<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, 1997 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) 566-0426
--------------------------------------------------------------------------------
                (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 5, 1997, 59,030,103 shares of Registrant's Common Stock were 
outstanding.


                                    Page 1 of 23

<PAGE>

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


                                       INDEX


PART I.  FINANCIAL INFORMATION


    Item 1 - Financial Statements:
                                                                          Page
                                                                          ----
         Condensed consolidated balance sheet at
         December 31, 1996 and June 30, 1997..............................  3

         Condensed consolidated statement of operations for the 
         three and six months ended June 30, 1996 and 1997................  4

         Condensed consolidated statement of cash flows for the
         six months ended June 30, 1996 and 1997..........................  5

         Condensed consolidated statement of changes in
         stockholders' equity for the period from
         December 31, 1996 to June 30, 1997...............................  6

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


    Item 2 - Management's Discussion and Analysis of Financial
         Condition and Results of Operations..............................  11



PART II. OTHER INFORMATION


    Item 1 - Legal Proceedings............................................  20

    Item 6 - Exhibits and Reports on Form 8-K.............................  21




                                       
                                     - 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
                                                        DECEMBER 31,  JUNE 30,
                                                            1996        1997   
                                                        -----------   --------
                                                                    (Unaudited)
Current assets:
  Cash..................................................   $  12,084  $   4,012
  Restricted cash and investment securities.............       2,332          -
  Receivables, net......................................      87,880     77,193
  Inventories...........................................      58,976     65,323
  Prepaid expenses and other current assets.............      21,582     19,832
                                                           ---------  ---------
     Total current assets...............................     182,854    166,360
                                                          
Net investment in sales-type leases, less                 
  current portion.......................................      27,276     31,334
Property, plant and equipment, net......................      56,628     55,683
Other non-current assets................................      18,107     18,228
Intangible assets, net..................................     308,517    295,865
                                                           ---------  ---------
                                                          
                                                           $ 593,382  $ 567,470
                                                           ---------  ---------
                                                           ---------  ---------
                                                          
                     LIABILITIES AND STOCKHOLDERS' EQUITY                    
                                                          
Current liabilities:                                      
  Current portion of long-term debt.....................   $   3,963  $   9,265
  Accounts payable......................................      25,812     24,347
  Accrued expenses and other current liabilities........      50,196     55,178
  Accrued restructuring.................................      15,098      7,373
                                                           ---------  ---------
     Total current liabilities..........................      95,069     96,163
                                                           ---------  ---------
Long-term debt..........................................     436,130    434,595
Other non-current liabilities...........................      16,130      5,642
                                                           ---------  ---------
     Total non-current liabilities......................     452,260    440,237
                                                           ---------  ---------
Contingent liabilities and commitments (Notes 4 and 5)

Common stock and other stockholders' equity:
  Common stock, authorized 75,000 shares at 
    $.01 par value; issued and outstanding  - 
    58,977 shares and 59,062 shares at December 31, 
    1996 and June 30, 1997, respectively................         589        591
  Capital in excess of par value........................     147,840    147,999
  Accumulated deficit...................................    (101,704)  (113,021)
  Treasury stock........................................        (734)    (2,027)
  Other equity..........................................          62     (2,472)
                                                           ---------  ---------
     Total common stock and other stockholders' equity..      46,053     31,070
                                                           ---------  ---------

                                                           $ 593,382  $ 567,470
                                                           ---------  ---------
                                                           ---------  ---------


             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             SIX MONTHS ENDED     
                                                                               JUNE 30,                       JUNE 30,             
                                                                        ----------------------        ----------------------
                                                                          1996          1997            1996          1997    
                                                                        -------       --------        -------       --------
<S>                                                                     <C>           <C>             <C>           <C>
Sales.................................................................  $28,216       $ 88,072        $54,091       $170,067   
Cost of sales.........................................................   15,756         47,361         29,651         94,331   
                                                                        -------       --------        -------       --------

  Gross margin........................................................   12,460         40,711         24,440         75,736   
                                                                        -------       --------        -------       --------
                                                                                                                               
Selling and marketing expense.........................................    4,655         16,414          8,862         31,909   
General and administrative expense....................................    2,579          9,681          5,545         18,935   
Research and development expense......................................    1,977          4,123          3,789          8,191   
Integration and other non-recurring expense...........................        -         12,247              -         15,899   
                                                                        -------       --------        -------       --------
                                                                                                                               
  Total operating expense.............................................    9,211         42,465         18,196         74,934   
                                                                        -------       --------        -------       --------
                                                                                                                               
Lease interest income.................................................      600          1,029          1,200          2,191   
                                                                        -------       --------        -------       --------
                                                                                                                               
  Income (loss) from operations.......................................    3,849           (725)         7,444          2,993   
                                                                        -------       --------        -------       --------
                                                                                                                               
Other income (expense):                                                                                                        
  Interest income.....................................................      357            227            714            385   
  Interest expense....................................................   (2,184)       (11,002)        (4,399)       (21,695)  
  Other, net..........................................................      304           (302)           306           (400)  
                                                                        -------       --------        -------       --------
                                                                                                                               
  Total other expense.................................................   (1,523)       (11,077)        (3,379)       (21,710)  
                                                                        -------       --------        -------       --------
                                                                                                                               
