<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 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 SEPTEMBER 30, 1998 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:      33-26398
                        -----------------------
                                       
                             ALARIS MEDICAL, INC.
-------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

           Delaware                                     13-3492624
-------------------------------             -----------------------------------
(State or other jurisdiction of             (I.R.S.Employer Identification No.)
 incorporation or organization)

              10221 Wateridge Circle, San Diego, CA           92121
-------------------------------------------------------------------------------
              (Address of principal executive offices)      (Zip Code)

                                 (619) 458-7000
-------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

-------------------------------------------------------------------------------
           (Former name, former address and former fiscal year, 
                        if changed since last report)

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

On November 5, 1998, 59,214,489 shares of Registrant's Common Stock were 
outstanding.

                          Page 1 of 31

<PAGE>

                      ALARIS MEDICAL, INC. AND SUBSIDIARIES

                                      INDEX


PART I.  FINANCIAL INFORMATION

    Item 1 - Financial Statements:

<TABLE>
<CAPTION>
                                                                                 Page
                                                                                 ----
<S>                                                                              <C>
        Condensed consolidated balance sheet at
        December 31, 1997 and September 30, 1998..............................     3

        Condensed consolidated statement of operations for the three and
        nine months ended September 30, 1997 and 1998.........................     4

        Condensed consolidated statement of cash flows for the
        nine months ended September 30, 1997 and 1998.........................     5

        Condensed consolidated statement of changes in
        stockholders' equity for the period from
        December 31, 1997 to September 30, 1998...............................     6

        Notes to the condensed consolidated financial statements..............     7


    Item 2 - Management's Discussion and Analysis of Financial

        Condition and Results of Operations...................................    15


PART II. OTHER INFORMATION

    Item 1 - Legal Proceedings................................................    28

    Item 6 - Exhibits and Reports on Form 8-K.................................    29

</TABLE>
                                      - 2 -

<PAGE>


                                   FORM 10 - Q
                                 PART 1 - ITEM 1

                              FINANCIAL INFORMATION

                      ALARIS MEDICAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET

         (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------
                                     ASSETS

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,     SEPTEMBER 30,
                                                                                1997              1998
                                                                            -------------  --------------
                                                                                            (UNAUDITED)
<S>                                                                        <C>             <C>
Current assets:

    Cash.................................................................. $    6,984        $    45,098
    Receivables, net......................................................     83,406             89,548
    Inventories...........................................................     61,666             78,297
    Prepaid expenses and other current assets.............................     23,260             21,829
                                                                           ----------        -----------
        Total current assets..............................................    175,316            234,772

Net investment in sales-type leases, less current portion.................     30,404             21,100
Property, plant and equipment, net........................................     55,365             60,032
Other non-current assets..................................................     16,279             22,310
Intangible assets, net....................................................    287,933            314,833
                                                                           ----------        -----------
                                                                           $  565,297        $   653,047
                                                                           ----------        -----------
                                                                           ----------        -----------

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

    Current portion of long-term debt..................................... $   14,559        $    12,517
    Accounts payable......................................................     24,042             21,722
    Accrued expenses and other current liabilities........................     52,668             64,061
                                                                           ----------        -----------
        Total current liabilities.........................................     91,269             98,300
                                                                           ----------        -----------
Long-term debt............................................................    431,571            530,877
Other non-current liabilities.............................................     10,508             15,741
                                                                           ----------        -----------
  Total non-current liabilities...........................................    442,079            546,618
                                                                           ----------        -----------

Contingent liabilities and commitments (Note 8)

Stockholders' equity:

    Common stock, authorized 75,000 shares at $.01 par value; issued and
       outstanding - 59,102 shares and 59,214 shares at December 31, 1997
       and September 30, 1998, respectively...............................        591                592
    Capital in excess of par value........................................    148,341            148,731
    Accumulated deficit...................................................   (111,330)          (136,072)
    Treasury stock........................................................     (2,027)            (2,027)
    Equity adjustment for foreign currency translation....................     (3,626)            (3,095)
                                                                           ----------        -----------
        Total stockholders' equity........................................     31,949              8,129
                                                                           ----------        -----------

                                                                           $  565,297        $   653,047
                                                                           ----------        -----------
                                                                           ----------        -----------
</TABLE>

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
                               FINANCIAL STATEMENTS.

                                      - 3 -
<PAGE>

                      ALARIS MEDICAL, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                    (UNAUDITED) (DOLLAR AND SHARE AMOUNTS IN
                        THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                          THREE MONTHS                       NINE MONTHS
                                                       ENDED SEPTEMBER 30,                ENDED SEPTEMBER 30,
                                               --------------------------------    ----------------------------
                                                     1997             1998               1997           1998
                                               -------------    ---------------    -------------    -----------
<S>                                            <C>              <C>                <C>              <C>
Sales   ...................................... $    86,830      $    94,227        $   256,897      $   271,881
Cost of sales.................................      42,400           46,672            136,731          138,025
                                               -----------      -----------        -----------      -----------
Gross margin..................................      44,430           47,555            120,166          133,856
                                               -----------      -----------        -----------      -----------
Selling and marketing expenses................      15,896           17,876             47,805           52,106
General and administrative expenses...........       9,273           10,518             28,208           30,059
Research and development expenses.............       4,534            5,126             12,725           14,126
Purchased in-process research and development.           -           22,800                  -           28,334
Integration and other non-recurring charges...       1,693            1,112             17,592            1,112
                                               -----------      -----------        -----------      -----------

    Total operating expenses..................      31,396           57,432            106,330          125,737
                                               -----------      -----------        -----------      -----------

Lease interest income.........................       1,226            1,185              3,417            3,407
                                               -----------      -----------        -----------      -----------

    Income (loss) from operations.............      14,260           (8,692)            17,253           11,526
                                               -----------      -----------        -----------      -----------
Other income (expenses):

    Interest income...........................          57              511                442              658
    Interest expense..........................     (11,277)         (13,014)           (32,972)         (34,809)
    Other, net................................         (46)              14               (446)            (667)
                                               -----------      -----------        -----------      -----------

Total other expense...........................     (11,266)         (12,489)           (32,976)         (34,818)
                                               -----------      -----------        -----------      -----------

Income (loss) before income taxes.............       2,994          (21,181)           (15,723)         (23,292)
Provision for (benefit from) income taxes.....       1,900            1,800             (5,500)           1,450
                                               -----------      -----------        -----------      -----------

Net income (loss)............................. $     1,094      $   (22,981)       $   (10,223)     $   (24,742)
                                               -----------      -----------        -----------      -----------
                                               -----------      -----------        -----------      -----------

    Net income (loss) per common share
      assuming no dilution.................... $   .02          $      (.39)       $      (.17)     $      (.42)
                                               -----------      -----------        -----------      -----------
                                               -----------      -----------        -----------      -----------

    Net income (loss) per common share
      assuming dilution ...................... $  .02           $      (.39)       $      (.17)     $      (.42)
                                               -----------      -----------        -----------      -----------
                                               -----------      -----------        -----------      -----------

Weighted average common shares outstanding
  assuming no dilution........................      58,612           58,737             58,645           58,692
                                               -----------      -----------        -----------      -----------
                                               -----------      -----------        -----------      -----------

Weighted average common shares outstanding
  assuming dilution...........................      59,322           58,737             58,645           58,692
                                               -----------      -----------        -----------      -----------
                                               -----------      -----------        -----------      -----------
</TABLE>

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
                               FINANCIAL STATEMENTS.

                                      - 4 -
<PAGE>

                      ALARIS MEDICAL, INC. AND SUBSIDIARIES

           CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

                             (DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                NINE MONTHS ENDED SEPTEMBER 30,
                                                              ---------------------------------
                                                                   1997                1998
                                                               -----------         ----------
<S>                                                            <C>                 <C>
Net cash provided by operating activities.....................  $      776         $    30,169
                                                                ----------         -----------
Cash flows from investing activities:

    Net decrease in restricted cash and investments...........       2,332                   -
    Return of capital by investee.............................         148                   -
    Net capital expenditures..................................     (15,107)           ( 16,795)
    Acquisitions and license of technology....................           -             (59,842)
                                                                ----------         -----------

Net cash used in investing activities.........................     (12,627)            (76,637)
                                                                ----------         -----------
Cash flows from financing activities:

    Principal payments on long-term debt......................      (3,935)            (20,228)
    Proceeds from term loan borrowing.........................           -              30,000
    Proceeds under revolving credit facility..................      18,800              34,800
    Repayments under revolving credit facility................      (7,500)            (60,000)
    Principal payments on acquired debt.......................           -              (4,822)
    Proceeds from issuance of notes payable...................           -             109,892
    Debt issue costs..........................................        (662)             (5,390)
    Purchase of treasury stock................................      (1,293)                  -
    Proceeds from exercise of stock options...................         168                 255
                                                                ----------         -----------

Net cash provided by financing activities.....................       5,578              84,507
                                                                ----------         -----------

Effect of exchange rate changes on cash.......................        (783)                 75
                                                                ----------         -----------

Net (decrease) increase in cash...............................      (7,056)             38,114
Cash at beginning of period...................................      12,084               6,984
                                                                ----------         -----------

Cash at end of period.........................................  $    5,028         $    45,098
                                                                ----------         -----------
                                                                ----------         -----------

</TABLE>

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
                               FINANCIAL STATEMENTS.

