations and credit facilities
that are tied to market rates. We do not believe that this risk is material.

ITEM 8.  Financial Statements and Supplementary Data



                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Item                                                                                                               Page
----                                                                                                               ----
<S>                                                                                                                <C>
Independent Auditors' Report                                                                                        21

Balance Sheets at December 31, 1999 and 2000                                                                        22

Statements of Operations for the Years Ended December 31, 1998, 1999 and 2000                                       23

Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1999 and 2000                             24

Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000                                        25

Notes to Financial Statements                                                                                       26
</TABLE>


                                       20
<PAGE>   21

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of VitalCom Inc.,

We have audited the accompanying balance sheets of VitalCom Inc. (the Company)
as of December 31, 1999 and 2000 and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. Our audits also included the financial statement
schedule listed in Item 14. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of VitalCom Inc. at December 31, 1999 and 2000,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

DELOITTE & TOUCHE LLP
Costa Mesa, California
February 10, 2001
(Except for Note 10, for which the date is March 12, 2001)


                                       21
<PAGE>   22

                                  VITALCOM INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                 -------------------------------
                                                                                     1999               2000
                                                                                 ------------       ------------
<S>                                                                              <C>                <C>
                                                 ASSETS
Current assets:
  Cash and cash equivalents ...............................................      $  7,107,420       $  3,657,100
  Restricted cash .........................................................                --          2,500,000
  Short-term investments ..................................................         5,273,037                 --
  Accounts receivable, net of allowance for doubtful accounts and
  returns of $346,079 and $248,551 in 1999 and 2000, respectively .........         2,309,392          3,828,821
  Inventories (Note 2) ....................................................         1,504,952          1,644,181
  Prepaid expenses ........................................................           530,833            134,396
                                                                                 ------------       ------------
          Total current assets ............................................        16,725,634         11,764,498
Property:
  Machinery and equipment .................................................         1,560,013          1,777,578
  Office furniture and computer equipment .................................         2,558,815          2,266,527
  Leasehold improvements ..................................................           181,778            200,419
                                                                                 ------------       ------------
                                                                                    4,300,606          4,244,524
  Less accumulated amortization and depreciation ..........................        (2,831,090)        (2,536,061)
                                                                                 ------------       ------------
          Property, net ...................................................         1,469,516          1,708,463
Other assets ..............................................................            68,237             75,872
Goodwill, net (Note 1) ....................................................           423,025            390,485
                                                                                 ------------       ------------
Total assets ..............................................................      $ 18,686,412       $ 13,939,318
                                                                                 ============       ============
                               LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ........................................................      $    508,322       $  1,609,559
  Accrued payroll and related costs .......................................           959,862            999,488
  Accrued warranty costs ..................................................           516,297            532,898
  Accrued liabilities (Note 7) ............................................           568,336            573,395
  Current portion of capital lease obligations ............................            28,796                 --
                                                                                 ------------       ------------
          Total current liabilities .......................................         2,581,613          3,715,340

Commitments and contingencies (Note 4)

Stockholders' equity (Notes 6 and 8):
  Common stock, including paid-in-capital, $0.0001 par value;
  25,000,000 shares authorized; 8,462,453 shares issued and 8,098,903
  shares outstanding at December 31, 2000; 8,281,112 shares issued and
  7,917,563 shares outstanding at December 31, 1999 .......................        37,665,468         38,160,751
  Note receivable for common stock sales ..................................           (30,590)           (30,590)
  Treasury stock, at cost .................................................          (740,154)          (740,154)
  Accumulated deficit .....................................................       (20,789,925)       (27,166,029)
                                                                                 ------------       ------------
          Total stockholders' equity ......................................        16,104,799         10,223,978
                                                                                 ------------       ------------
Total liabilities and stockholders' equity ................................      $ 18,686,412       $ 13,939,318
                                                                                 ============       ============
</TABLE>

                       See notes to financial statements.



                                       22
<PAGE>   23

                                  VITALCOM INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                           --------------------------------------------------
                                                               1998               1999               2000
                                                           ------------       ------------       ------------
<S>                                                        <C>                <C>                <C>
Revenues ............................................      $ 20,858,926       $ 16,289,617       $ 17,202,482
Cost of revenues ....................................         9,561,471          7,588,487          8,513,194
                                                           ------------       ------------       ------------
Gross profit ........................................        11,297,455          8,701,130          8,689,288
Operating expenses:
  Sales and marketing ...............................         6,793,879          6,128,233          6,061,432
  Research and development ..........................         4,697,750          5,729,148          7,220,144
  General and administrative ........................         2,158,558          2,357,687          2,227,032
                                                           ------------       ------------       ------------
          Total operating expenses ..................        13,650,187         14,215,068         15,508,608
                                                           ------------       ------------       ------------
Operating loss ......................................        (2,352,732)        (5,513,938)        (6,819,320)
Other income, net ...................................           889,621            758,555            479,216
                                                           ------------       ------------       ------------
Loss before provision for income taxes ..............        (1,463,111)        (4,755,383)        (6,340,104)
Provision for income taxes ..........................            25,200             36,000             36,000
                                                           ------------       ------------       ------------
Net loss ............................................      $ (1,488,311)      $ (4,791,383)      $ (6,376,104)
                                                           ============       ============       ============

Net loss per basic and diluted common share .........      $      (0.18)      $      (0.60)      $      (0.79)
                                                           ============       ============       ============
Weighted average basic and diluted common shares ....         8,148,085          8,045,998          8,020,263
                                                           ============       ============       ============
</TABLE>

                       See notes to financial statements.



                                       23
<PAGE>   24

                                  VITALCOM INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000

<TABLE>
<CAPTION>
                                           COMMON STOCK            TREASURY STOCK     NOTE RECEIVABLE                    TOTAL
                                      ----------------------- ----------------------    FOR COMMON      ACCUMULATED   STOCKHOLDERS
                                        SHARES     AMOUNT       SHARES     AMOUNT       STOCK SALES       DEFICIT        EQUITY
                                      ---------- -----------  ---------- -----------  ---------------   -----------   ------------
<S>                                  <C>         <C>          <C>        <C>          <C>              <C>            <C>
Balances, January 1, 1998             8,038,547  $37,226,125                          $(194,960)       $(14,510,231)   $22,520,934

Stock options exercised                  28,250       24,549                                                                24,549
Note receivable for common
stock sales                              10,000       30,600                            (30,600)
Cash collections on note
receivable                                                                                   10                                 10
Cancellation of note receivable
for common stock                        (40,000)    (194,960)                           194,960
Stock issued pursuant to
employee stock purchase plan             52,703      145,264                                                               145,264
Stock issued pursuant to 401(k)
plan employer match                      73,471      259,985                                                               259,985
Net loss                                                                                                 (1,488,311)    (1,488,311)
                                     ----------  -----------   --------   ----------   ---------       ------------   ------------
Balances, December 31, 1998           8,162,971   37,491,563                            (30,590)        (15,998,542)    21,462,431

Stock options exercised                  16,750       14,639                                                                14,639
Acquisition of treasury
stock                                                         (363,550)    (740,154)                                      (740,154)
Stock issued pursuant to
employee stock purchase plan             74,334       88,240                                                                88,240
Stock issued pursuant to 401(k)
plan employer match                      27,057       71,026                                                                71,026
Net loss                                                                                                 (4,791,383)    (4,791,383)
                                     ----------  -----------   --------   ----------   ---------       ------------   ------------
Balances, December 31, 1999           8,281,112   37,665,468  (363,550)    (740,154)    (30,590)        (20,789,925)    16,104,799

Stock options exercised                 101,320      336,489                                                               336,489
Compensation costs related
to stock options issued to
non-employee                                          33,760                                                                33,760
Stock issued pursuant to
employee stock purchase plan             80,021      125,034                                                               125,034
Net loss                                                                                                 (6,376,104)    (6,376,104)
                                     ----------  -----------  --------    ---------    --------        ------------    -----------
Balances, December 31, 2000           8,462,453  $38,160,751  (363,550)   $(740,154)   $(30,590)       $(27,166,029)   $10,223,978
                                     ==========  ===========  ========    =========    ========        ============    ===========
</TABLE>

                       See notes to financial statements.



