<PAGE>   1

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

                                    FORM 10-Q


(MARK ONE)

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

    For the quarterly period ended      JUNE 30, 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)


            DELAWARE                                           33-0538926
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                           Identification Number)

                              15222 DEL AMO AVENUE
                            TUSTIN, CALIFORNIA 92780
              (Address of principal executive offices and zip code)
                                 (714) 546-0147
              (Registrant's telephone number, including area code)

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of August 7, 2000, there were 8,003,605 shares outstanding of the issuer's
common stock.

<PAGE>   2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                  VITALCOM INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                        ---------------------------
                                                          JUNE 30,     DECEMBER 31,
                                                            2000           1999
                                                        ------------   ------------
                                                        (UNAUDITED)     (AUDITED)
                                     ASSETS
<S>                                                     <C>            <C>
Current assets
      Cash and cash equivalents                         $  5,618,257   $  7,107,420
      Restricted Cash                                      2,513,535              0
      Short-term investments                                       0      5,273,037
      Accounts receivable, net                             3,059,439      2,309,392
      Inventories                                          1,432,940      1,504,952
      Prepaid expenses                                       294,079        530,833
                                                        ------------   ------------
        Total current assets                              12,918,250     16,725,634

Property
      Machinery and equipment                              1,901,004      1,560,013
      Office furniture and computer equipment              2,716,059      2,558,815
      Leasehold improvements                                 200,419        181,778
                                                        ------------   ------------
                                                           4,817,482      4,300,606
      Less accumulated amortization and depreciation      (3,101,764)    (2,831,090)
                                                        ------------   ------------
        Property, net                                      1,715,718      1,469,516

Other assets                                                  74,396         68,237
Goodwill, net                                                406,755        423,025
                                                        ------------   ------------
                                                        $ 15,115,119   $ 18,686,412
                                                        ============   ============
</TABLE>


                                       2
<PAGE>   3

                                  VITALCOM INC.

                          BALANCE SHEETS - (CONTINUED)

<TABLE>
<CAPTION>
                                                           ----------------------------
                                                             JUNE 30,      DECEMBER 31,
                                                               2000           1999
                                                           ------------    ------------
                                                            (UNAUDITED)     (AUDITED)
<S>                                                        <C>             <C>
                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                         $    756,685    $    508,322
  Accrued payroll and related costs                             813,613         959,862
  Accrued warranty costs                                        458,119         516,297
  Other accrued liabilities                                     765,307         568,336
  Current portion of capital lease obligations                   13,455          28,796
                                                           ------------    ------------
       Total current liabilities                              2,807,179       2,581,613

Stockholders' equity (deficit):
  Common stock, including paid-in capital,
    $0.0001 par value; 25,000,000 shares authorized,
    8,367,155 shares issued and 8,003,605 outstanding
    at June 30, 2000; 8,281,112 shares issued and
    7,917,562 shares outstanding at December 31, 1999        37,831,141      37,665,468
  Note receivable for common stock sales                        (30,590)        (30,590)
  Treasury stock, at cost                                      (740,154)       (740,154)
  Accumulated deficit                                       (24,752,457)    (20,789,925)
                                                           ------------    ------------
       Net stockholders' equity                              12,307,940      16,104,799
                                                           ------------    ------------
                                                           $ 15,115,119    $ 18,686,412
                                                           ============    ============
</TABLE>


                                       3
<PAGE>   4

                                  VITALCOM INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        -------------------------------         -------------------------------
                                                               THREE MONTHS ENDED                      SIX MONTHS ENDED
                                                                    JUNE 30,                               JUNE 30,
                                                        -------------------------------         -------------------------------
                                                            2000                1999               2000                 1999
                                                        -----------         -----------         -----------         -----------
                                                                  (UNAUDITED)                             (UNAUDITED)
<S>                                                     <C>                 <C>                 <C>                 <C>
Revenues                                                $ 4,089,206         $ 3,600,254         $ 7,192,089         $ 8,410,354

Cost of revenues                                          1,496,258           1,777,662           3,334,384           3,802,988
                                                        -----------         -----------         -----------         -----------

Gross profit                                              2,592,948           1,822,592           3,857,705           4,607,366

Operating expenses
  Sales and marketing                                     1,620,660           1,486,305           3,232,186           3,057,626
  Research and development                                1,990,562           1,281,492           3,799,065           2,406,966
  General and administration                                490,981             541,304           1,069,467           1,132,199
                                                        -----------         -----------         -----------         -----------
      Total operating expenses                            4,102,203           3,309,101           8,100,718           6,596,791

Operating loss                                           (1,509,255)         (1,486,509)         (4,243,013)         (1,989,425)

Other income, net                                           132,166             203,960             298,480             387,756
                                                        -----------         -----------         -----------         -----------

Loss before provision for income taxes                   (1,377,089)         (1,282,549)         (3,944,533)         (1,601,669)