                                      - 5 -
<PAGE>
                      ALARIS MEDICAL, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
                        STOCKHOLDERS' EQUITY (UNAUDITED)

                     (DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                         EQUITY
                                                                                                       ADJUSTMENT
                                     COMMON STOCK       CAPITAL IN                   TREASURY STOCK   FOR FOREIGN
                                   ------------------   EXCESS OF    ACCUMULATED   ----------------     CURRENCY
                                    SHARES    AMOUNT    PAR VALUE      DEFICIT      SHARES  AMOUNT    TRANSLATION    TOTAL
                                   ---------  ------   -----------  -------------  ------- ---------  -----------    ------
<S>                                <C>       <C>       <C>          <C>            <C>     <C>        <C>           <C>
Balance at December 31, 1997        59,102   $   591   $  148,341    $ (111,330)      453  $ (2,027)  $  (3,626)    $ 31,949

Exercise of stock options              112         1          255                                                        256

Tax benefit from stock options                                135                                                        135

Equity adjustment for foreign

  currency translation                                                                                       531         531

Net loss for the period                                                 (24,742)                                     (24,742)
                                   -------    ------   ----------    ----------      ----  --------   ----------    --------
Balance at September 30, 1998       59,214    $  592   $  148,731    $ (136,072)      453  $ (2,027)  $   (3,095)   $  8,129
                                   -------    ------   ----------    ----------      ----  --------   ----------    --------
                                   -------    ------   ----------    ----------      ----  --------   ----------    --------
</TABLE>


    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
                               FINANCIAL STATEMENTS.

                                      - 6 -
<PAGE>
                      ALARIS MEDICAL, INC. AND SUBSIDIARIES
                    NOTES TO CONDENSED CONSOLIDATED FINANCIAL
                STATEMENTS (UNAUDITED) (DOLLARS AND SHARE AMOUNTS
                      IN THOUSANDS; EXCEPT PER SHARE DATA )
-------------------------------------------------------------------------------

NOTE 1 -- BUSINESS AND STATEMENT OF ACCOUNTING POLICY

THE COMPANY:

ALARIS Medical, Inc. ("ALARIS Medical"), formerly Advanced Medical, Inc., 
operating through its consolidated subsidiaries, designs, manufactures, 
distributes and services intravenous infusion therapy and vital signs 
measurement instruments and related disposables and accessories. On November 
26, 1996, IMED Corporation ("IMED"), then a wholly-owned subsidiary of 
Advanced Medical, Inc., ("Advanced Medical") acquired all of the outstanding 
stock of IVAC Holdings, Inc. ("IVAC Holdings") and its subsidiaries including 
IVAC Medical Systems, Inc. (Note 2). In connection with the acquisition, IMED 
and IVAC Medical Systems, Inc. were merged into IVAC Holdings (the "Merger"), 
which then changed its name to ALARIS Medical Systems, Inc. ("ALARIS Medical 
Systems"). ALARIS Medical and its subsidiaries are collectively referred to 
as the "Company." The acquisition was accounted for as a purchase.

STATEMENT OF ACCOUNTING POLICY: 

The accompanying financial statements have been prepared by the Company 
without audit pursuant to the rules and regulations of the Securities and 
Exchange Commission. Certain information and footnote disclosures normally 
included in financial statements prepared in accordance with generally 
accepted accounting principles have been condensed or omitted pursuant to 
those rules and regulations, although the Company believes that the 
disclosures herein are adequate to make the information not misleading.

In the opinion of the Company, the accompanying financial statements contain 
all adjustments, consisting of normal recurring adjustments, necessary for a 
fair statement of the Company's financial position as of September 30, 1998, 
and the results of its operations and its cash flows for the nine months 
ended September 30, 1997 and 1998.

USE OF ESTIMATES:

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

NET INCOME (LOSS) PER COMMON SHARE:

The Company's net income (loss) per common share assuming no dilution is 
computed using the weighted average number of common shares outstanding. The 
Company's net income (loss) per common share assuming dilution is computed 
using the weighted average number of common shares outstanding plus dilutive 
potential common shares using the treasury stock method at the average market 
price during the reporting period (Note 7).


                                   - 7 -

<PAGE>

NOTE 2 -- THE MERGER

On November 26, 1996, IMED acquired all of the outstanding stock of IVAC 
Holdings and its subsidiaries including IVAC Medical Systems, Inc., in 
exchange for $390,000 plus acquired cash of $7,225 less total debt assumed 
aggregating $173,314 plus related expenses. The Merger was financed with 
$204,200 in bank debt and $200,000 in senior subordinated notes. Subsequent 
to the acquisition, IVAC Medical Systems, Inc. and IMED were merged into IVAC 
Holdings, which subsequently changed its name to ALARIS Medical Systems, Inc.

In connection with the Merger, ALARIS Medical contributed $19,588 to IMED 
(the "Capital Contribution"). The Capital Contribution was funded in part 
through the sale to Decisions Incorporated ("Decisions"), a corporation 
wholly owned by ALARIS Medical's principal stockholder, of 13,333 shares of 
its common stock for aggregate proceeds of $40,000 (the "Decisions 
Contribution"). The balance of the Capital Contribution was funded with 
existing cash balances of ALARIS Medical. The portion of the net proceeds of 
the Decisions Contribution not applied to make the Capital Contribution was 
used by ALARIS Medical to redeem $21,924 principal amount of its 15% 
subordinated debentures due 1999 and fund the redemption of ALARIS Medical's 
outstanding preferred stock. In connection with the Decisions Contribution, 
Decisions exchanged an aggregate of $37,500 in principal amount of 
convertible promissory notes previously issued by ALARIS Medical for 29,416 
shares of ALARIS Medical common stock, including 3,333 shares issued as an 
inducement to convert.

The acquisition was accounted for as a purchase, whereby the purchase price, 
including related expenses, was allocated to identified assets, including 
intangible assets, purchased research and development and liabilities based 
upon their respective fair values. The excess of the purchase price over the 
value of identified assets and liabilities, in the amount of $132,482, was 
recorded as goodwill and is being amortized over its estimated life of thirty 
years.

NOTE 3 -- ACQUISITIONS AND LICENSES

On July 17, 1998, pursuant to an agreement with ALARIS Medical, ALARIS 
Medical Systems, Instromedix and its shareholders dated June 24, 1998, ALARIS 
Medical Systems acquired all of the outstanding common stock of Instromedix 
("Instromedix") and subsequently merged Instromedix with and into itself. The 
total consideration for the Instromedix acquisition included (i) $51.0 
million in cash, subject to certain adjustments, (ii) the assumption of 
indebtedness of Instromedix of approximately $5.5 million and (iii) the 
payment of certain seller transaction expenses in the amount of $1.0 million. 
The acquisition payment was funded with $30.0 million of ALARIS Medical 
Systems' bank term debt and proceeds from an ALARIS Medical debt offering. On 
July 28, 1998, ALARIS Medical completed the sale of $109.9 million of 11-1/8% 
Senior Discount Notes (the "Senior Discount Notes"), due 2008, receiving net 
proceeds of $106.3 million. A portion of the net proceeds of the sale of the 
notes was also used to repay certain borrowings under the bank credit 
facility.

The acquisition was accounted for as a purchase, whereby the purchase price, 
including related expenses, was allocated to identified assets and 
liabilities, based upon their respective fair values. The allocation included 
acquired in-process research and development of $22.8 million, which was 
immediately written-off, and other identifiable intangible assets of $21.1 
million, which are being amortized over their estimated weighted-average 
useful lives of 10 years. The excess of the purchase price over the value of 
identified assets and liabilities, in the amount of $18.0 million, was 
recorded as goodwill and is being amortized over its estimated life of ten 
years.

                                   - 8 -

<PAGE>

The Company is using the Instromedix purchased in-process research and 
development to create new cardiac disease diagnosis, monitoring and 
management products which will become part of the Arrhythmia Event Recorders 
and LifeSigns System product suites over the next several years. The nature 
of the efforts required to develop the purchased in-process technology into 
commercially viable products principally relate to designing, prototyping, 
verification and testing activities that are necessary to establish that the 
product can be produced to meet its design specifications, including 
functions, features and technical performance requirements. The Company 
expects to incur a total of approximately $4.0 million to complete the 
projects, of which $0.5 million is expected to be incurred in the fourth 
quarter of 1998, while $3.0 million and $0.5 million are expected to be 
incurred during 1999 and 2000, respectively. The Company anticipates that 
products in the Arrhythmia Event Recorders product suite using the purchased 
in-process technology will be released during 1999, while products under the 
LifeSigns System product suite will be released during 2000. The Company 
expects that the purchased in-process research and development will be 
successfully developed, but there can be no assurance that commercial 
viability of the products will be achieved.

During the second quarter of 1998, the Company acquired the net assets of 
Patient Solutions, Inc. ("PSI") for $5.3 million. PSI was a wholly owned 
subsidiary of Invacare Corporation and was focused on the development of an 
ambulatory pump for use in the alternate site market. The transaction was 
accounted for as a purchase with the net assets acquired recorded at their 
estimated fair values. The rights to the pump under development were valued 
at $4.4 million and were recorded as a non-recurring charge included in 
purchased in-process research and development. The nature of the efforts 
required to develop the purchased in-process technology into a commercially 
viable product principally relate to designing, prototyping, verification and 
testing activities that are necessary to establish that the product can be 
produced to meet its design specifications, including functions, features and 
technical performance requirements. The Company expects to incur a total of 
$0.7 million to complete the project, of which $0.2 million is projected to 
be incurred in 1998 and $0.5 million in 1999. It is anticipated that the pump 
will be released during 1999. The Company expects that the purchased 
in-process research and development will be successfully developed, but there 
can be no assurance that commercial viability of the pump will be achieved.

Also during the second quarter, the Company licensed technology from Caesarea 
Medical Electronics Limited ("Caesarea") for a pole mounted volumetric 
infusion pump being designed for developing international markets. At the 
time of license, the development of the applications and functionality 
required by the Company had not reached technological feasibility and no 
alternative uses were identified. As a result, the initial license payment 
and related expenses of approximately $1.2 million were recorded as purchased 
in-process research and development during the second quarter. Under the 
terms of the license agreement, the Company is obligated to pay additional 
consideration to Caesarea upon timely completion of certain development 
milestones and delivery of specified numbers of assembly kits. The 
milestones, which primarily relate to different product releases, require 
completion by various dates through the first half of 1999 with the first 
significant milestones expected to be met during the fourth quarter of 1998. 
If all such milestones are reached, the additional consideration will be up 
to a maximum of $4.0 million, excluding royalties. The Company expects that 
the purchased in-process research and development will be successfully 
developed, but there can be no assurance that commercial viability of the 
pump will be achieved.

