UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q

(Mark One)

[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September~~March 3031, ~~2003~~2004 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: 1-10207
______________________________________________


ALARIS MEDICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)
Delaware	13-3492624

(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10221 Wateridge Circle, San Diego, CA 92121

(Address of principal executive offices) (Zip Code)
(858) 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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

As of ~~October~~April 812, ~~2003~~2004, the registrant had 7172,~~013~~249,~~793~~796 shares of common stock outstanding.

Page 1 of 3528

ALARIS MEDICAL SYSTEMS, INC.

INDEX

PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed consolidated statement of operations for the three and nine
Consolidated Statement of Operations for the three
months ended September 30, 2003 and 2002 (unaudited)		3
months ended March 31, 2004 and 2003 (unaudited)		3
Consolidated balance sheet at September 30, 2003 (unaudited) and
Consolidated Balance Sheet at March 31, 2004 (unaudited) and
December 31, 2002		4
December 31, 2003		4
Condensed consolidated statement of cash flows for the nine months ended
Consolidated Statement of Cash Flows for the three months ended
September 30, 2003 and 2002 (unaudited)		5
March 31, 2004 and 2003 (unaudited)		5
Condensed consolidated statement of changes in stockholders' equity and
Consolidated Statement of Changes in Stockholders' Equity and
comprehensive loss for the period from December 31, 2002 to September
Comprehensive Income for the period from December 31, 2003 to March
30, 2003 (unaudited)		6
31, 2004 (unaudited)		6
Notes to the condensed consolidated financial statements (unaudited)		7
Notes to the Condensed Consolidated Financial Statements (unaudited)		7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations		1715
Item 3 - Quantitative and Qualitative Disclosures About Market Risk		2825
Item 4 - Controls and Procedures		2926
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K		3027

We have registered, applied to register or are using the following trademarks referred to in this document: ALARIS®, ALARIS Medical Systems®, Guardrails®, Medication Safety at the Point of Care™, Medley™, and SmartSite®.

FORM 10 – QQPART ~~PART~~ 1 - ITEM 11FINANCIAL ~~FINANCIAL~~ STATEMENTS ALARIS MEDICAL SYSTEMS, INC. ~~CONDENSED~~ CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (Dollar and share amounts in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
	2003			2002			2003			2002
	2004			2003
Sales	$	~~130~~134,~~454~~206		$	~~113~~121,~~063~~174		$	~~379,393~~		$	~~325,983~~
Cost of sales		6058,~~035~~193			5558,~~519~~000			~~177,195~~			~~162,597~~
Gross profit		7076,~~419~~013			5763,~~544~~174			~~202,198~~			~~163,386~~
Selling and marketing expenses		2527,~~284~~878			2224,~~512~~242			~~75,061~~			~~65,025~~
General and administrative expenses		1112,~~902~~854			1011,~~108~~142			~~35,229~~			~~30,372~~
Research and development expenses		911,~~635~~018			8,~~064~~798			~~27,934~~			~~21,846~~
Restructuring and other non-recurring items		-			-			-			(585	)
Total operating expenses		51,750			44,182
Total operating expenses		46,821			40,684			138,224			116,658
Interest income from sales-type capital leases		611			873
Interest income from sales-type
Income from operations		24,874			19,865
capital leases		780			1,080			2,530			3,391
Other income (expenses):
Income from operations		24,378			17,940			66,504			50,119
Interest income		127			222
Other income (expenses):
Interest expense		(6,123	)		(14,556	)
Interest income		119			144			632			626
Recapitalization expenses (Note 2)		-			(1,545	)
Interest expense		(6,612	)		(14,632	)		(35,271	)		(43,523	)
Other, net		(728	)		189
Recapitalization expenses		-			-			(67,695	)		-
Total other expense		(6,724	)		(15,690	)
Other, net		(261	)		(334	)		(783	)		(635	)
Income before income taxes		18,150			4,175
Total other expense		(6,754	)		(14,822	)		(103,117	)		(43,532	)
Provision for income taxes		6,534			1,628
Income (loss) before income taxes		17,624			3,118			(36,613	)		6,587
Net income	$	11,616		$	2,547
Provision for (benefit from) income taxes		6,695			1,246			(14,213	)		2,634
Net income per common share, basic	$	.16		$	.04
Net income (loss)	$	10,929		$	1,872		$	(22,400	)	$	3,953
Net income per common share, diluted	$	.15		$	.04
Net income (loss) per common share, basic	$	.15		$	.03		$	(.35	)	$	.07
Weighted average common shares outstanding, basic		71,800			59,772
Net income (loss) per common share, diluted	$	.15		$	.03		$	(.35	)	$	.06
Weighted average common shares outstanding, diluted		75,966			63,776
Weighted average common shares
outstanding, basic		70,716			59,507			63,684			59,350
Weighted average common shares
outstanding, diluted		75,250			62,922			63,684			62,112

The accompanying notes are an integral part of these condensed consolidated financial statements– — 3 — –

ALARIS MEDICAL SYSTEMS, INC. CONSOLIDATED BALANCE SHEET (Dollar and share amounts in thousands, except per share data)

ASSETS

	September 30, 2003		December 31, 2002
	March 31,2004		December 31,2003
	(Unaudited)
Current assets:
Cash and cash equivalents	$	3831,~~517~~700	$	6945,~~739~~914
Receivables, net		7780,~~726~~940		9092,~~050~~403
Inventories		58,~~078~~091		5652,~~924~~149
Deferred tax assets, net, current		3727,~~922~~910		1831,~~063~~420
Prepaid expenses and other current assets		107,~~038~~315		86,~~703~~866
Total current assets		~~222~~205,~~281~~956		~~243~~228,~~479~~752
Net investment in sales-type capital leases, less current portion		117,~~051~~580		169,~~050~~219
Property, plant and equipment, net		6276,~~752~~910		5669,~~448~~897
Other non-current assets		4035,~~692~~950		3537,~~666~~256
Goodwill		143,984		143,984
Intangible assets, net		8887,~~425~~331		9087,~~074~~877
	$	~~569~~557,~~185~~711	$	~~585~~576,~~701~~985

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt	$	2,450		$	-2,450
Accounts payable		2126,~~570~~953			1922,~~187~~760
Accrued expenses and other current liabilities		5756,~~980~~959			5176,~~157~~446
Total current liabilities		8286,~~000~~362			70101,~~344~~656
Long-term debt		~~386~~335,~~938~~713			~~527~~356,~~468~~325
Other non-current liabilities		27,~~190~~644			2027,~~038~~221
Total non-current liabilities		~~414~~363,~~128~~357			~~547~~383,~~506~~546
Contingent liabilities and commitments (Note 9)
Contingencies and litigation (Note 9)
Stockholders' equity:
Non-redeemable preferred stock, authorized 9,000 shares,
issued and outstanding: none		-			-
Common stock, authorized 85,000 shares at $.01 par value;
issued 71,449 and 60,045 shares at September 30, 2003
issued and outstanding: 72,201 and 71,320 shares at
and December 31, 2002, respectively		714			600
March 31, 2004 and December 31, 2003, respectively		722			713
Capital in excess of par value		~~275~~278,~~857~~147			~~151~~274,~~423~~109
Accumulated deficit		(~~199~~173,~~807~~264	)		(~~177~~184,~~407~~880	)
Treasury stock, at cost, 453 shares issued at September 30, 2003 and December 31, 2002		(2,027	)		(2,027	)
Accumulated other comprehensive income		2,387			1,841
Accumulated other comprehensive loss		(1,680	)		(4,738	)
Total stockholders' equity		107,992			91,783
Total stockholders' equity		73,057			(32,149	)
	$	557,711		$	576,985
	$	569,185		$	585,701

The accompanying notes are an integral part of these condensed consolidated financial statements– — 4 — –

ALARIS MEDICAL SYSTEMS, INC.~~CONDENSED~~ CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in thousands)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2003			2002
	2004			2003
Cash flows from operating activities:
Net (loss) income	$	(22,400	)	$	3,953
Net income	$	11,616		$	2,547
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		197,~~684~~181			176,~~409~~299
Stock options granted to non-employees for service		-			100
Net loss on disposal of property, plant and equipment		76			246
Net loss on disposal/write-off of property, plant and equipment and intangibles		707			442
Debt discount and issue costs amortization and write-offs		863			668
Debt discount and issue costs amortization and write-offs		2,539			1,993
Accretion of bond interest		-			4,599
Accretion of bond interest		8,921			13,493
Recapitalization expenses (Note 2)		-			1,545
Recapitalization expenses		67,695			-
(Increase) decrease in assets:
Receivables, net		1311,~~152~~680			~~(12~~18,~~563~~439	)
Inventories		(~~976~~5,946	)		(2,~~407~~198	)
Prepaid expenses and other current assets		~~(901~~5,381	)		32,~~467~~332
Deferred tax assets, net, current		(17,042	)		(7,386	)
Net investment in sales-type capital leases, non-current portion		1,639			947
Net investment in sales-type capital leases, non-current portion		4,999			6,379
Other non-current assets		(73	)		224
Other non-current assets		552			(871	)
Increase (decrease) in liabilities:
Increase (decrease) in liabilities:
Accounts payable		4,314			2,430
Accounts payable		2,850			(1,187	)
Accrued expenses and other current liabilities		(19,374	)		669
Accrued expenses and other current liabilities		5,031			3,712
Other non-current liabilities		423			(210	)
Other non-current liabilities		7,152			2,383
Net cash provided by operating activities		17,780			38,537
Net cash provided by operating activities		91,963			33,731
Cash flows from investing activities:
Cash flows from investing activities:
Capital expenditures		(12,736	)		(7,012	)
Capital expenditures		(21,930	)		(11,699	)
Patents, trademarks and other		(233	)		(113	)
Patents, trademarks and other		(8,494	)		(922	)
Proceeds from disposal of property, plant and equipment		5			-
Net cash used in investing activities		(3012,~~424~~964	)		(127,~~621~~125	)
Cash flows from financing activities:
Repurchase of debt and related costs		~~(591,839~~-	)		-(25,000	)
Principal payments on long-term debt		(3020,613	)		~~(15,969~~-	)
Proceeds from term loan borrowing		245,000			-
Proceeds from exercise of stock options		1,743			1,615
Proceeds from issuance of long-term debt		175,000			-
Net cash used in financing activities		(18,870	)		(23,385	)
Proceeds from exercise of stock options		3,776			1,695
Effect of exchange rate changes on cash		(160	)		191
Proceeds from sale of common stock		125,000			-
Net (decrease) increase in cash		(14,214	)		8,218
Equity issuance costs		(7,459	)		-
Cash and cash equivalents at beginning of period		45,914			69,739
Debt issuance costs		(12,230	)		-
Cash and cash equivalents at end of period	$	31,700		$	77,957
Net cash used in financing activities		(93,365	)		(14,274	)
Effect of exchange rate changes on cash		604			380
Net (decrease) increase in cash		(31,222	)		7,216
Cash and cash equivalents at beginning of period		69,739			51,200
Cash and cash equivalents at end of period	$	38,517		$	58,416

