<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 JUNE 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 August 6, 1998, 59,174,039 shares of Registrant's Common Stock were
outstanding.


                                 Page 1 of 27

<PAGE>

                      ALARIS MEDICAL, INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------


                                    INDEX


PART I.  FINANCIAL INFORMATION
------------------------------

  Item 1 - Financial Statements:
                                                                            Page
                                                                            ----
          Condensed consolidated balance sheet at
          December 31, 1997 and June 30, 1998..............................   3

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

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

          Condensed consolidated statement of changes in
          stockholders' equity for the period from
          December 31, 1997 to June 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....................................  14


PART II. OTHER INFORMATION
--------------------------

  Item 1 - Legal Proceedings...............................................  24

  Item 6 - Exhibits and Reports on Form 8-K................................  25



                                      - 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,   JUNE 30,
                                                          1997          1998
                                                       ------------  -----------
                                                                     (UNAUDITED)
<S>                                                    <C>           <C>
Current assets:
  Cash................................................  $  6,984     $    2,285
  Receivables, net....................................    83,406         82,274
  Inventories.........................................    61,666         65,619
  Prepaid expenses and other current assets...........    23,260         22,352
                                                       ------------  -----------
          Total current assets........................   175,316        172,530

Net investment in sales-type leases, less current 
  portion.............................................    30,404         23,473
Property, plant and equipment, net....................    55,365         56,693
Other non-current assets..............................    16,279         17,295
Intangible assets, net................................   287,933        280,272
                                                       ------------  -----------
                                                        $565,297       $550,263
                                                       ------------  -----------
                                                       ------------  -----------

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of long-term debt...................  $ 14,559     $   15,068
  Accounts payable....................................    24,042         23,669
  Accrued expenses and other current liabilities .....    52,668         56,213
                                                       ------------  -----------
          Total current liabilities...................    91,269         94,950
                                                       ------------  -----------
Long-term debt........................................   431,571        417,277
Other non-current liabilities.........................    10,508          8,034
                                                       ------------  -----------
     Total non-current liabilities....................   442,079        425,311
                                                       ------------  -----------
Contingent liabilities and commitments (Note 7)

Stockholders' equity:
  Common stock, authorized 75,000 shares at $.01 par 
    value; issued and outstanding - 59,102 shares and 
    59,160 shares at December 31, 1997 and June 30, 
    1998, respectively................................       591            591
  Capital in excess of par value......................   148,341        148,523
  Accumulated deficit.................................  (111,330)      (113,091)
  Treasury stock......................................    (2,027)        (2,027)
  Equity adjustment for foreign currency translation..    (3,626)        (3,994)
                                                       ------------  -----------
          Total stockholders' equity..................    31,949         30,002
                                                       ------------  -----------
                                                        $565,297     $  550,263
                                                       ------------  -----------
                                                       ------------  -----------