                                   - 9 -

<PAGE>

NOTE 4 -- INVENTORIES

Inventories comprise the following: 

<TABLE>
<CAPTION>

                                            DECEMBER 31,      SEPTEMBER 30,
                                                1997              1998
                                            -----------      -------------
<S>                                         <C>              <C>
    Raw materials.........................  $    24,144      $    36,524
    Work-in-process.......................        8,363            5,116
    Finished goods........................       29,159           36,657
                                            -----------      -----------
                                            $    61,666      $    78,297
                                            -----------      -----------
                                            -----------      -----------
</TABLE>

NOTE 5 -- DEBT

In July 1998, in connection with the Instromedix acquisition, the Company 
amended its bank credit facility ("The Credit Facility Amendment"). The 
Credit Facility Amendment, among other things, approved the Instromedix 
acquisition and the senior discount note offering, increased the revolving 
credit facility to $60.0 million and provided the Company an additional $30.0 
million under the Tranche D term debt. The Company used the $30.0 million 
term debt borrowing, along with approximately $3.0 million from the revolving 
credit line, to fund the initial payments required upon closing the 
Instromedix acquisition.

On July 28, 1998, subsequent to closing the Instromedix acquisition, the 
Company issued $189.0 million of Senior Discount Notes, issued at a discount 
from their principal amount at maturity to generate gross proceeds to the 
Company of $109.9 million. Upon receipt of net proceeds of $106.3 million, 
the Company paid its remaining obligations of approximately $22.7 million to 
the Instromedix shareholders and contributed the remaining net proceeds of 
approximately $82.6 million, after issuance costs, to ALARIS Medical Systems, 
as required under the Credit Facility Amendment. ALARIS Medical Systems then 
repaid the amount outstanding under its revolving credit line.

The Senior Discount Notes bear interest at a rate of 11 1/8% per annum. 
Interest accruing on these notes is added to the outstanding principal 
balance through July 31, 2003. Interest accruing beginning August 1, 2003 is 
payable in cash semi-annually in arrears on February 1 and August 1, 
commencing February 1, 2004. The notes will mature on August 1, 2008. The 
Company may redeem the notes at any time prior to the redemption date. In 
addition, on or prior to August 2, 2001, under certain conditions ALARIS 
Medical has the option to redeem a portion of the notes. The notes are senior 
in right of payment to all subordinated indebtedness of ALARIS Medical and 
rank PARI PASSU in right of payment with all existing and future senior 
indebtedness of the Company, including indebtedness incurred under the bank 
credit facility.

Additionally, the Company is required to register and is in the process of 
registering, the Senior Discount Notes with the Securities and Exchange 
Commission. If such registration is not completed by November 26, 1998, the 
Company will incur additional interest on the Senior Discount Notes. For the 
first 90 day period that such registration is not completed, additional 
interest of $0.05 per one thousand dollars of principal outstanding under the 
Senior Discount Notes, or approximately $0.1 million, will accrue. It is 
unlikely that the Company will receive the required approval from the 
Securities and Exchange Commission for such registration process prior to 
November 26, 1998, but management does believe such process should be 
completed before the expiration of the following 90 day period.


                                   - 10 -

<PAGE>


NOTE 6 -- COMPREHENSIVE INCOME (LOSS)

Effective January 1, 1998, the Company adopted Statement of Financial 
Accounting Standards No. 130, "Reporting Comprehensive Income." This 
Statement requires that all items recognized under accounting standards as 
components of comprehensive earnings be reported in an annual financial 
statement that is displayed with the same prominence as other annual 
financial statements. This Statement also requires that an entity classify 
items of other comprehensive earnings by their nature in an annual financial 
statement. For example, other comprehensive earnings may include foreign 
currency translation adjustments, minimum pension liability adjustments, and 
unrealized gains and losses on marketable securities classified as 
available-for-sale. Annual financial statements for prior periods will be 
reclassified, as required. ALARIS Medical's total comprehensive losses were 
as follows:

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED SEPTEMBER 30,
                                                             --------------------------------
                                                                1997               1998
                                                             -----------        ----------
<S>                                                          <C>                <C>
Net income (loss)..........................................  $     1,094        $  (22,981)

Other comprehensive (loss) income:

    Foreign currency translation adjustments...............         (599)              899
                                                             -----------        -----------
Comprehensive income (loss)................................  $       495        $  (22,082)
                                                             -----------        -----------
                                                             -----------        -----------
</TABLE>

<TABLE>
<CAPTION>
                                                            NINE MONTHS ENDED SEPTEMBER 30,
                                                            -------------------------------
                                                                1997               1998
                                                             -----------        ----------
<S>                                                          <C>                <C>

Net loss...................................................  $   (10,223)       $   (24,742)

Other comprehensive (loss) income:

    Foreign currency translation adjustments...............       (3,133)               531
                                                             -----------        -----------

Comprehensive loss.........................................  $   (13,356)       $   (24,211)
                                                             -----------        -----------
                                                             -----------        -----------

</TABLE>

NOTE 7 -- EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued the Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128")
which specifies the computation, presentation, and disclosure requirements for
earnings per share. The earnings per share information contained in these
financial statements, including those presented for prior periods, conform with
SFAS 128.

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED SEPTEMBER  30,
                                                ---------------------------------------------------------
                                                            1997                          1998
                                                ---------------------------     -------------------------
                                                     BASIC       DILUTED           BASIC        DILUTED
                                                ------------   -----------     -----------   -----------
<S>                                             <C>            <C>             <C>           <C>
Net income (loss) as reported.................. $   1,094      $    1,094       $  (22,981)    $ (22,981)
                                                ---------      ----------       ----------     ---------
                                                ---------      ----------       ----------     ---------

Weighted average common shares outstanding.....    58,612          59,322           58,737        58,737
                                                ---------      ----------       ----------     ---------
                                                ---------      ----------       ----------     ---------

Net income (loss) per common share............. $     .02      $      .02       $     (.39)    $    (.39)
                                                ---------      ----------       ----------     ---------
                                                ---------      ----------       ----------     ---------

</TABLE>


                                   - 11 -

<PAGE>

<TABLE>
<CAPTION>

                                                           NINE MONTHS ENDED SEPTEMBER 30,
                                                 ------------------------------------------------------
                                                            1997                         1998
                                                 ------------------------      ------------------------
                                                    BASIC        DILUTED         BASIC         DILUTED
                                                 -----------   ----------      ----------     ---------
<S>                                              <C>           <C>             <C>            <C>
Net loss as reported............................ $ (10,223)    $  (10,223)     $  (24,742)    $ (24,742)
                                                 ---------     ----------      ----------     ---------
                                                 ---------     ----------      ----------     ---------
Weighted average common shares outstanding......    58,645         58,645          58,692        58,692
                                                 ---------     ----------      ----------     ---------
                                                 ---------     ----------      ----------     ---------

Net loss per common share....................... $    (.17)    $     (.17)     $     (.42)    $    (.42)
                                                 ---------     ----------      ----------     ---------
                                                 ---------     ----------      ----------     ---------
</TABLE>

Potential common shares are not included in the diluted computation when the 
Company reports a net loss, as they are antidilutive. As a result, net loss 
per common share assuming no dilution and dilution are the same when the 
Company experiences a net loss.

The Company's 7.25% Debentures were not included in the calculation of 
diluted earnings per share in the three and nine months ended September 30, 
1997 and 1998, as they are antidilutive. For both three and nine month 
periods ended September 30, the $16,152 of convertible debentures, if 
converted at an exercise price of $18.14 per share, would result in an 
increase of 890 common shares and an increase of $176 and $528 net of taxes, 
to net income, due to the reduction in interest expense. Options outstanding 
at September 30, 1997 and 1998 were excluded from the three months ended 
September 30, 1998 and the nine months ended September 30, 1997 and 1998, due 
to their antidilutive nature. Had such options been included, the weighted 
average shares would have increased by 1,488 for the three months ended 
September 30, 1998 and increased by 1,123 and 1,619 for the nine months ended 
September 30, 1997 and 1998, respectively.

NOTE 8 -- CONTINGENCIES AND LITIGATION

GOVERNMENT REGULATION AND FIELD CORRECTIONS

The United States Food and Drug Administration (the "FDA"), pursuant to the 
Federal Food, Drug, and Cosmetic Act (the "FDC Act"), regulates the 
introduction of medical devices into commerce, as well as testing 
manufacturing procedures, labeling, adverse event reporting and 
record-keeping with respect to such products. The process of obtaining market 
clearances from the FDA for new products can be time-consuming and expensive 
and there can be no assurance that such clearances will be granted or that 
FDA review will not involve delays adversely affecting the marketing and sale 
of products. Enforcement of the FDC Act depends heavily on administrative 
interpretation and there can be no assurance that interpretations made by the 
FDA or other regulatory bodies will not have a material adverse effect on the 
business, financial condition, results of operations or cash flows. The FDA 
and state agencies routinely inspect the Company to determine whether the 
Company is in compliance with various requirements relating to manufacturing 
practices, testing, quality control, complaint handling, medical device 
reporting and product labeling. Such inspections can result in such agencies 
requiring the Company to take certain corrective actions for non-complying 
conditions observed during the inspections. A determination that the Company 
is in violation of the FDC Act could lead to the imposition of civil 
sanctions, including fines, recall orders, orders for repair or refund or 
product seizures and criminal sanctions. Since 1994, the Company has on 
sixteen occasions temporarily removed products from the market that were 
found not to meet performance standards. None of such recalls materially 
interfered with the Company's operations and all such product lines, except 
the Model 599 Series infusion pump, were subsequently returned to the market. 