                                       24
<PAGE>   25

                                  VITALCOM INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                   ---------------------------------------------------
                                                                        1998               1999               2000
                                                                        ----               ----               ----
<S>                                                                <C>                <C>                <C>
Cash flows used in operating activities:
  Net loss ..................................................      $ (1,488,311)      $ (4,791,383)      $ (6,376,104)
  Adjustments to reconcile net loss to net cash
     used in  operating activities:
     Depreciation and amortization ..........................           735,338            693,027            681,239
     Provision for doubtful accounts and sales returns ......            79,934             (4,068)           (97,529)
     Common stock contribution to 401(k) plan ...............           259,985             71,026                 --
     Compensation costs related to stock options to
       non-employee .........................................                --                 --             33,760
     Loss on disposal of property ...........................             1,311              7,004             38,352
  Changes in operating assets and liabilities:
     Accounts receivable ....................................          (842,163)         2,309,971         (1,421,900)
     Inventories ............................................           420,600           (113,053)          (139,229)
     Prepaid expenses .......................................           128,815           (390,186)           396,437
     Other assets ...........................................           (81,959)            65,657             (7,635)
     Accounts payable .......................................          (155,757)            78,335          1,101,237
     Accrued payroll and related costs ......................          (393,168)           154,975             39,626
     Accrued warranty costs .................................          (210,797)          (241,151)            16,601
     Accrued liabilities ....................................          (642,420)          (142,919)             5,059
                                                                   ------------       ------------       ------------
     Net cash used in operating activities ..................        (2,188,592)        (2,302,765)        (5,730,086)

Cash flows from investing activities:
  Purchases of property and equipment .......................          (283,494)          (481,780)          (925,998)
  Proceeds from sale of short-term investments ..............           630,787             96,176          5,273,037
  Increase in restricted cash ...............................                --                 --         (2,500,000)
                                                                   ------------       ------------       ------------
     Net cash provided by (used in) investing activities ....           347,293           (385,604)         1,847,039

Cash flows from financing activities:
  Repayment of capital lease obligations.....................           (24,874)           (27,746)           (28,796)
  Cash collections on note receivable .......................                10                 --                 --
  Net proceeds from issuance of common stock ................           169,813            102,879            461,523
  Acquisition of treasury stock .............................                --           (740,154)                --
                                                                   ------------       ------------       ------------
     Net cash provided by (used in) financing activities ....           144,949           (665,021)           432,727

Net decrease in cash and cash equivalents ...................        (1,696,350)        (3,353,390)        (3,450,320)
Cash and cash equivalents, beginning of year ................        12,157,160         10,460,810          7,107,420
                                                                   ------------       ------------       ------------
Cash and cash equivalents, end of year ......................      $ 10,460,810       $  7,107,420       $  3,657,100
                                                                   ============       ============       ============

Supplemental disclosures of cash flow information:
  Interest paid .............................................      $     12,136       $      4,182       $     19,293
                                                                   ============       ============       ============
  Income taxes paid .........................................      $     19,861       $     26,365       $     25,172
                                                                   ============       ============       ============

Supplemental schedule of noncash transactions:
  Notes receivable for stock sales ..........................      $     30,600
  Cancellation of note receivable for stock .................      $    194,460
</TABLE>

                       See notes to financial statements.



                                       25
<PAGE>   26

                                  VITALCOM INC.

                          NOTES TO FINANCIAL STATEMENTS

1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General and Nature of Operations -- VitalCom Inc. (the Company) provides
computer networks and related communications products that acquire, interpret
and distribute real-time patient monitoring information. The Company's computer
and radio networks acquire physiological data generated by its own proprietary
ECG monitors and other manufacturers' bedside equipment located throughout a
healthcare facility. The Company's products are sold through a direct sales
force to acute care hospitals and integrated healthcare delivery networks
("IHDNs") and on an Original Equipment Manufacturer ("OEM") basis to patient
monitoring equipment manufacturers primarily located in the United States.

Management's Plans -- For the year ended December 31, 2000, the Company incurred
a net loss of $6,376,104 and experienced a significant decrease in working
capital. The Company's cost structure and operating results were negatively
impacted by both continued increases in research and development expenses and
the delay in the release of its Patient Net Wireless Network (Patient Net)
product. The Patient Net product was released during the third quarter of 2000.
The Company believes that the release of its Patient Net product will enable the
Company to improve its operating performance during fiscal 2001. The Company
plans to significantly reduce research and development expenses in fiscal 2001,
and is presently re-negotiating the terms of its line of credit arrangement to
release the restriction on cash. However, if management is unable to execute its
business plan, the Company may need to obtain additional financing or
restructure its operations. The Company believes that existing cash resources,
cash flows from operations and line of credit facility will be sufficient to
fund the Company's operations for at least the next twelve months.

Fair Value of Financial Instruments -- The Company's balance sheets include the
following financial instruments: cash and cash equivalents, restricted cash,
accounts receivable, accounts payable, and accrued liabilities. The Company
considers the carrying value of cash and cash equivalents, restricted cash,
accounts receivable, accounts payable, and accrued liabilities in the financial
statements to approximate fair value for these financial instruments because of
the relatively short period of time between origination of the instruments and
their expected realization.

Cash Equivalents -- Cash equivalents include highly liquid investments purchased
with an original maturity date of three months or less. At December 31, 2000,
the Company's cash equivalents were held primarily with two financial
institutions.

Restricted Cash-- The Company has $2,500,000 in restricted cash included in a
money market account pursuant to a secured lending arrangement with Silicon
Valley Bank (Note 3).

Short-Term Investments -- The Company's short-term investments are classified as
available for sale. The Company's short-term investments consist of commercial
paper, money market funds and debt securities. Investments classified as
available for sale are required to be recorded at fair value and any temporary
difference between an investment's cost and its fair value is recorded as a
separate component of stockholders' equity. As of December 31, 1999, the fair
value of investments approximates investment cost. On December 31, 2000, the
company had no short-term investments.

Inventories -- Inventories are stated at the lower of FIFO cost or market. The
Company periodically reviews inventory quantities on hand and provides for
excess and obsolete inventory based primarily on current production requirements
and forecasted product demand.

Property -- Property is stated at cost. Depreciation is provided using the
straight-line method and the double declining balance method over the estimated
useful lives of the related assets, generally three to eight years. Leasehold
improvements are amortized over the lesser of the estimated useful lives of the
related improvements or the related lease term.

Long-Lived Assets -- The Company accounts for the impairment and disposition of
long-lived assets in accordance with Statement of Financial Accounting Standards
No. 121 (SFAS No. 121), Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed. The Company periodically reviews the
carrying value of long-lived assets based on an undiscounted cash flow analysis
to determine whether or not impairment to such value has occurred and has
determined that there was no impairment at December 31, 2000.

Goodwill -- Goodwill represents the excess purchase cost over the net assets
acquired and is amortized over 20 years using the straight-line method. The
Company periodically evaluates the recoverability of goodwill based on an
undiscounted cash flow analysis related to its product sales and has determined
that there was no impairment of goodwill at December 31, 2000.



                                       26
<PAGE>   27
Revenue Recognition -- Revenues from both Enterprise-Wide Monitoring Systems
and OEM products, which consist of both hardware and software, are recognized in
accordance with Statement of Position No. 97-2 (SOP 97-2), Software Revenue
Recognition, which was later amended in part by SOP 98-4, Deferral of the
Effective Date of a Provision of SOP 97-2, Software Recognition (SOP 98-4). As
of April 1, 1998, the Company adopted SOP 97-2, as amended by SOP 98-4. SOP 97-2
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supercedes the guidance
contained in SOP 91-1, which the Company had previously been following. The
Company generates a portion of its revenues from licensing rights to use its
software products directly to end-users. The Company also generates revenues
from sales of hardware and third party software, and implementation, training,
and post contract support (maintenance) services performed for customers who
license its products. A typical system contract contains multiple elements of
two or more of the above items. In accordance with SOP 97-2, revenue is
allocated to each element of the contract based on vendor specific evidence of
each element's fair market value. Provided the fees are fixed and determinable
and collection is considered probable, revenue from licensing rights and sales
of hardware and third party software is recognized upon shipment. Revenue from
implementation, training and software customization services is recognized as
the corresponding services are performed. Maintenance revenue is recognized
ratably over the contractual maintenance period.

Warranties -- The Company offers warranties of various lengths depending on the
product and negotiated terms of purchase agreements with its customers. An
estimate for warranty related costs based on historical experience are recorded
at the time of sale.

Software Development Costs -- Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs would be capitalized in accordance with Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed. Because the Company believes that its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized as of
December 31, 1999 or 2000.

Income Taxes -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standard No. 109 (SFAS No. 109), Accounting
for Income Taxes. This statement requires the recognition of deferred tax assets
and liabilities for the future consequences of events that have been recognized
in the Company's financial statements or tax returns. Measurement of the
deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company's assets and liabilities result in a deferred tax asset, SFAS No.
109 requires an evaluation of the probability of being able to realize the
future benefits indicated by such asset. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
or all of the deferred tax asset will not be realized.

Loss Per Share -- Basic and diluted loss per share (EPS) is computed using the
weighted average number of common shares outstanding. Common stock equivalents
were excluded from the calculation of diluted EPS because their effect was
antidilutive.

Comprehensive Loss -- In 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS
130 establishes standards for the reporting and disclosure of comprehensive
income (revenues, expenses, gains and losses) in a full set of general purpose
financial statements. For the years ended December 31, 1998, 1999, and 2000
there was no difference between comprehensive loss and net loss as reported in
the Company's financial statements.

Recent Accounting Pronouncements -- Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended, establishes accounting and reporting standards for derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
133, certain contracts that were formerly considered derivatives may now meet
the definition of a derivative. The Company adopted SFAS 133 effective January
1, 2001. The adoption of SFAS 133 did not have a significant impact on the
financial position, results of operations, or cash flows of the Company.

In December 1999, Staff Accounting Bulletin No. 101 (SAB 101) was issued to
provide the Security and Exchange Commission's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 is effective no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The Company has adopted this statement during
the fourth quarter of the year ended December 31, 2000. The adoption of SAB 101
did not have a material impact on the Company's results of operations.