The accompanying notes are an integral part of these condensed consolidated financial statements– — 5 — –

ALARIS MEDICAL SYSTEMS, INC. ~~CONDENSED~~ CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE ~~LOSS~~INCOME (Unaudited) (Dollar and share amounts in thousands)

	Common Stock Shares Amount				Capital in Excess of Par Value		Accumulated Deficit			Treasury Stock Shares Amount						Accumulated Other Compre- hensive Loss			Total Stock- holders’ Equity			Compre- hensive Loss
	Common StockShares Amount				Capital inExcess ofPar Value		AccumulatedDeficit			AccumulatedOtherComprehensiveIncome			TotalStockholders’Equity			Compre-hensiveIncome
Balance at December 31, 2002		60,045	$	600	$	151,423	$	(177,407	)		453		$	(2,027	)	$	(4,738	)	$	(32,149	)
Balance at December 31, 2003		71,320	$	713	$	274,109	$	(184,880	)	$	1,841		$	91,783
Comprehensive loss:
Comprehensive income:
Net loss for the period								(22,400	)											(22,400	)	$	(22,400	)
Net income for the period								11,616						11,616		$	11,616
Equity adjustment from foreign
currency translation											666			666			~~4,308~~666			~~4,308~~			~~4,308~~
Effects of cash flow hedges included
in other comprehensive loss
in other comprehensive income
(net of tax benefit of $779)																	(1,250	)		(1,250	)		(1,250	)
(net of tax expense of $111)											(120	)		(120	)		(120	)
Comprehensive loss																						$	(19,342	)
Comprehensive income																$	12,162
Sale of common stock		10,000		100		117,441														117,541
Exercise of stock options		881		9		1,734								1,743
Exercise of stock options		1,404		14		3,762														3,776
Tax benefit from exercise of
Tax benefit from exercise of stock options						3,231														3,231
stock options						2,304								2,304
Balance at September 30, 2003		71,449	$	714	$	275,857	$	(199,807	)		453		$	(2,027	)	$	(1,680	)	$	73,057
Balance at March 31, 2004		72,201	$	722	$	278,147	$	(173,264	)	$	2,387		$	107,992

The accompanying notes are an integral part of these condensed consolidated financial statements– — 6 — –

ALARIS MEDICAL SYSTEMS, INC. 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 Systems, Inc. was originally incorporated under the name Advanced Medical Technologies, Inc. on September 28, 1988. On November 26, 1996, IMED Corporation, the Company’s operating subsidiary, and IVAC Medical Systems, Inc., two pioneers in infusion systems, merged to create ALARIS Medical Systems, Inc. (“Former AMS”), and the Company changed its name to ALARIS Medical, Inc. (“AMI”). On June 30, 2003, AMI and Former AMS completed a recapitalization ~~which is further discussed in Note 2~~. In connection with the recapitalization, Former AMS merged with and into AMI, which changed its name to ALARIS Medical Systems, Inc. ALARIS Medical Systems, Inc. and its subsidiaries are collectively referred to as the “Company”, “ALARIS” or “ALARIS Medical Systems.”

Statement of accounting policy:

The accompanying Condensed Consolidated 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.

In the opinion of the Company, the accompanying Condensed Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments, necessary for a ~~fair~~ fair statement of the Company’s financial position as of ~~September~~March 3031, ~~2003~~2004, the ~~results~~ results of its operations for the three ~~and nine~~ months ended ~~September 30~~March 31, ~~2003~~2004 and ~~2002~~2003, and its cash flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003.

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~~ reported amounts of revenues, costs, and expenses, assets, liabilities and related disclosure of contingent amounts. ~~While~~The ~~the~~ Company’s estimates ~~believes~~are ~~its~~based ~~estimates~~on historical experience and various judgments and assumptions management believes are appropriate. ~~reasonable~~However, the inherent nature of estimates is that actual results will likely be ~~different~~ different from the estimates made.

CollateralConcentrations depositof credit risk:

The Company ~~was~~provides ~~required~~a atvariety ~~September~~of ~~30,~~financing ~~2003~~arrangements tofor ~~maintain~~its ~~$4,686,~~customers. inThe ~~collateralized~~majority ~~deposit~~of the Company’s accounts ~~with~~receivable ~~commercial~~are ~~banks~~from ashospitals ~~security~~throughout ~~against~~the ~~open~~United ~~foreign exchange contracts~~States, ~~primarily~~Europe, ~~forward~~Canada ~~contracts.~~and ~~Such~~Australia with ~~amounts~~credit ~~are~~terms ~~classified~~of asgenerally ~~cash~~30 ~~and~~to ~~cash~~90 ~~equivalents~~days, inalthough various European markets pay much longer than the contractual terms. The Company’s maintains ~~Consolidated~~adequate ~~Balance~~reserves ~~Sheet.~~for ~~This~~potential ~~collateral~~credit ~~amount~~losses ~~will~~and ~~fluctuate~~such losses ashave been within ~~open~~management’s ~~foreign~~estimates. ~~exchange~~One ~~contracts~~customer whose payment terms are ~~settled~~30 ~~throughout~~days, ~~2003~~accounted ~~and~~for ~~2004.~~12% ~~Under~~of the ~~secured~~outstanding accounts ~~credit~~ ~~agreement~~receivable ~~(discussed~~at inDecember ~~Note 5)~~31, ~~the~~2003 ~~Company~~and ~~has~~4% of the ~~ability~~outstanding toaccounts ~~enter~~receivable ~~into~~at ~~similar~~March ~~foreign~~31, ~~exchange~~2004. ~~contracts~~This customer ~~with~~is ~~lenders~~an ~~who~~unaffiliated ~~will~~third ~~not~~party ~~require~~finance ~~restricted~~company ~~cash~~that ~~balances~~many toNorth beAmerican ~~maintained.~~customers have chosen to use when financing their purchases.

- 7 -

NOTE 1 – BUSINESS AND STATEMENT OF ACCOUNTING POLICY (Continued)

Collateral deposit:

The Company was required at March 31, 2004 to maintain $3,565 in collateralized deposit accounts with commercial banks as security against open foreign exchange contracts, primarily forward contracts. Such amounts are classified as cash and cash equivalents in the Company’s Consolidated Balance Sheet. This collateral amount will fluctuate as open foreign exchange contracts are settled throughout 2004. Under the Company’s Credit Facility (discussed in Note 5), certain lenders have agreed to provide foreign exchange contract lines to the Company without requiring direct cash collateral.

Shipping and handling costs:

Shipping and handling costs for customer sales are classified as a selling and marketing expense. Shipping and handling costs for customer sales, for the three ~~and nine~~ months ended ~~September~~ ~~30,~~March ~~2003~~31, ~~were $2,085 and $6,253, respectively. Shipping and handling costs for~~ ~~customer~~2004 ~~sales, for the three~~ and ~~nine months ended September 30~~2003, ~~2002,~~ were $2,~~369~~154 and $61,~~160~~940, respectively.

Product warranties and deferred service revenues:

~~Generally,~~ Changes in the ~~Company’s~~liability ~~standard warranty~~ for ~~infusion instruments is a one- or two-year~~ ~~warranty (based on the specific~~ product) ~~that covers both parts and labor. In some instances, a customer may elect to have parts-only~~ warranty ~~coverage, which adds a year to the coverage period. Patient monitoring products generally have a three-year parts~~ and ~~labor~~ ~~warranty.~~deferred ~~For~~revenue ~~patient~~associated ~~monitoring~~with ~~products~~these ~~the~~service ~~Company~~programs ~~sells that are manufactured by a third party, the Company passes on to the customer the warranty provided by the manufacturer. The Company provides~~ for the ~~estimated cost of product warranties at the~~ ~~time~~three ~~revenue~~months isended ~~recognized.~~March ~~Product~~31, ~~warranties~~2004 ~~are recorded in other current~~ and ~~other non-current~~2003 ~~liabilities.~~were as follows:

The Company’s product warranty liability reflects management’s best estimate of probable liability under its product warranties. Management estimates the liability based on the Company’s stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty.

	March 31,
	2004			2003
Product warranties:
Balance at beginning of period	$	8,145		$	8,557
Accruals for warranties issued during the period		2,338			2,647
Adjustments for fluctuations in foreign exchange		14			49
Settlements made during the period (A)		(2,186	)		(2,346	)

Balance at end of period	$	8,311		$	8,907

The Company also engages in the sale of technical services for which revenue is deferred and recognized upon completion of the service. Additionally, the Company sells service programs for which revenue is deferred and recognized over the service period. Deferred service revenue is recorded in other non-current liabilities.


Deferred service revenues:
Balance at beginning of period	$	10,654		$	10,039
Amounts added to deferred revenue		637			291
Adjustments for fluctuations in foreign exchange		15			(6	)
Amounts recorded as revenue during the period		(601	)		(301	)

Balance at end of period	$	10,705		$	10,023

~~Changes~~ (A) in ~~the~~Settlements ~~liability~~made ~~for~~to product ~~warranty~~warranties ~~and~~represent ~~deferred~~actual ~~revenue~~expenses ~~associated~~incurred ~~with these service programs~~ for the period ~~ended~~related ~~September~~to ~~30,~~products ~~2003~~under ~~was~~warranty. ~~as follows:~~

Product warranties:
Balance at December 31, 2002	$	8,557
Accruals for warranties issued during the period		5,546
Adjustments to pre-existing warranties		(200	)
Settlements made during the period		(5,575	)
Balance at September 30, 2003	$	8,328
Deferred service revenues:
Balance at December 31, 2002	$	10,039
Amounts added to deferred revenue		1,713
Amounts recorded as revenue during the period		(1,151	)
Balance at September 30, 2003	$	10,601

-8-

NOTE 1 – BUSINESS AND STATEMENT OF ACCOUNTING POLICY (Continued)

Basic and diluted net income per common share has been computed in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“FAS 128”), using the weighted-average number of shares of common stock outstanding and dilutive potential common ~~stock~~shares ~~equivalents~~ during the period.

~~Weighted average~~ ~~common~~- ~~shares~~8 ~~used~~- in the calculation of diluted earnings per share for the three months ended September 30, 2003 includes common stock equivalents of 4,534. As the Company experienced net losses during the nine months ended September 30, 2003, basic and diluted net loss per share are the same. If the Company had earnings during the nine months ended September 30, 2003, common stock equivalents of 4,349 would have been added to the weighted shares outstanding for the period. Weighted average common shares used in the calculation of diluted earnings per share for the three and nine months ended September 30, 2002 includes common stock equivalents of 3,415 and 2,762, respectively. For the three and nine months ended September 30, 2003, options to purchase 28 and 494 shares of common stock, respectively, were excluded from the calculation of common stock equivalents because the options have an exercise price greater than or equal to the average market value of ALARIS Medical Systems’ common stock during the period. For the three and nine months ended September 30, 2002, options to purchase 309 and 263 shares of common stock, respectively, were excluded from the calculation of common stock equivalents because the options have an exercise price greater than or equal to the average market value of ALARIS Medical Systems’ common stock during the period.