Provision for income taxes                                    9,000               9,000              18,000              18,000
                                                        -----------         -----------         -----------         -----------

Net loss                                                $(1,386,089)        $(1,291,549)        $(3,962,533)        $(1,619,669)
                                                        ===========         ===========         ===========         ===========

Net loss per basic and diluted common share             $     (0.17)        $     (0.16)        $     (0.50)        $     (0.20)
                                                        ===========         ===========         ===========         ===========

Weighted average basic and diluted common shares          7,987,570           8,210,871           7,960,900           8,196,927
</TABLE>


                                       4
<PAGE>   5

                                  VITALCOM INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                            --------------------------
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                            --------------------------
                                                               2000           1999
                                                            ----------    ------------
                                                                   (UNAUDITED)
<S>                                                         <C>           <C>
Cash flows from operating activities:
      Net loss                                             $(3,962,533)   $  1,619,669)
      Adjustments to reconcile net loss to net cash
        used in operating activities:
      Depreciation and amortization                            286,944         329,890
      Loss on disposal of property                                   0           3,644
      Changes in operating assets and liabilities:
           Accounts receivable                                (750,047)        945,405
           Inventories                                          72,012         146,766
           Prepaid expenses and other current assets           230,594           6,134
           Accounts payable                                    248,363         180,656
           Accrued payroll and related costs                  (146,248)       (119,260)
           Accrued warranty costs                              (58,178)        (56,866)
           Income taxes payable                                (81,825)        (61,690)
           Accrued liabilities                                 278,797        (207,717)
                                                           -----------    ------------
                  Net cash used in operating activities     (3,882,121)       (452,707)

Cash flows from investing activities:
      Purchases of property                                   (516,876)       (206,736)
      Proceeds from sale of short-term investments           5,273,037       1,924,507
      (Increase) decrease in other assets                      (10,039)         10,410
                                                           -----------    ------------
           Net cash provided by investing activities         4,746,122       1,728,181

Cash flows from financing activities:
      Repayment of capital lease obligation and
        long-term debt                                          (5,302)        (13,504)
      Restricted cash for compensated balance on
        line of credit                                      (2,513,535)              0
      Net proceeds from issuance of common stock               165,673         126,612
      Repurchase of common stock                                     0        (154,475)
                                                           -----------    ------------
           Net cash provided by (used in)
             financing activities                           (2,353,164)        (41,367)

Net increase (decrease) in cash and cash equivalents        (1,489,163)      1,234,107

Cash and cash equivalents, beginning of period               7,107,420      10,460,810

                                                           -----------    ------------
Cash and cash equivalents, end of period                   $ 5,618,257    $ 11,694,917
                                                           ===========    ============

Supplemental disclosures of cash flow information:
  Interest paid                                            $     6,926    $      2,403
                                                           ===========    ============
  Income taxes paid                                        $    10,360    $     12,480
                                                           ===========    ============
</TABLE>


                                       5
<PAGE>   6

                                  VITALCOM INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)


1. BASIS OF PRESENTATION

The interim condensed financial statements included herein have been prepared by
the Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such SEC rules and regulations; nevertheless, the management
of the Company believes that the disclosures herein are adequate to make the
information presented not misleading. These condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1999 and
filed with the SEC. In the opinion of management, the condensed financial
statements included herein reflect all normal, recurring adjustments necessary
to present fairly the financial position of the Company as of June 30, 2000, and
the results of its operations and its cash flows for the three-month and
six-month periods ended June 30, 2000 and 1999. The results of operations for
the interim periods are not necessarily indicative of the results of operations
for the full year.

2. NET LOSS PER SHARE

Net loss per share is computed by dividing net loss by the weighted average
number of common and common equivalent shares outstanding. For the three-month
and six-month periods ended June 30, 2000 and 1999, the diluted weighted average
shares were equal to the basic weighted average shares due to the anti-dilutive
effect the conversion of options would have given the Company's net loss for the
period.

3. STOCK PLANS AND STOCKHOLDERS' EQUITY

Stock Option Plans - The following is a summary of stock option transactions
under the 1993 Stock Option Plan (the "1993 Plan") and 1996 Stock Option Plan
(the "1996 Plan") for the six months ended June 30, 2000:

<TABLE>
<CAPTION>
                                                                     NUMBER OF
                                   NUMBER OF        PRICE PER         OPTIONS
                                    SHARES            SHARE         EXERCISABLE
                                   ---------        ---------       -----------
<S>                                <C>            <C>               <C>
Balance, December 31, 1999         1,680,116      $0.60 to $6.00       601,094
  Granted                            170,000      $1.63 to $1.94
  Exercised                          (37,403)     $3.00 to $4.00
  Canceled                          (171,427)     $1.50 to $6.00
                                   ---------
Balance, June 30, 2000             1,641,286      $0.60 to $4.75       761,480
                                   =========
</TABLE>

At June 30, 2000, 647,196 options were available for grant under the 1993 Plan
and 1996 Plan.