</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 ENDED JUNE 30,    SIX MONTHS ENDED JUNE 30,
                                                      ---------------------------    -------------------------
                                                          1997             1998         1997          1998
                                                      --------------  -----------    ------------  -----------
<S>                                                   <C>             <C>            <C>           <C>
Sales...........................................       $ 88,072         $ 90,683     $170,067      $177,654
Cost of sales...................................         47,361           46,499       94,331        91,353
                                                      --------------  -----------    ------------  -----------
Gross margin....................................         40,711           44,184       75,736        86,301
                                                      --------------  -----------    ------------  -----------
Selling and marketing expenses..................         16,414           17,101       31,909        34,230
General and administrative expenses.............          9,681            9,639       18,935        19,541
Research and development expenses...............          4,123            4,660        8,191         9,000
Purchased in-process research and development...              -            5,534            -         5,534
Integration and other non-recurring charges.....         12,247                -       15,899             -
                                                      --------------  -----------    ------------  -----------
     Total operating expenses...................         42,465           36,934       74,934        68,305
                                                      --------------  -----------    ------------  -----------
Lease interest income...........................          1,029            1,060        2,191         2,222
                                                      --------------  -----------    ------------  -----------
     (Loss) income from operations..............           (725)           8,310        2,993        20,218
                                                      --------------  -----------    ------------  -----------
Other income (expenses):                           
     Interest income............................            227               85          385           147
     Interest expense...........................        (11,002)         (10,639)     (21,695)      (21,795)
     Other, net.................................           (302)            (324)        (400)         (681)
                                                      --------------  -----------    ------------  -----------
Total other expense.............................        (11,077)         (10,878)     (21,710)      (22,329)
                                                      --------------  -----------    ------------  -----------
Loss before income taxes........................        (11,802)          (2,568)     (18,717)       (2,111)
Benefit from income taxes.......................         (4,800)            (600)      (7,400)         (350)
                                                      --------------  -----------    ------------  -----------
Net loss........................................       $ (7,002)        $ (1,968)    $(11,317)     $ (1,761)
                                                      --------------  -----------    ------------  -----------
                                                      --------------  -----------    ------------  -----------
     Net loss per common share assuming            
       no dilution..............................       $   (.12)        $   (.03)    $   (.19)     $   (.03)
                                                      --------------  -----------    ------------  -----------
                                                      --------------  -----------    ------------  -----------
     Net loss per common share assuming            
       dilution.................................       $   (.12)        $   (.03)    $   (.19)     $   (.03)
                                                      --------------  -----------    ------------  -----------
                                                      --------------  -----------    ------------  -----------
Weighted average common shares outstanding         
  assuming no dilution..........................         58,635           58,680       58,788        58,669
                                                      --------------  -----------    ------------  -----------
                                                      --------------  -----------    ------------  -----------
Weighted average common shares outstanding         
  assuming dilution.............................         58,635           58,680       58,788        58,669
                                                      --------------  -----------    ------------  -----------
                                                      --------------  -----------    ------------  -----------

</TABLE>

              The accompanying notes are an integral part of these 
                  condensed consolidated financial statements

<PAGE>

                                    -4-



                       ALARIS MEDICAL, INC. AND SUBSIDIARIES
              CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
                                (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                     SIX MONTHS ENDED JUNE 30,
                                                     -------------------------
                                                         1997          1998
                                                     -----------   -----------
<S>                                                  <C>           <C>
Net cash (used) provided by operating activities     $(2,776)       $ 25,715
                                                     -----------   -----------
Cash flows from investing activities:
     Net decrease in restricted cash and 
       investments..............................       2,332               -
     Return of capital by investee..............         148               -
     Net capital expenditures...................      (9,717)        (10,405)
     Acquisition and license of technology .....           -          (6,547)
                                                     -----------   -----------
Net cash used in investing activities...........      (7,237)        (16,952)
                                                     -----------   -----------
Cash flows from financing activities:
     Principal payments on long-term debt.......      (3,622)         (8,579)
     Proceeds under revolving credit facility...      10,300          27,300
     Repayments under revolving credit facility.      (3,000)        (32,250)
     Debt issue costs...........................        (429)              -
     Purchase of treasury stock.................      (1,293)              -
     Proceeds from exercise of stock options ...         161             107
                                                     -----------   -----------
Net cash provided by (used in) financing 
  activities                                           2,117         (13,422)
                                                     -----------   -----------
Effect of exchange rate changes on cash.........        (176)            (40)
                                                     -----------   -----------
Net decrease in cash............................      (8,072)         (4,699)
Cash at beginning of period.....................      12,084           6,984
                                                     -----------   -----------
Cash at end of period...........................     $ 4,012        $  2,285
                                                     -----------   -----------
                                                     -----------   -----------
</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.......      58                 107                                                   107

Equity adjustment for foreign
  currency translation..........                                                                  (368)       (368)

Other equity....................                          75                                                    75

Net loss for the period.........                                  (1,761)                                   (1,761)
                                  -------  ------  ----------  -----------  -------  -------  -----------  -------
Balance at June 30, 1998........  59,160    $591    $148,523   $(113,091)    453    $(2,027)   $(3,994)    $30,002
                                  -------  ------  ----------  -----------  -------  -------  -----------  -------
                                  -------  ------  ----------  -----------  -------  -------  -----------  -------
</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 June 30, 1998, and 
the results of its operations and its cash flows for the six months ended 
June 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 6). 