Income (loss) before income taxes.....................................    2,326        (11,802)         4,065        (18,717)  
Provision for (benefit from) income taxes.............................    1,176         (4,800)         2,056         (7,400)  
                                                                        -------       --------        -------       --------
                                                                                                                               
Net income (loss).....................................................    1,150         (7,002)         2,009        (11,317)  
Dividends on mandatorily redeemable preferred stock ..................      163              -            325              -   
                                                                        -------       --------        -------       --------
                                                                                                                               
  Net income (loss) attributable to common stock......................  $   987       $ (7,002)       $ 1,684       $(11,317)  
                                                                        -------       --------        -------       --------
                                                                        -------       --------        -------       --------
                                                                                                                               
  Net income (loss) per common share assuming no dilution.............  $   .06       $   (.12)       $   .10       $   (.19)  
                                                                        -------       --------        -------       --------
                                                                        -------       --------        -------       --------
                                                                                                                               
  Net income (loss) per common share assuming full dilution...........  $   .03       $   (.12)       $   .06       $   (.19)  
                                                                        -------       --------        -------       --------
                                                                        -------       --------        -------       --------
                                                                                                                               
Weighted average common shares outstanding assuming no dilution.......   16,402         58,635         16,432         58,788   
                                                                        -------       --------        -------       --------
                                                                        -------       --------        -------       --------
                                                                                                                               
Weighted average common shares outstanding assuming full dilution.....   42,593         58,635         42,589         58,788   
                                                                        -------       --------        -------       --------
                                                                        -------       --------        -------       --------

</TABLE>

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

                                        - 4 -
<PAGE>
 
                        ALARIS MEDICAL, INC. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
                               (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------


                                                              SIX MONTHS ENDED 
                                                                   JUNE 30,
                                                           ---------------------
                                                             1996         1997  
                                                           --------     -------
Net cash provided by (used in) operating activities.....   $  6,656     $(2,776)
                                                           --------     -------

Cash flows from investing activities:
  Net decrease in restricted cash and investments.......     12,444       2,332
  Net capital expenditures..............................     (2,756)     (9,717)
  Payments for product distribution rights..............     (1,503)          -
  Proceeds from sale of investments.....................        154           -
  Return of capital by investee.........................          -         148
                                                           --------     -------
                                                            
Net cash provided by (used in) investing activities.....      8,339      (7,237)
                                                           --------     -------
                                                            
Cash flows from financing activities:                       
  Net repayments under former credit facilities.........     (1,973)          -
  Principal payments on long-term debt..................       (322)     (3,622)
  Purchase of IMED common stock warrants................    (12,500)          -
  Purchase of treasury stock............................          -      (1,293)
  Proceeds under revolving credit facility..............          -      10,300
  Repayments under revolving credit facility............          -      (3,000)
  Debt issue costs......................................          -        (429)
  Proceeds from exercise of stock options...............         15         161
                                                           --------     -------
                                                            
Net cash (used in) provided by financing activities.....    (14,780)      2,117
                                                           --------     -------
                                                            
Effect of exchange rate changes on cash.................         31        (176)
                                                           --------     -------
                                                            
Net increase (decrease) in cash.........................        246      (8,072)
Cash at beginning of period.............................      1,862      12,084 
                                                           --------     -------
                                                            
Cash at end of period...................................   $  2,108     $ 4,012
                                                           --------     -------
                                                           --------     -------


             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>
                                   COMMON STOCK     CAPITAL IN                   TREASURY STOCK 
                                  ---------------   EXCESS OF    ACCUMULATED   ------------------       OTHER
                                  SHARES   AMOUNT   PAR VALUE      DEFICIT     SHARES     AMOUNT        EQUITY        TOTAL    
                                  ------   ------   ---------    -----------   ------     -------       -------     ---------
<S>                               <C>      <C>      <C>          <C>           <C>        <C>           <C>         <C>
Balance at December 31, 1996      58,977    $589     $147,840     $(101,704)      83      $  (734)      $    62     $  46,053

Exercise of stock options             85       2          159                                                             161

Purchase of treasury stock                                                       370       (1,293)                     (1,293)

Translation adjustment                                                                                   (2,534)       (2,534)

Net loss for the period                                             (11,317)                                          (11,317)
                                  ------    ----     --------     ---------      ---      -------       -------      --------

Balance at June 30, 1997          59,062    $591     $147,999     $(113,021)     453      $(2,027)      $(2,472)     $ 31,070
                                  ------    ----     --------     ---------      ---      -------       -------      --------
                                  ------    ----     --------     ---------      ---      -------       -------      --------

</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-TM- Medical, Inc., formerly Advanced Medical, Inc. ("ALARIS Medical"), 
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.  Accordingly, the interim 1996 operating results and cash 
flows exclude those of the acquired company and are not comparable to the 
interim 1997 operating results and cash flows.

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, 1997, and 
the results of its operations and its cash flows for the six months ended 
June 30, 1996 and 1997.