                                   - 12 -

<PAGE>


The Company continues, however, to sell administration sets and replacement 
parts for the Model 599 Series infusion pump. In addition, the Company has 
initiated a voluntary safety alert of its Model 597/598 and Model 599 Series 
infusion pumps. Moreover, the Company has initiated a voluntary field 
correction of approximately 50,000 of its Gemini PC-1 and PC-2 infusion pumps 
because failure of specific electrical components on the power regulator 
printed circuit board may result in improper regulation of the battery charge 
voltage, which may cause the battery to overheat. The Company recorded a 
charge of $2,500 to cost of sales for the quarter ended March 31, 1997 on 
account of this voluntary field correction. The Company initiated a voluntary 
field correction of its Signature Edition infusion pumps to correct a 
malfunction of an electronic line filter component (which malfunction may 
occur when a user fails to follow the Company's written cleaning instructions 
and can result in an electrical short). The Company is not aware of the 
occurrence of any injury incidents relating to a malfunction of this type. 
Further, in November 1998, the Company initiated a voluntary safety alert 
regarding the Signature Edition infusion pumps advising to check for the 
proper installation of a spring in the pumping mechanism assembly. In the 
third quarter of 1998, the Company initiated a recall of its Gemini PC-4 
infusion pumps to correct certain electro-mechanical problems which may cause 
one or more channels of the device to audibly and visibly alarm and 
temporarily cease operation. Although there can be no assurance, the Company 
believes that these voluntary field corrections, along with adjustments and 
corrections that may be made to various Company products from time to time as 
an ordinary part of the business of the Company, will not have a material 
adverse effect on the business, financial condition, results of operations or 
cash flows.

LITIGATION

The Company is a defendant in a lawsuit filed in June 1996 by Sherwood 
Medical, Inc. against IVAC Holdings which alleges infringement of two patents 
by reason of certain activities including the sale by IVAC Holdings of 
disposable probe covers for use with the Company's infrared tympanic 
thermometer. The lawsuit seeks injunctive relief, treble damages and the 
recovery of costs and attorney fees. Trial commenced on November 10, 1998. 
The Company believes it has sufficient defenses to all claims, including the 
defenses of noninfringement and invalidity and intends to vigorously defend 
this action. However, there can be no assurance that the Company will 
successfully defend all claims made by Sherwood and the failure of the 
Company to successfully prevail in this lawsuit could have a material adverse 
effect on the Company's operations, financial condition and cash flows.

The Company is a defendant in a lawsuit filed on April 20, 1998 and served on 
October 28, 1998, by Becton Dickinson and Company ("Becton") against ALARIS 
Medical Systems, Inc., which alleges infringement of a patent licensed to 
Becton by reason of certain activities, including the sale of the Company's 
SmartSite Needle Free System. The lawsuit seeks injunctive relief, damages 
and the recovery of costs and attorney fees. The Company believes it has 
sufficient defenses to all claims, and intends to vigorously defend this 
action. However, there can be no assurance that the Company will successfully 
defend all claims made by Becton and the failure of the Company to 
successfully prevail in this lawsuit could have a material adverse effect on 
the Company's operations, financial condition and cash flows.

UNITED STATES CUSTOMS SERVICE MATTER

During the years 1988 through 1995, Cal Pacifico acted as the Company's 
United States customs broker and importer of record with respect to the 
importation into the United States of finished products ("Finished Products") 
assembled at the Company's two maquiladora assembly plants in Tijuana, 
Mexico. In May 1995, Cal Pacifico received a pre-penalty notice from the 
United States Customs Service ("Customs") to the effect that Customs intended 
to assess additional duties and substantial penalties against Cal Pacifico 
for its alleged failure, during the years 1988 through 1992, to comply with 
certain 


                                   - 13 -

<PAGE>


documentary requirements regarding the importation of goods on behalf of its 
clients, including the Company. Customs recently assessed additional duties 
with respect to Cal Pacifico's importation of goods on behalf of its clients, 
including the importation of the Company's Finished Products, for the years 
1993 and 1994, and it is anticipated that Customs will issue a pre-penalty 
notice to Cal Pacifico in respect of these years as well (collectively with 
the amounts referred to in the immediately preceding sentence, the "Disputed 
Amounts"). The Company has been advised by its special Customs counsel that, 
under applicable law, no person, by fraud, gross negligence or negligence, 
may (i) import merchandise into the commerce of the United States by means of 
any material and false document, statement or act, or any material omission, 
or (ii) aid or abet any other person to import merchandise in such manner. No 
proceeding has been initiated by Customs against the Company in respect of 
the matters which are the subject of the proceeding against Cal Pacifico. 
Since Cal Pacifico was the Company's United States customs broker and 
importer of record during each of the foregoing years, the Company believes 
that it is unlikely that Customs will assess against the Company any portion 
of the Disputed Amounts.

Cal Pacifico is contesting Customs' assessment of the Disputed Amounts. Cal 
Pacifico's challenge to the assessment of the Disputed Amounts is in its 
preliminary stages. Given the present posture of Cal Pacifico's challenge, 
and the inherent uncertainty of contested matters such as this, it is not 
possible for the Company to express an opinion as to the likelihood that Cal 
Pacifico will prevail on its challenge. Cal Pacifico or Customs has not 
informed the Company as to the specific amount of the Disputed Amounts.

Cal Pacifico has advised the Company that, should Cal Pacifico's challenge to 
the assessment of the Disputed Amounts prove to be unsuccessful, it will seek 
recovery from the Company, through arbitration, for any portion of the 
Disputed Amounts which it is required to pay to Customs. As part of the 
settlement agreement which resolved the Company's contract dispute with Cal 
Pacifico during the second quarter of 1997, the Company paid Cal Pacifico 
$550, which is to be applied toward Cal Pacifico's payment of Disputed 
Amounts. The $550 payment by the Company is to be credited toward any portion 
of the Disputed Amounts which the arbitrator determines the Company owes to 
Cal Pacifico. The actual amount so determined by the arbitrator may be less 
or greater than $550. Although the ultimate outcome of such an arbitration 
proceeding cannot be guaranteed, the Company believes that it has meritorious 
defenses to claims with respect to Disputed Amounts which Cal Pacifico might 
raise against the Company. These defenses would be based, among other 
factors, on the contractual relationship between the Company and Cal Pacifico 
(including a defense with respect to the availability of indemnification 
under the agreements between Cal Pacifico and the Company), the conduct of 
Cal Pacifico with respect to both the Company and Customs, and the compliance 
obligations of Cal Pacifico under applicable customs laws. Inasmuch as Cal 
Pacifico's challenge before Customs is still pending and any claim against 
the Company for indemnification would be based on Cal Pacifico's ultimate 
lack of success in that challenge, and inasmuch as any arbitration proceeding 
by which Cal Pacifico might seek indemnification has not been filed nor has 
Cal Pacifico committed itself to the theories under which it might seek 
indemnification or the recovery of damages from the Company, it is not 
possible for the Company to express an opinion at this time as to the 
likelihood of an unfavorable outcome in such a proceeding.

OTHER

The Company is also a defendant in various actions, claims, and legal 
proceedings arising from its normal business operations. Management believes 
they have meritorious defenses and intends to vigorously defend against all 
allegations and claims. As the ultimate outcome of these matters is 
uncertain, no contingent liabilities or provisions have been recorded in the 
accompanying financial statements for such matters. However, in management's 
opinion, based on discussions with legal counsel, liabilities arising from 
such matters, if any, will not have a material adverse effect on consolidated 
financial position, results of operations or cash flows.


                                   - 14 -

<PAGE>

                                 PART I - ITEM 2

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

ALARIS Medical is a holding company for ALARIS Medical Systems. ALARIS 
Medical also identifies and evaluates potential acquisitions and investments, 
and performs various corporate functions. As a holding company, ALARIS 
Medical currently has no revenues to fund its operating and interest expense 
and relies on its existing cash and cash generated from operations of ALARIS 
Medical Systems, external borrowings and other external sources of funds to 
meet its obligations. Capitalized terms used but not defined herein have the 
meaning ascribed to them in the Notes to the Condensed Consolidated Financial 
Statements.

The Company is a leading provider of infusion systems and related 
technologies to the United States hospital market, with the largest installed 
base of pump delivery lines ("channels"). The Company is also a leader in the 
international infusion systems market. The Company's infusion systems, which 
are used to deliver one or more fluids, primarily pharmaceuticals or 
nutritionals, to patients, consist of single and multi-channel infusion pumps 
and controllers, and proprietary and non-proprietary disposable 
administration sets (i.e., plastic tubing and pump interfaces). In addition, 
the Company is a leading provider of patient monitoring products that measure 
and monitor temperature, pulse, pulse oximetry and blood pressure, with the 
largest installed base of hospital thermometry systems in the United States.

In recent years, the cost containment pressures applicable to health care 
providers have affected the Company's results of operations. In particular, 
in order to reduce costs, certain hospitals have adopted a protocol 
increasing the maximum time between disposable administration set changes 
from every 24 hours to as much as every 72 hours. Notwithstanding this change 
in protocol, unit sales volume of the Company's disposable administration 
sets increased in every year since 1993, primarily as a result of the growth 
in its installed base of infusion pumps. However, uncertainty remains with 
regard to future changes within the healthcare industry. The trend towards 
managed care and economically motivated buyers in the U.S. may result in 
continued pressure on selling prices of products and compression on gross 
margins. The U.S. marketplace is increasingly characterized by consolidation 
among healthcare providers and purchasers of medical products. The Company's 
profitability is affected by the increasing use of Group Purchasing 
Organizations ("GPOs") which are better able to negotiate favorable pricing 
from providers of infusion systems, such as the Company, and which police 
compliance with exclusive buying arrangements for their members. These buying 
arrangements, in certain situations, also may result in the GPO requiring 
removal of the Company's existing infusion pumps. The Company expects that 
such GPOs will become increasingly more common and may have an adverse effect 
on the Company's future profitability.