NOTE 1 – BUSINESS AND STATEMENT OF ACCOUNTING POLICY (Continued)

Weighted average common shares used in the calculation of diluted earnings per share for the quarter ended March 31, 2004 and 2003, includes dilutive potential common shares of 4,166 and 4,004, respectively. For the quarter ended March 31, 2004 and 2003, options to purchase 24 and 5 shares of common stock, respectively, were excluded from the calculation of dilutive potential common shares because the options have an exercise price greater than or equal to the average market value of ALARIS Medical Systems’ common stock during the period of $19.46 and $7.94, respectively.

Stock-based compensation:

The Company measures compensation expense for ALARIS Medical Systems’ stock-based employee compensation plans using the intrinsic value method and provides pro forma disclosures of net income as if the fair value-based method had been applied in measuring compensation expense.

ALARIS Medical Systems has stock-based compensation plans from which incentive stock options may be granted to key employees of the Company and non-qualified stock options may be granted to key employees, directors, officers, independent contractors, and consultants. The ~~Company~~ ~~accounts~~following ~~for~~table ~~options~~illustrates ~~issued to employees, directors, and officers under those plans pursuant to~~ the ~~recognition~~effect ~~and~~on ~~measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees, and Related Interpretations.” No stock-based employee compensation cost is reflected in~~ net income, asand ~~all~~earnings ~~options granted~~per ~~under~~share ~~those~~if ~~plans have an exercise price equal to~~ the ~~market value of the~~ ~~underlying~~Company ~~common~~had ~~stock on~~ applied the ~~date of grant. Stock options issued to independent contractors and consultants under those plans are accounted for using a~~ fair value method ~~and~~ ~~are~~to restock-~~measured~~based toemployee ~~fair value at each period end until the earlier of the date that performance by the counter party is complete or a performance commitment has been reached.~~ compensation:

-9-

	Three Months Ended March 31,
	2004			2003
Net income, as reported	$	11,616			2,547
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects		(1,165	)		(415	)

Pro forma net income	$	10,451			2,132

Earnings per share:
Net income per common share, basic	$	.16		$	.04

Net income per common share, diluted	$	.15		$	.04

Net income per common share, pro forma basic	$	.15		$	.04

Net income per common share, pro forma diluted	$	.14		$	.03

~~NOTE~~ These 1pro –forma ~~BUSINESS~~amounts ~~AND~~may ~~STATEMENT~~not OFbe ~~ACCOUNTING~~representative ~~POLICY~~of ~~(Continued)~~future costs since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for the quarters ended March 31, 2004 and 2003:

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation, assuming such standard had been adopted January 1, 1995.

	2004	2003
Weighted average risk-free interest rates	3.3%	3.4%
Expected life	7 years	7 years
Volatility	50%	50%
Expected dividends	None	None

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Net income (loss), as reported	$	10,929		$	1,872		$	(22,400	)	$	3,953
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects		(843	)		(230	)		(2,075	)		(1,688	)
Pro forma net income (loss)	$	10,086		$	1,642		$	(24,475	)	$	2,265
Earnings per share:
Net income (loss) per common share, basic	$	.15		$	.03		$	(.35	)	$	.07
Net income (loss) per common share, diluted	$	.15		$	.03		$	(.35	)	$	.06
Net income (loss) per common share, pro forma basic	$	.14		$	.03		$	(.38	)	$	.04
Net income (loss) per common share, pro forma diluted	$	.13		$	.03		$	(.38	)	$	.04

The Black-Scholes option valuation model is one of a number of models available for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because ALARIS Medical Systems’ employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock based compensation plans. To comply with disclosure requirements, the Company has valued its options using the Black-Scholes option valuation model but plans to assess other valuation models and assumptions that may more accurately reflect the value of these stock options.

~~These pro~~- ~~forma~~9 amounts may not be representative of future costs since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years. The fair value for these options was estimated at the date of grant using the Black-~~Scholes~~ option pricing model with the following weighted average assumptions for the three and nine months ended September 30, 2003 and 2002 – dividend yields of 0% and expected lives of 7 years. Weighted average risk free interest rates of 3.6% and 3.3% were used for the three and nine months ended September 30, 2003, respectively. Expected volatility of 50% was used for both the three and nine months ended September 30, 2003. The weighted average risk free interest rate of 3.4% and expected volatility of 75% was used for both the three and nine months ended September 30, 2002.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because ALARIS Medical Systems’ employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock based compensation plans. To comply with disclosure requirements, the Company has valued its options using the Black-Scholes option valuation model but plans to assess other valuation models and assumptions that may more accurately reflect the value of these stock options.

-10-

NOTE 2 – RECAPITALIZATION EXPENSES

In ~~February~~ February 2003, AMI repurchased in a private transaction $25,000 principal amount at maturity of its former 11-1/8% senior ~~Senior~~discount ~~Discount~~notes ~~Notes~~ due 2008 (“Senior Discount Notes”) at a total cost of $25,000, representing a premium of $1,171 or 4.7% over the then accreted carrying value. Such premium, along with a write-off of unamortized debt issuance costs related to the purchased Senior Discount Notes, was recorded as a charge of $1,545 in the Company’s first quarter 2003 operating results.

In AprilNOTE 2003,3 Former– AMSGOODWILL repurchasedAND $2,500OTHER principalINTANGIBLE amount of its 11-5/8% Senior Secured Notes due 2006 (“Senior Secured Notes”), at a total cost of $2,925, representing a premium of 17% over such principal amount. Such premium, along with a write-off of unamortized debt issuance costs related to the purchased Senior Secured Notes, was recorded as a charge of $503 in the Company’s second quarter 2003 operating results. ASSETS

In Acquired ~~April~~ ~~2003,~~intangible ~~AMI~~assets filed a universal shelf registration statement with the Securities and Exchange Commission (SEC) registering $550,000 of equity and debt securities. In May 2003, AMI commenced a cash tender offer for any and all of its outstanding Senior Discount Notes, and Former AMS commenced cash tender offers for any and all of its outstanding Senior Secured Notes and 9-3/4% Senior Subordinated Notes due 2006 (“Senior Subordinated Notes”). On June 30, 2003, ALARIS Medical Systems sold in underwritten public offerings pursuant to the registration statement $175,000 of 7-1/4% senior subordinated notes due 2011 (the “Notes”) and 9,100 shares of its common stock at an offering price of $12.50 per share. Proceeds received from the sale of the Notes were ~~$170,625,~~as ~~net~~follows: of the underwriting discount of $4,375. Proceeds received from the stock offering were $106,882, net of the underwriting discount and other expenses of $6,868. Also on June 30, 2003, the Company established a new credit facility with a group of banks and other lenders providing for a six-year $245,000 term loan and a five-year $30,000 revolving credit facility. (See Note 5 – Long-term Debt)

On July 2, 2003, the underwriters of the common stock offering exercised their over-allotment option to purchase an additional 1,350 shares at $12.50 per share, which consisted of 900 shares purchased from ALARIS Medical Systems and 450 shares purchased from the Company’s executive officers. ALARIS Medical Systems received proceeds from the sale of these 900 shares of $10,659, net of the underwriting discount of $591, which proceeds were recorded in the Company’s stockholders’ equity during the third quarter.

	March 31, 2004				December 31, 2003
	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization

Patents	$	29,021	$	20,126	$	29,021	$	19,728
Distribution rights and license agreements		8,462		4,776		8,462		4,628

Subtotal other intangible assets, net
(subject to amortization)		37,483		24,902		37,483		24,356
Acquired other intangible assets
(not subject to amortization):
IVAC trade name		74,750		-		74,750		-

Intangible assets, net	$	112,233	$	24,902	$	112,233	$	24,356

~~The~~ For ~~Company used~~ the quarter ~~net~~ended ~~proceeds~~March ~~from the sale of the Notes and the common stock~~31, ~~borrowings under~~2004 ~~the $245,000 bank term loan~~ and ~~approximately $51~~2003,~~000~~ ofamortization ~~its~~expense ~~existing~~for ~~cash:~~other ~~(i) to~~intangible ~~repurchase~~assets, ~~pursuant~~net towas the tender offers described above: (a) all outstanding Senior Discount Notes at a price of 105.375% of the principal amount thereof at maturity, (b) all outstanding Senior Secured Notes at a price of 122% of principal amount thereof, plus accrued interest $546 and ~~(c) all (except~~ $25551, ~~which was not tendered) Senior Subordinated Notes at a price of 103~~respectively.~~75%~~ ofThe ~~principal~~estimated ~~amount~~future ~~thereof,~~annual ~~plus accrued interest;~~amortization ~~and (ii)~~expense tofor ~~pay~~other ~~related~~intangible ~~fees and expenses. All of such transactions occurred in June 2003. In August 2003~~assets, net ~~ALARIS~~is ~~Medical~~as ~~Systems retired the remaining $25 of Senior Subordinated Notes at a price of 103.25%.~~ follows:

The sale of the Notes and common stock, the borrowings under the bank credit facility, the repurchase of indebtedness pursuant to the tender offers, other debt repurchases made in 2003 and the merger of Former AMS into AMI described in Note 1 are collectively referred to as the “Recapitalization.”


Fiscal Year
2004 (A)		$1,638
2005		2,181
2006		2,085
2007		1,769
2008		1,769

(A) Amount represents remaining estimated amortization expense for 2004.

-11 10 -

NOTE 2 – RECAPITALIZATION EXPENSES (Continued)

Premiums (representing the excess of tender offer purchase prices over principal amounts of the purchased indebtedness) and consent fees paid in connection with the tender offers and consent solicitations, representing a total of $53,854, along with a write-off of unamortized debt issuance costs of $9,833 and other costs of $1,960, were recorded in “other expenses” as a total charge of $65,647 in the second quarter of 2003. These charges are in addition to the $503 charge related to the $2,500 repurchase of Senior Secured Notes during the second quarter of 2003 and the $1,545 charge related to the $25,000 repurchase of Senior Discount Notes during the first quarter of 2003. As a result, the Company recorded total pre-tax charges related to the recapitalization for the nine months ended September 30, 2003 of $67,695.

NOTE 3 –INTANGIBLE ASSETS

Acquired intangible assets were as follows:

	September 30, 2003				December 31, 2002
	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Patents	$	29,021	$	19,331	$	29,021	$	18,135
Distribution rights and license
agreements		8,462		4,477		8,462		4,024
Subtotal other intangible assets, net
(subject to amortization)		37,483		23,808		37,483		22,159
Acquired other intangible assets
(not subject to amortization):
IVAC trade name		74,750		-		74,750		-
Intangible assets, net	$	112,233	$	23,808	$	112,233	$	22,159

For the quarter ended September 30, 2003 and 2002, amortization expense for intangible assets, net was $548 and $561, respectively. For the nine months ended September 30, 2003 and 2002, amortization expense for intangible assets, net was $1,649 and $1,730, respectively. The estimated future annual amortization expense for intangible assets, net is as follows:

Fiscal Year
2003 (A)	$	532
2004		2,182
2005		2,182
2006		2,130
2007		1,774

(A) Amount represents remaining estimated amortization expense for 2003.