                                       -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

During the second quarter of 1998, the Company acquired the net assets of 
Patient Solutions, Inc. ("PSI") for $5,250. 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 $4,421 and 
were recorded as a non-recurring charge included in purchased in-process 
research and development. The underlying technology had not reached 
technological feasibility and no alternative use has been identified.  The 
Company estimates completing such development by the fourth quarter of 1998.

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 $1,200 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 
require completion by various dates through the first half of 1999 with the 
first significant milestones expected to be met during the third quarter of 
1998. If all such milestones are reached, the additional consideration will 
total approximately $4,000. 

                                       -8-
<PAGE>

On June 24, 1998, the Company entered into an agreement to acquire 
Instromedix, Inc. ("Instromedix") for approximately $51,000 in cash, 
assumption of approximately $5,100 of debt and the payment of approximately 
$1,000 of seller transaction expenses.  This acquisition was completed on 
July 17, 1998 and was financed with $30,000 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 $109,892 of 11-1/8% Senior 
Discount Notes (the "Senior Discount Notes"), due 2008, receiving net 
proceeds of $106,321.  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.

NOTE 4 -- INVENTORIES 

Inventories comprise the following:

<TABLE>
<CAPTION>
                                                DECEMBER 31,    JUNE 30,
                                                   1997           1998  
                                                ------------  -----------
<S>                                             <C>           <C>
     Raw materials............................    $ 24,144      $26,570
     Work-in-process..........................       8,363        7,843
     Finished goods...........................      29,159       31,206
                                                ------------  -----------
                                                  $ 61,666      $65,619
                                                ------------  -----------
                                                ------------  -----------

NOTE 5 -- 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:

                                                THREE MONTHS ENDED JUNE 30,
                                                ---------------------------
                                                    1997            1998
                                                --------------  -----------
<S>                                             <C>             <C>
Net loss....................................       $ (7,002)      $(1,968)

Other comprehensive loss:
     Foreign currency translation adjustments.       (1,332)         (309)
                                                --------------  -----------
Comprehensive loss..........................       $ (8,334)      $(2,277)
                                                --------------  -----------
                                                --------------  -----------
</TABLE>

<TABLE>
<CAPTION>
                                                 SIX MONTHS ENDED JUNE 30, 
                                                ---------------------------
                                                    1997            1998
                                                --------------  -----------
<S>                                             <C>             <C>
Net loss....................................       $(11,317)      $(1,761)

Other comprehensive loss:
     Foreign currency translation adjustments.       (2,534)         (368)
                                                --------------  -----------
Comprehensive loss..........................       $(13,851)      $(2,129)
                                                --------------  -----------
                                                --------------  -----------
</TABLE>

                                      -9-
<PAGE>

NOTE 6 -- 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 JUNE 30,          
                                                    ---------------------------------------------------
                                                               1997                       1998    
                                                    ------------------------  -------------------------
                                                      BASIC        DILUTED        BASIC       DILUTED  
                                                    -----------  -----------  ------------  -----------
<S>                                                 <C>          <C>          <C>           <C>
Net loss as reported..............................  $ (7,002)     $(7,002)       $(1,968)      $(1,968)
                                                    -----------  -----------  ------------  -----------
                                                    -----------  -----------  ------------  -----------
Weighted average common shares outstanding .......    58,635       58,635         58,680        58,680
                                                    -----------  -----------  ------------  -----------
                                                    -----------  -----------  ------------  -----------
Net loss per common share.........................  $   (.12)     $  (.12)       $  (.03)      $  (.03)
                                                    -----------  -----------  ------------  -----------
                                                    -----------  -----------  ------------  -----------
</TABLE>