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 and 
dilutive common stock equivalents using the treasury stock method. The 
Company's net income (loss) per common share assuming full dilution is 
computed using the weighted average number of common shares outstanding plus 
dilutive common stock equivalents using the treasury stock method at the 
higher of the average or ending market price during the reporting period and 
non-common stock equivalents. The Company's non-common stock equivalents for 
the three months ended June 30, 1996 consisted of convertible promissory 
notes issued to Decisions Incorporated ("Decisions"), a corporation wholly 
owned by the Company's principal stockholder. Since conversion was assumed 
from the beginning of the period or date of issuance, if later, net income 
attributable to common stock for the three months and six months ended June 
30, 1996 has been increased by $412 and $824, respectively, for the interest 
expense (net of tax) on the convertible promissory notes.  The convertible 
promissory notes issued to Decisions were all converted to common stock in

                                     -7-

<PAGE>

connection with the Merger (Note 2). Net loss per common share assuming no 
dilution and full dilution is the same for June 30, 1997, as the Company 
experienced a net loss for the three months and six months ended June 30, 
1997. 

In March 1997, the Financial Accounting Standards Board issued Statement of 
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share."  SFAS No. 
128 will be adopted by the Company as required in the fourth quarter of 
fiscal 1997.  Upon adoption of SFAS No. 128, the Company will present basic 
earnings per share and diluted earnings per share.  Basic earnings per share 
will be computed based on the weighted average number of shares outstanding 
during the period.  Diluted earnings per share will be computed based on the 
weighted average number of shares outstanding during the period increased by 
the effect of all dilutive potential common shares, computed using the 
treasury stock method, that were outstanding during the period.  Using this 
standard, basic and diluted earnings per share would be the same as primary 
and fully diluted earnings per share for the three months and six months 
ended June 30, 1996 and 1997.

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. 

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 by ALARIS Medical 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--INVENTORIES 

Inventories comprise the following:

                              DECEMBER 31,    JUNE 30,
                                 1996           1997
                              ------------    --------
  Raw materials . . . . . . .  $  24,711      $ 31,321
  Work-in-process . . . . . .      9,622         8,711
  Finished goods. . . . . . .     24,643        25,291
                              ------------    --------
                               $  58,976      $ 65,323
                              ------------    --------
                              ------------    --------

                                     -8-

<PAGE>

NOTE 4--CONTRACT SETTLEMENT

MAQUILADORA CONTRACT DISPUTE. On June 26, 1997, the Company entered into a 
settlement agreement which resolved its contract dispute with Cal Pacifico of 
California and affiliated entities (collectively, "Cal Pacifico"), the 
operator of the Company's two maquiladora assembly plants in Tijuana, Mexico. 
For over eight years, the Company has assembled disposable administration 
sets at these two plants, which utilize more than 1,200 workers employed by 
Cal Pacifico, under a contract with Cal Pacifico. The dispute originated in 
April 1997 when the Company, in accordance with the terms of such contract, 
informed Cal Pacifico that it would be terminating its contractual 
arrangements effective August 1, 1997.  Cal Pacifico objected to such 
notification and proposed the systematic termination of the work force.  In 
response to such objection, the Company on June 6, 1997 hired substantially 
all of the workers at the plants directly.  On June 11, 1997, Cal Pacifico 
locked the Company's administrative personnel and production employees out of 
the plants and would not allow the Company access to its production equipment 
or inventory.  As a result of the settlement agreement, the plants resumed 
full operations on June 27, 1997.  The Company expects to directly operate 
these plants before the end of the third quarter of 1997.

The Company recorded a non-recurring charge of $4.1 million during the 
quarter ended June 30, 1997 relating to this settlement and the legal fees 
and other costs associated therewith.  As a result of the manufacturing 
shutdown, sales of the Company's disposable administration sets during June 
1997 were approximately $1.5 million below that of previous months and new 
orders for infusion pumps were not filled, resulting in a North American 
infusion pump sales backlog of approximately $5.5 million at June 30, 1997.  
During the contract dispute, the Company implemented interim assembly plans 
for disposable administration sets at its facilities in Creedmore, North 
Carolina and San Diego, California.  The Company will continue to use these 
facilities during the third quarter of 1997 in order to replenish its 
inventory.  While production costs of disposable administration sets at these 
facilities are greater than in Mexico, the incremental volume of the 
disposable administration sets to be produced outside of Mexico is not 
anticipated to have a significant impact on the Company's gross margins.

UNITED STATES CUSTOMS SERVICE LIABILITY. 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"). Since Cal 
Pacifico was the 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 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, the Company paid Cal Pacifico $550, which is to be applied 
toward Cal Pacifico's payment of Disputed Amounts. The $550 payment by 
the Company is to be credited toward any portion of the Disputed Amounts 
which the arbitrator determines the Company owes to Cal Pacifico. 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.
                                     -9-

<PAGE>

NOTE 5--CONTINGENCIES AND LITIGATION

FIELD CORRECTION

The Company will initiate a voluntary field correction of approximately 
50,000 of its Gemini model 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 can 
cause the battery to overheat.  Such overheating could result in product 
failure and discharge of hydrogen gas which may accumulate within the 
instrument's case. As an interim measure, the Company has advised its 
customers of simple precautions that can be taken to minimize the potential 
for an adverse incident pending completion of the field correction. The 
Company is not aware of any injuries sustained in known battery overcharging 
incidents.