There were no stock transactions under the 1996 Director Option Plan (the
"Director Plan") for the six months ended June 30, 2000. At June 30, 2000,
60,000 options were available for grant under the Director Plan and no options
were exercisable.

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


                                       6
<PAGE>   7

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, 1997, 1998 and 1999 the Company
issued 47,359, 52,703 and 74,334 shares of Common Stock, under the ESPP for
$191,218, $145,264 and $88,240 respectively. At June 30, 2000, $59,053 has been
withheld from employee earnings for stock purchases under the ESPP.

4. 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>
                                           OEM         Enterprise-Wide
                                         Products          Systems            Total
                                        ----------     ---------------      ----------
<S>                                     <C>            <C>                  <C>
Three months ended June 30, 2000
     Revenues                           $2,333,303        $1,755,903        $4,089,206
     Cost of Revenues                    1,002,846           493,412         1,496,258
                                        ----------        ----------        ----------
     Gross Profit                       $1,330,457        $1,262,491        $2,592,948
                                        ==========        ==========        ==========

Three months ended June 30, 1999
     Revenues                           $2,573,952        $1,026,302        $3,600,254
     Cost of Revenues                    1,259,058           518,604         1,777,662
                                        ----------        ----------        ----------
     Gross Profit                       $1,314,894        $  507,698        $1,822,592
                                        ==========        ==========        ==========

<CAPTION>
                                           OEM         Enterprise-Wide
                                         Products          Systems            Total
                                        ----------     ---------------      ----------
<S>                                     <C>            <C>                  <C>
Six months ended June 30, 2000
     Revenues                           $4,687,977        $2,504,112        $7,192,089
     Cost of Revenues                    2,299,020         1,035,364         3,334,384
                                        ----------        ----------        ----------
     Gross Profit                       $2,388,957        $1,468,748        $3,857,705
                                        ==========        ==========        ==========

Six months ended June 30, 1999
     Revenues                           $5,223,567        $3,186,787        $8,410,354
     Cost of Revenues                    2,638,578         1,164,410         3,802,988
                                        ----------        ----------        ----------
     Gross Profit                       $2,584,989        $2,022,377        $4,607,366
                                        ==========        ==========        ==========
</TABLE>

5. RECENT ACCOUNTING PRONOUNCEMENT

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for derivatives used for hedging activities. It requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either as an asset or
liability and measured at fair value. SFAS 133 is required to be adopted in
fiscal year 2001. The Company believes that the application of SFAS 133 will not
have a material impact on the Company's financial statements.


                                       7
<PAGE>   8

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which the
Company is required to adopt no later than the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. The company is in the process of
determining the effect of adopting SAB No. 101.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q CONSTITUTE
FORWARD-LOOKING STATEMENTS 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. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL MADE IN THIS FORM
10-Q ARE FORWARD-LOOKING. IN PARTICULAR, THE STATEMENTS HEREIN REGARDING
INDUSTRY PROSPECTS AND FUTURE RESULTS OF OPERATIONS OR FINANCIAL POSITION ARE
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS REFLECT THE COMPANY'S
CURRENT EXPECTATIONS AND ARE INHERENTLY UNCERTAIN. ACTUAL RESULTS MAY VARY
SUBSTANTIALLY FROM THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE
DISCUSSED IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999.

GENERAL

VitalCom Inc. provides computer networks and related wireless radio
communications products that acquire, interpret and distribute real-time patient
monitoring information. The Company's computer and wireless radio networks
acquire and integrate patient's physiologic data from different manufactures'
monitoring and bedside devices into a single network, making patient information
available in real-time via the internet, a wireless LAN, a system wide intranet
and WAN. 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.

In July 2000 the Company announced a new patent pending suite of products to be
sold by the Company's direct sales force and through its OEM customers -
"PatientNet Wireless Network(TM)". These new products utilize elements of
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.

Revenues from sales of Enterprise-Wide Systems and OEM products are recognized
upon shipment. The Company has experienced seasonal variations in sales of its
OEM products, with sales in the first quarter typically lower than the preceding
fourth quarter's sales. The sales cycle for Enterprise-Wide Systems has
historically been from nine to 18 months. The Company has also experienced
seasonal variations in the sales of its Enterprise-Wide Systems, with sales in
the first quarter typically lower than the preceding fourth quarter's sales due
to customer budget cycles. Furthermore, a large percentage of a particular
quarter's shipments of Enterprise-Wide Systems have historically been recorded
in the last weeks of the quarter. The Company also offers after sales support
programs for new and existing customers. Revenue from sales of such programs is
deferred to future periods in accordance with SOP 97-2, Software Revenue
Recognition.

The Company's products are generally shipped as orders are received, and
accordingly, the Company typically operates with limited backlog. As a result,
sales in any quarter are dependent on orders recorded and shipped the current
quarter.