-12-

NOTE 4 – INVENTORIES

Inventories comprise the following:

	September 30, 2003		December 31, 2002
	March 31,2004		December 31,2003
Raw materials	$	3026,~~425~~171	$	2725,~~946~~487
Work-in-process		34,~~333~~174		2,~~322~~764
Finished goods		2427,~~320~~746		2623,~~656~~898
	$	58,~~078~~091	$	5652,~~924~~149

NOTE 5 – LONG-TERM DEBT

Long-term debt consists of the following:

	September 30, 2003		December 31, 2002
	March 31, 2004		December 31, 2003
Bank credit facility, total term loans due 2009	$	~~214~~163,~~388~~163	$	-183,775
7-1/4% senior subordinated notes due 2011		175,000		-175,000
9-3/4% senior subordinated notes due 2006		-		180,000
		338,163		358,775
11-5/8% senior secured notes due 2006		-		170,000
Current portion		2,450		2,450
11-1/8% senior discount notes due 2008		-		177,468
Long-term debt	$	335,713	$	356,325
		389,388		527,468
Current portion		2,450		-
Long-term debt	$	386,938	$	527,468

Bank credit facility:

As part of ~~the~~its ~~recapitalization~~2003 ~~described in Note 2~~recapitalization, on June 30, 2003, the Company established a $275,000 bank credit facility (the “Credit Facility”) consisting of a six-year $245,000 term loan and a five-year $30,000 revolving credit facility. The Company has not borrowed any portion of the revolving credit facility. The term loan bears interest at an annual rate equal to current LIBOR (or, ~~at the Company’s option,~~ a fluctuating base rate), plus a margin of 2.7525% as of March 31, 2004. The Company can elect to use either a one-, two-, three-, or six-month LIBOR rate. ~~The~~ALARIS ~~Company~~ has made elections resulting in a weighted average interest rate at ~~September~~March 3031, ~~2003~~ 2004 of 3.8736% per annum (1.1211% plus the margin of 2.7525%) ~~per annum~~. Payments of $613 (0.25% of the original principal balance on the term loan) plus accrued ~~interest~~ interest are due each quarter, with any unpaid principal balance due at maturity. The Company is required to pay a quarterly commitment fee at an annual rate of 0.5% on the ~~unused~~ unused portion of the revolving credit facility. As a result of the Company’s receipt of proceeds from the sale of 900 additional shares of common stock on July 2, 2003, in connection with the exercise by the underwriters of their over-allotment option to purchase common stock, on July 10, 2003, the Company made a $10,000 prepayment of principal under the term loan. Utilizing cash flow from operations, the Company made two additional principal prepayments of $10,000 each during the third quarter of 2003, along with the first scheduled principal payment of $613 on September 30, 2003. Non-cash ~~charges of $748 for the write-off of financing costs related to the prepayments were recorded in the Company’s interest expense in the third quarter.~~

~~Subsequently, in October~~ Utilizing ~~2003~~cash flow from operations and cash on hand, the Company made atwo principal ~~prepayment~~ prepayments of $10,000 each, along with one ~~utilizing cash~~scheduled ~~flow~~quarterly ~~from~~principal payment of $613, during the first quarter ~~operations~~of 2004. A ~~non~~Non-cash ~~charge~~ ofcharges of $~~241~~478 for the write-off of ~~financing costs~~unamortized debt issuance costs related to the ~~prepayment will~~ beprepayments were recorded in the Company’s interest expense in the quarter ~~fourth~~ended ~~quarter~~March 31, 2004.

~~-13-~~ The Company is also required, under terms agreeable to lenders under the Credit Facility, to effectively fix the variable interest rate exposure on at least 50% of its total outstanding debt. The Company met this requirement by entering into two separate interest rate swap agreements in July 2003 and August 2003 whereby $202,000 of the term loan was effectively converted to a weighted average fixed rate of 4.85% as of March 31, 2004. The July 2003 swap agreement has a notional amount of $30,000 and expires on December 30, 2005. The August 2003 swap agreement has an original notional amount of $172,000 that decreases on a quarterly basis to a final notional amount of $54,000 and expires on December 29, 2006.

- 11 -

NOTE 5 – LONG-TERM DEBT (Continued)

The ~~Company is also required, under terms agreeable to lenders under the~~ Credit Facility, ~~to effectively~~contains ~~fix~~various ~~the~~operating, ~~variable~~financial ~~interest~~and ~~rate~~reporting ~~exposure on at least 50% of its total outstanding debt~~covenants. ~~The~~As ~~Company met this requirement by fixing its LIBOR rate for the remainder~~ of ~~2003 and entering into two separate interest rate swap agreements in July~~ ~~2003~~March ~~and August 2003 whereby $202~~31,~~000~~ ~~of the term loan is effectively converted to a weighted average fixed rate of 5.36% beginning January 2,~~ 2004~~. The July 2003 swap agreement has a notional amount of $30~~,~~000~~ ~~and~~the ~~expires~~Company was onin ~~December~~compliance ~~30,~~with ~~2005.~~all ~~The~~such ~~August 2003 swap agreement has an original notional amount of $172,000 that decreases on a quarterly basis to a final notional amount of $54,000 and expires on December 29, 2006~~covenants.

The Company’s indebtedness under the Credit Facility ~~contains~~is ~~various~~guaranteed ~~operating,~~by ~~financial~~its direct and indirect ~~reporting~~domestic ~~covenants~~subsidiaries. The AsCompany’s obligations and the obligations of ~~September~~its ~~30,~~subsidiary ~~2003~~guarantors are collateralized by a security interest in substantially all assets of the Company and its subsidiary guarantors, including a pledge of the capital stock of the Company’s ~~was~~domestic insubsidiaries ~~compliance~~and ~~with~~any ~~all~~notes ~~such~~owned ~~covenants.~~by the Company or any of its subsidiary guarantors and 65% of the capital stock of the Company’s and any subsidiary guarantor’s directly owned foreign subsidiaries.

Senior subordinated notes:

As part of ~~the~~its ~~recapitalization~~June ~~described~~2003 ~~in Note 2~~recapitalization, ALARIS Medical Systems sold $175,000 ~~principal~~ principal amount of its senior subordinated notes due 2011 (the “Notes”). The Notes bear interest at an annual rate of 7-1/4%, which is payable semi-annually in arrears on July 1 and January 1 of each year, ~~commencing January 1, 2004,~~ and mature on July 1, 2011. The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after July 1, 2007 at an initial redemption price of 103.625%, plus accrued and unpaid interest, if any, to the date of redemption, with the redemption price declining annually thereafter. In addition, subject to certain limitations, the Company may redeem up to 35% of the Notes on or before July 1, 2006 with the net cash proceeds of one or more equity offerings, at a price of 107.25%, plus accrued and unpaid interest, if any, to the date of redemption. In the event of a change of control, as defined in the indenture governing the Notes, holders may require the Company to purchase their Notes at 101% of ~~the~~ the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The Notes are subject to certain restrictive and reporting covenants. As of ~~September~~ 30March 31, ~~2003~~2004, the Company was in compliance with all such covenants.

NOTE 6 – RESTRUCTURINGPENSION AND OTHER NON-RECURRING ITEMSPLANS

~~During~~ The ~~the~~Company had ~~first~~a ~~quarter~~defined ofbenefit ~~2002,~~pension plan (the ~~Company~~“Plan”) ~~recorded~~which covered substantially all of its U.S. employees of a ~~non-recurring~~predecessor ~~benefit~~company as of $December 31, 1993. On December 1,~~125~~ ~~for~~1993, ~~an insurance~~the ~~settlement.~~predecessor ~~The~~company’s ~~settlement~~Board of ~~related~~Directors approved amendments to ~~damages~~the ~~and~~Plan ~~losses~~provisions ~~incurred~~which atinclude, ~~one~~among ofother ~~the~~matters, cessation of ~~Company’s~~benefit ~~disposable~~accruals ~~products~~after ~~manufacturing~~December ~~plants~~1, in1993. ~~Mexico~~All inearned ~~1993~~benefits as aof ~~result~~that ofdate were ~~flooding.~~preserved ~~The~~and ~~contingency~~the Company ~~related~~will continue to contribute to the ~~insurance~~Plan ~~settlement~~as ~~was~~necessary ~~resolved~~to infund earned benefits. No contributions to the ~~first~~Plan were required during the three months ~~quarter~~ended ofMarch ~~2002~~31, ~~when~~2004 or the ~~Company~~preceding ~~received~~year ~~proceeds~~due to the prepaid position of $1the Plan during those years,~~000~~ and ~~notification~~the ofCompany ~~an additional~~does ~~payment~~not ~~due~~expect ofto ~~$125,~~contribute ~~which~~to the ~~was~~Plan ~~received~~ during ~~April~~the remainder ~~2002~~of 2004.

~~Also~~ The ~~during the first quarter~~ components of ~~2002,~~net ~~the~~periodic ~~Company~~benefit ~~initiated~~(gain) acost ~~plan~~for tothe ~~restructure~~three ~~its technical~~months ~~services~~ended ~~operations~~March ~~in Central Europe. In this connection~~31, ~~the Company recorded~~2004 ~~a charge of $540 which included $400 for severance costs for 21 positions affected by the relocation of the German operation~~ and ~~$140 related to lease termination expenses. As of September 30~~2003, ~~2003~~respectively, are ~~all~~as ~~severance payments have been made to the identified employees and $47 in lease termination payments have been made.~~ follows:

-14-

	Three Months Ended March 31,
	2004			2003
Service cost	$	70		$	63
Interest cost		245			249
Expected return on Plan assets		(347	)		(337	)
Recognized actuarial loss		27			42

Net periodic benefit (gain) cost	$	(5	)	$	17

- 12 -

NOTE 7 – SEGMENT INFORMATION

The Company is organized primarily based on geographic location with the United States and Canada drug infusion and patient monitoring business, and Mexico manufacturing activities, representing the North America segment. All other international operations, including Europe, Asia, Australia, Latin America, and Africa represent the International segment.

The accounting policies of the segments are the same as those described in the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2002~~2003. The geographical data does not include intersegment revenues. All expenses associated with corporate headquarters ~~are~~appear ~~included~~ in the North America ~~segment~~business unit. The Company evaluates the performance of its segments based on sales and operating income.