As a result of this decision,  the Company recorded a charge of $2.5 million 
to cost of sales during the first quarter of 1997.  Based on management's 
current understanding of these incidents, the Company believes it has 
adequately accrued for this matter.  However, since the Company's analysis of 
this matter is preliminary, there can be no assurances that it can be 
resolved for an amount consistent with management's estimated cost.   

LITIGATION

The Company is a defendant in a lawsuit which alleges infringement of two 
patents by reason of certain activities including the sale of disposable 
probe covers for use with tympanic thermometers. The lawsuit seeks injunctive 
relief, treble damages and the recovery of costs and attorney fees. The 
discovery phase of the lawsuit has recently commenced. The Company is 
currently unable to quantify its exposure to the lawsuit; however, the 
Company believes it has sufficient defenses to all claims, including the 
defenses of noninfringement and invalidity. However, there can be no 
assurance that the Company will successfully defend all claims 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 also a defendant in various actions, claims, and legal 
proceedings arising from its normal business operations. Management believes 
the Company has 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.



                                     -10-

<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.

As a result of the Merger on November 26, 1996, the operating results 
reported for the three and six months ended June 30, 1997 are not comparable 
to 1996. The 1996 operating results and cash flows represent those of 
Advanced Medical and IMED.

The Company sells and services infusion systems primarily in the United 
States, Western Europe, Canada, Australia, Latin America and the Middle East. 
The Company generates revenues from the sale and/or lease of infusion pumps 
and sales of associated proprietary disposable administration sets. 
Additionally, as a result of the Merger, the Company now generates revenue 
from the sale of vital signs measurement products.

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 new 
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 has increased in every year since 1993, primarily as a 
result of its growing installed base of infusion pumps. The Company's 
profitability is also 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 profitability in the future. Finally, the enactment of 
national health care reform or other legislation affecting payment mechanisms 
and health care delivery would affect the Company's future results of 
operations. Although the final form of any such legislation is not known, it 
is likely that any such legislation may impose limits on the number and type 
of medical procedures which may be performed and may restrict a provider's 
ability to select specific devices or products for use in administering care 
which, in turn, could adversely impact demand and/or pricing for the 
Company's infusion systems. It is impossible to predict the extent to which 
the Company may be affected by any such change in legislation. 

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected financial 
information expressed as a percentage of sales, as well as, pro forma second 
quarter 1996 and pro forma six months ended June 30, 1996 operating results 
in thousands of dollars.  The pro forma data is based on the historical 
operating results of Advanced Medical and IVAC Holdings, Inc., adjusted to 
give effect to the Merger as if it occurred on January 1, 1996.  The data 
excludes non-recurring charges related to the Merger, as well as, the 
operating results of River Medical, Inc., a subsidiary of IVAC which was 
divested prior to the consummation of the Merger.

                                     -11-

<PAGE>

The pro forma financial data is not necessarily indicative of the Company's 
results of operations that might have occurred had such transactions been 
completed at the beginning of the period specified, and do not purport to 
represent what the Company's consolidated results of operations might be for 
any future period.


<TABLE>
<CAPTION>

                                                THREE MONTHS ENDED JUNE 30,
                                 ----------------------------------------------------------
                                 AS REPORTED      PRO FORMA       PRO FORMA     AS REPORTED
                                     1996           1996             1996           1997
                                 -----------   ----------------   ----------    -----------
                                 (% OF SALES)  ($ IN THOUSANDS)        (% OF SALES)
<S>                              <C>           <C>                <C>           <C>

Sales . . . . . . . . . . . . .         100.0%        $ 86,803         100.0%         100.0%
Cost of sales . . . . . . . . .          55.8           47,774          55.0           53.8
                                    ---------        ---------     ---------      ---------
Gross margin. . . . . . . . . .          44.2%          39,029          45.0%          46.2%
Selling and marketing expense .          16.5           15,724          18.1           18.6
General and administrative 
  expense . . . . . . . . . . .           9.1            9,948          11.5           11.0
Research and development 
  expense . . . . . . . . . . .           7.0            4,645           5.4            4.7
Integration and other 
  non-recurring expense . . . .             -                -             -           13.9
Lease interest income . . . . .           2.0             1,181          1.4            1.2
                                    ---------        ---------     ---------      ---------
Income (loss) from operations .          13.6             9,893         11.4            (.8)
Interest expense. . . . . . . .          (7.7)          (10,159)       (11.7)         (12.5)
Other, net. . . . . . . . . . .           2.3               522           .6            (.1)
                                    ---------        ---------     ---------      ---------
Income (loss) before income 
  taxes . . . . . . . . . . . .           8.2               256           .3          (13.4)
Provision for (benefit from) 
  income taxes  . . . . . . . .           4.1               675           .8           (5.4)
                                    ---------        ---------     ---------      ---------
Net income (loss) . . . . . . .           4.1%           $ (419)         (.5%)         (8.0%)
                                    ---------        ---------     ---------      ---------
                                    ---------        ---------     ---------      ---------

OTHER DATA:
  Adjusted EBITDA . . . . . . .          20.7%          $18,369         21.2%          23.3%