                                   - 15 -

<PAGE>



RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected financial
information expressed as a percentage of sales:

<TABLE>
<CAPTION>
                                                                THREE MONTHS                  NINE MONTHS
                                                              ENDED SEPTEMBER 30,          ENDED SEPTEMBER 30,
                                                         --------------------------     --------------------------
                                                             1997           1998           1997           1998
                                                         -----------     ----------     ----------      ----------
<S>                                                      <C>             <C>            <C>             <C>
Sales..................................................     100.0%          100.0%         100.0%         100.0%
Cost of sales..........................................       48.8            49.5           53.2           50.8
                                                          --------       ---------      ---------        -------
Gross margin...........................................      51.2%           50.5%          46.8%          49.2%

Selling and marketing expenses.........................       18.3            19.0           18.6           19.2
General and administrative expenses....................       10.7            11.2           11.0           11.1
Research and development expenses......................        5.2             5.4            5.0            5.2
Purchased in-process research and development..........          -            24.2              -           10.4
Integration and other non-recurring charges............        1.9             1.2            6.8            0.4
Lease interest income..................................        1.3             1.3            1.3            1.3
                                                          --------       ---------      ---------       --------
Income (loss) from operations..........................       16.4            (9.2)           6.7            4.2
Interest expense.......................................      (13.0)          (13.8)         (12.8)         (12.8)
Other, net.............................................          -              .5              -              -
                                                          -----------    ---------      -----------     --------
Income (loss) before income taxes......................        3.4           (22.5)          (6.1)          (8.6)
Provision for (benefit from) income taxes..............        2.2             1.9           (2.1)            .5
                                                          --------       ---------      ---------       --------
Net income (loss)......................................       1.2%          (24.4%)         (4.0%)         (9.1%)
                                                          --------       ---------      ---------       --------
                                                          --------       ---------      ---------       --------
OTHER DATA:

     Adjusted EBITDA...................................      28.3%           26.5%          24.3%          24.7%


</TABLE>

<TABLE>
<CAPTION>
                                                                    THREE MONTHS                   NINE MONTHS
                                                                 ENDED SEPTEMBER 30,             ENDED SEPTEMBER 30,
                                                             ---------------------------     ------------------------
                                                                 1997           1998           1997           1998
                                                             ------------     ----------     ---------      ---------
<S>                                                          <C>              <C>            <C>            <C>
                                                                   (IN THOUSANDS)                  (IN THOUSANDS)
Adjusted EBITDA (1)....................................   $    24,580    $    24,957    $    62,402     $    67,181
Inventory purchase price allocation adjustment (2).....             -           (172)        (1,607)           (172)
Integration and other non-recurring expense............        (1,693)        (1,112)       (17,592)         (1,112)
Depreciation and amortization (3)......................        (8,627)        (9,565)       (25,950)        (26,037)
Purchased in-process research and development (4)......             -        (22,800)             -         (28,334)
Interest income........................................            57            511            442             658
Interest expense.......................................       (11,277)       (13,014)       (32,972)        (34,809)
Other, net.............................................           (46)            14           (446)           (667)
(Provision for) benefit from income taxes..............        (1,900)        (1,800)         5,500          (1,450)
                                                          -----------    -----------    -----------     -----------
Net income (loss)......................................   $     1,094    $   (22,981)   $   (10,223)    $   (24,742)
                                                          -----------    -----------    -----------     -----------
                                                          -----------    -----------    -----------     -----------
</TABLE>
------------------
(1)    Adjusted EBITDA represents income from operations before restructuring,
       integration and other non-recurring charges, non-cash purchase accounting
       charges and depreciation and amortization. Adjusted EBITDA does not
       represent net income or cash flows from operations, as these terms are
       defined under generally accepted accounting principles, and should not be
       considered as an alternative to net income as 


                                   - 16 -

<PAGE>


       an indicator of the Company's operating performance or to cash flows 
       as a measure of liquidity. ALARIS Medical has included information 
       concerning Adjusted EBITDA herein because it understands that such 
       information is used by investors as one measure of an issuer's 
       historical ability to service debt. Restructuring and other one-time 
       non-recurring charges are excluded from Adjusted EBITDA as ALARIS 
       Medical believes that the inclusion of these items would not be 
       helpful to an investor's understanding of ALARIS Medical's ability to 
       service debt. ALARIS Medical's computation of Adjusted EBITDA may not 
       be comparable to similar titled measures of other companies.

(2)    Amount represents that portion of the purchase accounting adjustments
       made to adjust the acquired IVAC inventory in 1997 and Instromedix
       inventory in 1998 to their estimated fair value on the acquisition dates.
       Such amounts were charged to cost of sales during the first and third
       quarters of 1997 and 1998, respectively.

(3)    Depreciation and amortization excludes amortization of debt discount and
       issuance costs included in interest expense.

(4)     Amount represents that portion of the purchase accounting adjustments
        related to the value assigned to the acquired in-process research and
        development of projects acquired from PSI, Caesarea and Instromedix for
        which technological feasibility had not been established and for which
        there was no alternative future use.

The following table summarizes sales to customers located in the United States
and international locations:

<TABLE>
<CAPTION>
                                     THREE MONTHS                   NINE MONTHS
                                  ENDED SEPTEMBER 30,           ENDED SEPTEMBER 30,
                               -----------------------       ----------------------
                                 1997           1998           1997          1998
                               ---------     ---------       --------      --------
<S>                            <C>           <C>             <C>           <C>
                                    (IN MILLIONS)                 (IN MILLIONS)
U.S. sales...................  $ 55.8         $  62.0        $ 162.6         $171.6
International sales..........    31.0            32.2           94.3          100.3
                               ------         -------        -------         ------
     Total sales.............  $ 86.8         $  94.2        $ 256.9         $271.9
                               ------         -------        -------         ------
                               ------         -------        -------         ------

</TABLE>

For purposes of this discussion and analysis, the three months ended September
30, 1997 and 1998 are referred to as Third Quarter 1997 and Third Quarter 1998,
respectively, and the nine months ended September 30, 1997 and 1998 are referred
to as 1997 and 1998, respectively.

THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED 
SEPTEMBER 30, 1998

SALES

Sales increased $7.4 million during Third Quarter 1998 as compared to Third
Quarter 1997. International sales increased $1.2 million, or 3.9% while United
States sales increased $6.2 million, or 11.1%. The increase in international
sales is primarily due to increases in drug infusion instrument revenue. The
majority of the Company's international sales are denominated in foreign
currency. Due to a stronger U.S. dollar in 1998 as compared to the actual
foreign currency exchange rates in effect during Third Quarter 1997, translation
of Third Quarter 1998 international sales were adversely impacted by $0.3
million. The increase in U.S. sales in Third Quarter 1998 as compared to Third
Quarter 1997 is due to increases in drug infusion disposable administration set
revenue of $2.4 million, patient monitoring revenue of $0.6 million, service
revenue of $0.1 million, and revenue of $3.7 million generated by Instromedix
products. These increases were partially offset by a decrease in drug infusion
instrument revenue of $0.6 million.


                                   - 17 -

<PAGE>


GROSS MARGIN

The gross margin percentage decreased from 51.2% in Third Quarter 1997 to 
50.5% in Third Quarter 1998. Third Quarter 1997 cost of sales benefited from 
high production volumes and sales of drug infusion disposable administration 
sets resulting in improved gross margin for such period. The higher volumes 
were due to the resolution of a third-party contract manufacturer dispute 
which had shut down the Company's two maquiladora assembly plants in Tijuana, 
Mexico during June of 1997. The Company did not experience similar 
manufacturing efficiencies in Third Quarter 1998.

SELLING AND MARKETING EXPENSES

Selling and marketing expenses increased $2.0 million, or 12.5%, during Third 
Quarter 1998 as compared to Third Quarter 1997. As a percentage of sales, 
selling and marketing expenses increased from 18.3% in Third Quarter 1997 to 
19.0% in Third Quarter 1998. This increase is primarily due to increases in 
personnel and related costs associated with the addition of Instromedix and 
Patient Solutions in 1998.

GENERAL AND ADMINISTRATIVE EXPENSES

Third Quarter 1998 general and administrative expenses increased $1.2 million 
or 13.4% from Third Quarter 1997. As a percentage of sales, general and 
administrative expenses increased from 10.7% in 1997 to 11.2% in 1998. This 
increase is primarily due to increased consulting and legal expenses, as well 
as intangible amortization and other administrative expenses resulting from 
the Instromedix and Patient Solutions acquisitions in 1998.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased approximately $0.6 million, or 
13.0%, during Third Quarter 1998 as compared to Third Quarter 1997 primarily 
due to increased activities necessary to complete development for new 
projects acquired in 1998 through the Instromedix and Patient Solutions 
acquisitions.

INTEGRATION AND OTHER NON-RECURRING CHARGEs

In connection with the Instromedix acquisition, management, with the 
assistance of consultants, is performing a review of the operating activities 
of the acquired company and is assessing how to best integrate and leverage 
the Instromedix operations with ALARIS Medical. During the Third Quarter of 
1998, the Company incurred $1.1 million in costs associated with this 
integration, primarily in consulting fees of $0.8 million, retention bonuses 
of $0.2 million and $0.1 million in other related costs.

The Company incurred $1.7 million in costs to integrate the IMED and IVAC 
operations during the Third Quarter of 1997. These costs are in addition to 
restructuring and integration charges of $15.3 million recorded in the fourth 
quarter of 1996. The Third Quarter 1997 expense consisted primarily of 
information systems conversion costs of $1.4 million and other integration 
costs of $0.3 million.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

In connection with the Instromedix acquisition, the assets and liabilities of 
Instromedix were adjusted to their estimated fair values. As a result of this 
process, during the Third Quarter, the Company incurred a one-time $22.8 
million write-off related to the value assigned to the acquired in-process 
research and development of Instromedix projects for which technological 
feasibility had not been established and for which there was no alternative 
future use. Such amount was determined with the assistance of a third party 
appraiser based upon the present value of estimated future cash flow 
contributions from the identified projects. The Company has continued to 
invest in the development necessary to obtain technological feasibility of 
these projects.