<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED JUNE 30,
                                                    ---------------------------------------------------
                                                               1997                       1998    
                                                    ------------------------  -------------------------
                                                      BASIC        DILUTED        BASIC       DILUTED  
                                                    -----------  -----------  ------------  -----------
<S>                                                 <C>          <C>          <C>           <C>
Net loss as reported..............................  $(11,317)     $(11,317)      $(1,761)      $(1,761)
                                                    -----------  -----------  ------------  -----------
                                                    -----------  -----------  ------------  -----------
Weighted average common shares outstanding .......    58,788        58,788        58,669        58,669
                                                    -----------  -----------  ------------  -----------
                                                    -----------  -----------  ------------  -----------
Net loss per common share.........................  $   (.19)     $   (.19)      $  (.03)      $  (.03)
                                                    -----------  -----------  ------------  -----------
                                                    -----------  -----------  ------------  -----------
</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 six months ended June 30, 1997 
and 1998 as they are antidilutive.  For both three and six month periods 
ended June 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 $352 net of taxes, to net income, due to 
the reduction in interest expense.  Options outstanding at June 30, 1997 and 
1998 were excluded due to their antidilutive nature.  Had such options been 
included, the weighted average shares would have increased by 886 and 1,204 
for the three and six month periods ended June 30, 1997, respectively, and 
increased by 1,807 and 1,687 for the three and six months ended June 30, 
1998, respectively.

NOTE 7 -- 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

                                       -10-
<PAGE>

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 twelve 
occasions removed products from the market that were found not to meet 
acceptable 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.  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.  
In the third quarter of 1998, the Company will initiate 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. 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 QUI TAM lawsuit filed by a former IMED 
employee in the United States District Court for the Northern District of 
Illinois. On November 15, 1996, an amended complaint was filed which alleges 
fraud in the inducement, breach of employment contract, common law fraud and 
violations of the Federal False Claims Act and Medicare Fraud and Abuse Act. 
To date, the United States has declined to intervene in this action. The 
Company believes it has sufficient defenses to all claims by the plaintiff. 

                                       -11-
<PAGE>

However, there can be no assurance that the Company will successfully defend 
all claims made in this lawsuit and the failure of the Company to prevail in 
this lawsuit could have a material adverse effect on the Company's 
operations, financial condition and cash flows.

The Company was recently informed that on April 20, 1998, Becton Dickinson 
and Company ("Becton") filed a complaint (the "Complaint") in the United 
States District Court for the District of Utah alleging that the Company's 
SmartSite Needle Free System infringes certain patents licensed to Becton.  
The Complaint has not yet been served on the Company and the Company does not 
know whether or not the Complaint will be timely served.  However, if the 
Complaint is timely served, the Company intends to vigorously defend any 
claim brought against it with respect to this matter.  There can be no 
assurance that the court would find in the Company's favor if the Complaint 
were to be pursued or that if the court were to find that the Company's 
SmartSite Needle Free System infringes the patents licensed to Becton that 
such finding would not have a material adverse effect on the business, 
financial condition, results of operations or cash flows of the Company.

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 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.  The Company has not been informed by 
Cal Pacifico or Customs 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 

                                       -12-
<PAGE>

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.

                                       -13-
<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 Company's results of operations have been affected by 
the cost containment pressures applicable to health care providers. 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.

                                       -14-

<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 ENDED JUNE 30,   SIX  MONTHS ENDED JUNE 30,
                                                            ---------------------------   --------------------------
                                                                1997           1998            1997         1998
                                                            ------------   ------------   -------------  -----------
<S>                                                       <C>              <C>           <C>           <C>
Sales..................................................        100.0%          100.0%         100.0%       100.0%
Cost of sales..........................................         53.8            51.3           55.5          51.4
                                                              -------         -------        -------        ------
Gross margin...........................................         46.2%           48.7%          44.5%        48.6%
Selling and marketing expenses.........................         18.6            18.9           18.8          19.3
General and administrative expenses....................         11.0            10.6           11.1          11.0
Research and development expenses......................          4.7             5.1            4.8           5.1
Purchased in-process research and development                      -             6.1              -           3.1
Integration and other non-recurring charges............         13.9               -            9.3             -
Lease interest income..................................          1.2             1.2            1.3           1.3
                                                              -------         -------        -------        ------
Income from operations.................................         (0.8)            9.2            1.8          11.4
Interest expense.......................................        (12.5)          (11.7)         (12.8)        (12.3)
Other, net.............................................          (.1)            (.3)             -           (.3)
                                                              -------         -------        -------        ------
Loss before income taxes...............................        (13.4)           (2.8)         (11.0)         (1.2)
Benefit from income taxes..............................         (5.4)            (.6)          (4.3)          (.2)
                                                              -------         -------        -------        ------
Net loss...............................................        (8.0%)          (2.2%)          (6.7)          (1.0)
                                                              -------         -------        -------        ------
                                                              -------         -------        -------        ------
Other Data:
     Adjusted EBITDA...................................        23.3%           24.3%          22.2%          23.8%