<CAPTION>


                                                SIX MONTHS ENDED JUNE 30,
                                 ----------------------------------------------------------
                                 AS REPORTED      PRO FORMA       PRO FORMA     AS REPORTED
                                     1996           1996             1996           1997
                                 -----------   ----------------   ----------    -----------
                                 (% OF SALES)  ($ IN THOUSANDS)        (% OF SALES)
<S>                              <C>             <C>              <C>           <C>

Sales . . . . . . . . . . . .          100.0%    $   166,480           100.0%         100.0%
Cost of sales . . . . . . . .           54.8          89,096            53.5           55.5
                                    ---------        ---------     ---------      ---------
Gross margin. . . . . . . . .           45.2%         77,384            46.5%          44.5%
Selling and marketing 
  expense . . . . . . . . . .           16.4          31,128            18.7           18.8
General and administrative 
  expense . . . . . . . . . .           10.3          19,527            11.7           11.1
Research and development 
  expense . . . . . . . . . .            7.0           8,503             5.1            4.8
Integration and other 
  non-recurring expense . . .              -               -               -            9.3
Lease interest income . . . .            2.2           2,424             1.4            1.3
                                    ---------        ---------     ---------      ---------
Income from operations. . . .           13.7          20,650            12.4            1.8
Interest expense. . . . . . .           (8.1)        (20,551)          (12.3)         (12.8)
Other, net. . . . . . . . . .            1.9             633              .3              -
                                    ---------        ---------     ---------      ---------
Income (loss) before 
  income taxes  . . . . . . .            7.5             732              .4           (11.0)
Provision for (benefit from)
  income taxes  . . . . . . .            3.8           1,435              .8            (4.3)
                                    ---------        ---------     ---------      ---------
Net income (loss) . . . . . .            3.7%       $   (703)            (.4%)          (6.7%)
                                    ---------        ---------     ---------      ---------
                                    ---------        ---------     ---------      ---------

OTHER DATA:
  Adjusted EBITDA . . . . . .           21.0%       $ 36,848            22.1%           22.2%

</TABLE>

                                     -12-
<PAGE>


<TABLE>
<CAPTION> 

                                   THREE MONTHS ENDED JUNE 30,                 SIX MONTHS ENDED JUNE 30,
                             ---------------------------------------    ---------------------------------------
                             AS REPORTED    PRO FORMA    AS REPORTED    AS REPORTED    PRO FORMA    AS REPORTED
                                1996          1996           1997           1996          1996          1997
                             -----------    ----------   -----------    -----------    ----------   -----------
                                          (IN THOUSANDS)                             (IN THOUSANDS)
<S>                          <C>            <C>          <C>            <C>            <C>          <C>
ADJUSTED EBITDA (1)           $   5,836     $   18,369   $   20,560      $  11,357     $   36,848    $   37,822
Inventory purchase price 
  allocation adjustment (2)           -              -            -              -              -        (1,607)
Integration and other non-
  recurring expense                   -              -      (12,247)             -              -       (15,899)
Depreciation and
   amortization (3)              (1,987)        (8,476)      (9,038)        (3,913)       (16,198)      (17,323)
Interest income                     357            218          227            714            327           385
Interest expense                 (2,184)       (10,159)     (11,002)        (4,399)       (20,551)      (21,695)
Other, net                          304            304         (302)           306            306          (400)
(Provision for) benefit
   from income taxes             (1,176)          (675)       4,800         (2,056)       (1,435)         7,400
                             ----------     ----------   ----------     -----------    ----------   -----------
  Net income (loss)           $   1,150       $   (419)   $  (7,002)      $  2,009       $   (703)   $  (11,317)
                             ----------     ----------   ----------     -----------    ----------   -----------
                             ----------     ----------   ----------     -----------    ----------   -----------




----------
</TABLE>

(1) Adjusted EBITDA represents income from operations before
    non-recurring non-cash purchase accounting charges, restructuring 
    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. Restructuring 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.
  
(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 1997.

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


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,
                             ---------------------------------------    ---------------------------------------
                             AS REPORTED    PRO FORMA    AS REPORTED    AS REPORTED    PRO FORMA    AS REPORTED
                                1996          1996           1997           1996          1996          1997
                             -----------    ----------   -----------    -----------    ----------   -----------
                                          (IN MILLIONS)                               (IN MILLIONS)
<S>                          <C>            <C>          <C>            <C>            <C>          <C>

U.S. sales                    $   22.5       $   57.1      $   55.4       $   42.7      $   109.0      $   106.8 
International sales                5.7           29.7          32.7           11.4           57.5           63.3
                             -----------    ----------   -----------    -----------    ----------   ------------
  Total sales                 $   28.2       $   86.8      $   88.1       $   54.1       $  166.5      $   170.1
                             -----------    ----------   -----------    -----------    ----------   ------------
                             -----------    ----------   -----------    -----------    ----------   ------------
</TABLE>





                                    -13-
<PAGE>

For purposes of this discussion and analysis, the three months ended June 30, 
1996 and 1997 are referred to as Second Quarter 1996 and Second Quarter 1997, 
respectively, and the six months ended June 30, 1996 and 1997 are referred to 
as 1996 and 1997, respectively.

THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997

SALES 
Sales increased $59.9 million during Second Quarter 1997 as compared to 
Second Quarter 1996 due to the Merger.  On a pro forma basis, sales increased 
$1.3 million, or 1.5%, during Second Quarter 1997 as compared to Second 
Quarter 1996. United States sales decreased $1.6 million, or 2.9%, on a pro 
forma basis while international sales increased $2.9 million, or 9.8%, on a 
pro forma basis.  The increase in international sales is partially due to the 
August 1996 repurchase of IMED product European distribution rights from 
Pharmacia & Upjohn, Inc. which has resulted in higher average selling prices 
for these products in 1997.  The decrease in U.S. sales during Second Quarter 
1997 as compared to Second Quarter 1996, on a pro forma basis, is primarily 
due to a decrease in the disposable administration set volume from 1996 as a 
result of the business interruption in Mexico during the second quarter of 
1997 (see Note 4 to the Condensed Consolidated Financial Statements).

GROSS MARGIN 
The gross margin percentage increased 2 percentage points, from 44.2% for 
Second Quarter 1996 to 46.2% for Second Quarter 1997, primarily due to 
favorable international margins due in part to the repurchase of European 
distribution rights from Pharmacia & Upjohn, Inc.  This was partially offset 
by increased amortization expenses resulting from the IVAC purchase price 
allocated to certain intangible assets.  Pro forma gross margin percentage 
for Second Quarter 1996 was 45.0% compared to 46.2% for Second Quarter 1997.

SELLING AND MARKETING EXPENSE
Selling and marketing expense increased $11.8 million during Second Quarter 
1997 primarily due to the Merger.  On a pro forma basis, selling and 
marketing expense increased approximately $0.7 million, or 4.4%, during 
Second Quarter 1997.  As a percentage of sales, on a pro forma basis, selling 
and marketing expense increased from 18.1% in Second Quarter 1996 to 18.6% in 
Second Quarter 1997 due partly to the addition of sales and marketing 
management personnel.  Domestic expense increased by $1.0 million, or 7.9%, 
from Second Quarter 1996. The increase in domestic selling and marketing 
expense was partially offset by decreased international expenses of $0.2 
million, or 4.9%.

GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased $7.1 million during Second 
Quarter 1997 primarily due to the Merger.  On a pro forma basis, general and 
administrative expense decreased by $0.3 million, or 2.7%, during Second 
Quarter 1997.  As a percentage of sales, on a pro forma basis, general and 
administrative expense decreased from 11.5% for Second Quarter 1996 to 11.0% 
for Second Quarter 1997 due to an increase in sales as well as Merger-related 
synergies at ALARIS Medical Systems including lower data processing and 
general insurance expense.

RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased approximately $2.1 million during 
1997 primarily due to the Merger.  On a pro forma basis, research and 
development expense decreased from $4.6 million, or 5.4% of sales, during 
Second Quarter 1996 to $4.1 million, or 4.7% of sales, for Second Quarter 
1997, primarily due to synergies realized in the Merger and realignment and 
prioritization of research and development projects.


                                      -14-

<PAGE>

INTEGRATION AND OTHER NON-RECURRING EXPENSE The Company incurred $12.2 
million in integration costs and other non-recurring expense during Second 
Quarter 1997.  These costs are in addition to restructuring and integration 
charges of $15.3 million recorded in the fourth quarter of 1996 and $3.7 
million recorded in the first quarter of 1997.  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 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 has 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.

INCOME (LOSS) FROM OPERATIONS
Income from operations decreased $4.6 million during Second Quarter 1997 
primarily due to the Merger.  On a pro forma basis, operating income 
decreased $10.6 million, from $9.9 million in Second Quarter 1996 to a loss 
of $.7 million in Second Quarter 1997, due primarily to the 1997 integration 
and other non-recurring expense.

ADJUSTED EBITDA
Adjusted EBITDA increased $14.7 million during Second Quarter 1997 compared 
to Second Quarter 1996 primarily due to the Merger.  On a pro forma basis, as 
a percentage of sales, Adjusted EBITDA increased from 21.2%, or $18.4 
million, for Second Quarter 1996 to 23.3%, or $20.6 million, for Second 
Quarter 1997 due to the reasons discussed above.  Adjusted EBITDA represents 
income from operations before non-recurring purchase accounting charges, 
restructuring 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. 
Restructuring 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 $8.8 million during Second Quarter 1997 compared 
to Second Quarter 1996 primarily due to the Merger.  In addition to interest 
on approximately $404.0 million of borrowings to finance the Merger and 
related debt refinancings, higher interest expense was incurred in Second 
Quarter 1997 due to IMED's $11.0 million purchase of the European 
distribution rights for IMED products in August 1996.  This increase in 
interest expense was offset by reductions in interest on $37.5 million of 
convertible debt which was converted to common stock in connection with the 
Merger as well as the redemption of $21.9 million of 15% subordinated 
debentures in December 1996.  On a pro forma basis, interest expense 
increased $0.8 million due to additional borrowings under the Company's 
revolving credit facility (see Liquidity and Capital Resources). The 
additional borrowings were used to pay for restructuring and integration 
costs associated with the Merger.