The table below presents information about reported segments for the: three months ended March 31:

Three months ended September 30:

	North America		International		Total

2004
Sales	$	86,955	$	47,251	$	134,206
Income from operations		15,339		9,535		24,874

2003
Sales	$	79,980	$	41,194	$	121,174
Income from operations		8,900		10,965		19,865

	North America		International		Total
2003
Sales	$	90,328	$	40,126	$	130,454
Income from operations		15,324		9,054		24,378
2002
Sales	$	78,060	$	35,003	$	113,063
Income from operations		9,998		7,942		17,940

Nine months ended September 30:

	North America		International		Total
2003
Sales	$	258,223	$	121,170	$	379,393
Income from operations		38,300		28,204		66,504
2002
Sales	$	224,965	$	101,018	$	325,983
Income from operations		27,943		22,176		50,119

NOTE 8 – CASH FLOW INFORMATION

For the quarters ~~nine months~~ ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003, federal, state and foreign income taxes paid, net of tax refunds, totaled $31,~~193~~227 and $7679,~~097,~~ respectively. Interest paid during the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 ~~and 2002~~ totaled $229,~~513~~848 and ~~$21,706,~~no interest was paid in the ~~respectively~~quarter ended March 31, 2003.

-15-

NOTE 9 – CONTINGENCIES AND LITIGATION

Litigation:

~~In May~~ The ~~2003,~~Company is ~~the~~a ~~Company~~defendant ~~purchased~~in ~~from~~various ~~Filtertek~~actions, ~~Inc.~~claims, aand ~~worldwide,~~legal ~~unrestricted~~proceedings ~~patent~~arising ~~license~~from ~~related~~its tonormal ~~needle-free~~business ~~valve products~~operations. Management ~~The~~believes ~~purchase price of~~ the ~~license~~Company ofhas ~~$7,300~~meritorious ~~has~~defenses ~~been~~to ~~capitalized~~these cases and isintends ~~included~~to indefend ~~the~~itself vigorously. ~~Company’s~~As ~~balance~~the ~~sheet~~ultimate ~~under~~outcome ~~the~~of ~~caption~~these ~~“Other~~matters ~~non-current~~is ~~assets”~~uncertain, ~~and~~no iscontingent ~~being~~liabilities ~~amortized~~or onprovisions have abeen ~~straight-line~~recorded ~~basis~~in ~~over~~the aaccompanying 10financial ~~year~~statements ~~estimated~~for ~~useful~~such ~~life~~matters. ~~All~~However, ~~remaining claims~~ in ~~a patent litigation relating to~~management’s ~~needle-free~~ ~~systems~~opinion, ~~between~~based ~~Filtertek~~on ~~and~~discussions ~~the~~with ~~Company~~legal ~~(and~~counsel, ~~one~~liabilities ofarising ~~its~~from ~~customers),~~such asmatters, ~~discussed~~if inany, ~~note~~are not 14expected to ~~our~~have ~~Consolidated~~a ~~Financial~~material ~~Statements~~adverse ~~contained~~effect ~~in our Annual Report~~ on ~~Form~~the ~~10-K (filed under our former name “ALARIS Medical~~business, ~~Inc.”) for the~~financial ~~year ended December 31~~condition, ~~2002,~~results ~~have~~of ~~been~~operations or ~~dismissed~~cash byflows ~~the~~of ~~United States District Court for~~ the ~~District of Northern Illinois~~Company.

~~The Company~~- is13 ~~also~~- a defendant in various actions, claims, and legal proceedings arising from its normal business operations. Management believes the Company has meritorious defenses to these cases and intends to defend itself vigorously. 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 the business, financial condition, results of operations or cash flows of the Company.

NOTE 9 – CONTINGENCIES AND LITIGATION (Continued)

Cal Pacifico:

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 assembled at the Company’s two maquiladora assembly plants in Tijuana, Mexico. Cal Pacifico ~~received~~may aseek ~~pre-penalty~~to ~~notice~~recover ~~of intent~~ from the ~~United~~ ~~States~~Company ~~Customs Service (“Customs”) to assess~~ any additional duties and penalties assessed against ~~Cal Pacifico for its alleged failure to comply with certain documentary requirements regarding the importation of goods on behalf of its clients, including the Company. The Company believes that~~ it isby ~~unlikely that Customs will assess any portion of~~ the ~~disputed~~United ~~amounts~~States ~~against the Company.~~ Customs ~~has not initiated any proceedings~~Service ~~against~~ ~~the Company~~ in ~~respect~~this ~~of such matters~~connection. Nonetheless, Cal Pacifico advised the Company that it may seek recovery from the Company, through arbitration, for any portion of the disputed amounts which it is required to pay to Customs. The Company believes that it has meritorious defenses to claims Cal Pacifico might raise against the Company. Although management does not believe it is probable that ~~the~~this ~~Cal Pacifico dispute will~~matter ~~result~~will result in a material claim against the Company, it will continue to monitor the matter.

Intellectual Property Indemnification:

Under our sales agreements with certain customers, subject to certain exceptions and limitations, we have agreed to indemnify our customers for damages and costs, including attorneys fees, resulting from infringement by our products of third-party intellectual property rights. In certain circumstances, we also may have an obligation to defend our customer against claims of such infringement made by third parties. Subject to expiration or termination of third party intellectual property rights and to statutes of limitation that bar third party claims, the terms of our indemnifications are generally perpetual from the effective date of the agreement. Based on historical experience, the Company does not believe any significant payments will result, and accordingly, we have not accrued any amounts for our indemnification. However, there can be no assurances that we will not have any future financial exposure under these indemnifications.

-16 14 -

PART I – ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain of the matters discussed in this report, including, without limitation, matters ~~discussed~~ discussed under this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Certain of these forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or the negative of these terms or other comparable terminology, or by discussions of strategy, plans or intentions. Statements contained in this report that are not historical facts are forward-looking statements. Without limiting the generality of the preceding statement, all statements in this report concerning or relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, through our senior management, from time to time we make forward-looking statements concerning our expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting our best judgment based upon current information and involve a number of risks and uncertainties. Other factors may affect the accuracy of these forward-looking statements and our actual results may differ materially from the results anticipated in these forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions described under this Item 2, – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and ~~under~~ Item 7,– “Management’s Discussion and Analysis of Financial Condition and Results of Operations — –Critical Accounting ~~Policies~~ ~~and~~ Estimates” and “– Factors Relating ~~That~~to ~~Could~~ALARIS, ~~Affect~~Our ~~Future~~Industry and ~~Financial Condition~~Our ~~and~~Common ~~Results~~Stock” in our Annual Report on Form 10-K ~~(filed under our former name “ALARIS Medical, Inc.”)~~ for the year ended December 31, ~~2002~~2003, and general conditions in the economy and capital markets.

The Company:

ALARIS Medical Systems, Inc. was originally incorporated under the name Advanced Medical Technologies, Inc. on September 28, 1988. On November 26, 1996, IMED Corporation, the Company’s operating subsidiary, and IVAC Medical Systems, Inc., two pioneers in infusion systems, merged to create ALARIS Medical Systems, Inc. (“Former AMS”), and the Company changed its name to ALARIS Medical, Inc. (“AMI”). On June 30, 2003, AMI and Former AMS completed a recapitalization. In connection with the recapitalization, Former AMS merged with and into AMI, which changed its name to ALARIS Medical Systems, Inc. ALARIS Medical Systems, Inc. and its subsidiaries are collectively referred to as the “Company” or “ALARIS Medical Systems.”

Overview:

We develop and market products for the safe delivery of intravenous (IV) medications. We are a global leader in ~~The Company’s~~the design, development and marketing of IV medication safety and infusion therapy delivery systems, software applications, needle-free disposables and related patient monitoring equipment. Our intravenous infusion systems are ~~marketed in~~ ~~the~~used to deliver to patients one or more fluids, primarily pharmaceuticals or nutritionals, ~~United States~~ and consist of medication safety systems, single and multi-channel large volume infusion pumps, syringe ~~internationally~~pumps and dedicated and non-dedicated disposable administration sets. ~~ALARIS Medical Systems’~~ Our “smart” pumps, with ~~the~~ our proprietary Guardrails Safety Software, help to reduce the risks and costs of medication errors, help to safeguard patients and clinicians and gather and record clinical information for review, analysis and interpretation.

~~-17-~~ We have one of the largest installed bases of large volume pump delivery lines, or channels, in the U.S. hospital market, which we believe to be approximately 33% of such channels. We also believe that we have the number one or number two market position in the large volume pump segment or the syringe pump segment, or

We have one of the largest installed bases of large volume pump delivery lines in the U.S. hospital market, which we believe to be approximately 32% of such lines. We also believe that we have the number one or number two market position in the large volume pump segment or the syringe pump segment, or both segments, in eight Western European countries, as well as in Australia, Canada, New Zealand and South Africa. We provide our products, professional and technical support and training services to over 5,000 hospital and health care systems, as well as alternative care sites, in more than 120 countries through our direct sales force and distributors. We also have long-~~term~~ ~~contracts~~15 ~~with most major hospital group purchasing organizations (GPOs) in the United States, which enhance our ability to sell our products to individual member hospitals. We generate approximately two~~-~~thirds~~ of our revenues from our North America business unit and approximately one-third of our revenues from our International business unit. Headquartered in San Diego, California, ALARIS Medical Systems employs approximately 2,900 people worldwide.

~~Critical~~both ~~Accounting~~segments, ~~Policies~~in Belgium, France, Italy, The Netherlands, Norway, Spain, Sweden, the United Kingdom, Australia, Canada, New Zealand and ~~Estimates:~~South Africa. In addition, we are a leading provider of patient monitoring products that measure and monitor temperature, with a substantial installed base of hospital thermometry systems in the United States. We also provide products which measure and monitor pulse, pulse oximetry and blood pressure. We provide products, professional and technical support and training services to over 5,000 hospitals and health care systems, as well as alternative care sites, in over 100 countries through a direct sales force of over 200 salespersons and more than 100 distributors. We also have long-term contracts with most major hospital group purchasing organizations (GPOs) in the United States, which enhance our ability to sell our products to individual member hospitals. We generate approximately two-thirds of our revenues from our North America business unit and approximately one-third of our revenues from our International business unit. Headquartered in San Diego, California, ALARIS Medical Systems employs approximately 3,000 people worldwide, including approximately 1,000 in the United States.

Our discussionCritical andAccounting analysis of our operating results and financial condition is based upon our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with United States generally accepted accounting principles. Estimates:

~~Critical~~ Our ~~accounting policies are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments~~ discussion and ~~estimates:~~analysis ~~inventory valuation, allowances for uncollectible accounts receivable and estimated rebates, cost~~ of ~~field~~our ~~corrective~~operating ~~actions,~~results ~~deferred tax asset valuation~~ and ~~carrying~~ ~~value~~financial ofcondition ~~intangible~~is ~~assets. Estimates in each of these areas are~~ based onupon historical experience and various judgments and assumptions that we believe are appropriate. However, the inherent nature of estimates is that actual results will likely be different from these estimates. Our accounting practices are discussed in more detail in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 to our unaudited Condensed Consolidated Financial Statements, ~~contained in~~which ~~our~~have ~~Annual~~been ~~Report~~prepared ~~on Form 10-K (filed under our former name “ALARIS Medical,~~in ~~Inc.”)~~accordance ~~for~~with ~~the~~United ~~year~~States ~~ended~~generally accepted ~~December~~accounting ~~31, 2002~~principles.