                                       27
<PAGE>   28
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting for
Certain Transactions Involving Stock Compensation. FIN 44 is an interpretation
of Accounting Principal Board's Opinion No. 25 Accounting for Stock Issued to
Employees (APB 25). Among other matters, FIN 44 clarifies the application of APB
25 regarding the definition of employee for purposes of applying APB 25, the
criteria for determining whether a plan qualifies as non compensatory and the
accounting consequences of modifications to the terms of a previously issued
stock options or similar awards. The Company adopted the provisions of FIN 44 in
the third quarter of fiscal 2000. The adoption of FIN 44 did not have a material
impact on the Company's results of operations.

Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.

Certain Risks and Concentrations.

Customer Concentrations -- The Company's OEM revenues, which represented 57.9%,
68.6% and 52.2% of the Company's total revenues in 1998, 1999 and 2000
respectively, have historically been concentrated in a small number of OEM
customers. Approximately 46.0%, 60.9%, and 45.1% of 1998, 1999 and 2000 total
revenues, respectively, were to three customers. Accounts receivable from these
three customers accounted for 52.0%, 71.5%, and 58.7% of the Company's total
accounts receivable at December 31, 1998, 1999, and 2000, respectively. The
Company performs limited credit evaluations of its customers' financial
condition, and generally requires no collateral from its customers. The loss of
or a reduction in sales to, any such OEM customers would have a material adverse
effect on the Company's business, operating results and financial condition.
Further, sales of the Company's OEM products are dependent to a large extent
upon the Company's OEM customers selling patient monitoring devices that include
the Company's OEM products as necessary components. Any inability of such OEM
customers to sell such systems, or any election by such OEM customers not to
include the Company's products as components therein, could have a material
adverse effect on the Company's business, operating results and financial
condition.

Supplier Concentration -- Certain of the Company's products utilize components
that are available in the short term only from a single or a limited number of
sources. Certain of these components, such as semiconductor devices, have been
available only on an allocation basis in the past and could be in scarce supply
again in the future. Any inability to obtain components in the amounts needed on
a timely basis or at commercially reasonable prices could result in delays in
product introductions or interruption in product shipments or increases in
product costs, which could have a material adverse effect on the Company's
business, operating results and financial condition until alternative sources
could be developed or design and manufacturing changes could be completed. Any
such design or manufacturing changes or increased costs could result in delayed
shipments and significant expenses in a particular quarter and therefore could
materially adversely affect operating results for any such quarter or other
period.

Reclassifications -- Certain reclassifications have been made to the 1999 and
1998 financial statements to conform to the 2000 presentation.

2. INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of the following at December 31:

<TABLE>
<CAPTION>
                                   1999            2000
                                   ----            ----
<S>                            <C>             <C>
Raw materials ...........      $  903,294      $1,187,185
Work-in-process .........          20,047          81,514
Finished goods ..........         581,611         375,482
                               ----------      ----------
                               $1,504,952      $1,644,181
                               ==========      ==========
</TABLE>

3. REVOLVING LINE OF CREDIT

During the year ended December 31, 2000, the Company had a secured lending
arrangement (the "Agreement") with Silicon Valley Bank, providing for a $5.0
million revolving line of credit agreement bearing interest at the bank's prime
(9.5% at December 31, 2000) plus 0.5%. The bank does not have a security
interest in any of the Company's assets until the Company is borrowing under the
line of credit. In March 2001, the Company and the bank entered into a letter of
commitment to extend the Agreement for 60 days. The extension to the Agreement
included restrictive financial covenants that required the Company to maintain
minimum liquidity levels, a $2.5 million restriction on cash and total
liabilities to tangible net worth ratios, as well as specified annual and
quarterly net loss (after taxes) amounts. At December 31, 2000, there were no
borrowings outstanding under the Agreement and the Company was in compliance
with all covenants under the agreement, except for a profitability covenant for
which they have received a waiver. The Company has $5.0 million of cash
availability under the extended terms of the Agreement.

4.  COMMITMENTS AND CONTINGENCIES

The Company leases its facilities and certain equipment under non-cancelable
operating leases expiring at various dates through 2005.


                                       28
<PAGE>   29

     Future minimum lease payments under noncancelable operating leases are as
follows:

<TABLE>
<CAPTION>
                                    OPERATING
                                      LEASE
                                    ----------
<S>                                 <C>
Year ending December 31:
  2001 .......................      $  473,418
  2002 .......................         615,312
  2003 .......................         610,618
  2004 .......................         621,588
  2005 .......................         310,794
  Thereafter .................              --
                                    ----------
                                    $2,631,730
                                    ==========
</TABLE>

The Company's rent expense was $349,832, $375,543, and $492,898 for the years
ended December 31, 1998, 1999 and 2000, respectively.

The Company, in the normal course of business, is subject to various legal
matters. Although it is too early to determine the ultimate outcome, in the
opinion of management, the resolution of these matters will not have a material
adverse effect on the financial statements of the Company.

5. SEGMENT REPORTING

Utilizing the management approach, the Company has broken down its business
based upon sales through its two distribution channels. The Company does not
allocate operating expenses to these segments, nor does it allocate specific
assets to these segments. Therefore, segment information reported includes only
net sales, cost of sales and gross profit.

      Selected information regarding the Company's product sectors is as
follows:

<TABLE>
<CAPTION>
                                                               ENTERPRISE-
                                                                  WIDE
                                                 OEM            MONITORING
                                               PRODUCTS         PRODUCTS           TOTAL
                                              -----------      -----------      -----------
<S>                                           <C>              <C>              <C>
Year ended December 31, 1998
  Net Sales ............................      $12,071,380      $ 8,787,546      $20,858,926
  Cost of Sales ........................        6,052,828        3,508,643        9,561,471
                                              -----------      -----------      -----------
  Gross Profit .........................      $ 6,018,552      $ 5,278,903      $11,297,455
                                              ===========      ===========      ===========
Year ended December 31, 1999
  Net Sales ............................      $11,144,445      $ 5,145,172      $16,289,617
  Cost of Sales ........................        5,545,323        2,043,164        7,588,487
                                              -----------      -----------      -----------
  Gross Profit .........................      $ 5,599,122      $ 3,102,008      $ 8,701,130
                                              ===========      ===========      ===========
Year ended December 31, 2000
  Net Sales ............................      $ 8,980,769      $ 8,221,713      $17,202,482
  Cost of Sales ........................        4,539,826        3,973,368        8,513,194
                                              -----------      -----------      -----------
  Gross Profit .........................      $ 4,440,943      $ 4,248,345      $ 8,689,288
                                              ===========      ===========      ===========
</TABLE>

6. STOCKHOLDERS' EQUITY

During the year ended December 31, 1998, the Company issued 52,703 shares of its
common stock under its Employee Stock Purchase Plan for net proceeds of
$145,264; 73,471 shares of its common stock issued under the VitalCom Employee
Stock 401(k) and Profit Sharing Plan for the employer match valued at $259,985
and 28,250 shares of its common stock for exercises of stock options under the
1993 Stock Option Plan for net proceeds of $24,549. During the year ended
December 31, 1998, the Company also cancelled 40,000 shares of its common stock
that were issued during 1997 under interest bearing, non-recourse notes for
$194,960. The cancellations were due to the purchasers' forfeiting their right
to purchase the shares. In addition, the Company also issued 10,000 shares of
its common stock, under an interest-bearing, nonrecourse note in the amount of
$30,600 and received net proceeds of $10 during 1998.

During the year ended December 31, 1999, the Company issued 74,334 shares of its
common stock under its Employee Stock Purchase Plan for net proceeds of $88,240;
27,057 shares of its common stock issued under the VitalCom Employee Stock
401(k) and



                                       29
<PAGE>   30

Profit Sharing Plan for the employer match valued at $71,026 and 16,750 shares
of its common stock for exercises of stock options under the 1993 Stock Option
Plan for net proceeds of $14,639.

In April 1999, the Company implemented a stock repurchase program whereby up to
800,000 shares of its Common Stock could be purchased in the open market from
time to time. In October 1999 the Company terminated its stock repurchase
program. The Company repurchased 363,550 shares of Common Stock at a total
aggregate price of $740,154.

During the year ended December 31, 2000, the Company issued 80,021 shares of its
common stock under its Employee Stock Purchase Plan for net proceeds of $125,034
and 101,320 shares of its common stock for exercises of stock options under its
1993 and 1996 Stock Option Plans for net proceeds of $336,489. The Company also
recorded compensation cost of $33,760 for stock options granted to a
non-employee in exchange for services performed. This cost was calculated using
the Black Scholes- option-pricing model using the following assumptions;
expected volatility of 247%, risk free interest rate of 6%, no dividend yield
and expected life of 10 years.

7. 401(k) AND PROFIT SHARING PLAN

The Company has a 401(k) and Profit Sharing Plan (Plan) which covers
substantially all of its employees. Effective July 1, 1993, the Company amended
its profit-sharing plan to include a 401(k) provision. The 401(k) provisions in
the Plan allow eligible employees to contribute up to 15% of their income on a
tax-deferred basis, subject to IRS discrimination and maximum dollar deferral
rules. The Company, at its sole election, may make matching contributions to the
Plan. The Board of Directors approved a discretionary employer matching
contribution of $0.50 for each $1.00 the employee contributes on the first 12%
of compensation deposited as elective contributions, subject to 401(k) Plan
limitations and IRS regulations, for calendar years 1998, 1999, and 2000. The
Company's matching contributions vest to employees at 25% per year for each full
year of continuous service. The Company's 401(k) matching expense was $356,006,
$336,116, and $303,265 for the years ended December 31, 1998, 1999 and 2000,
respectively. For the year ended December 31, 2000 the Company's employer
matching contribution was made in the Company's treasury stock after the end of
2000. For the year ended December 31, 1999 the Company's employer matching
contribution was made in cash. For the year ended December 31, 1998 the
Company's employer matching contribution was made in the Company's common stock
at the end of each calendar quarter (Note 6).