                                      -15-

<PAGE>

SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

SALES
Sales increased $116.0 million during 1997 as compared to 1996 due to the 
Merger.  On a pro forma basis, sales increased $3.6 million, or 2.2%, during 
1997 as compared to 1996.  United States sales decreased $2.2 million, or 
2.0%, on a pro forma basis while international sales increased $5.8 million, 
or 10.1%, on a pro forma basis.  The increase in international sales is 
partially due to the August 1996 repurchase of IMED product European 
distribution rights from Pharmacia & Upjohn, Inc. which has resulted in 
higher average selling prices for these products in 1997.  The decrease in 
U.S. sales in the six months ended June 30, 1997 as compared to June 30, 
1996, on a pro forma basis, is primarily due to a decrease in the disposable 
administration set volume from prior year as a result of the business 
interruption in Mexico during the second quarter of 1997 (see Note 4 to the 
Condensed Consolidated Financial Statements).

GROSS MARGIN
The gross margin percentage decreased from 45.2% for the six months ended 
June 30, 1996 to 44.5% for the six months ended June 30, 1997 primarily due 
to increased amortization expense resulting from the IVAC purchase price 
allocated to certain intangible assets as well as $1.6 million of 
non-recurring purchase accounting inventory adjustments charged to cost of 
sales during 1997.  Also adversely impacting the gross margin percentage 
during 1997 was $2.5 million related to a voluntary field correction of 
certain Gemini PC-1 and PC-2 infusion pumps. (See Note 5 to the Condensed 
Consolidated Financial Statements.)  These were partially offset by favorable 
international margins due in part to the repurchase of European distribution 
rights from Pharmacia & Upjohn, Inc.  Pro forma gross margin percentage for 
the six months ended June 30, 1996 was 46.5% compared to 47.0% for the six 
months ended June 30, 1997, exclusive of the purchase accounting inventory 
adjustment and product field correction charges.

SELLING AND MARKETING EXPENSE
Selling and marketing expense increased $23.0 million during 1997 primarily 
due to the Merger.  On a pro forma basis, selling and marketing expense 
increased approximately $0.8 million, or 2.5%, during 1997.  As a percentage 
of sales, on a pro forma basis, selling and marketing expense increased from 
18.7% in 1996 to 18.8% in 1997. Domestic expense decreased by $0.1 million, 
or 0.5%, from 1996 due to Merger-related synergies which are anticipated to 
be offset in future periods as further investment is made to add personnel in 
this area. The decrease in domestic selling and marketing expense was more 
than offset by increased international expenses of $0.9 million, or 8.7%, due 
largely to IMED's repurchase of the European distribution rights for IMED 
products from Pharmacia & Upjohn, Inc. in August 1996 and an associated 
increase in European direct operations.

GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased $13.4 million during 1997 
primarily due to the Merger.  On a pro forma basis, general and 
administrative expense decreased by $0.6 million, or 3.0%, during 1997.  As a 
percentage of sales, on a pro forma basis, general and administrative expense 
decreased from 11.7% for 1996 to 11.1% for 1997 due to an increase in sales, 
as well as Merger-related synergies at ALARIS Medical Systems, including 
lower data processing and general insurance expense.  International expenses 
increased by $0.3 million, or 8.5%, primarily as a result of IMED's 
repurchase of the European distribution rights for IMED products from 
Pharmacia & Upjohn, Inc. in August 1996 and an associated increase in 
European direct operations.

RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased approximately $4.4 million during 
1997 primarily due to the Merger.  On a pro forma basis, research and 
development expense decreased from $8.5 million, or 5.1% of sales, for the 
six months ended June 30, 1996 to $8.2 million, or 4.8% of sales, for the six 
months ended


                                      -16-

<PAGE>

June 30, 1997, primarily due to synergies realized in the Merger and 
realignment and prioritization of research and development projects.

INTEGRATION AND OTHER NON-RECURRING EXPENSE The Company incurred $15.9 
million in integration costs and other non-recurring expense during the first 
six months of 1997.  These costs are in addition to restructuring and 
integration charges of $15.3 million recorded in the fourth quarter of 1996.  
The 1997 expense consists primarily of the write-off of a product 
distribution and license agreement with a third party developer of an 
ambulatory and alternate site infusion pump of $4.5 million, maquiladora 
settlement and related costs of $4.1 million, information systems 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 has 
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 stockholder 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 intangible asset associated with such 
agreement.

INCOME FROM OPERATIONS
Income from operations decreased $4.5 million during 1997 primarily due to 
the field correction on the Gemini pumps in the first quarter and the 
maquiladora business interruption in the second quarter.  On a pro forma 
basis, operating income decreased $17.7 million from $20.7 million in 1996 to 
$3.0 million in 1997 due to the reasons discussed above.