</TABLE>

<TABLE>
<CAPTION>

                                                            THREE MONTHS ENDED JUNE 30,  SIX  MONTHS ENDED JUNE 30,
                                                            ---------------------------  --------------------------
                                                                1997           1998           1997          1998
                                                            ------------  -------------  -------------   ----------
                                                                  (IN THOUSANDS)               (IN THOUSANDS)
<S>                                                      <C>          <C>             <C>             <C>
Adjusted EBITDA (1)....................................   $    20,560    $    22,032    $    37,822     $  42,224
Inventory purchase price allocation adjustment (2)                  -              -         (1,607)            -
Integration and other non-recurring expense............       (12,247)             -        (15,899)            -
Depreciation and amortization (3)......................        (9,038)        (8,188)       (17,323)      (16,472)
Purchased in-process research and development (4)                   -         (5,534)             -        (5,534)
Interest income........................................           227             85            385           147
Interest expense.......................................       (11,002)       (10,639)       (21,695)      (21,795)
Other, net.............................................          (302)          (324)          (400)         (681)
(Provision for) benefit from income taxes..............         4,800            600          7,400           350
                                                              -------         -------        -------        ------

Net income (loss)......................................   $    (7,002)   $    (1,968)   $   (11,317)     $ (1,761)
                                                              -------         -------        -------        ------
                                                              -------         -------        -------        ------

</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 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

                                       -15-

<PAGE>

       
       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 to its estimated fair value on
       the Merger date which was charged to cost of sales during the first
       quarter of 1997.

(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 and Caesarea 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 Ended June 30,   Six Months Ended June 30,
                                                             ---------------------------   -------------------------
                                                                1997           1998           1997          1998
                                                             -----------   -------------   ------------  -----------
                                                                  (in millions)                   (in millions)
<S>                                                        <C>          <C>            <C>           <C>

U.S. sales................................................  $   55.4       $    57.0      $   106.8       $ 109.5
International sales.......................................      32.7            33.7           63.3          68.1
                                                            --------       ---------      ---------       -------
     Total sales..........................................  $   88.1       $    90.7      $   170.1       $ 177.6
                                                            --------       ---------      ---------       -------
                                                            --------       ---------      ---------       -------

</TABLE>

For purposes of this discussion and analysis, the three months ended June 30,
1997 and 1998 are referred to as Second Quarter 1997 and Second Quarter 1998,
respectively, and the six months ended June 30, 1997 and 1998 are referred to as
1997 and 1998, respectively.

Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1998

SALES
Sales increased $2.6 million during Second Quarter 1998 as compared to Second
Quarter 1997. International sales increased $1.0 million, or 3.2% while United
States sales increased $1.6 million, or 2.8%. The increase in international
sales is primarily due to increases in drug infusion disposable administration
set revenue of $1.0 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 Second
Quarter 1997, translation of Second Quarter 1998 international sales were
adversely impacted by $1.2 million. The increase in U.S. sales in Second Quarter
1998 as compared to Second Quarter 1997 is primarily due to increases in drug
infusion disposable administration set revenue of $2.0 million and patient
monitoring revenue of $0.6 million. These increases were offset by a decrease in
drug infusion instrument revenue of $1.0 million.