The 401(k) and Profit Sharing Plan provides for an annual discretionary
contribution to a self-directed employee trust in an amount to be determined by
the Board of Directors, but limited to the amount allowable for income tax
purposes. The Company's discretionary contributions vest to the employees at 10%
per year for the first four years and 20% per year for years five through seven
for each full year of continuous service, and are allocated based on employee
compensation. The Company had no profit-sharing expense for the years ended
December 31, 1998, 1999 and 2000.

8. STOCK BASED COMPENSATION PLANS

At December 31, 2000 the Company had three stock option plans and an employee
stock purchase plan, which are described below. The Company accounts for these
plans in accordance with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations
(APB 25). In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation. As permitted by SFAS 123, the Company has chosen to
continue to account for its stock-based compensation plans under APB 25 and
provide the expanded disclosures specified in SFAS 123. No compensation expense
has been recognized for its stock-based compensation plans.

Had compensation costs for the stock-based compensation plans been determined
for the stock option plans and employee stock purchase plan using the provisions
of SFAS 123, the Company's net loss and loss per share would have been increased
to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                  1998            1999            2000
                                                                  ----            ----            ----
<S>                                            <C>           <C>             <C>             <C>
Net loss...................................    As reported   $ (1,488,311)   $ (4,791,383)   $ (6,376,104)
                                               Pro forma       (2,728,095)     (6,253,899)     (7,975,048)

Net loss per basic and diluted share.......    As reported         $(0.18)         $(0.60)         $(0.79)
                                               Pro forma           $(0.33)         $(0.78)         $(0.99)
</TABLE>

For purposes of estimating the compensation cost of the Company's option grants
and employee stock purchase plan in accordance with SFAS 123, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants in the years
1998, 1999 and 2000, respectively: expected volatility of 80%, 120%, and 247%;
risk free interest rates of 6.25% in 1998, 6.33% in 1999, and 6.0% in 2000; no
dividend yield; and expected lives of 10 years for the 1993 Stock Option Plan
and the 1996 Stock Option Plan.

In November 1998, the Company's Board of Directors approved a proposal allowing
the Company's employees and officers to surrender for cancellation any existing
stock option grants and have a new stock option issued for the equivalent number
of shares with one half at a new exercise price of $3.00 per share and the other
half at a new exercise price of $4.00 per share. The new options




                                       30
<PAGE>   31

vest over the Company's standard four year vesting period, with the vesting
period starting six months later than the vesting commencement date of the
surrendered option. A total of 447,763 options were cancelled with exercise
prices ranging from $4.00 to $6.00 per share.

The Company has reserved an aggregate of 100,000 shares of Common Stock for
issuance under its 1996 Stock Option Plan (the "1996 Plan") to permit employees
and consultants to the Company to participate in ownership of the Company. The
1996 Plan was adopted by the Board of Directors in October 1996. The 1996 Plan
is administered by a committee consisting of two or more non-employee directors
of the Company. Each option agreement includes a provision requiring the
optionee to consent to the terms of the 1996 Plan. The Option Plan provides for
the grant of nonqualified options.

The following table summarizes activity under the 1993 Option Plan and 1996
Option Plan, as amended.

<TABLE>
<CAPTION>
                                                                     WEIGHTED                    WEIGHTED
                                      NUMBER                         AVERAGE      NUMBER OF      AVERAGE
                                        OF             PRICE         EXERCISE      OPTIONS       EXERCISE
                                      SHARES         PER SHARE        PRICE      EXERCISABLE      PRICE
                                   --------------  ---------------- ----------- -------------- -------------
<S>                                <C>             <C>              <C>         <C>            <C>
Balance, January 1, 1998......        1,674,178      $0.60-$15.75      $4.74        301,692        $5.09
Granted.......................        1,642,970       2.63---4.44       3.66
  Exercised...................          (28,250)      0.60---1.41       0.87
  Canceled....................       (1,800,801)      1.28---6.00       4.60
                                   -------------
Balance, December 31, 1998....        1,488,097       0.60---4.00       3.46        343,774         3.46
Granted.......................          424,040       1.50---3.00       2.29
  Exercised...................          (16,750)      0.60---1.28       0.87
  Canceled....................         (215,271)      0.60---5.72       3.73
                                   -------------
Balance, December 31, 1999....        1,680,116       0.60---6.00       3.18        601,094         3.42
Granted.......................          352,675       1.63---2.47       2.13
  Exercised...................         (101,320)      1.50---4.00       3.32
  Canceled....................         (275,845)      1.50---6.00       2.74
                                   -------------
Balance, December 31, 2000....        1,655,626      $0.60--$4.75      $3.02        858,449        $3.30
                                   =============
</TABLE>

At December 31, 2000, 770,259 options were available for grant under the 1993
Option Plan and 1996 Option Plan.

The weighted average fair market value of each option granted under the 1993
Stock Option Plan and the 1996 Stock Option Plan in 1998, 1999 and 2000 was
$3.49, $1.81 and $1.97, respectively.

The following table summarizes information about stock options outstanding under
the 1993 Option Plan and the 1996 Option Plan at December 31, 2000:

<TABLE>
<CAPTION>
                                                     OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
                                  -----------------------------------------------------      -------------------------------
                                                 WEIGHTED AVERAGE
                                    NUMBER           REMAINING         WEIGHTED AVERAGE        NUMBER       WEIGHTED AVERAGE
  RANGE OF EXERCISE PRICES        OUTSTANDING    CONTRACTUAL LIFE       EXERCISE PRICE       EXERCISABLE     EXERCISE PRICE
  ------------------------        -----------    ----------------       --------------       -----------     --------------
<S>                               <C>            <C>                   <C>                   <C>            <C>
$0.60--$2.00................         366,827         8.4 years             $   1.84            84,386           $  1.66
$2.38--$2.63................         140,713         9.6 years                 2.46               438              2.63
$3.00--$4.75................       1,148,086         7.3 years                 3.47           773,625              3.48
                                  ----------                                                 --------
                                   1,655,626         7.7 years             $   3.02           858,449           $  3.30
                                  ===========                                                ========
</TABLE>

The Company has reserved an aggregate of 450,000 shares of Common Stock for
issuance under its 1996 Employee Stock Purchase Plan (the "ESPP"). The ESPP was
adopted by the Board of Directors in January 1996 and approved by the Company's
stockholders prior to the consummation of the Company's initial public offering
in February 1996. The ESPP is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, and permits eligible employees of the
Company to purchase Common Stock through payroll deductions of up to 10% of
their compensation provided that no employee may purchase more than $25,000
worth of stock in any calendar year. The ESPP was implemented by an offering
period commencing on February 14, 1996 and ending on the last business day in
the period ending October 31, 1996. Each subsequent offering period (an
"Offering Period") commences on the day following the end of the prior Offering
Period and has a duration of six months. The price of Common Stock purchased
under the ESPP is 85% of the lower of the fair market value of the Common Stock
on the first or last day of each offering period. The ESPP will expire in the
year 2006. In the years ended December 31, 1998, 1999 and 2000 the Company
issued 52,703, 74,334, and 80,021 shares of Common Stock, respectively under the
ESPP for $145,264, $88,240, and $125,034, respectively. At December 31, 2000,
$24,476 had been withheld from employee earnings for stock purchases under the
ESPP.

The Company has reserved an aggregate of 60,000 shares of Common Stock for
issuance under its 1996 Director Option Plan (the "Director Plan"). The Director
Plan was adopted by the Board of Directors in February 1996. The Director Plan
provides for the grant of an option to purchase a number of shares of Common
Stock (the "First Option") to be determined by the incumbent Board of Directors
to each non-employee director who first becomes a non-employee director after
the effective date of the Director Plan. Annually, each outside director shall
automatically be granted an option to purchase 4,000 shares (a "Subsequent
Option"), provided he or she is then a non-employee director and, as of such
date, he or she shall have served on the Board for at least the preceding six


                                       31
<PAGE>   32

months. Each non-employee director will be eligible to receive a Subsequent
Option, regardless of whether such non-employee director was eligible to receive
a First Option. First Options and each Subsequent Option will have a term of ten
years. One-quarter of the shares subject to a First Option will vest one year
after their date of grant and an additional one-quarter will vest at the end of
each year thereafter, provided that the optionee continues to serve as a
director on such dates. Similarly, one-quarter of the shares subject to a
Subsequent Option will vest one year after the date of the option grant and an
additional one-quarter will vest at the end of each year thereafter, provided
that the optionee continues to serve as a director on such date. The exercise
prices of the First Option and each Subsequent Option will be 100% of the fair
market value per share of the Company's Common Stock on the date of the grant of
the option. At December 31, 1998, 1999 and 2000 there were no options
outstanding and 60,000 shares were available for issuance.

9. INCOME TAXES

The Company accounts for income taxes under the provisions of SFAS No. 109 --
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are established for temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at tax
rates expected to be in effect when such assets or liabilities are realized or
settled.