Critical accounting estimates are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments and estimates: inventory valuation, allowances for uncollectible accounts receivable and estimated rebates, cost of field corrective actions, income taxes and carrying value of intangible assets. Estimates in each of these areas are based on historical experience and various judgments and assumptions that we believe are appropriate. However, the inherent nature of estimates is that actual results will likely be different from these estimates. Our accounting practices are discussed in more detail in Item 7– “Management’s Discussion and Analysis of Financial Condition and Results of Operations:” and Note 1 to our Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2003.

The followingSummary tableStatement sets forth, for the periods indicated, selected financial information expressed as a percentage of sales: Operations

		Three Months Ended September 30,				Nine Months Ended September 30,
			Three Months Ended March 31,
		2003		2002		2003		2002
			2004			2003
Sales		100.0	%	100.0	%	100.0	%	100.0	%
			As Reported			As Reported			Recapitalization Expenses (1)		Without Recapitalization Expenses (1)
Cost of sales		46.0		49.1		46.7		49.9
			(dollars in millions, except per share amounts)
Gross margin		54.0		50.9		53.3		50.1
Sales			$	134.2		$	121.2		$	—	$	121.2
Selling and marketing expenses		(19.4	)	(19.9	)	(19.8	)	(19.9	)
Gross profit	— $		$	76.0		$	63.2			—	$	63.2
General and administrative expenses		(9.1	)	(8.9	)	(9.3	)	(9.3	)
	— % of sales			56.6	%		52.1	%				52.1	%
Research and development expenses		(7.4	)	(7.1	)	(7.4	)	(6.7	)
Operating profit	— $		$	24.9		$	19.9			—	$	19.9
Restructuring and other non-recurring items		-		-		-		0.2
	— % of sales			18.5	%		16.4	%				16.4	%
Interest income from sales-type capital leases		0.6		0.9		0.7		1.0
Net income	— $		$	11.6		$	2.5		$	1.0	$	3.5
Income from operations		18.7		15.9		17.5		15.4
	— % of sales			8.7	%		2.1	%				2.9	%
Interest expense, net		(5.0	)	(12.8	)	(9.1	)	(13.2	)
Net income per common share, diluted			$	.15		$	.04			NM	$	.05
Recapitalization expenses		-		-		(17.8	)	-
Other, net		(0.2	)	(0.3	)	(0.2	)	(0.2	)
Income (loss) before income taxes		13.5		2.8		(9.6	)	2.0
(Provision for) benefit from income taxes		(5.1	)	(1.1	)	3.7		(0.8	)
Net income (loss)		8.4	%	1.7	%	(5.9	)%	1.2	%

(1) Recapitalization expenses are $1.5 ($.9 after tax). See note 2 to our Condensed Consolidated Financial Statements for a full discussion of this item as well as the “Supplemental Schedule Reconciling GAAP Data to Pro Forma Non-18GAAP Data” on page 20 for a reconciliation of net income and net income per common share, diluted to this non-GAAP presentation.

~~We report~~- ~~our~~16 ~~sales~~- ~~results consistent with our two geographical segments: North America and International. The following table summarizes sales to customers by each segment.~~

	Three Months Ended September 30,							Nine Months Ended September 30,
	2003		2002		incr/(decr)			2003		2002		incr/(decr)
	(dollars in millions)
North America
Infusion Instruments	$	24.5	$	18.4		33	%	$	68.4	$	49.1		39	%
Dedicated Disposables		37.8		34.9		8	%		110.6		103.3		7	%
Other Disposables and Service		22.0		18.3		20	%		61.3		53.4		15	%
Subtotal		84.3		71.6		18	%		240.3		205.8		17	%
Patient Monitoring		6.1		6.5		(6	%)		17.9		19.2		(7	%)
North America Total	$	90.4	$	78.1		16	%	$	258.2	$	225.0		15	%
International
Infusion Instruments	$	9.9	$	9.9		0	%	$	33.9	$	29.8		14	%
Dedicated Disposables		22.3		18.5		21	%		64.5		53.0		22	%
Other Disposables and Service		6.6		5.3		25	%		19.1		14.1		35	%
Subtotal		38.8		33.7		15	%		117.5		96.9		21	%
Patient Monitoring		1.3		1.3		0	%		3.7		4.1		(10	%)
International Total	$	40.1	$	35.0		15	%	$	121.2	$	101.0		20	%
ALARIS Medical Systems Total	$	130.5	$	113.1		15	%	$	379.4	$	326.0		16	%

We report our sales results consistent with our two geographical segments: North America and International. The following table summarizes sales to customers by each segment.

Three Months Ended September 30, 2003 Compared with Three Months Ended September 30, 2002

	Three Months Ended March 31,
	2004		2003		incr/(decr)
	(dollars in millions)

North America
Infusion Instruments	$	17.3	$	19.0		(9	%)
Dedicated Disposables		40.3		35.9		12	%
Other Disposables		19.0		15.6		22	%
Service and other		5.1		3.9		31	%

Subtotal		81.7		74.4		10	%

Patient Monitoring		5.3		5.6		(5	%)

North America Total	$	87.0	$	80.0		9	%

International
Infusion Instruments	$	14.1	$	13.9		1	%
Dedicated Disposables		24.4		20.6		18	%
Other Disposables		4.3		2.9		48	%
Service and other		3.4		2.7		26	%

Subtotal		46.2		40.1		15	%

Patient Monitoring		1.0		1.1		(9	%)

International Total	$	47.2	$	41.2		15	%

ALARIS Medical Systems Total	$	134.2	$	121.2		11	%

Sales. ForThree theMonths threeEnded monthsMarch ended September 3031, 2003,2004 salesCompared werewith $130.5Three million,Months an increaseEnded ofMarch $17.4 million31, or 15%, over the same period in the prior year. If currency exchange rates for the third quarter of 2003 had prevailed during the third quarter of 2002, sales would have been $117.3 million for the third quarter of 2002. Thus, excluding the effects of currency changes, the increase in sales for the third quarter of 2003 was $13.2 million, or 11%, over the third quarter of 2002.

~~Higher~~ Sales. For ~~volumes~~the ofquarter ~~both~~ended ~~drug~~March ~~infusion~~31, ~~instruments~~2004, ~~and~~sales ~~disposable administration sets~~ were ~~the primary~~$134.2 ~~factors~~million, ~~leading~~an ~~to the~~ increase ~~in North America sales~~ of $1213.3 0 million, or 1611%, over the ~~prior~~same ~~year.~~period ~~The increase~~ in ~~infusion instruments was primarily due to sales of~~ the ~~Medley~~prior ~~Medication~~year. ~~Safety~~If ~~System~~currency ~~and~~exchange ~~our~~rates ~~proprietary Guardrails Safety Software. We~~for ~~believe~~ the ~~increase~~first inquarter ~~sales~~ of ~~dedicated~~2004 ~~disposables~~had prevailed ~~was~~during ~~due~~2003, tosales anwould ~~increase~~have inbeen ~~our installed base of infusion devices. The growth in other disposables and service was due to an increase of approximately~~ $2127.6 million infor ~~sales~~the ofquarter ~~SmartSite~~ended ~~Needle-Free~~March ~~Systems~~31, ~~along with~~2003. ~~an increase in professional services over~~ Thus, the ~~third~~favorable ~~quarter~~effect of ~~2002. The increase in~~currency ~~sales~~changes ofon ~~drug~~revenues ~~infusion products in North America~~ was ~~partially offset by lower volumes of patient monitoring instruments and associated disposables compared with the prior year~~$6.4 million.

~~International~~ Higher volumes of Medley Medication Safety Systems and our proprietary Guardrails Safety Software and disposable administration sets, as well as increased sales ~~for~~of professional services were the ~~third~~primary factors ~~quarter~~leading ofto ~~2003~~the ~~increased~~increase in North America sales of $57.1 0 million, or 159%, ~~compared~~over ~~with~~ the ~~same~~first quarter of 2003. These increases were partially offset by ~~period~~a decrease in ~~the~~sales ~~prior~~volume ~~year~~of other infusion instruments, as well as a decrease in sales of patient monitoring products. ~~Excluding~~North America infusion instrument sales during the ~~effects~~first quarter of ~~currency~~2003 ~~changes,~~included ~~International~~$4.0 million of sales to support the U.S. government war readiness, that were not repeated in 2004. Additionally, an order for approximately $2 million of infusion instruments was shipped but not recognized during the ~~third~~first quarter of ~~2003~~2004. Revenues from professional services, most frequently sold with our safety products, increased $1.3% million over the ~~third~~first quarter in the prior year as a result of ~~2002~~the growth in sales of Medley Systems and Guardrails Safety Software. ~~This~~We believe that the increase in dedicated disposables was due to ~~higher~~the ~~volumes~~continuing growth in our installed base of, ~~and~~infusion ~~revenues~~devices. ~~from,~~The ~~dedicated~~growth in ~~disposable~~other ~~administration~~disposables ~~sets,~~was due to an increase of approximately $1.9 million in sales of SmartSite Needle-Free Systems ~~and service~~.

-19 17 -

~~Gross~~ International ~~Profit.~~sales ~~Gross~~for ~~profit~~the quarter ended March 31, 2004 increased $126.90 million, or 2215%, ~~for the quarter ended September 30, 2003,~~ compared with the same ~~quarter~~period in the prior year. ~~The~~This ~~gross~~increase ~~margin percentage~~was ~~increased~~due to ~~54.0%~~higher ~~for~~syringe ~~the~~pump ~~third quarter of 2003~~volumes, ~~from 50.9% for the third~~ ~~quarter~~strong sales of ~~2002.~~dedicated ~~Excluding~~disposable ~~the~~administration ~~effects of currency changes~~sets, ~~gross~~and ~~profit~~higher ~~for~~volumes ~~the third quarter~~ of ~~2003~~SmartSite ~~would~~Needle-Free ~~have~~Systems ~~increased~~and ~~$10.3~~services ~~million~~compared ~~from~~with the ~~third~~same ~~quarter~~period ofin ~~2002 and~~ the ~~gross~~ ~~margin~~prior ~~percentage~~year. ~~for~~These ~~the~~increases were ~~third~~partially offset ~~quarter~~by ofa ~~2002~~decrease ~~would~~in ~~have~~sales ~~been~~of ~~51.3%.~~large Involume ~~both~~pumps ~~Business~~and ~~Units,~~patient ~~the~~monitoring ~~improved~~products. ~~margin~~If ~~percentage~~currency ~~was~~exchange rates ~~due~~for tothe ~~increased~~quarter ~~volume~~ended ~~of products~~March ~~manufactured and sold~~31, an2004 ~~increased percentage of revenues from sales of software~~had ~~products~~prevailed ~~that~~during ~~carry~~the asame ~~higher~~period ~~margin~~in ~~than~~2003, ~~equipment~~International sales ~~and~~would ~~disposables,~~have ~~lower~~been ~~warranty costs,~~$47.2 ~~and~~million ~~generally~~for ~~lower~~the ~~product~~quarter ~~costs~~ended ~~resulting~~March ~~from~~31, ~~improved manufacturing efficiencies~~2003.