ADJUSTED EBITDA
Adjusted EBITDA increased $26.5 million during 1997 primarily due to the 
Merger. On a pro forma basis, as a percentage of sales, Adjusted EBITDA 
increased from 22.1%, or $36.8 million, for 1996 to 22.2%, or $37.8 million, 
for 1997 due to the reasons discussed above.  Excluding the $2.5 million 
charge to cost of sales during the first quarter of 1997, Adjusted EBITDA 
would have increased to $40.3 million, an increase of $3.5 million or 
approximately 9.5%, as compared to pro forma 1996. Adjusted 
EBITDA represents income from operations before non-recurring non-cash 
purchase accounting charges, restructuring 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. Restructuring 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 $17.3 million during 1997 primarily due to the 
Merger.  In addition to interest on approximately $404.0 million of 
borrowings to finance the Merger and related debt refinancings, higher 
interest expense was incurred in 1997 due to IMED's $11.0 million purchase of 
the European distribution rights for IMED products in August 1996.  This 
increase in interest expense was offset by reductions in interest on $37.5 
million of convertible debt which was converted to common stock in connection 
with the Merger, as well as the redemption of $21.9 million of 15% 
subordinated debentures in December 1996.  On a pro forma basis, interest 
expense increased $1.1 million due to additional borrowings under the 
Company's revolving credit facility (see Liquidity and Capital Resources).  
The additional borrowings were used to pay for restructuring and integration 
costs associated with the Merger.


                                      -17-

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Management currently believes that sufficient cash will be available through 
ALARIS Medical Systems, based upon current operations, to satisfy debt 
service and other corporate expenses of ALARIS Medical in the foreseeable 
future. In particular, ALARIS Medical Systems' credit facility permits ALARIS 
Medical Systems to transfer to ALARIS Medical up to $1.5 million annually to 
fund ALARIS Medical's operating expenses and additional amounts sufficient to 
meet interest expense requirements. 

The Company expects to continue to meet its liquidity needs, including, in 
the short-term, funding of restructuring and integration costs, as well as 
long-term capital expenditure requirements with cash flow from operations and 
borrowings under the credit facility.  The Company's primary future use of 
funds will be to fund capital expenditures and strategic acquisitions and to 
pay debt service on outstanding indebtedness. 

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.

At June 30, 1997, the Company's outstanding indebtedness was $443.9 million, 
which includes $199.4 million of bank term debt under the credit facility and 
$200.0 million of Senior Subordinated Notes due 2006 (the "Notes"), which 
were borrowed in connection with the Merger.  The bank debt bears interest at 
floating rates based, at the Company's option, on Eurodollar or prime rates. 
As a result, a one percent increase in the rate of interest charged on 
indebtedness outstanding under the credit facility at June 30, 1997 would 
result in additional annual interest expense of approximately $2.0 million. 
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. Included in 
total consolidated debt, at June 30, 1997, ALARIS Medical had $16.2 million 
of outstanding 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, 1997, $22.5 million in borrowings, of which $3.0 million was 
borrowed during the second quarter, and $0.5 million under letters of credit 
were outstanding under this line of credit and $27.0 million was available. 

In connection with the Merger, the Company assumed IVAC's obligations to 
Siemens Infusion Systems Ltd. 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) and provide for the 
payment of the greater of $3.0 million per year or 8% of the prior year's MS 
III sales in 1997 through 1999.  The Company made the minimum 1997 payment of 
$3.0 million during the first quarter of 1997.

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 amortizations of the Company's indebtedness are $4.2 million, $14.6 
million and $15.6 million for 1997, 1998 and 1999, 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. 


                                      -18-

<PAGE>

In addition to routine capital expenditures that are expected to be 
consistent with the combined historical capital expenditures of IMED and 
IVAC, the Company expects to make a total of approximately $12.3 million of 
capital and operating expenditures during 1997 and 1998 for the acquisition 
and implementation of a new enterprise-wide information system.

The Company made capital expenditures of approximately $4.8 million and $9.7 
million during the three and six months ended June 30, 1997, respectively, of 
which approximately $1.6 million and $4.6 million, respectively, were related 
to the consolidation of the IMED and IVAC facilities.  The Company 
anticipates capital spending for the second half of 1997 to be near or 
greater than first half spending as the Company plans to purchase hardware to 
support new information systems, move and consolidate its U.K. operations 
into a new leased facility and purchase tooling and other equipment for new 
products.

The Company believes that it will generate sufficient cash flow from 
operations 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. Accordingly, the Company 
may have to refinance the Notes at or prior to maturity or sell assets or 
raise equity capital to repay the principal amount of the Notes. In addition, 
the Company's ability to fund its operations, to make planned capital 
expenditures and to make scheduled principal and interest payments will be 
dependent on the Company's future operating performance, which 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.

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.

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 
national health care reform or other 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 
and ALARIS Medical's Report on Form 10-K for the year ended December 31, 1996.

BACKLOG
The backlog of orders, believed to be firm, at June 30, 1997 was $7.8 million.

                                      -19-

<PAGE>
                                   PART II
                              OTHER INFORMATION
-------------------------------------------------------------------------------

ITEM 1.  LEGAL PROCEEDINGS

See Item 3. of the Company's December 31, 1996 Form 10-K.




                                      -20-

<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     11.1 -- Computation of Net Income per share for the three and six months
ended June 30, 1996 and 1997.

                    ______________________________________


(b)  Reports on Form 8-K

     None.





                                      -21-

<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 13, 1997               By: /s/ WILLIAM J. MERCER 
                                       ----------------------------------------
                                                              William J. Mercer
                                             President, Chief Executive Officer
                                                    and Chief Financial Officer
                                                  

                                      -22-

<PAGE>

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


Exhibit                                                                    Page
  No.                                                                       No.
-------                                                                    ----
11.1      Computation of Net Income per share for the three and six
          months ended June 30, 1996 and 1997 ..........................    20





                                      -23-