RESULTS OF OPERATIONS - THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2000
AND JUNE 30, 1999

Total Revenues. Total revenues consist of revenue from sales of Enterprise-Wide
Systems and support, and OEM products, together with fees for installation and
servicing of Enterprise-Wide Systems. Total revenues increased 13.6% to $4.1
million


                                       8
<PAGE>   9

in the three months ended June 30, 2000 from $3.6 million for the three months
ended June 30, 1999. Total revenues decreased 14.5% to $7.2 million in the six
months ended June 30, 2000 from $8.4 million in the six months ended June 30,
1999. Both Enterprise-Wide Systems and OEM sales declined in 2000. Management
believes that a contributing factor to the decrease in Enterprise-Wide System
revenues for the first six months of this year was due, in part, to delayed
sales agreements as customers diverted spending to address other vendors'
outstanding year 2000 issues. The decrease in OEM revenues for the first six
months, from $2.6 million in 1999 to $2.4 million in 2000 resulted from a shift
in sales strategy by a large OEM customer following its sale to new investors
that adversely impacted the Company's shipments to them. It is uncertain what
effect, if any, the sale of the OEM customer to new investors will have on
future purchases by the OEM customer of the Company's products.

Gross Margins. Cost of goods sold generally includes material, direct labor,
overhead and for Enterprise Wide Systems, installation expenses. The Company's
overall gross margin depends on its sales mix in any given period, as certain
products generate a higher gross margin than others do. Cost of sales decreased
18.8% to $1.5 million in the three months ended June 30, 2000 from $1.8 million
in the three months ended June 30, 1999. Gross margin increased to 63.4% in the
second quarter of 2000 compared to 50.6% for the second quarter of 1999. The
increase in gross margin in the second quarter of 2000, compared to the second
quarter of 1999 was due, in part, to an increase in percentage of Enterprise
Wide Systems sold. These Systems, which tend to have a higher content of
software, generally generate a higher gross margin.

Revenue from Enterprise-Wide Systems increased in the second quarter of 2000
over the first quarter of 2000 by almost 135%. This had a positive impact on
gross profit for the second quarter over the first quarter of 2000. Cost of
goods sold decreased 12.3% to $3.3 million for the six-month period ended June
30, 2000 from $3.8 million in the six months ended June 30, 1999. Gross margin
decreased to 53.6% in the six months ended June 30, 2000 compared to 54.8% for
the six months ended June 30, 1999. The decrease in gross margin in the first
six months of 2000 as compared to the same period of 1999 was due primarily to
fewer sales of Enterprise-Wide Systems, particularly in the first quarter of
2000, resulting in an overall decrease in the Company's gross margin for the
period.

Sales and Marketing Expenses. Sales and marketing expenses include payroll,
commissions and related costs attributable to Enterprise Monitoring systems and
OEM sales and marketing personnel, travel and entertainment expenses and other
promotional expenses. Sales and marketing expenses were $1.6 million, or 39.6%
of total revenue in the three months ended June 30, 2000, as compared to $1.5
million or 41.3% of total revenue for the three months ended June 30, 1999. The
$134,355 increase in sales and marketing expenses in the second quarter of 2000
as compared to the second quarter of 1999 was primarily due to an increase in
salary and marketing costs as the Company continues to build its direct sales
force.

Sales and marketing expenses were $3.2 million, or 44.9% of total revenue in the
six months ended June 30, 2000, as compared to $3.1 million or 36.3% of total
revenue in the six months ended June 30, 1999. The $174,560 increase in sales
and marketing expenses in the six months ended June 30, 2000 as compared to the
six months ended June 30, 1999 was primarily due to an increase in salary and
marketing costs in preparation for selling the Company's new suite of wireless
network products, which were partially offset by a reduction in commissions on
lower sales this period as compared to the same six months in 1999.

Research and Development Expenses. Research and development expenses include
payroll and related costs attributable to research and development personnel,
prototyping expenses, consulting and other costs. Research and development
expenses were $2.0 million or 48.7% of total revenue in the three months ended
June 30, 2000, as compared to $1.3 million or 35.6% of total revenue in the
three months ended June 30, 1999. The $709,070 increase in the second quarter of
2000 as compared to the second quarter of 1999 was primarily due to higher third
party contractor expenses. The Company has been increasing its use of third
party contractors for research and development, because the use of outside
contractors gives the Company the ability to scale back its expenses as needed.
The Company continued its heavy use of third party contractors in the quarter
ended June 30, 2000 due to the Company's ongoing development of its new
software, wireless and Internet-related technology products such as
PatientNet(TM), PatientBrowser(TM), and MobilePatientViewer(TM).

Research and development expenses were $3.8 million, or 52.8% of total revenue
in the six months ended June 30, 2000, as compared to $2.4 million or 28.6% of
total revenue in the six months ended June 30, 1999. The $1,392,099 increase in
research and development expenses in the first six months of 2000 as compared to
the first six months of 1999 was due primarily to higher third party contractor
costs.