~~Selling~~ Gross ~~and Marketing Expenses~~Profit. ~~Selling~~Gross ~~and~~profit ~~marketing expenses~~ increased $212.8 million, or 1220%, for the quarter ended ~~September~~March 3031, ~~2003~~2004, compared with the same period in ~~2002,~~2003. ~~primarily~~The ~~due~~gross tomargin percentage increased ~~selling~~to 56.6% ~~costs~~for ~~associated~~the ~~with~~first ~~higher~~quarter ~~sales~~of ~~volume~~2004, in from 52.1% for the ~~third~~first quarter of 2003. ~~compared~~If ~~with~~currency ~~the~~exchange rates ~~third~~for the quarter ofended ~~2002~~March ~~and~~31, to2004 ~~higher~~had ~~sales and~~prevailed ~~marketing~~during ~~costs~~the ~~related~~same toperiod ~~increased~~in ~~personnel~~2003, ~~consulting~~the ~~and~~gross ~~related~~margin percentage ~~activities supporting~~for the ~~continued~~quarter ~~deployment~~ended ofMarch 31, ~~our~~2003 ~~medication~~would ~~safety~~have ~~strategy~~been 53.1%. AsOur aincreased ~~percentage~~gross ofmargin is primarily due to growth in the sales, ~~selling~~of our disposables and ~~marketing~~change ~~expenses~~in ~~decreased~~the toproduct ~~19.4%~~mix ~~for~~which included more higher margin sales than in the ~~third~~prior ~~quarter~~year. ofDisposables ~~2003~~carry a higher margin than instruments, ~~from~~ ~~19.9%~~and ~~for~~our ~~the~~strong ~~third~~disposables ~~quarter~~growth ofhas ~~2002.~~had ~~Excluding~~a ~~the~~positive ~~effects~~impact ofon ~~currency~~gross ~~changes,~~margin. ~~the~~The sales ~~increase~~growth inof ~~selling~~our Medley Medication Safety System and ~~marketing~~Guardrails ~~expenses~~Safety ~~for~~Software has also contributed to the ~~third~~increase in gross profit in the first quarter of 2004 over the same period in 2003, ~~would~~as ~~have~~these ~~been~~software-enabled safety products carry higher margins than $2equipment without advanced medication-error reducing software.0 Product ~~million~~quality and manufacturing efficiencies have been a primary focus for us, orand 8%lower warranty repair rates have resulted from these efforts. Additionally, increased volumes ~~compared~~have ~~with~~resulted ~~the~~in ~~third~~lower ~~quarter~~per-unit ofproduct ~~2002~~costs.

~~General~~ Selling and ~~Administrative~~Marketing Expenses. ~~General~~Selling and ~~administrative~~marketing expenses increased $13.8 6 million, or 1815%, for the quarter ended ~~September~~March 3031, ~~2003~~2004, compared with the same period in 2003, ~~the~~primarily due ~~prior~~to ~~year.~~increased Asselling acosts ~~percentage~~associated ofwith higher sales, ~~general~~volume ~~and~~in the ~~administrative~~first ~~expenses increased~~quarter toof ~~9.1%~~2004 ~~for~~and due to the ~~third~~continued ~~quarter~~investment ofin ~~2003,~~developing ~~from~~our International ~~8.9%~~selling ~~for~~and ~~the~~marketing ~~third~~functions ~~quarter~~to ofsupport our ~~2002.~~International medication ~~Increases~~safety instrategy. ~~administrative~~Both ~~expenses~~our ~~were~~North ~~largely~~America ~~due~~and toInternational ~~higher~~business ~~depreciation,~~units incurred ~~legal~~higher sales and ~~other~~ ~~professional~~marketing ~~services~~costs related to increased personnel, travel and ~~bonus~~related ~~expense~~activities supporting ~~over~~ the ~~same~~continued ~~period~~expansion inof ~~the~~our ~~prior~~medication ~~year~~safety strategy. ~~Excluding~~ ~~the~~As ~~effects~~a percentage of sales, ~~currency~~selling and ~~changes,~~marketing ~~the~~expenses ~~increase~~increased into ~~general~~20.8% ~~and~~for ~~administrative~~the quarter ended March 31, ~~expenses~~2004 ~~for~~compared with 20.0% for the ~~third~~same ~~quarter~~period ofin 2003. ~~would~~The ~~have~~effect ~~been~~of ~~$1.5~~unfavorable ~~million,~~changes orin ~~15%,~~foreign ~~compared~~currency ~~with~~exchange rates ~~the~~on ~~third~~selling ~~quarter~~and ofmarketing ~~2002~~expenses was $1.4 million.

~~Research~~ General and ~~Development~~Administrative Expenses. ~~Research~~General and ~~development~~administrative expenses increased ~~approximately~~ $1.67 million, or 1915%, for the quarter ended ~~September~~March 3031, ~~2003~~2004, compared with the same period in ~~the prior year~~2003. ~~The~~As ~~increase~~a ~~was~~percentage ~~due~~of tosales, ~~spending~~general ~~associated~~and ~~with~~administrative expenses ~~new~~increased ~~product~~to ~~development~~9.6% ~~primarily~~for ~~related~~the toquarter ended ~~our~~March ~~medication safety strategy~~31, ~~including increased~~2004 ~~spending~~compared onwith ~~new~~9.2% ~~products~~ for the ~~international~~same period ~~market~~in 2003. ~~This~~The ~~higher~~effect ~~spending~~of ~~was primarily~~unfavorable changes in ~~the~~foreign ~~form~~currency ofexchange ~~increased~~rates ~~salaries~~on general and ~~benefits~~administrative expenses ~~and~~was ~~outside~~$.4 ~~consulting~~million. ~~Research and~~Increases ~~development~~in administrative expenses were ~~increased~~largely due to higher ~~7.4%~~legal ofand ~~sales~~other ~~for~~professional ~~the~~services, ~~third~~insurance, ~~quarter~~and ofadditional ~~2003,~~personnel and ~~compared~~related ~~with~~payroll ~~7.1%~~tax ofexpenses ~~sales~~over ~~for~~ the ~~third~~prior ~~quarter of 2002~~year.

~~Interest~~ Research ~~Income~~and ~~from~~Development ~~Sales-Type Capital Leases~~Expenses. Research ~~Interest income from sales-type capital leases decreased~~ and development expenses increased approximately $2.3 2 million, or 2825%, for the quarter ended ~~September~~March 3031, ~~2003~~2004, compared with the same ~~quarter~~period in ~~2002,~~2003. The increase was due to aspending associated ~~decrease~~with new product development primarily related to our medication safety strategy, including increased spending on new products for international markets. This higher spending was primarily in the ~~contract~~form ~~portfolio~~of asadditional personnel, outside consulting and project supplies. The effect of unfavorable changes in foreign currency exchange rates on ~~more~~research ~~customers~~and development expenses was ~~have~~$.2 ~~utilized~~million. Research and development expenses increased ~~third~~to ~~party~~8.2% ~~financing~~of sales for the quarter ended March 31, 2004, compared with 7.3% of sales for the same period in 2003.

Interest ~~Expense~~Income from Sales-Type Capital Leases. Interest ~~expense~~income from sales-type capital leases decreased $8.03 million, or 5530%, for the quarter ended ~~September~~March 3031, ~~2003~~2004, compared with the same period in ~~the prior year. Included in interest expense in the third quarter of~~ 2003 isdue ~~$.7 million of debt-issue cost write-offs related~~ to ~~$30~~a ~~million in prepayments made under our new bank credit facility (the “Credit Facility”). The~~ decrease ~~in interest expense resulted from~~ ~~the reduction~~ in the ~~principal~~ ~~amount~~contract ofreceivables ~~outstanding~~portfolio ~~debt~~as ~~and lower interest rates on debt under the Credit Facility and the Notes compared with~~more ~~the~~customers ~~interest rates on the debt which was refinanced in the second quarter recapitalization described in Note 2~~ continue to ~~the~~utilize ~~unaudited~~third ~~Condensed~~party ~~Consolidated Financial Statements~~financing.

-20 18 -

~~Nine~~ Interest Income. ~~Months~~Interest ~~Ended~~income ~~September~~decreased ~~30,~~$.1 ~~2003~~million ~~Compared~~due ~~with~~to ~~Nine~~lower ~~Months~~interest rates earned ~~Ended~~and ~~September~~lower ~~30,~~cash ~~2002~~balances invested during 2004 compared with 2003.

Interest ~~Sales~~Expense. ~~For~~ ~~the~~Interest ~~nine~~expense ~~months~~decreased ~~ended September 30, 2003, sales were~~ $~~379~~8.4 million, ~~an increase~~or of58%, ~~$53.4~~for ~~million,~~the quarter ended orMarch ~~16%~~31, ~~over~~2004, compared with the same period in ~~the~~2003. ~~prior~~Included ~~year.~~in Ifinterest expense ~~currency~~in the ~~exchange~~first ~~rates~~quarter ~~for~~of ~~the~~2004 ~~nine~~is ~~months~~$.5 ~~ended~~million ~~September~~of ~~30,~~debt-issue ~~2003~~cost ~~had prevailed~~write-offs ~~during~~related ~~the~~to ~~same~~$20 million ~~period~~in ~~2002,~~prepayments made ~~sales~~under ~~would~~the ~~have~~Credit ~~been $341~~Facility.8 ~~million~~The ~~for the~~decrease ~~nine~~in ~~months~~interest ~~ended~~expense resulted ~~September~~from ~~30,~~the ~~2002.~~2003 ~~Thus~~recapitalization, which ~~excluding~~reduced the ~~effects~~principal amount of ~~currency~~outstanding ~~changes,~~debt ~~the~~and ~~increase~~lowered ininterest ~~sales~~rates ~~for~~on ~~the~~debt ~~nine~~under ~~months~~the Credit ~~ended~~Facility ~~September~~and ~~30,~~the ~~2003~~Notes ~~was~~compared ~~$37.6~~with ~~million,~~the orinterest ~~11%,~~rates ~~over~~on the ~~same~~debt ~~period~~which was refinanced in ~~2002~~the recapitalization.

~~Higher~~ Recapitalization ~~volumes~~Expenses. ofIn ~~both~~connection ~~drug~~with ~~infusion~~our ~~instruments~~2003 ~~and~~recapitalization discussed ~~disposable~~in ~~administration~~note 2 ~~sets~~to ~~were~~ the ~~primary~~ ~~factors~~Condensed ~~leading~~Consolidated toFinancial ~~the~~Statements, ~~increase~~we inrecorded ~~North~~a ~~America~~pre-tax ~~sales~~ charge of $331.25 million, or($.9 ~~15%~~million, ~~over~~ ~~the~~net ~~prior~~of ~~year.~~tax) ~~The~~for ~~increase~~the inquarter ~~infusion~~ended ~~instruments~~March ~~was~~31, ~~primarily~~2003. ~~due~~This tocharge includes a ~~sales~~premium of ~~the~~ ~~Medley Medication Safety System and our proprietary Guardrails Safety Software~~$1.2 ~~We believe~~million, ~~that~~representing the ~~increase~~purchase inprice ~~dedicated~~over ~~disposables~~the ~~was due to an increase in our installed~~then ~~base~~accreted ofcarrying ~~infusion~~value ~~devices. The growth in other disposables and service was due to an increase~~ of ~~approximately~~ $723.58 million ~~in sales~~ of ~~SmartSite~~senior ~~Needle-Free~~discount ~~Systems~~notes, ~~along with~~and the anwrite-off ~~increase in professional services. The increase in sales~~ of ~~drug~~related ~~infusion~~unamortized ~~products in~~debt ~~North~~issuance ~~America~~costs ~~was partially offset by lower volumes~~ of ~~patient monitoring instruments~~ ~~and~~$.3 ~~associated disposables compared with the prior year~~million.