                                   - 18 -

<PAGE>


The Company is using the purchased in-process research and development to 
create new cardiac disease diagnosis, monitoring and management products 
which will become part of the Arrhythmia Event Recorders and LifeSigns System 
product suites over the next several years. The nature of the efforts 
required to develop the purchased in-process technology into commercially 
viable products principally relate to designing, prototyping, verification 
and testing activities that are necessary to establish that the product can 
be produced to meet its design specifications, including functions, features 
and technical performance requirements. The Company expects to incur a total 
of approximately $4.0 million to complete the projects, of which $0.5 million
is expected to be incurred in the fourth quarter of 1998, while $3.0 million
and $0.5 million are expected to be incurred during 1999 and 2000, respectively.
The Company anticipates that products in the Arrhythmia Event Recorders product 
suite using the purchased in-process technology will be released during 1999, 
while products under the LifeSigns System product suite will be released 
during 2000. The Company expects that the purchased in-process research and 
development will be successfully developed, but there can be no assurance 
that commercial viability of the products will be achieved.

INCOME FROM OPERATIONS

Income from operations decreased $23.0 million during Third Quarter 1998 as 
compared to Third Quarter 1997 primarily due to the $22.8 million write-off 
of purchased in-process research and development costs, discussed above, 
which was not incurred in Third Quarter 1997. After adjusting for the 
one-time write-off, Third Quarter income from operations decreased $0.2 
million as compared to Third Quarter 1997 due to increased gross margin 
offset by increased operating expenses.

ADJUSTED EBITDA

Adjusted EBITDA increased $0.4 million during Third Quarter 1998 as compared 
to Third Quarter 1997. As a percentage of sales, Adjusted EBITDA decreased 
from 28.3%, or $24.6 million, for Third Quarter 1997 to 26.5%, or $25.0 
million, for Third Quarter 1998 due to the reasons discussed above. Adjusted 
EBITDA represents income from operations before non-recurring, non-cash 
purchase accounting charges, integration charges and depreciation and 
amortization. Adjusted EBITDA does not represent net income or cash flows 
from operations, as these terms are defined under generally accepted 
accounting principles, and should not be considered as an alternative to net 
income or to cash flows as an indicator of the Company's operating 
performance or to cash flows as a measure of liquidity. The Company has 
included information concerning Adjusted EBITDA herein because it understands 
that such information is used by investors as a measure of an issuer's 
historical ability to service debt. Integration and other one-time 
non-recurring charges are excluded from Adjusted EBITDA as the Company 
believes that the inclusion of these items would not be helpful to an 
investor's understanding of the Company's ability to service debt. The 
Company's computation of Adjusted EBITDA may not be comparable to similar 
titled measures of other companies.

INTEREST EXPENSE

Interest expense increased $1.7 million during Third Quarter 1998 due to 
additional debt incurred to fund the Instromedix acquisition. In July, the 
Company increased term debt borrowings $30.0 million and completed the sale 
of $109.9 million of 11 1/8% Senior Discount Notes, resulting in higher 
interest expense for the quarter. (see Liquidity and Capital Resources).

NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 
30, 1998

SALES

Sales increased $14.9 million during 1998 as compared to 1997. International 
sales increased $6.0 million, or 6.4% while United States sales increased 
$8.9 million, or 5.5%. The increase in international sales is primarily due 
to increases in drug infusion revenues of $5.4 million. The majority of the 
Company's international sales are denominated in foreign currency. Due to a 
stronger U.S. dollar in 1998 as compared to the actual foreign currency 
exchange rates in effect during 1997, translation of 1998 


                                   - 19 -

<PAGE>


international sales were adversely impacted by $2.9 million. The increase in 
U.S. sales in 1998 as compared to 1997 is primarily due to increases in drug 
infusion disposable administration set revenue of $5.6 million, 
patient-monitoring revenue of $1.9 million, and revenue of $3.7 million 
generated by Instromedix products. These increases were partially offset by a 
decrease in drug infusion instrument revenue of $2.4 million.

GROSS MARGIN

The gross margin percentage increased from 46.8% in 1997 to 49.2% in 1998 
primarily due to $4.1 million of non-recurring costs included in 1997 cost of 
sales. Exclusive of $1.6 million of non-recurring purchase accounting 
inventory adjustments and $2.5 million related to a voluntary field 
correction of certain Gemini PC-1 and PC-2 infusion pumps charged to cost of 
sales during 1997, the gross margin percentage for 1997 was 48.4%. The 
improvement over 1997 is due to overall higher margins on domestic and 
international disposable administration sets and instruments as well as the 
benefits realized from ongoing cost reduction efforts and purchasing 
synergies.

SELLING AND MARKETING EXPENSES

Selling and marketing expenses increased $4.3 million, or 9.0%, during 1998 
as compared to 1997. As a percentage of sales, selling and marketing expenses 
increased from 18.6% in 1997 to 19.2% in 1998. Domestic expenses increased by 
$1.8 million, or 6.5%, from 1997 due to the addition of Instromedix and 
Patient Solutions in 1998 as well as increases in personnel and freight costs 
in 1998. International expenses increased $2.5 million from 1997 due to 
increased sales, the investment in international direct operations in Italy 
and Norway during the second half of 1997 and related increases in personnel 
costs.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased $1.9 million, or 6.6%, during 
1998 as compared to 1997. As a percentage of sales, general and 
administrative expenses increased from 11.0% in 1997 to 11.1% in 1998. 
Domestic expenses increased by $0.4 million due to additional domestic 
amortization resulting from the Instromedix and Patient Solutions 
acquisitions. International expenses increased by $1.5 million, primarily as 
a result of the conversion of certain European dealer operations into direct 
operations, expansion of the European headquarters and quality initiatives to 
obtain required CE markings on products.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased approximately $1.4 million, or 
11.0%, during 1998 as compared to 1997 primarily due to additional research 
and development related to projects associated with the recently acquired 
Instromedix and Patient Solutions, as well as increased activities associated 
with the later development stages of various domestic and international 
engineering projects for infusion systems and disposable administration sets.

INTEGRATION AND OTHER NON-RECURRING CHARGES

In connection with the Instromedix acquisition, management, with the 
assistance of consultants, is performing a review of the operating activities 
of the acquired company and is assessing how best to integrate and leverage 
the Instromedix operations with ALARIS Medical. During the first nine months 
of 1998, the Company incurred $1.1 million in costs associated with this 
integration, primarily in consulting fees of $0.8 million, retention bonuses 
of $0.2 million and $0.1 million in other related costs.

The Company incurred $17.6 million in costs to integrate the IMED and IVAC
operations during the first nine months of 1997. These costs are in addition to
restructuring and integration charges of $15.3 million recorded in the fourth
quarter of 1996. The 1997 expense consists primarily of the write-off of a
product distribution and license agreement with a third party developer of an
ambulatory and alternate site infusion pump of $4.5 million, maquiladora
settlement and related costs of $4.1 million, information systems 


                                   - 20 -

<PAGE>


conversion costs of $3.1 million, management consulting fees of $1.4 million, 
severance of $1.3 million and other integration costs of $3.2 million. The 
Company reviewed its products and related research and development activities 
and market opportunities in order to focus on projects that will provide 
greater competitive advantage and shareholder return. That review resulted in 
the termination of the aforesaid product distribution and license agreement. 
The $4.5 million charge related to such termination includes a $4.3 million 
non-cash charge representing the write-off of the intangible asset associated 
with such agreement.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

During 1998, the Company recorded $28.3 million in purchased in-process 
research and development write-offs as a result of certain business 
acquisitions. In conjunction with the Instromedix acquisition, the assets and 
liabilities of Instromedix were adjusted to their estimated fair values. As a 
result of this process, the Company incurred a one-time $22.8 million 
write-off related to the value assigned to the acquired in-process research 
and development of Instromedix projects for which technological feasibility 
had not been established and for which there was no alternative future use. 
Such amount was determined with the assistance of a third party appraiser 
based upon the present value of estimated future cash flow contributions from 
the identified projects.

The Company is using the Instromedix purchased in-process research and 
development to create new cardiac disease diagnosis, monitoring and 
management products which will become part of the Arrhythmia Event Recorders 
and LifeSigns System product suites over the next several years. The nature 
of the efforts required to develop the purchased in-process technology into 
commercially viable products principally relate to designing, prototyping, 
verification and testing activities that are necessary to establish that the 
product can be produced to meet its design specifications, including 
functions, features and technical performance requirements. The Company 
expects to incur a total of approximately $4.0 million to complete the 
projects, of which $0.5 million is expected to be incurred in the fourth 
quarter of 1998, while $3.0 million and $0.5 million are expected to be 
incurred during 1999 and 2000, respectively. The Company anticipates that 
products in the Arrhythmia Event Recorders product suite using the purchased 
in-process technology will be released during 1999, while products under the 
LifeSigns System product suite will be released during 2000. The Company 
expects that the purchased in-process research and development will be 
successfully developed, but there can be no assurance that commercial 
viability of the products will be achieved.

In connection with the PSI acquisition and the technology license agreement 
with Caesarea during the second quarter of 1998, the Company incurred a 
one-time $5.5 million write-off related to the value assigned to the acquired 
in-process research and development of the projects for which technological 
feasibility had not been established and for which there was no alternative 
future use. The Company has continued to invest in the development necessary 
to obtain technological feasibility of these projects.

In connection with the PSI acquisition, the Company is using the acquired 
in-process research and development to develop an ambulatory infusion pump 
for use in the alternate-site market. The nature of the efforts required to 
develop the purchased in-process technology into a commercially viable 
product principally relate to designing, prototyping, verification and 
testing activities that are necessary to establish that the product can be 
produced to meet its design specifications, including functions, features and 
technical performance requirements. The Company expects to incur a total of 
$0.7 million to complete the project, of which $0.2 million is projected to 
be incurred in 1998 and $0.5 million in 1999. It is anticipated that the pump 
will be released during 1999. The Company expects that the purchased 
in-process research and development will be successfully developed, but there 
can be no assurance that commercial viability of the pump will be achieved.