                                       9
<PAGE>   10

General and Administrative Expenses. General and administrative expense includes
accounting, finance, information systems, human resources, general
administration, executive officers and professional fee expenses. General and
administrative expenses were $490,981 or 12.0% of total revenue in the three
months ended June 30, 2000, as compared to $541,304 or 15.0% of total revenue in
the three months ended June 30, 1999. The $50,323 decrease in general and
administrative expenses in the second quarter of 2000 as compared to the second
quarter of 1999 was primarily attributable to a decrease in salaries partially
offset by an increase in outside professional fees.

General and administrative expenses were $1.1 million, or 14.8% of total revenue
in the six months ended June 30, 2000, as compared to $1.1 million or 13.4% of
total revenue in the six months ended June 30, 1999.

Other Income, Net. Other income, net, consists primarily of interest income
earned on proceeds from the Company's initial public offering, net of payments
made in respect of outstanding indebtedness. Other income, net, decreased to
$132,166 in the three months ended June 30, 2000, as compared to $203,960 in the
three months ended June 30, 1999. The decrease resulted from a decrease in the
Company's short-term investments, which were sold to fund the Company's cash
needs.

Other income, net, was $298,480 in the six months ended June 30, 2000, as
compared to $387,756 in the six months ended June 30, 1999. The reduction in
other income resulted from a decrease in the Company's short-term investments.

Provision for Income Taxes: The Company recorded a minimum state tax provision
of $9,000 for both of the three month periods ended June 30, 2000 and 1999. For
both of the six-month periods ended June 30, 2000 and 1999, the Company recorded
a minimum state tax provision of $18,000.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations (including capital expenditures) through
net proceeds from the Company's February 1996 initial public offering, cash flow
from operations, cash and cash equivalent balances, a bank line of credit and
long-term debt. During the year ended December 31, 1996, the Company issued
2,300,000 shares of common stock in its initial public offering, raising $25.6
million, net of expenses. At June 30, 2000, the Company had $8.1 million in
cash, cash equivalents, restricted cash, and short-term investments as compared
to $12.4 million at December 31, 1999. In March 2000, the Company renewed a
secured lending arrangement with Silicon Valley Bank, providing for up to
$5,000,000 in total borrowings. As a compensating balance, the Company
covenanted with the bank to maintain at least $2,500,000 in a money market
mutual fund designated by the bank. The Company has no outstanding borrowings
with the bank under the Agreement, and is in compliance with all covenants.

In the first six months of 2000, the Company used cash in operating activities
of $3,882,121 resulting in a $3,962,533 net loss. Accounts receivable increased
$750,047 during the same period as a result of a 14% increase in revenue for the
second quarter over the first quarter of 2000.

During the first six months of 2000, the Company generated $4,746,122 in cash
from investing activities, of which $5,273,037 was provided by the sale of
short-term investments. Cash used for investing activities in the first six
months of 2000 was $516,876 for the purchase of capital equipment, the majority
of which was purchased for use in production of the Company's new suite of
wireless network products.

The Company used $2,353,164 in financing activities in the first six months of
2000. This included $2,513,535 in restricted cash for a compensated balance the
Company covenanted with the bank to maintain for it's revolving line of credit,
and $165,673 in net proceeds from the issuance of the Company's Common Stock for
the matching contribution to its 401(k) plan and Common Stock purchased through
its ESPP plan.

In the first six months of 1999, the Company used cash in operating activities
of $452,707 resulting in a $1,619,669 net loss. Cash was generated primarily by
sales of short-term investments of $1,924, 507 and a decrease in account
receivables of $945,405 due to a decline in revenues in the first and second
quarters of 1999 over the fourth quarter of 1998. Cash used for investing
activities was $206,736 for the purchase of capital equipment in the first six
months of 1999.


                                       10
<PAGE>   11

The Company used $41,367 in cash from financing activities in the first six
months of 1999, of which, $154,474 was used to repurchase the Company's Common
Stock. This was partially offset by $126,612 in net proceeds from the issuance
of the Company's Common Stock for the matching contribution to its 401(k) plan
and Common Stock purchased through its ESPP plan.

At June 30, 2000, the Company's principal sources of liquidity consisted of $8.1
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, the Company covenanted to maintain at
least $2,500,000 in a money market mutual fund designated by the bank. The bank
does not have a security interest in any of the Company's assets until the
Company borrows under the line of credit. The Agreement expires in March 2001.
At June 30, 2000, there were no borrowings outstanding under the Agreement and
the Company was in compliance with all covenants. The financial covenants
require that the Company maintain minimum liquidity levels and total liabilities
to tangible net worth ratios, as well as specified annual and quarterly net loss
(after taxes) amounts.

The Company's principal commitment at June 30, 2000 consisted of a lease on its
office and manufacturing facility. During the remaining six months of this year
the Company expects to spend approximately $600,000 for capital expenditures,
including the purchase of tooling and test fixtures for its planned production
of its new suite of wireless network products.