GROSS MARGIN
The gross margin percentage increased from 46.2% in Second Quarter 1997 to 48.7%
in Second Quarter 1998 primarily due to increased sales of higher margin
disposable administration sets as well as stable pricing and continued benefits
realized from ongoing cost reduction efforts.

                                       -16-

<PAGE>

SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased $0.7 million, or 4.2%, during Second
Quarter 1998 as compared to Second Quarter 1997. As a percentage of sales,
selling and marketing expenses increased from 18.6% in Second Quarter 1997 to
18.9% in Second Quarter 1998. Domestic expenses decreased by $0.8 million, or
7.8%, from Second Quarter 1997 due to lower commissions, and personnel costs.
International expenses increased $1.5 million, or 24.2%, from Second Quarter
1997. These increases were due to increases in personnel and investment in
international direct operations in Italy and Norway during the latter part of
1997.

GENERAL AND ADMINISTRATIVE EXPENSES
Second Quarter 1998 general and administrative expenses was consistent with 
Second Quarter 1997. As a percentage of sales, general and administrative 
expenses decreased from 11.0% in 1997 to 10.6% in 1998. Domestic expenses 
decreased $1.4 million due to lower consulting and legal fees. International 
expenses increased by $1.3 million, or 100.0%, 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 $0.5 million, or 
13.0%, during Second Quarter 1998 as compared to Second Quarter 1997 
primarily due to 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
The Company incurred $12.2 million in costs to integrate the IMED and IVAC 
operations during 1997.  These costs are in addition to restructuring and 
integration charges of $15.3 million recorded in the fourth quarter of 1996. 
The Second Quarter 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 
dispute settlement and related costs of $4.1 million, information systems 
conversion costs of $1.1 million and other integration costs of $2.5 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
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.

INCOME FROM OPERATIONS
Income from operations increased $9.0 million during Second Quarter 1998 as 
compared to Second Quarter 1997 primarily due to increased sales and gross 
margin in Second Quarter 1998 and to the Second Quarter 1997 operating 
results including significant integration charges, as discussed above which 
were not incurred in Second Quarter 1998.

                                      -17-
<PAGE>

ADJUSTED EBITDA

Adjusted EBITDA increased $1.5 million during Second Quarter 1998 as compared 
to Second Quarter 1997. As a percentage of sales, Adjusted EBITDA increased 
from 23.3%, or $20.6 million, for Second Quarter 1997 to 24.3%, or $22.0 
million, for Second 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 decreased $0.4 million during Second Quarter 1998 primarily 
due to reduced interest rates on the Company's bank credit facility resulting 
from an amendment to such debt agreement during the Second Quarter of 1998 
(see Liquidity and Capital Resources).

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998

SALES
Sales increased $7.6 million during 1998 as compared to 1997. International
sales increased $4.8 million, or 7.6% while United States sales increased $2.8
million, or 2.6%. The increase in international sales is primarily due to
increases in drug infusion instrument revenue of $1.8 million and drug infusion
disposable administration set revenue of $2.1 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 international sales were
adversely impacted by $2.6 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 $3.3 million and patient monitoring revenue of
$1.3 million. These increases were offset by a decrease in drug infusion
instrument revenue of $1.8 million.

GROSS MARGIN
The gross margin percentage increased from 44.5% in 1997 to 48.6% 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 46.9%. The improvement over 1997 is due to
increased sales of higher margin disposable administration sets as well as the
benefits realized from ongoing cost reduction efforts and purchasing synergies.

SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased $2.3 million, or 7.3%, during 1998 as
compared to 1997. As a percentage of sales, selling and marketing expenses
increased from 18.8% in 1997 to 19.3% in 1998. Domestic expenses decreased by
$0.3 million, or 1.6%, from 1997 due primarily to lower commissions earned on
instrument sales. International expenses increased $2.6 million, or 20.1%, from
1997. These increases were due to increases in personnel and investment in
international direct operations in Italy and Norway during the latter part of
1997.