The provision for income taxes is as follows:

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                         -----------------------------------------------
                                            1998              1999              2000
                                         -----------       -----------       -----------
<S>                                      <C>               <C>               <C>
Current:
  Federal                                $        --       $        --       $        --
  State                                       25,200            36,000            36,000
                                         -----------       -----------       -----------
                                              25,200            36,000            36,000
                                         -----------       -----------       -----------
Deferred:
  Federal                                   (804,805)       (1,496,320)       (1,850,117)
  State                                     (304,624)         (221,938)         (248,039)
                                         -----------       -----------       -----------
                                          (1,109,429)       (1,718,258)       (2,098,156)
                                         -----------       -----------       -----------
Change in valuation allowance              1,109,429         1,718,258         2,098,156
                                         -----------       -----------       -----------
                                         $    25,200       $    36,000       $    36,000
                                         ===========       ===========       ===========
</TABLE>

A reconciliation of the provision for income taxes to the amount of income tax
expense that would result from applying the federal statutory rate (35%) to loss
before provision for income taxes is as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                      1998        1999        2000
                                                      ----        ----        ----
<S>                                                  <C>         <C>         <C>
Income tax expense at statutory rate .........       (35.0)%     (35.0)%     (35.0)%
State tax expense, net of federal benefit ....         1.1         0.5         3.5
Research and development credits .............          --          --          --
Change in valuation allowance ................        32.5        34.3        29.2
Other ........................................         3.1         1.0         2.9
                                                     -----       -----       -----
                                                       1.7%        0.8%        0.6%
                                                     =====       =====       =====
</TABLE>



                                       32
<PAGE>   33

Deferred tax assets and liabilities at December 31 are as follows:

<TABLE>
<CAPTION>
                                                            1998              1999              2000
                                                            ----              ----              ----
<S>                                                     <C>               <C>               <C>
Current:
  Accrued compensation and related costs                $   161,281       $   108,255       $   144,020
  Warranty reserves                                         324,491           259,887           228,294
  Sales returns and bad debt allowance                      127,298           148,260           106,479
  Inventory reserves                                        294,622           272,685           290,833
  Other                                                    (331,465)           69,309            54,675
                                                        -----------       -----------       -----------
                                                            576,227           858,396           824,301
Long-term:
  Amortization and depreciation                            (170,558)         (115,200)         (110,637)
  Net operating loss carryforward                         2,591,947         4,358,387         6,587,997
  Tax credit carryforward                                 1,244,799         1,185,273         1,252,975
  Deferred state taxes and other                                 --          (326,183)         (495,808)
                                                        -----------       -----------       -----------
                                                          3,666,188         5,102,277         7,234,527
                                                        -----------       -----------       -----------
 Valuation allowance                                     (4,242,415)       (5,960,673)       (8,058,828)
                                                        -----------       -----------       -----------
                                                        $        --       $        --       $        --
                                                        ===========       ===========       ===========
</TABLE>

As of December 31, 2000, a valuation allowance of $8,058,828 has been provided
based upon the Company's assessment of the future realizability of certain
deferred tax assets, as it is more likely than not that sufficient taxable
income will not be generated to realize these temporary differences.

At December 31, 2000, the Company had federal and state net operating loss carry
forwards of approximately $17,000,000 and $8,000,000, respectively, which begin
to expire in the years 2013 and 2002, respectively. At December 31, 2000, the
Company had tax credit carry forwards for federal and state purposes of
approximately $645,000 and $610,000, respectively, which will begin to expire in
the years 2011 and 2012, respectively.



                                       33
<PAGE>   34

10. SUBSEQUENT EVENT

On March 12, 2001, the Company entered into a definitive agreement to merge with
a wholly owned subsidiary of Data Critical Corporation, a leading provider of
wireless patient monitoring systems. Under the merger agreement, VitalCom will
become a wholly owned subsidiary of Data Critical, and VitalCom's shareholders
will receive 0.62 shares of Data Critical common stock for each share of
VitalCom common stock held. This exchange ratio is fixed, and will not be
adjusted to reflect any increase or decrease in the market value of the
Company's common stock, or any increase or decrease in the market value of Data
Critical's common stock, that may occur between the date on which the merger
agreement was signed and the effective date of the merger. Consummation of the
merger is conditioned on approval by the respective stockholders of both
companies, as well as certain other events. However, certain of VitalCom's
stockholders, who hold an aggregate of approximately 61% of the Company's
outstanding common stock, have entered into voting agreements with Data
Critical. Under these voting agreements they have agreed to vote in favor of the
proposed merger. These stockholders have also granted Data Critical irrevocable
proxies to vote their shares in favor of the merger. The Company believes the
proposed merger, if completed, will integrate the technologies of two hospital
wireless market leaders and will result in a broader alarm notification and
networking portfolio of products for the combined companies and their partners
and customers.

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

Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is certain information concerning the members of our Board of
Directors:

<TABLE>
<CAPTION>
                                                                                                     DIRECTOR
   NAME OF DIRECTOR            AGE                  POSITION WITH THE COMPANY                         SINCE
   ----------------            ---                  -------------------------                         -----
<S>                            <C>    <C>                                                            <C>
Frank T. Sample                55     President, Chief Executive Officer and Chairman of the          1997
                                      Board of Directors
Elizabeth H. Weatherman        40     Director                                                        1995
Jack W. Lasersohn              48     Director                                                        1995
Timothy T. Weglicki            48     Director                                                        1995
</TABLE>

Frank T. Sample joined us in October 1997 as our President and Chief Executive
Officer and as a member of our Board of Directors. Before joining us, Mr. Sample
served as Executive Vice President of IDX Systems Corporation (Nasdaq symbol
"IDXC"). From 1990 to July 1997, when PHAMIS, Inc. was merged into IDX, he was
President and Chief Executive Officer at PHAMIS, Inc., a provider of
patient-centered medical record information systems. Prior to joining PHAMIS, he
held executive management positions at TRW, Inc., Information Systems & Services
Division and the Healthcare Services Group of Control Data Corporation. Mr.
Sample holds a B.A. degree in Business Administration from Cleveland State
University.

Elizabeth H. Weatherman has served as a member of our Board of Directors since
August 2000. She is a Managing Director of E.M. Warburg, Pincus & Co., LLC where
she has been a member of the Healthcare Group since 1988. Ms. Weatherman is
responsible for Warburg Pincus' medical device investment activities. Ms.
Weatherman currently also serves on the Board of Directors of American Medical
Systems Holdings, Inc., a public company, as well as Wright Medical Group, Inc.,
Kyphon Inc., SURx, Inc. and EndiCOR Medical, Inc., all privately-held companies.

Jack W. Lasersohn has served as a member of our Board of Directors since June
1995. He has been a General Partner of The Vertical Group, L.P., a private
venture capital firm, since its formation in 1989 by former principals of F.
Eberstadt & Co., Inc. From 1981 to 1989, he was a Vice President and later a
Managing Director of the venture capital division of F. Eberstadt & Co., Inc.
Mr. Lasersohn also serves as a director of Masimo Corporation and of a number of
privately held healthcare companies. He holds a B.S. and an M.A. from Tufts
University, and a J.D. from Yale University.

Timothy T. Weglicki has served as a member of our Board of Directors since June
1995. Since December 1993, he has been principally employed as a Managing Member
of ABS Partners, L.P., the General Partner of ABS Capital Partners, L.P., a
private


                                       34
<PAGE>   35

equity fund. Prior to that date, he was principally employed as a Managing
Director of Alex Brown & Sons Incorporated where he established and headed its
Capital Markets Group. Mr. Weglicki is a director of SciQuest, a provider of
supply chain solutions for leading research enterprises, and a number of
privately held information technology solutions and services companies. Mr.
Weglicki holds an M.B.A. from the Wharton Graduate School of Business and a B.A.
from The Johns Hopkins University.

BOARD MEETINGS AND COMMITTEES

Our Board of Directors held a total of nine (9) meetings during fiscal 2000. No
director attended fewer than 75% of the meetings of the Board of Directors and
committees thereof, if any, upon which such director served. The Board of
Directors has an Audit Committee and an Executive Compensation Committee.

The Audit Committee was established in June 1995 and is responsible for
reviewing the results and scope of the audit and other services provided by our
independent auditors. The Audit Committee currently consists of directors
Timothy T. Weglicki, Jack W. Lasersohn and Elizabeth H. Weatherman. The Audit
Committee met six (6) times in fiscal 2000.

The Compensation Committee is responsible for the administration of our 1993
Stock Option Plan, our 1996 Stock Option Plan, our 1996 Director Option Plan and
any future option plans that may be established, as well as determining which
persons are to be granted options under such plans and the number of shares
subject to such options. The Compensation Committee consists of directors
Elizabeth H. Weatherman and Timothy T. Weglicki. The Compensation Committee met
five (5) times in fiscal 2000.