The Company believes that existing cash resources, cash flows from operations,
if any, and line of credit facilities will be sufficient to fund the Company's
operations for at least the next twelve months.

YEAR 2000 COMPUTER SYSTEMS COMPLIANCE

On January 1, 2000, many companies faced a potentially serious information
technology (IT) systems problem because many software applications and
operational programs written in the past did not properly recognize calendar
dates beginning in the Year 2000. This problem could have forced computers or
machines, which utilize date dependent software to either shut down or provide
incorrect data or information. The Company, led by its Y2K Task Force, examined
it's IT and Non-IT Systems to determine whether its software applications and
computer and information systems were compliant with the Year 2000. The
Company's remediation efforts for the systems found not to be Year 2000
compliant included, but were not limited to, internal upgrade efforts, vendor
provided upgrades, replacement, and decommissioning of obsolete systems and
equipment. Based on these efforts the Company considered its critical and
non-critical business systems to be Year 2000 compliant as of December 31, 1999.

At this time the Company has not experienced any material Year 2000 related
problems with its IT systems or software applications, and has not experienced
any material problems with key Company suppliers or customers related to Year
2000. There has been no material impact on the Company's business, financial
condition or results of operations related to the Year 2000.

RISK FACTORS

Dependence on Increased Market Acceptance of Enterprise-wide Monitoring Systems.
Since 1995, the Company's sales levels for its 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 have had a material adverse
effect on the Company's business, operating results and financial condition. If
the Company is not successful in increasing sales levels of its Enterprise-wide
Monitoring Systems in future periods, the Company's business, operating results
and financial condition will continue to be materially adversely affected. In
addition, although the Company's Enterprise-wide monitoring products have been
installed in more than 100 hospitals, there is no assurance that the Company's
products will achieve the hospital penetration necessary to increase sales.


                                       11
<PAGE>   12

Customer Concentration. Dependence on Departmental Products. The Company's OEM
product sales, which represented approximately 53.7%, 57.9%, 68.6% and 62.1% of
the Company's total net revenues in 1997, 1998, 1999 and the first six months of
2000, respectively, have historically been to a small number of OEM customers.
In 1997, Quinton Instrument Company ("Quinton") and Datascope Corporation
("Datascope") accounted for approximately 12.2% and 25.0%, respectively, of the
Company's total revenues and in 1998 Quinton and Datascope accounted for
approximately 19.7% and 22.6%, respectively, of the Company's total revenues. In
1999, Quinton and Datascope accounted for approximately 24.0% and 34.0%,
respectively. In the first six months of 2000, Quinton and Datascope accounted
for approximately 17.8% and 30.9%, respectively. The loss of or a reduction in
sales to any such OEM customer would have a material adverse effect on the
Company's business, operating results and financial condition.

Fluctuations in Quarterly Results. The Company's 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; the
Company's success in expanding its sales and marketing programs and the effects
of changes in sales force alignment; the ability of the Company's customers to
obtain budget allocations for the purchase of the Company's products; changes in
pricing policies or price reductions by the Company or its competitors; mix of
sales between Enterprise-wide Monitoring Systems and OEM products; the timing of
new product announcements and introductions by the Company or its competitors;
deferrals of customer orders in anticipation of new products or product
enhancements; the Company's ability to develop, introduce and market new
products and product enhancements; market acceptance of new products or product
enhancements; the Company's 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.

The Company's products are generally shipped as orders are received and,
accordingly, the Company has 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 the Company's
expenses is relatively fixed, and the amount and timing of increases in such
expenses are based in large part on the Company's expectations for future
revenues. If revenues are below expectations in any given quarter, the adverse
effect may be magnified by the Company's inability to maintain gross margins and
to decrease spending to compensate for the revenue shortfall. This dynamic has
contributed to the Company's net losses in the past. Further, the Company has
sometimes experienced seasonal variations in operating results, with sales in
the first quarter being lower than in the preceding fourth quarter's sales 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 Small Cap
Market and Possible Delisting of Securities from the NASDAQ Small Cap Market.
The Company's Common Stock historically traded on the NASDAQ National Market and
was moved to the NASDAQ Small Cap Market during the third quarter of 1999 as the
Company did not meet one 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 the Company fails to
comply with the listing standards, it may become de-listed from the NASDAQ Small
Cap Market which could adversely affect the ability or willingness of investors
to purchase the Company's securities and therefore would severely adversely
affect the market liquidity for the Company's 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. 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 the Company's Enterprise-wide monitoring
systems has typically been nine to 18 months from initial contact to receipt of
a purchase order. During this period, the Company expends substantial time,
effort and funds preparing a contract proposal and negotiating a purchase order
without any guarantee that the Company 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 the
Company's business, operating results and financial condition.