                                       -18-

<PAGE>

GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $0.6 million, or 3.2%, during 
1998 as compared to 1997. As a percentage of sales, general and 
administrative expenses decreased from 11.1% in 1997 to 11.0% in 1998. 
Domestic expenses decreased $1.1 million due to decreases in legal and 
consulting fees. International expenses increased by $1.7 million, or 54.8%, 
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 $0.8 million, or 9.9%,
during 1998 as compared to 1997 primarily due to 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
The Company incurred $15.9 million in costs to integrate the IMED and IVAC 
operations during 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 conversion 
costs of $1.6 million, management consulting fees of $1.4 million, severance 
of $1.3 million and other integration costs of $3.0 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
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.

INCOME FROM OPERATIONS
Income from operations increased $17.2 million during 1998 as compared to 1997
primarily due to improved sales and gross margins and to the 1997 operating
results including significant integration charges and expenses related to the
field correction on the Gemini pumps as discussed above which were not incurred
in 1998.

ADJUSTED EBITDA
Adjusted EBITDA increased $4.4 million during 1998 as compared to 1997. As a
percentage of sales, Adjusted EBITDA increased from 22.2%, or $37.8 million, for
1997 to 23.8%, or $42.2 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 

                                       -19-

<PAGE>

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 $0.1 million during 1998 primarily due to a higher
average balance on the Company's revolving credit facility in the first quarter
of 1998, partially offset by reduced interest rates on the Company's bank credit
facility resulting from an amendment to such debt agreement during the Second
Quarter of 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 to 
be to fund capital expenditures and strategic acquisitions and to pay debt 
service on outstanding indebtedness.

At June 30, 1998, the Company's outstanding indebtedness was $432.3 million, 
which includes $192.9 million of bank term debt under the credit facility and 
$200.0 million of Senior Subordinated Notes due 2006 (the "Notes"), which 
were issued in connection with the Merger.  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 June 30, 1998 would result in 
additional annual interest expense of approximately $1.0 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 June 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.  At 
June 30, 1998, $20.3 million in borrowings and $0.5 million under letters of 
credit were outstanding under this line of credit and $29.2 million was 
available.

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, increased the revolving credit  
facility to $60 million and provided the Company an additional $30 million 
under the Tranche D term debt.  The Company used the $30 million term debt 
borrowing, along with approximately $3 million from the revolving credit 
line, to fund the 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 

                                      -20-
<PAGE>

on February 1 and August 1. Upon receipt of the net proceeds from the Senior 
Discount Notes, ALARIS Medical paid its remaining obligations to the 
Instromedix shareholders and contributed the remaining proceeds 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.

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 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 amortization of the Company's indebtedness is $6.0 million for the 
remaining six months of 1998 and $15.8 million and $14.0 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 Second Quarter 1998, the Company made cash payments of approximately 
$0.5 million related to merger and integration costs accrued at December 31, 
1997. During the quarter ended June 30, 1997 the Company made cash payments 
of approximately $2.5 million related to merger and integration costs accrued 
at December 31, 1996, as well as payments of approximately $5.8 million for 
integration costs expensed during the second quarter of 1997.

During the Second Quarter of 1998 the Company made capital expenditures of 
approximately $5.4 million and anticipates it will make capital expenditures 
of approximately $30.0 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 or new 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 the remaining net proceeds 
from the Senior Discount Notes, sufficient at least through the next twelve 
months to fund its operations, make planned capital expenditures and make 
required payments of principal and interest under its credit facility and 
interest on the Notes; however, the Company may not generate sufficient cash 
flow from operations to repay the Notes at maturity, to make scheduled 
payments on the Senior Discount Notes or to repay the Senior Discount Notes 
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. In addition, the Company's ability to fund 

                                      -21-
<PAGE>

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 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.

YEAR 2000
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 
while the Company's existing information system for its domestic operations 
does not properly recognize and process transactions dated in the year 2000.  
Additionally, certain aspects of the Company's domestic information system 
can not properly associate with transactions and activities dated subsequent 
to 1998. The Company successfully implemented certain financial applications 
of the new system and began utilizing such applications at the beginning of 
1998. The Company is in the final phase of testing its new system for the 
remainder of it domestic business processes and expects to complete the 
conversion to the new system by the end of the third quarter of 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 is also 
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.  