DIRECTOR COMPENSATION

Our directors do not receive any fees for serving as such, nor do any directors
receive any fees for serving on any committee of the Board of Directors.
Directors are reimbursed by the Company for their out-of-pocket expenses in
connection with attending any board or committee meeting. In addition, the
directors participate in our 1996 Director Option Plan (the "Director Plan").
The Director Plan provides for the grant of an option to purchase a number of
shares of common stock to be determined by the incumbent Board of Directors to
each non-employee director, and each such director is automatically granted an
option to purchase 4,000 shares of common stock each year, provided he or she is
then a non-employee director and he or she has served on the Board of Directors
for at least the preceding six months. The fist options and each subsequent
option have terms of ten years. One quarter of the shares subject to a first
option will vest one year after its date of grant and an additional one-quarter
will vest at the end of each year thereafter, provided that the optionee
continues to serve as a director. Similarly, one-quarter of the shares subject
to a subsequent option will vest one year after the date of grant and an
additional one-quarter will vest at the end of each year thereafter, provided
that the optionee continues to serve as a director. The exercise price of such
options will be 100% of the fair market value per share of the Company's common
stock on the date of grant.

EXECUTIVE OFFICERS

In addition to Mr. Sample, the following persons are our executive officers:

<TABLE>
<CAPTION>
NAME                                   AGE               POSITION
----                                   ---               --------
<S>                                    <C>    <C>
Warren J. Cawley..................     59     Vice President, Client Services Organization
John R. Graham....................     54     Vice President, Corporate Alliances
Stephen E. Hannah.................     41     Vice President, Research and Development/Product Management
Cheryl L. Isen ...................     39     Vice President, Corporate Communications/Marketing
Scott E. Lamb.....................     38     Senior Director of Finance, Controller
</TABLE>

Warren J. Cawley, Vice President Client Services Organization -- Mr. Cawley
joined us in 1985 and has also served as Vice President of Direct Sales and Vice
President of OEM Sales, prior to assuming his current position of Vice President
of Client Services Organization. Mr. Cawley's experience in marketing products
to the medical community spans 25 years. He has held sales and management
positions, launching successful products in pharmaceutical and laboratory
diagnostics with SmithKline Beechman, disposable products with Bergen Brunswig
and electronics with Cavitron. Mr. Cawley holds both M.B.A. and B.S. degrees
from the University of Southern California.

John R. Graham, Vice President Corporate Alliances -- Mr. Graham joined us in
1989 as the Vice President of Corporate Alliances and has increased OEM Sales
almost four fold since then. Prior to joining us, Mr. Graham founded and managed
a medical device company that produced innovative VHF telemetry anesthesiology
devices. He has also held several management positions with Electronics for
Medicine/Honeywell and other electronics firms and medical institutions. Mr.
Graham holds a M.S. degree in Bioengineering from Columbia University, New York
and a B.S.E.E. degree from Northeastern University, Boston.



                                       35
<PAGE>   36

Stephen E. Hannah, Vice President, Research and Development/Product Management -
Mr. Hannah joined us in December 1998 as Vice President, Research and
Development/Product Management. Prior to joining us, Mr. Hannah led Product
Development, Systems Engineering at Sony Trans Com Inc. Prior to Sony, Mr.
Hannah developed hardware and software products and managed large development
projects at Hughes Aircraft Company. Mr. Hannah holds a B.S. degree in Computer
Engineering from the University of Michigan.

Cheryl L. Isen, Vice President, Corporate Communications/Marketing - Ms. Isen
joined us in January 1998 as Senior Director of Corporate Communications and was
promoted to Vice President, Corporate Communications/Marketing in January 1999.
Prior to joining us, Ms. Isen served as Senior Director of Corporate
Communications at PHAMIS, Inc., which merged with IDX Systems in 1997, where she
was responsible for company-wide communications. Prior to PHAMIS, Inc., Ms. Isen
was Manager of Marketing Communications for the Target Marketing Services
division of TRW. Ms. Isen holds a B.A. degree in Journalism and Marketing from
San Diego State University.

Scott E. Lamb, Senior Director of Finance, Controller -- Mr. Lamb joined us in
July 2000 as Senior Director of Finance and Corporate Controller. Before joining
us, Mr. Lamb served as Controller at Iteris, Inc., a start-up company that
delivers critical information to motorists. Prior to Iteris, Mr. Lamb was a
Division Controller from 1995 to 1999 for Datum Inc., a manufacturer of
synchronization equipment for the telecommunications industry, and held various
other positions at the company from 1990 to 1995. Mr. Lamb holds a B.A. degree
in International Business Finance from California State University Fullerton and
a M.B.A. degree in Business Administration from the University of Redlands.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation earned by (i) the Company's
Chief Executive Officer, and (ii) the four most highly compensated other
executive officers of the Company (collectively, the "Named Executive Officers")
for services rendered in all capacities to VitalCom during the years ended
December 31, 1998, 1999 and 2000:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                               LONG-TERM
                                                                                            OTHER         COMPENSATION AWARDS
                                                                                            ANNUAL     ---------------------------
                                                            ANNUAL COMPENSATION          COMPENSATION  SECURITIES      ALL OTHER
                                                     ---------------------------------   ------------  UNDERLYING     COMPENSATION
      NAME AND PRINCIPAL POSITION              YEAR  SALARY($)(4)         BONUS ($)(1)       ($)(2)    OPTIONS(#)        $(5)
      ---------------------------              ----  ------------         ------------       ------    ----------        ----
<S>                                            <C>   <C>                  <C>            <C>           <C>            <C>
Frank T. Sample ............................   2000     $292,595            $     --           --           --        $  1,898
    President, Chief Executive Officer and     1999      291,764                  --           --           --           2,592
    Chairman of the Board                      1998      294,958              20,000           --           --           2,112
Warren J. Cawley ...........................   2000      144,810                  --           --           --           1,241
     Vice President, Client Services           1999      146,977                  --           --        7,500           3,229
                                               1998      144,810                  --           --        8,500           1,842
Stephen E. Hannah ..........................   2000      162,026                  --           --       40,000           1,366
     Vice President, R&D/Product               1999      140,512              25,000           --       60,000             275
     Management                                1998           --                  --                        --              --
John R. Graham .............................   2000      152,209              11,232           --       30,000           1,278
     Vice President, Corporate Alliances       1999      145,651              19,391           --       10,000           2,070
                                               1998      145,000              18,764           --       12,000           1,325
Cheryl L. Isen .............................   2000      132,458                  --           --       30,000           1,132
     Vice President, Corporate                 1999      117,240                  --           --       15,000             202
     Communications/Marketing(3)               1998      110,410               7,500           --       25,000             245
</TABLE>

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

(1)     Represents amounts paid or accrued under our Management Bonus Plan for
        which senior management is eligible. The amount of a particular
        employee's bonus varies depending on salary level, position with the
        Company and the operating results.

(2)     In accordance with the rules of the Securities and Exchange Commission,
        other compensation in the form of prerequisites and other personal
        benefits has been omitted in those cases where the aggregate amount of
        such prerequisites and other personal benefits constituted less than the
        lesser of $50,000 or 10% of the total annual salary and bonus for the
        Named Executive Officer for such year.

(3)     Ms. Isen became an officer of the Company in February 1999.

(4)     Amounts include contributions paid by the Company under its 401(k) and
        Profit Sharing Plan.

(5)     Represents premiums paid by the Company on insurance policies for the
        benefit of the Named Executive Officer.



                                       36
<PAGE>   37

                              OPTION GRANTS IN 2000

The following table sets forth information with respect to stock options granted
to each of the Named Executive Officers during the year ended December 31, 2000.

<TABLE>
<CAPTION>
                                                   INDIVIDUAL GRANTS
                        --------------------------------------------------------------------------
                          NUMBER OF            % OF TOTAL
                          SECURITIES          OPTIONS/SARS
                          UNDERLYING           GRANTED TO
                         OPTIONS/SARS         EMPLOYEES IN      EXERCISE OR BASE
     NAME               GRANTED (#)(1)          2000 (%)          PRICE ($/SH)     EXPIRATION DATE
     ----               --------------          --------          ------------     ---------------
<S>                     <C>                   <C>               <C>                <C>
Frank T. Sample .....            --                --                     --                 --
John R. Graham ......        30,000               8.5%          $     1.9375         04/27/2010
Stephen E. Hannah ...        40,000              11.3%          $     1.9375         04/27/2010
Cheryl L. Isen ......        30,000               8.5%          $     1.9375         04/27/2010
</TABLE>

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

(1)     All of these stock option grants were pursuant to our 1993 Stock Option
        Plan, as amended, and are subject to the terms of that plan. These
        options were granted at exercise prices equal to the fair market value
        of our common stock as determined by our Board of Directors on the date
        of grant. Unless otherwise indicated, options granted vest as to 25% of
        the shares subject to the option on the first anniversary of the date of
        grant and as to 6.25% of the shares subject to the option quarterly
        thereafter.

                       AGGREGATED OPTION EXERCISES IN 2000
                           AND YEAR-END OPTION VALUES

The following table sets forth information with respect to exercises of stock
options during the year ended December 31, 2000 by each of the Named Executive
Officers, the number of options held at year end and the aggregate value of the
"in-the-money" options held at December 31, 2000.

<TABLE>
<CAPTION>
                                                                    NUMBER OF SECURITIES
                                     SHARES                        UNDERLYING OPTIONS AT YEAR-    VALUE OF UNEXERCISED IN-THE-
                                    ACQUIRED ON   VALUE REALIZED    END (#) EXERCISABLE/            MONEY OPTIONS AT YEAR-END
   NAME                             EXERCISE (#)        ($)              UNEXERCISABLE           EXERCISABLE/UNEXERCISABLE(1)($)
   ----                             ------------  --------------   ---------------------------   -------------------------------
<S>                                 <C>           <C>              <C>                           <C>
Frank T. Sample ............            --               --           536,250 / 243,750                $0 / $0
Warren J.  Cawley ..........            --               --            51,910 / 15,207              $2,925 / $0
John R. Graham .............            --               --            62,507 / 50,610              $2,925 / $0
Stephen E. Hannah ..........            --               --            25,625 / 74,375                 $0 / $0
Cheryl L. Isen .............            --               --            19,687 / 50,313                 $0 / $0
</TABLE>
------------

(1)     The closing price of our common stock on December 31, 2000 was $1.25 per
        share.