                                       12
<PAGE>   13

Competition. The Company's 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 the
Company. In addition, many of these competitors have longstanding relationships
with acute care hospitals and IHDNs. There can be no assurance that the Company
will be able to sell to such hospitals or IHDNs or that the Company will be able
to compete successfully with such vendors, and any inability to do so could have
a material adverse effect on the Company's business, operating results, and
financial condition. While the Company is not aware of any competitive open
system multi-parameter Enterprise-wide monitoring systems currently available,
the Company's 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 the Company using significantly
greater financial, technical, research and development and marketing resources
than are available to the Company. In addition, the Company's success in selling
its multi-parameter OpenNet networks 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 the Company's business, operating results and financial
condition. The market for the Company's OEM products is also intensely
competitive. The Company sells to a range of patient monitoring and life support
device companies, many of, which have significantly greater financial,
technical, research and development and marketing resources than 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
the Company 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 the
Company's business, operating results and financial condition.

In addition, the Company may in the future elect to incorporate in its 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 the Company's OEM customers design and sell
their products. Although the Company believes that its OEM customers would not
compete with its Enterprise-wide monitoring systems because the Enterprise-wide
monitoring systems are sold to hospitals and IHDNs who elect to install larger,
more dispersed systems, the Company could face competition with its OEM
customers to the extent hospitals forego purchasing the Company's facility-wide
Enterprise-wide monitoring systems for the smaller departmental systems of its
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, the Company derived substantially all of its revenue from sales of
its Enterprise-wide monitoring systems and OEM products. The Company believes
that as the market for these products matures, the Company's future success will
depend upon its 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 the Company's existing
products unmarketable or obsolete. If the Company is 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
the Company's new products or product enhancements, such as SiteLink, do not
achieve market acceptance, the Company's 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 the Company's
products, and the increased bargaining power of these organizations could lead
to reductions in the amounts paid for the Company's 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 the Company will be able to sell to such hospitals or IHDNs
or that the Company will be able to compete successfully with such vendors. The
impact of these developments in the healthcare


                                       13
<PAGE>   14

industry is difficult to predict and could have a material adverse effect on the
Company's business, operating results and financial condition.

Government Regulation. The manufacturing, marketing and sales of medical
devices, including the Company's products, are subject to extensive regulation
by numerous governmental authorities. In the United States, the Food and Drug
Administration regulate the Company's products. The Company has received
clearance from the FDA to market its 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 the Company 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 Company 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 the Company's 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. There can be no assurance that the Company will be
able to obtain further clearance or approvals for its products or components on
a timely basis or at all. Delays in receipt of, loss of or failure to receive
such approvals or clearances could have a material adverse effect on the
Company's business, operating results and financial condition.

The Company's radio frequency transmitter devices are subject to regulation by
the Federal Communication Commission ("FCC"), and applicable approvals must be
obtained before shipment of such products. The Company believes that all of its
products designated for sale in the United States meet applicable Federal
Communications Commission (FCC) regulations, including US FCC Part 15 for
electromagnetic emissions. The FCC approval process starts with the collection
of test data that demonstrates that a product meets the requirements stated in
Part 15 of 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 or request additional information or withhold approval. Any failure of the
Company's 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 the Company's products and therefore have a material
adverse effect on the Company's business, financial condition and result of
operations.

The Company's proprietary radio frequency (RF) communication products transmit
real-time physiologic information from the patient to the central surveillance
station. These communication products currently operate in three radio bands:
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). Historically, the majority of the
Company's RF products used 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). 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 the
Company's lower power RF communication products may begin seeing more
interference in the future. This interference may result in the Company's
hospital biomedical personnel having to re-tune the Company's traditional RF
transmitters to other channels in order to reduce interference. In the event of
high interference the Company's customers may need to purchase new 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.

During 1998 the Company 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
its 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


                                       14
<PAGE>   15

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. The Task Force
submitted its recommendations to the FCC which then filed a Notice of Proposed
Rule Making (NPRM, FCC docket # 99-182). In June 2000 the FCC approved this new
rule which now makes it mandatory for hospitals and independent health care
networks to migrate their entire wireless patient monitoring telemetry to the
new band over the next three years. FCC rules typically require 90-days before
they are made official. The Company believes this ruling will be made official
in September 2000. If this new rule is not made official, or is delayed for any
considerable period of time, hospitals and independent health care networks may
not migrate their entire wireless telemetry systems at the same rate that they
would have had the rule been made official. This could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, the costs of developing 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 such competitive
advantage of the Company's competitors and any additional development costs
associated with expanding the Company's UHF RF product offerings could have a
material adverse effect on the Company's business, operating results and
financial condition. Additionally, future regulatory changes could significantly
affect the Company's operations by diverting the Company's development efforts,
making current products obsolete or increasing the opportunity for additional
competition which could have a material adverse effect on the Company's
business, operating results and financial condition.