Due to the inherent complexities in converting enterprise-wide information 
systems, there can be no assurance that the Company's domestic information 
system conversion will be completed in the planned time frame.  If the 
Company were not able to successfully implement the new system prior to 1999, 
the Company's ability to take orders, ship product, invoice for shipments and 
collect cash would be adversely impacted.  This could result in a material 
adverse impact on the Company's financial condition, results of operations 
and cash flows.  Additionally, 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.

During fiscal year 1997 and the six months ended June 30, 1998, the Company 
made combined capital and operating expenditures of approximately $6.0 
million and $2.3 million, respectively, related to the new enterprise-wide 
information system. To complete the identified phases of the project, the 
Company 

                                      -22-
<PAGE>

anticipates additional expenditures for the remainder of 1998 and for 
1999 of approximately $4.4 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 June 30, 1997 and 1998 was 
$7.8 million and $5.5 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 loss of approximately $0.2 
million during Second Quarter 1998. 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 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.

                                      -23-
<PAGE>


                               PART II
                         OTHER INFORMATION
-------------------------------------------------------------------------------


ITEM 1.  LEGAL PROCEEDINGS
 
See Note 7 to the Condensed Consolidated Financial Statements.


                                      -24-
<PAGE>


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

2.1(a)  --  Agreement to Purchase Selected Assets dated May 18, 1998 among
            ALARIS Medical Systems, Inc., Invacare Corporation and Patient
            Solutions, Inc.
        
2.1(b)  --  Agreement to furnish to the Securities and Exchange Commission, upon
            request, omitted exhibits from the Agreement to Purchase Selected
            Assets dated May 18, 1998.
        
2.2  --     Agreement and Plan of Merger dated June 24, 1998 by and among ALARIS
            Medical, Inc., ALARIS Medical Systems, Inc., Herbert J. and Shirley
            L. Semler, Instromedix, Inc. and the shareholders of Instromedix,
            Inc.  (Incorporated by reference to Exhibit 2 to ALARIS Medical,
            Inc.'s report on Form 8-K dated July 30, 1998.)
        
10.1(a) --  Agreement dated May 7, 1998 among ALARIS Medical Systems, Inc. and
            Caesarea Medical Electronics Limited.
        
10.1(b) --  Agreement to furnish to the Securities and Exchange Commission, upon
            request, omitted exhibits and schedules from the Agreement dated 
            May 7, 1998.
        
27   --     Financial Data Schedule

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

(b)   Reports on Form 8-K

None.


                                      -25-
<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:   August 11, 1998             By: /s/ DOUGLAS C. JEFFRIES  
                                                ------------------------------
                                                Douglas C. Jeffries
                                                Vice President and Chief 
                                                  Financial Officer
     
     
                                      -26-

<PAGE>

                                  EXHIBIT INDEX
-------------------------------------------------------------------------------



Exhibit                                                                         
  No.                                                                           

 2.1(a) --  Agreement to Purchase Selected Assets dated May 18, 1998 among
            ALARIS Medical Systems, Inc., Invacare Corporation and Patient
            Solutions, Inc.
        
 2.1(b) --  Agreement to furnish to the Securities and Exchange Commission, upon
            request, omitted exhibits from the Agreement to Purchase Selected
            Assets dated May 18, 1998.
        
 2.2    --  Agreement and Plan of Merger dated June 24, 1998 by and among ALARIS
            Medical, Inc., ALARIS Medical Systems, Inc., Herbert J. and Shirley
            L. Semler, Instromedix, Inc. and the shareholders of Instromedix,
            Inc.  (Incorporated by reference to Exhibit 2 to ALARIS Medical,
            Inc.'s report on Form 8-K dated July 30, 1998.)
        
10.1(a) --  Agreement dated May 7, 1998 among ALARIS Medical Systems, Inc. and
            Caesarea Medical Electronics Limited.

10.1(b) --  Agreement to furnish to the Securities and Exchange Commission, upon
            request, omitted exhibits and schedules from the Agreement dated May
            7, 1998.

27      --  Financial Data Schedule

                                      -27-