COMPENSATION COMMITTEE INTERLOCKS

The Compensation Committee was formed in December 1997 and the members of the
Compensation Committee are Ms. Weatherman and Mr. Weglicki. Neither of these
individuals was at any time during the year ended December 31, 2000, or at any
other time, an officer or employee of the Company. No member of the Compensation
Committee serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of our
Board of Directors or Compensation Committee.



                                       37
<PAGE>   38

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information known to us regarding the
beneficial ownership of our common stock as of March 16, 2001 as to (i) each
person known by us to own beneficially more than five percent of the outstanding
shares of our common stock, (ii) each of our directors, (iii) each Named
Executive Officer, and (iv) all directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder is care of VitalCom
Inc, 15222 Del Amo Avenue, Tustin, California 92780.

<TABLE>
<CAPTION>
                                                                              SHARES BENEFICIALLY OWNED
                                                                          ------------------------------
                          NAME AND ADDRESS                                  NUMBER               PERCENT
-----------------------------------------------------------------------   ---------              -------
<S>                                                                       <C>                    <C>
Warburg, Pincus Ventures, L.P.(1)......................................   3,915,181                44.1%
     466 Lexington Avenue, 10th Floor
     New York, NY 10017
ABS Capital Partners, L.P.(2)..........................................     457,062                 5.2
     One South Street
     Baltimore, MD 21202
Frank T. Sample(3).....................................................     623,971                 7.0
Elizabeth H. Weatherman(4).............................................   3,915,181                44.1
Jack W. Lasersohn (5)..................................................     274,141                 3.1
Timothy T. Weglicki(6).................................................     457,062                 5.2
Warren J. Cawley(7)....................................................     122,956                 1.4
John R. Graham(8)......................................................     215,040                 2.4
Stephen E. Hannah(9)...................................................      43,673                 *
Cheryl L. Isen(10).....................................................      38,914                 *
Scott E. Lamb..........................................................          --                 *
All executive officers and directors as a Group (9 persons)(11)........   5,690,938                64.1
</TABLE>

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

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options,
warrants and convertible notes currently exercisable or convertible, or
exercisable or convertible within 60 days of April 2, 2001 are deemed
outstanding for computing the percentage of the person holding such option but
are not outstanding for purposes of computing the percentage of any other
person. Except as indicated by footnote, and subject to community property laws
where applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.

*       Less than one percent of the outstanding common stock.

(1)     The sole general partner of Warburg, Pincus Ventures, L.P. ("Ventures")
        is Warburg, Pincus & Co., a New York general partnership ("WP"). E.M.
        Warburg, Pincus & Co., LLC, a New York limited liability company ("EMW
        LLC"), manages Ventures. The members of EMW LLC are substantially the
        same as the partners of WP. Lionel I. Pincus is the managing partner of
        WP and the managing member of EMW LLC and may be deemed to control both
        WP and EMW LLC. WP has a 15% interest in the profits of Ventures as the
        general partner, and also owns approximately 1.5% of the limited
        partnership interests in Ventures. Elizabeth H. Weatherman, one of our
        directors, is a Managing Director and a member of EMW LLC and a general
        partner of WP. As such, Ms. Weatherman may be deemed to have an indirect
        pecuniary interest (within the meaning of Rule 16a-1 under the Exchange
        Act) in an indeterminate portion of the shares beneficially owned by
        Ventures and WP. See Note 4 below.

(2)     The sole general partner of ABS Capital Partners, L.P. ("ABS Capital")
        is ABS Partners, L.P. ("ABS Partners"). Timothy T. Weglicki, one of our
        directors, is a general partner of ABS Partners. See Note 6 below.

(3)     Includes 585,000 shares issuable upon exercise of options exercisable
        within 60 days of April 1, 2001.

(4)     All of the shares indicated as owned by Ms. Weatherman are owned
        directly by Ventures and are included because of her affiliation with
        Ventures. Ms. Weatherman disclaims "beneficial ownership" of these
        shares within the meaning of Rule 13d-3 under the Exchange Act. See Note
        1 above.

(5)     Of the shares indicated as owned by Mr. Lasersohn, one of our directors,
        9,700 are owned directly by Vertical Life Sciences, L.P., of which
        Vertical is the sole general partner, and 264,441 are owned directly by
        Vertical Fund, and all of such shares are included because of Mr.
        Lasersohn's affiliation with those entities. Because of that
        affiliation, Mr. Lasersohn may be deemed to have an indirect pecuniary
        interest in an indeterminate portion of the shares beneficially owned by
        Vertical Life Sciences, L.P., Vertical Fund and Vertical. Mr. Lasersohn
        disclaims "beneficial ownership" of these shares within the meaning of
        Rule l3d-3 under the Exchange Act.



                                       38
<PAGE>   39

(6)     All of the shares indicated as owned by Mr. Weglicki are owned directly
        by ABS Capital and are included because of his affiliation with that
        entity. Because of that affiliation, Mr. Weglicki may be deemed to have
        an indirect pecuniary interest in an indeterminate portion of the shares
        beneficially owned by ABS Capital and ABS Partners. Mr. Weglicki
        disclaims "beneficial ownership" of these shares within the meaning of
        Rule 13d-3 under the Exchange Act. See Note 2 above.

(7)     Includes 54,786 shares issuable upon exercise of stock options
        exercisable within 60 days of April 1, 2001.

(8)     Includes 73,882 shares issuable upon exercise of stock options
        exercisable within 60 days of April 1, 2001.

(9)     Includes 39,375 shares issuable upon exercise of stock options
        exercisable within 60 days of April 1, 2001.

(10)    Includes 29,689 shares issuable upon exercise of stock options
        exercisable within 60 days of April 1, 2001.

(11)    Includes 782,732 shares issuable upon exercise of stock options
        exercisable within 60 days of April 1, 2001 and 3,915,181, 457,062,
        264,441 and 9,700 shares owned directly by Ventures, ABS, Vertical Fund
        and Vertical Life Sciences, L.P., respectively. See notes 4, 5 and 6
        above.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the Exchange Act ("Section 16(a)") requires our executive
officers and directors, and persons who own more than ten percent of our common
stock to file reports of ownership and changes in ownership with the Securities
and Exchange Commission ("SEC") and the National Association of Securities
Dealers, Inc. Executive officers, directors and greater than ten percent
stockholders are required by SEC regulations to furnish the Company copies of
all Section 16(a) forms they file. Based solely on our review of the copies of
such forms received by us, or written representations from certain reporting
persons, we believe that during fiscal 2000, all reporting persons complied with
all Section 16(a) filing requirements applicable to them.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In October 1997 and renewed in October 2000, the Company entered into an
employment agreement with Mr. Sample in connection with his appointment as
President and Chief Executive Officer. The agreement provides for a three-year
employment term, subject to early termination in the event of the death or
disability of Mr. Sample or as otherwise provided therein. The Company may
terminate Mr. Sample's employment with or without "Just Cause" (as defined in
the employment agreement), but in the event such termination is without "Just
Cause", Mr. Sample will be entitled to receive severance pay at his then current
salary for a period of twelve months following such termination.



                                       39
<PAGE>   40

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

        (a)     The following documents are filed as part of this Form 10-K:

                (1)     Our Financial Statements and the related Report of
                        Deloitte and Touche LLP (See Item 8)

                (2)     Financial Statement Schedules.

                        The following financial statement schedule of VitalCom
                        is filed as part of this report and should be read in
                        conjunction our Financial Statements.

                                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                   BALANCE AT   CHARGED TO                     BALANCE
                                                                   BEGINNING    COSTS AND                       END
DESCRIPTION                                                        OF PERIOD    EXPENSES       DEDUCTIONS     OF PERIOD
-----------                                                        ---------    --------       ----------     ---------
<S>                                                                <C>          <C>            <C>            <C>
Allowance for Doubtful Accounts and Sales Returns:
  December 31, 1998 ...................................            $ 270,213    $ 79,934       $     --        $350,147
  December 31, 1999 ...................................              350,147          --         (4,068)        346,079
  December 31, 2000 ...................................              346,079          --        (97,528)        248,551
</TABLE>


<TABLE>
<CAPTION>
                                                                   BALANCE AT   CHARGED TO                     BALANCE
                                                                   BEGINNING    COSTS AND                       END
DESCRIPTION                                                        OF PERIOD    EXPENSES       DEDUCTIONS     OF PERIOD
-----------                                                        ---------    --------       ----------     ---------
<S>                                                                <C>          <C>            <C>            <C>
Allowance for Excess and Obsolete Inventory:
  December 31, 1998 ...................................            $ 728,738    $ 263,640      $ (304,651)    $ 687,727
  December 31, 1999 ...................................              687,727       32,389         (83,597)      636,519
  December 31, 2000 ...................................              636,519      265,093        (222,729)      678,883
</TABLE>

All other schedules are omitted because they are inapplicable or because the
requested information is shown in our financial statements or in the related
notes thereto.