                                   - 21 -

<PAGE>


Pursuant to the technology license agreement, the Company acquired certain 
volumetric infusion pump technology from Caesarea. Caesarea is conducting 
research and development on this in-process technology in order to create a 
large volume infusion pump marketed primarily to consumers in emerging 
international markets. The Company is required to make certain milestone 
payments up to an aggregate of $4.0 million to Caesarea upon the attainment 
of certain developmental milestones, which primarily relate to different 
product releases. The Company anticipates that certain products using the 
purchased in-process technology will be released during the fourth quarter of 
1998, with additional product releases in subsequent periods through the 
first half of 1999. The Company expects that the purchased in-process 
research and development will be successfully developed, but there can be no 
assurance that commercial viability of the pump will be achieved.

INCOME FROM OPERATIONS

Income from operations decreased $5.7 million during 1998 as compared to 1997 
primarily due to non-recurring charges related to the write-off of $28.3 
million in purchased in-process research and development charges in 
connection with acquisitions and $1.1 million in integration charges related 
to the Instromedix acquisition. The 1997 income from operations includes 
integration and other non-recurring charges of charges of $21.7 million in 
1997 related to the IVAC/IMED merger. After excluding non-recurring charges 
from 1997 and 1998, the adjusted income from operations is $39.0 in 1997 as 
compared to $40.9 in 1998. The increase in 1998 over 1997 is due primarily to 
improved sales and gross margins.

ADJUSTED EBITDA

Adjusted EBITDA increased $4.8 million during 1998 as compared to 1997. As a 
percentage of sales, Adjusted EBITDA increased from 24.3%, or $62.4 million, 
for 1997 to 24.7%, or $67.2 million, for 1998 due to the reasons discussed 
above. Adjusted EBITDA represents income from operations before non-recurring 
non-cash purchase accounting charges, integration charges and depreciation 
and amortization. Adjusted EBITDA does not represent net income or cash flows 
from operations, as these terms are defined under generally accepted 
accounting principles, and should not be considered as an alternative to net 
income or to cash flows as an indicator of the Company's operating 
performance or to cash flows as a measure of liquidity. The Company has 
included information concerning Adjusted EBITDA herein because it understands 
that such information is used by investors as a measure of an issuer's 
historical ability to service debt. Integration and other one-time 
non-recurring charges are excluded from Adjusted EBITDA as the Company 
believes that the inclusion of these items would not be helpful to an 
investor's understanding of the Company's ability to service debt. The 
Company's computation of Adjusted EBITDA may not be comparable to similar 
titled measures of other companies.

INTEREST EXPENSE

Interest expense increased $1.8 million or 5.6% during 1998 due to additional 
financing obtained to fund the Instromedix acquisition. In connection with 
the Instromedix acquisition, in July the Company increased the outstanding 
bank term debt $30.0 million and completed the sale of $109.9 million 11 1/8 
% Senior Discount Notes, due 2008, resulting in increased interest expense 
for 1998. (see Liquidity and Capital Resources).

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of liquidity have been cash flow from 
operations and borrowings under the bank facility. The Company expects to 
continue to meet its liquidity needs including capital expenditure 
requirements with cash flow from the operations of ALARIS Medical Systems and 
remaining cash proceeds from the issuance of the Senior Discount Notes in 
July 1998. In addition to operating expenses, the Company's primary 
historical use of funds has been and its future use of funds will continue 

                                   - 22 -

<PAGE>

to be to fund capital expenditures and strategic acquisitions and to pay debt 
service on outstanding indebtedness.

At September 30, 1998, the Company's outstanding indebtedness was $543.4 
million, which includes $211.4 million of bank term debt under the credit 
facility, $200.0 million of Senior Subordinated Notes due 2006 (the "Notes"), 
which were issued in connection with the Merger and $112.0 million of Senior 
Discount Notes due 2008 which were issued to fund the Instromedix acquisition 
in July 1998. The bank debt bears interest at floating rates based, at the 
Company's option, on Eurodollar or prime rates. During the second quarter of 
1997, the Company entered into an interest rate protection agreement covering 
50% of its term loan borrowings. Such agreement fixed the interest rate 
charged on such borrowings resulting in a weighted average fixed rate of 9.6% 
on the principal balance covered. As a result, a one percent increase in the 
rate of interest charged on indebtedness outstanding under the credit 
facility at September 30, 1998 would result in additional annual interest 
expense of approximately $1.1 million. During March 1998, the bank credit 
facility was amended and the interest rates on the bank debt reduced. As a 
result, the weighted average interest rate, including the effect of the 
interest rate protection agreement, was reduced to 8.5% based on the amounts 
outstanding at the time of the amendment. The Company incurred fees of 
approximately $0.4 million related to such interest rate reductions. Included 
in total consolidated debt, at September 30, 1998, ALARIS Medical had 
outstanding $16.2 million of 7 1/4% Convertible Debentures.

In connection with obtaining the Merger financing, the Company also obtained 
a $50.0 million revolving credit line as part of the credit facility. In July 
1998, in connection with the Instromedix acquisition, the Company amended its 
bank credit facility. The amendment provided for the banks' consent to the 
Instromedix acquisition and increased the revolving credit facility to $60.0 
million. At September 30, 1998, a $0.5 million letter of credit was committed 
under this line of credit and $59.5 million was available.

The amended bank credit facility also provided the Company an additional 
$30.0 million under the Tranche D term debt. The Company used the $30.0 
million term debt borrowing, along with approximately $3.0 million from the 
revolving credit line, to fund the initial payments required upon closing the 
Instromedix acquisition. Subsequent to closing the Instromedix acquisition, 
ALARIS Medical completed the sale of $109.9 million of 11 1/8% Senior 
Discount Notes, due 2008, receiving net proceeds of approximately $106.3 
million. Interest accruing on these notes is added to the outstanding 
principal balance through July 31, 2003. Interest accruing subsequent to July 
31, 2003 is payable in cash semi-annually in arrears on February 1 and August 
1. Upon receipt of the net proceeds from the Senior Discount Notes, ALARIS 
Medical paid its remaining obligations of approximately $22.7 million to the 
Instromedix shareholders and contributed the remaining net proceeds of 
approximately $82.6 million to ALARIS Medical Systems, as required under the 
amended bank credit agreement. ALARIS Medical Systems then repaid the amount 
outstanding under its revolving credit line.

Additionally, the Company is required to register the Senior Discount Notes 
with the Securities and Exchange Commission. If such registration is not 
completed by November 26, 1998, the Company will incur additional interest on 
the Senior Discount Notes. For the first 90 day period that such registration 
is not completed, additional interest of $0.05 per one thousand dollars of 
principal outstanding under the Senior Discount Notes, or approximately $0.1 
million, will accrue. It is unlikely that the Company will receive the 
required approval of the Securities and Exchange Commission for such 
registration process prior to November 26, 1998 but management does believe 
such process should be completed before the expiration of the following 90 
day period.

In connection with the Merger, the Company assumed IVAC's obligations to Siemens
Infusion Systems Ltd. ("SIS"). These obligations relate to the payment of
additional purchase consideration related to the 


                                   - 23 -

<PAGE>

acquisition of the MiniMed product line (the predecessor product line to MS 
III). The Company's remaining obligation to SIS is the greater of $3.0 
million or 8% of the prior year's MS III sales in 1999. The Company made the 
minimum 1998 payment of $3.0 million during the first quarter of 1998.

As a result of the Company's significant indebtedness, the Company expects to 
incur significant interest expense in future periods. The Company believes 
that cash provided by operations will be sufficient to meet its interest 
expense obligations.

Annual principal amortization of the Company's indebtedness is $0.1 million 
for the fourth quarter of 1998 and $15.5 million and $13.9 million for 1999 
and 2000, respectively.

The Convertible Debentures provide for semi-annual interest payments of 
approximately $0.6 million and mature on January 15, 2002. The Notes and the 
credit facility permit ALARIS Medical Systems to fund interest payments on 
the Convertible Debentures and to make limited distributions to ALARIS 
Medical to fund operating expenses and to pay income taxes; provided that, 
with respect to the credit facility, there exists no default or event of 
default under the credit facility. The Notes and the credit facility, 
however, restrict distributions to ALARIS Medical to fund the repayment of 
the Convertible Debentures at maturity.

During the quarter ended September 30,1998, the Company made cash payments of 
approximately $0.4 million related to merger and integration costs accrued at 
December 31, 1997. Also during the third quarter of 1998, the Company accrued 
approximately $1.1 million for integration costs related to Instromedix, of 
which approximately $0.1 million was paid in cash. During the quarter ended 
September 30, 1997 the Company made cash payments of approximately $1.5 
million related to merger and integration costs accrued at December 31, 1996, 
as well as payments of approximately $1.7 million for integration costs 
expensed during the third quarter of 1997.

During the Third Quarter of 1998, the Company made capital expenditures of 
approximately $6.5 million and anticipates it will make capital expenditures 
of approximately $25.0 million for the full year.

During the first quarter of 1998, the Company created a corporate development 
function to assess product and company acquisitions, distribution alliances 
and joint ventures which would expand Company technologies into unserved 
markets. While there can be no assurances that the Company will complete 
additional acquisitions, depending on the value of potential acquisitions, 
the Company might fund such transactions through a variety of sources, 
including existing cash, new or existing debt facilities or through the sale 
of equity securities.