Limited Intellectual Property Protection. The Company relies on a combination of
copyright, trade secret and trademark laws, confidentiality procedures and
contractual provisions to protect its intellectual property. The Company seeks
to protect its software, circuitry documentation and other written materials
under trade secret and copyright laws, which afford only limited protection. The
Company cannot assure that its protective measures for proprietary rights will
be adequate or that the Company's competitors will not independently develop
similar or superior technology, duplicate the Company's products or otherwise
circumvent its intellectual property rights. Although the Company has never
received a claim that its products infringe a third party's intellectual
property rights, there can be no assurance that third parties will not in the
future claim infringement by the Company 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 the Company to enter into costly royalty or licensing
agreements. The impact of any of these developments could have a material
adverse effect on the Company's business, operating results and financial
condition.

Risk of Product Liability Claims. Certain of the Company's products provide
applications that relate to patient physiologic status or other clinically
critical information. Any failure by the Company's products to provide accurate
and timely information could result in product liability and warranty claims
against the Company by its customers or their patients. The Company maintains
insurance against claims associated with the use of its products, but there can
be no assurance that its insurance coverage would adequately cover any claim
asserted against the Company. A successful claim brought against the Company in
excess of its insurance coverage or outside the scope of the Company's insurance
coverage could have a material adverse effect on the Company's business,
operating results and financial condition. The Company in the past had to incur
warranty expenditures for upgrades that had adverse expenses to the periods.
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 the Company's 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 the
Company's business, operating results and financial 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 the Company are discontinued by manufacturers, requiring the
Company 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 the Company's business, operating
results and financial condition until alternative sources could be developed or
design and manufacturing changes could be completed.


                                       15
<PAGE>   16

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

Dependence on Key Personnel. The Company's success depends to a large extent on
its 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 the Company's business,
operating results and financial condition. In addition, the Company's future
success depends to a large extent on its 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 the Company will be successful in attracting and retaining such personnel,
and the failure to do so could have a material adverse effect on the Company's
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 the Company's
operating results will be below the expectations of market analysts and
investors. This may cause the market price of the Company's common stock to
fall. These risks are impossible to fully determine at present, and should be
considered in evaluating the financial prospects and future growth of the
Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's financial instruments include cash and cash equivalents, trade
accounts receivable, accounts payable and accrued liabilities. At June 30, 2000,
the carrying values of the Company's financial instruments approximated their
fair values based on current market prices and rates. It is the Company's policy
not to enter into derivative financial instruments. The Company does not
currently have any significant foreign currency exposure since it does not
transact business in foreign currencies. Due to this, the Company does not have
significant overall currency exposure at June 30, 2000.

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.

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


                                       16
<PAGE>   17

The Company has not experienced any significant operational disruptions to date
and does not currently expect the continued implementation of the Euro to cause
any significant operational disruptions.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company has been party to various litigation proceedings
relating to claims arising from its operations in the normal course of business.
Management believes that the resolution of these matters will not have a
material adverse effect on the Company's business, results of operations,
financial condition or cash flows.

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

The Company held an Annual Meeting of Stockholders on July 25, 2000. At the
Annual Meeting, the following actions were taken:

Election of Directors:

The following persons were duly elected to the Company's Board of Directors. The
tabulation of the votes cast for and against each director is set forth opposite
their names below.

               Name                            For         Withheld
               ----                            ---         --------

               Frank T. Sample              7,828,881       27,455
               Jonathon S. Leff             7,830,891       25,445
               Jack W. Lasersohn            7,830,891       25,445
               Timothy T. Weglicki          7,830,891       25,445


Approval of Amendment to the 1996 Employee Stock Purchase Plan:

The shareholders duly approved an amendment to the Company's 1996 Employee Stock
Purchase Plan (the "Plan") which increased the number of shares of the Company's
common stock available for purchase under the Plan from 300,000 to 450,000. The
tabulation of the votes with respect to the amendment to the Plan is as follows:

                          For                       7,804,450
                          Against                      43,621
                          Abstain                       8,265


Appointment of Auditors:

The shareholders approved the appointment of the accounting firm of Deloitte &
Touche LLP as its independent auditors for the fiscal year ending December 31,
2000. The tabulation of the votes with respect to such appointment is as
follows:

                          For                       7,831,621
                          Against                      21,200
                          Abstain                       3,515


                                       17
<PAGE>   18

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

       10.1(a)    1993 Stock Option Plan as amended and restated June 1999, and
                  forms of agreement thereunder.

       27.1       Financial Data Schedule.


(b) Reports on Form 8-K

No reports on Form 8-K were filed during the reporting period.


                                       18
<PAGE>   19

                                   SIGNATURES


Pursuant to the requirements 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 on August 7, 2000.




                                       VITALCOM INC.



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




                                       /s/ Scott E. Lamb
                                       -------------------------------------
                                       Scott E. Lamb
                                       Senior Director Finance and Controller


                                       19

<PAGE>   20

                                 EXHIBIT INDEX

Exhibit
Number                        Description
------                        -----------

10.1(a)        1993 Stock Option Plan as amended and restated June 1999, and
               forms of agreement thereunder.

27.1           Financial Data Schedule.