                (3)     Exhibits (numbered in accordance with Item 601 of
                        Regulation S-K)


        (b) Reports on Form 8-K:

            Not applicable



                                       40
<PAGE>   41

        (c) Exhibits

<TABLE>
<CAPTION>
      EXHIBIT
         NO.                         DESCRIPTION OF EXHIBIT
         ---                         ----------------------
      <S>       <C>
        3.1     Amended and Restated Certificate of Incorporation of the
                Registrant, as currently in effect.(1)

        3.2     Amended and Restated Bylaws of the Registrant, as currently in
                effect.(1)

        4.1     Specimen Common Stock Certificate.(1)

        4.2     Form of Voting Agreement among the Registrant, Warburg, Pincus
                Ventures, L.P., ABS Capital Partners, L.P. and Donald W. Judson.
                (1)

        10.1    Registrant's 1993 Stock Option Plan, as amended, and forms of
                agreement thereunder.(7)

        10.2    Registrant's 1996 Employee Stock Purchase Plan.(8)

        10.3    Lease dated July 28, 1995 between Catellus Development
                Corporation as Landlord and Registrant as Tenant.(1)

        10.4    Warburg Securities Purchase Agreement dated as of June 1, 1995
                by and among the Registrant, Warburg, Pincus Ventures, L.P., ABS
                Capital Partners, L.P., Vertical Fund Associates, L.P., Vertical
                Partners, L.P. and BT Capital Partners, Inc.(1)

        10.5    Form of Indemnification Agreement between the Registrant and its
                executive officers and directors.(1)

        10.6    Form of Employment Agreement between the Registrant and certain
                of its executive officers.(1)

        10.7    Form of Employee Severance Agreement with certain of the
                Registrant executive officers.(1)

        10.8    Registrant's 1996 Director Option Plan.(1)

        10.9    Registrant's 1996 Stock Option Plan and related agreements.(9)

        10.10   Promissory Note Secured by Deed of Trust dated October 17, 1996
                of David L. Schlotterbeck in favor of the Registrant.(2)

        10.11   Loan Agreement between the Registrant and Silicon Valley Bank
                dated February 26, 1993, as amended through August 6, 1996.(1)

        10.12   Common Stock Purchase Agreement dated July 14, 1998 between the
                Registrant and Irwin & Browning, Inc.(10)

        10.13   Silicon Valley Bank Amendment to Loan Agreement.(6)

        10.14   Second amendment to lease dated August 30, 1999 between Catellus
                Finance 1, L.L.C. as Landlord and Registrant as Tenant.(*)

        10.15   Agreement and Plan of Merger dated as of March 12, 2001 among
                the Registrant, Data Critical Corporation and Viper Acquisition
                Corp.(*)

        23.1    Independent Auditors' Consent.(*)

        24.1    Power of Attorney (Included on page 42 hereof).
</TABLE>

(*)     Filed herewith.

(1)     Incorporated by reference to the Registrant's Registration Statement on
        Form S-1 (File No. 333-00268-LA) in the form in which it was declared
        effective on February 13, 1997.

(2)     Incorporated by reference to the Registrant's Quarterly Report on Form
        10-Q for the quarter ended September 30, 1996.

(3)     Incorporated by reference to the Registrant's Quarterly Report on Form
        10-Q for the quarter ended March 31, 1997.

(4)     Incorporated by reference to the Registrant's Quarterly Report on Form
        10-Q for the quarter ended June 30, 1997.

(5)     Incorporated by reference to the Registrant's Quarterly Report on Form
        10-Q for the quarter ended September 30, 1997.

(6)     Incorporated by reference to the Registrant's Quarterly Report on Form
        10-Q for the quarter ended June 30, 1999.

(7)     Incorporated by reference to the Registrant's Registration Statement on
        Form S-8 (File No. 333-47173).

(8)     Incorporated by reference to the Registrant's Registration Statement on
        Form S-8 (File No. 333-67109).

(9)     Incorporated by reference to the Registrant's Registration Statement on
        Form S-8 (File No. 333-33901).

(10)    Incorporated by reference to the Registrant's Annual Report on Form 10-K
        for the year ended December 31, 1998.



                                       41
<PAGE>   42

                                   SIGNATURES

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

                                       VitalCom Inc.


                                       By:       /s/ Frank T. Sample
                                          -------------------------------------
                                                    Frank T. Sample
                                          President and Chief Executive Officer


                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Frank T. Sample as his or her attorney-in-fact, with
full power of substitution, for him or her in any and all capacities, to sign
any and all amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant on
March 29, 2001 in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE                                   TITLE
---------                                   -----
<S>                                         <C>
/s/ Frank T. Sample                         Chairman of the Board,
------------------------------------        President and Chief Executive Officer
Frank T. Sample                             (Principal Executive Officer)



/s/ Scott E. Lamb                           Senior Director of Finance, Controller
------------------------------------        (Principal Financial and
Scott E. Lamb                               Accounting Officer)



/s/ Elizabeth H. Weatherman                 Director
------------------------------------
Elizabeth H. Weatherman



/s/ Jack W. Lasersohn                       Director
------------------------------------
Jack W. Lasersohn



/s/ Timothy T. Weglicki                     Director
------------------------------------
Timothy T. Weglicki
</TABLE>



                                       42
<PAGE>   43

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                    SEQUENTIALLY
      EXHIBIT                                                                          NUMBERED
        NO.                       DESCRIPTION OF EXHIBIT                                PAGES
        ---                       ----------------------                                -----
      <S>       <C>                                                                 <C>
        3.1     Amended and Restated Certificate of Incorporation of the
                Registrant, as currently in effect.(1)

        3.2     Amended and Restated Bylaws of the Registrant, as currently in
                effect.(1)

        4.1     Specimen Common Stock Certificate.(1)

        4.2     Form of Voting Agreement among the Registrant, Warburg, Pincus
                Ventures, L.P., ABS Capital Partners, L.P. and Donald W. Judson.
                (1)

        10.1    Registrant's 1993 Stock Option Plan, as amended, and forms of
                agreement thereunder.(7)

        10.2    Registrant's 1996 Employee Stock Purchase Plan.(8)

        10.3    Lease dated July 28, 1995 between Catellus Development
                Corporation as Landlord and Registrant as Tenant.(1)

        10.4    Warburg Securities Purchase Agreement dated as of June 1, 1995
                by and among the Registrant, Warburg, Pincus Ventures, L.P., ABS
                Capital Partners, L.P., Vertical Fund Associates, L.P., Vertical
                Partners, L.P. and BT Capital Partners, Inc.(1)

        10.5    Form of Indemnification Agreement between the Registrant and its
                executive officers and directors.(1)

        10.6    Form of Employment Agreement between the Registrant and certain
                of its executive officers.(1)

        10.7    Form of Employee Severance Agreement with certain of the
                Registrant executive officers.(1)

        10.8    Registrant's 1996 Director Option Plan.(1)

        10.9    Registrant's 1996 Stock Option Plan and related agreements.(9)

        10.10   Promissory Note Secured by Deed of Trust dated October 17, 1996
                of David L. Schlotterbeck in favor of the Registrant.(2)

        10.11   Loan Agreement between the Registrant and Silicon Valley Bank
                dated February 26, 1993, as amended through August 6, 1996.(1)

        10.12   Common Stock Purchase Agreement dated July 14, 1998 between the
                Registrant and Irwin & Browning, Inc.(10)

        10.13   Silicon Valley Bank Amendment to Loan Agreement.(6)

        10.14   Second amendment to lease dated August 30, 1999 between Catellus
                Finance 1, L.L.C. as Landlord and Registrant as Tenant.(*)

        10.15   Agreement and Plan of Merger dated as of March 12, 2001 among
                the Registrant, Data Critical Corporation and Viper Acquisition
                Corp.(*)

        23.1    Independent Auditors' Consent.(*)

        24.1    Power of Attorney (Included on page 42 hereof).
</TABLE>

(*)     Filed herewith.

(1)     Incorporated by reference to the Registrant's Registration Statement on
        Form S-1 (File No. 333-00268-LA) in the form in which it was declared
        effective on February 13, 1997.

(2)     Incorporated by reference to the Registrant's Quarterly Report on Form
        10-Q for the quarter ended September 30, 1996.

(3)     Incorporated by reference to the Registrant's Quarterly Report on Form
        10-Q for the quarter ended March 31, 1997.

(4)     Incorporated by reference to the Registrant's Quarterly Report on Form
        10-Q for the quarter ended June 30, 1997.

(5)     Incorporated by reference to the Registrant's Quarterly Report on Form
        10-Q for the quarter ended September 30, 1997.

(6)     Incorporated by reference to the Registrant's Quarterly Report on Form
        10-Q for the quarter ended June 30, 1999.

(7)     Incorporated by reference to the Registrant's Registration Statement on
        Form S-8 (File No. 333-47173).

(8)     Incorporated by reference to the Registrant's Registration Statement on
        Form S-8 (File No. 333-67109).

(9)     Incorporated by reference to the Registrant's Registration Statement on
        Form S-8 (File No. 333-33901).

(10)    Incorporated by reference to the Registrant's Annual Report on Form 10-K
        for the year ended December 31, 1998.



                                       43