The Company believes that, based on current levels of performance, it will 
generate cash flow from operations, together with its existing cash, 
sufficient to fund its operations, make planned capital expenditures and make 
required payments of principal and interest under its credit facility and 
interest on the 9 3/4% Notes; however, the Company may not generate 
sufficient cash flow from operations to repay the 9 3/4 % Notes at maturity 
in the amount of $200.0 million, to make scheduled payments on the Senior 
Discount Notes or to repay the Senior Discount Notes in the amount of $189.0 
million at maturity. Accordingly, the Company may have to refinance the Notes 
and the Senior Discount Notes at or prior to maturity or sell assets or raise 
equity capital to repay such debt. Based on current interest rates, over the 
next twelve months the Company is required to make principal and interest 
payments under it's bank credit facility in the amount of $30.8 million and 
interest payments on the 9 3/4% Notes and the 7 1/4% Convertible Debentures 
in the amount of $19.5 million and $1.2 million, respectively. In addition, 
the Company's ability to fund its operations, to make planned capital 
expenditures and to make scheduled principal and interest payments will be 
dependent on the Company's future operating performance, which 


                                   - 24 -

<PAGE>

is itself dependent on a number of factors, many of which the Company cannot 
control, including conditions affecting the Company's foreign operations, 
prevailing economic conditions, availability of other sources of liquidity, 
and financial, business, regulatory and other factors affecting the Company's 
business and operations.

CONTINGENCIES AND LITIGATION

See Note 8 to the Consolidated Financial Statements.

YEAR 2000

Certain of the Company's infusion pumps contain software in which the 
product's record keeping capabilities will be affected beyond the year 2000. 
The Company believes that these issues will not interfere with the fluid 
delivery functions of the products involved, nor will they affect the safety 
of patients; however, there can be no assurance in this regard. Such record 
keeping capabilities serve as a log of the products use and are primarily 
used by the Company if needed in determining causes of product failures. 
Management believes the Company has completed development of the corrective 
software for all but one of its products and is offering such software for 
sale to its customers. Corrective software for the one remaining product is 
under development and will be available to customers in the first quarter of 
1999. Costs of such development has not been and is not anticipated to be 
material to the Company.

In addition to routine capital expenditures, and in connection with the 
Merger, the Company has made significant expenditures for the acquisition of 
enterprise-wide information system software and hardware and the related 
design, testing and implementation. The new system is year 2000 compliant. 
The Company successfully implemented certain financial applications of the 
new system and began utilizing such applications at the beginning of 1998. 
The Company successfully converted the remainder of its domestic business 
processes to the new system in September 1998. The Company believes the 
primary information system for its international operations is not directly 
affected by the year 2000. However, due to the increased significance of its 
international operations, the Company will be converting the international 
information systems to a system common with the domestic operations. The 
international project is scheduled for completion in 1999. The international 
system is also designed to properly process transactions denominated in euro 
currency. Euro currency is a new monetary unit which certain European 
countries can begin using in 1999.

In order to successfully provide product to its customers, the Company is 
dependent upon the timely fulfillment of its supply orders from its chosen 
vendors. The Company has identified potentially critical suppliers and 
attempted to determine if such suppliers have identified and/or addressed 
their own year 2000 issues by means of questionnaires. At this time, the 
Company has not identified or been informed of any significant suppliers that 
will not be able to fulfill the Company's orders. However, many of the 
Company's key suppliers have acknowledged that they must make improvements to 
their systems to properly deal with year 2000 orders and issues. As a result, 
there can be no assurances that key suppliers will be able to timely fill the 
Company's future orders. The Company is in the process of evaluating what 
alternatives are available if key suppliers could not provide required 
materials and supplies to the Company when ordered. While a formal 
contingency plan related to this risk has not yet been completed by the 
Company, alternatives would be to increase inventory levels of key supplies 
and seek supplies from other vendors. The Company estimates that such a 
contingency plan will be completed by December 31, 1998. However, there can 
be no assurance that all significant primary and back-up suppliers will be 
able to fill the Company's orders due to their own year 2000 issues. Such 
supplier failures could have a material adverse impact on the Company's 
financial condition, results of operations and cash flows.

The Company has formed a committee to identify, evaluate and address year 
2000 issues to which the Company might be exposed on a worldwide basis 
including and in addition to the items previously described. The committee is 
currently assessing the year 2000 readiness of certain key areas including, 
but not limited to, Company operations (including non-information technology 
systems) and third party suppliers. The committee has not yet completed this 
assessment but it is not currently aware of any material year 2000 issues 
related to other third parties with whom the Company conducts business or in 
its non-information technology systems. The committee's assessment will 
likely be a continuous process through the end of calendar year 1998 and into 
1999. In addition to its customers, the Company conducts business with and 
utilizes the services of numerous third parties including but not limited to 
suppliers, distributors, telecommunication companies, financial institutions, 
governmental agencies, and utility companies. The ability of these third 
parties to adequately address their year 2000 

                                   - 25 -

<PAGE>

issues is outside the Company's control. Failure by some or all these parties 
to adequately address their year 2000 issues could have a material adverse 
effect on the Company. Given the number of parties with whom the Company 
transacts business, it is reasonably likely some of these parties will not be 
able to adequately solve their year 2000 issues in a timely manner. The 
Company does not believe it has significant dependence on any one of these 
third parties and accordingly does not believe that it is reasonably likely 
that the Company will experience any material adverse impacts related to year 
2000 issues. However, due to the Company's inability to control third party 
compliance with year 2000 issues, there can be no assurances that such year 
2000 issues will not have a material adverse effect on the financial 
condition, results of operations or cash flows of the Company.

During the fiscal years 1996 and 1997 the Company made combined capital and 
operating expenditures of approximately $7.5 million related to the new 
enterprise-wide information system, and expenditures of $4.5 million in the 
nine months ended September 30, 1998. To complete the identified phases of 
the project, the Company anticipates additional expenditures for the 
remainder of 1998 and for 1999 of approximately $3.4 million and $3.5 
million, respectively.

SEASONALITY

Infusion instrument sales are typically higher in the fourth quarter due to 
sales compensation plans which reward the achievement of annual quotas and 
the seasonal characteristics of the industry, including hospital purchasing 
patterns. First quarter sales are traditionally not as strong as the fourth 
quarter. The Company anticipates that this trend will continue but is unable 
to predict the effect, if any, from health care reform and increased 
competitive pressures.

BACKLOG

The backlog of orders, believed to be firm, at September 30, 1997 and 1998 
was $7.9 million and $5.2 million, respectively.

FOREIGN OPERATIONS

As a result of the Merger, the Company has significant foreign operations. 
Accordingly, the Company is subject to various risks, including without 
limitation, foreign currency risks. Historically, the Company has not entered 
into foreign currency contracts to hedge such exposure and such risk. Due to 
changes in foreign currency exchange rates during 1998, primarily a 
strengthening of the U.S. dollar against many European currencies, the 
Company recognized a foreign currency transaction gain of approximately $0.1 
million during Third Quarter 1998. For the year ended December 31, 1997 and 
the nine months ended September 30, 1998, approximately 30% and 32% of the 
Company's sales and 23% and 22% of the Company's operating expenses were 
denominated in currencies other than the Company's functional currency, 
respectively. These foreign currencies are primarily those of Western Europe, 
Canada and Australia. Additionally, substantially all of the receivables and 
payables of the Company's foreign subsidiaries are denominated in currencies 
other than the Company's functional currency, and no formal hedging program 
exists to manage fluctuations in foreign currencies. The Company will 
evaluate hedging programs during 1998 to limit the exposure to the Company 
resulting from changes in foreign currency exchange rates.

HEALTH CARE REFORM

Heightened public awareness and concerns regarding the growth in overall 
health care expenditures in the United States may result in the enactment of 
legislation affecting payment mechanisms and health care delivery. 
Legislation which imposes limits on the number and type of medical procedures 
which may be performed or which has the effect of restricting a provider's 
ability to select specific devices or products 


                                   - 26 -

<PAGE>

for use in administrating medical care may adversely impact the demand for 
the Company's products. In addition, legislation which imposes restrictions 
on the price which may be charged for medical products may adversely affect 
the Company's results of operations. It is not possible to predict the extent 
to which the Company or the health care industry in general may be adversely 
affected by the aforementioned in the future.

FORWARD-LOOKING STATEMENTS

Forward-Looking Statements in this report are made pursuant to the Safe 
Harbor Provisions of the Private Securities Litigation Reform Act of 1995. 
Persons reading this report are cautioned that such forward-looking 
statements involve risks and uncertainties, including, without limitation, 
the effect of legislative and regulatory changes effecting the health care 
industry; the potential of increased levels of competition; technological 
changes; the dependence of the Company upon the success of new products and 
ongoing research and development efforts; restrictions contained in the 
instruments governing the Company's indebtedness; the significant leverage to 
which the Company is subject; and other matters referred to in this report.


                                   - 27 -

<PAGE>

                                     PART II

                                OTHER INFORMATION
-------------------------------------------------------------------------------
ITEM 1.  LEGAL PROCEEDINGS

See Note 8 to the Condensed Consolidated Financial Statements.


                                   - 28 -


<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

27        --     Financial Data Schedule

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

(b)   Reports on Form 8-K

A Report on Form 8-K was filed on July 30, 1998. The Agreement and Plan of 
Merger entered into on June 24, 1998 by ALARIS Medical, Inc., ALARIS Medical 
Systems, Inc., Herbert J. Semler and Shirley L. Semler, Instromedix, Inc., 
and other shareholders of Instromedix was reported. Also reported was Summary 
Financial Data of Instromedix and news releases issued by ALARIS Medical, 
Inc., dated June 20, 1998 and June 25, 1998.

                                   - 29 -



<PAGE>

                                  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.

                                           ALARIS MEDICAL, INC.
                                               (REGISTRANT)

Date: November 13, 1998                   By:   /s/ WILLIAM J. MERCER
     ----------------------               ----------------------------------
                                                  William J. Mercer
                                          President, Chief Executive Officer
                                               Chief Financial Officer


                                   - 30 -



<PAGE>

                                 EXHIBIT INDEX
------------------------------------------------------------------------------
Exhibit
  No.
---------

27        --     Financial Data Schedule


                                   - 31 -