~~International~~ Excluding ~~sales~~this charge, for the ~~nine~~quarter ~~months~~ ended ~~September~~March 3031, 2003, ~~increased~~net income would have been $203.25 million, orand ~~20%, compared~~net ~~with~~income ~~the~~per ~~same~~common ~~period~~share, inon ~~the~~a ~~prior~~fully ~~year.~~diluted ~~Excluding~~basis, ~~the~~would ~~effects~~have ofbeen ~~currency~~$.05. ~~changes,~~On ~~International~~a ~~sales~~pro ~~for~~forma basis, assuming the ~~nine~~recapitalization ~~months~~had ~~ended~~occurred ~~September~~on 30January 1, 2003, ~~increased 5%~~and ~~over~~excluding the ~~same~~charge ~~period~~relating to inthe ~~2002.~~repurchase ~~This~~of ~~increase~~debt ~~was~~that ~~due~~we torecorded ~~higher~~in ~~volumes~~the first quarter of 2003, ~~and~~net ~~revenues from,~~income ~~large~~for ~~volume~~the ~~pumps~~quarter ended March 31, ~~dedicated~~2003 ~~disposable~~would ~~administration~~have ~~sets,~~been ~~SmartSite~~$8.4 ~~Needle-Free~~million ~~Systems~~ and ~~services~~net ~~compared~~income ~~with~~per ~~the~~common ~~same~~share, ~~period~~on ina ~~the~~fully ~~prior~~diluted basis, ~~year~~would have been $.11.

~~Gross~~ We ~~Profit.~~refer ~~Gross profit increased $38.8 million, or 24%, for~~ the ~~nine~~reader ~~months ended~~to ~~September~~“Supplemental ~~30,~~Schedule ~~2003,~~Reconciling ~~compared~~GAAP ~~with~~Data ~~the~~to ~~same~~Pro ~~period in the prior year. The gross~~Forma ~~margin~~Non-GAAP ~~percentage~~Data” ~~increased~~on topage ~~53.3%~~20 for ~~the~~a ~~first~~reconciliation ~~nine months~~ of ~~2003,~~net ~~from~~income ~~50.1%~~and ~~for~~net ~~the~~income per ~~first~~common ~~nine~~share ~~months~~to ofthis ~~2002.~~pro ~~Excluding~~forma ~~the effects of currency changes~~data, which ~~gross~~are ~~profit~~non-GAAP ~~for~~financial ~~the nine months ended September 30~~measures, ~~2003~~as ~~would~~well ~~have~~as ~~increased $27.7 million from the same~~a ~~period~~discussion inof ~~2002 and~~ the ~~gross~~reasons ~~margin~~that ~~percentage~~management ~~for~~ believes the ~~nine~~presentation ~~months ended September 30, 2002 would have been 51.0%. In both Business Units, the improved margin percentage was due to increased volume~~ of ~~products~~such ~~manufactured and sold, an increased~~information ~~percentage~~is ofuseful ~~revenues~~for ~~from sales of software products that carry a higher margin than equipment and disposables, lower warranty costs, and generally lower product costs resulting from improved manufacturing efficiencies~~investors.

~~Selling~~ Other, ~~and Marketing Expenses~~Net. ~~Selling~~Other, ~~and~~net ~~marketing~~ expenses increased $10.0 9 million, ~~or 15%,~~ for the ~~nine~~quarter ~~months~~ ended ~~September~~March 3031, ~~2003~~2004, compared with the same period in ~~2002,~~2003 primarily due to ~~increased~~an ~~selling~~increase ~~costs associated with higher sales~~in ~~volume~~realized ~~in 2003 compared with the prior year~~ and tounrealized losses ~~higher~~on ~~sales~~foreign ~~and~~currency ~~marketing costs related to increased personnel~~transactions, ~~bonus~~fees ~~expense, consulting and~~ related ~~activities~~to ~~supporting~~amending ~~the continued deployment of our medication safety strategy. As a percentage of sales, selling~~ and ~~marketing~~lowering ~~expenses decreased to 19.8% for~~ the ~~nine~~interest ~~months~~rate ~~ended September~~on our ~~30,~~Credit ~~2003,~~Facility ~~from 19.9% for the same period in 2002. Excluding the effects of currency changes, the increase in selling~~ and ~~marketing~~lower ~~expenses~~miscellaneous ~~for the nine months ended September 30, 2003 would have been $6~~income.8 ~~million, or 10%, compared with the same period in 2002.~~

~~General~~ Provision ~~and~~for ~~Administrative~~Income ~~Expenses~~Taxes. The ~~General~~effective ~~and~~income ~~administrative~~tax ~~expenses~~rate was ~~increased $4.9~~a ~~million, or 16~~36%, expense for the ~~nine~~three months ended ~~September~~March 3031, ~~2003,~~2004 compared with a 39% expense for the same period in ~~the prior year~~2003. Our Aseffective atax ~~percentage~~rate ofdiffers ~~sales,~~from ~~general~~the ~~and~~U.S. ~~administrative~~federal ~~expenses remained~~rate ~~constant~~of ~~at 9.3~~35%. due ~~Excluding~~to ~~the~~state taxes, ~~effects~~tax ~~of currency changes~~credits, ~~the~~certain ~~increase~~non-deductible ~~in general~~expenses and ~~administrative~~different ~~expenses~~tax rates for ~~the~~operations ~~nine~~outside ~~months~~of the ~~ended~~United ~~September~~States. The ~~30,~~change ~~2003~~in ~~would have~~the effective tax ~~been~~rate ~~$4.2~~from ~~million,~~the orfirst quarter ~~13%,~~of ~~compared~~2003 ~~with~~to the ~~same~~first ~~period~~quarter inof ~~2002.~~2004 ~~Increases~~is ~~in administrative~~primarily ~~expenses were largely~~ due to ~~higher~~the change ~~depreciation,~~in ~~legal~~mix ~~and~~of anticipated taxable income derived from ~~other professional services,~~ various jurisdictions and increases ~~bonus~~in ~~expense~~available research credits ~~over~~for the ~~same~~full ~~period in the prior~~ year 2004.

~~Research and~~ ~~Development~~- ~~Expenses.~~19 ~~Research~~- and development expenses increased approximately $6.1 million, or 28%, for the nine months ended September 30, 2003, compared with the same period in the prior year. The increase was due to spending associated with new product development primarily related to our medication safety strategy, including increased spending on new products for the international market. This higher spending was primarily in the form of increased salaries, bonus, benefits and outside consulting. Research and development expenses increased to 7.4% of sales for the nine months ended September 30, 2003, compared with 6.7% of sales for the same period in 2002.

-21-

Restructuring and Other Non-Recurring Items. We recorded a non-recurring benefit of $1.1 million during the first quarter of 2002 for an insurance settlement. The settlement related to damages and losses incurred at one of our disposable products manufacturing plants in Mexico in 1993 as a result of flooding. The contingency related to the insurance settlement was resolved in the first quarter of 2002, when we received proceeds of $1.0 million and notification of an additional payment due of $.1 million, which we received during April 2002.

During the first quarter of 2002, we initiated a plan to restructure our Central European technical services. In connection with this plan, we recorded a charge of $.5 million which included $.4 million for severance costs for 21 positions affected by the relocation of our German operations and $.1 million related to lease termination payments. As of September 30, 2003, all severance payments had been made to the identified employees.

Interest Income from Sales-Type Capital Leases. Interest income from sales-type capital leases decreased $.9 million, or 25%, for the nine months ended September 30, 2003, compared with the same period in 2002 due to a decrease in the contract portfolio as more customers have utilized third party financing.

Interest Expense. Interest expense decreased $8.3 million, or 19%, for the nine months ended September 30, 2003, compared with the same period in the prior year. Included in interest expense in the third quarter of 2003 is $.7 million of debt-issue cost write-offs related to $30 million in prepayments made under the Credit Facility. The decrease in interest expense resulted from the reduction in the principal amount of outstanding debt and lower interest rates on debt under the Credit Facility and the Notes compared with the interest rates on the debt which was refinanced in the recapitalization described in Note 2 to the unaudited Condensed Consolidated Financial Statements.

Recapitalization Expenses. In connection with the recapitalization discussed in Note 2 to the unaudited Condensed Consolidated Financial Statements, we recorded a pre-tax charge of $67.7 million ($41.4 million, net of tax, or $.69 per share) through June of 2003. This charge includes premiums (representing the excess of tender offer purchase prices over principal amounts of purchased indebtedness) and consent payments in connection with the tender offers and consent solicitations of $55.4 million, the write-off of related unamortized debt issuance costs of $10.3 million and other related costs of $2.0 million. No charges were recorded in the third quarter of 2003.

Excluding this charge, for the nine months ended September 30, 2003, net income would have been $19.1 million and net income per common share, on a fully diluted basis, would have been $.28. On a pro forma basis, assuming the recapitalization had occurred on January 1, 2003, and excluding the charge relating to recapitalization expenses that we recorded in the first half of 2003, net income for the nine months ended September 30, 2003 would have been $29.0 million and net income per common share, on a fully diluted basis, would have been $.39.

We refer the reader to “–Supplemental Schedule Reconciling GAAP Data to Pro Forma Non-GAAP Data” on page 23 for a reconciliation of net income and net income per common share to this pro forma data, which are non-GAAP financial measures, as well as a discussion of the reasons that management believes the presentation of such information is useful for investors.

-22-

Supplemental Schedule Reconciling GAAP Data to Pro Forma Non-GAAP Data

The following table sets forth a reconciliation of our reported net ~~loss~~income and net ~~loss~~income per common share for the ~~nine~~three months ended ~~September~~March 3031, 2003 to our net income and net income per share on a pro forma basis as if the recapitalization had occurred on January 1, 2003, which pro forma amounts are non-GAAP financial measures. The pro forma data exclude the effect of the pre-tax charges of $671.7 5 million weand the related tax effects we recorded in the first ~~half~~quarter of 2003.

The pro forma data assume that the following transactions occurred on January 1, 2003: (i) ~~the~~ the sale of 10 million shares of common stock; (ii) the sale of $175 million aggregate principal amount of ~~ALARIS Medical Systems’ new 7-1/4% senior subordinated notes due 2011 (the “~~Notes”); (iii) borrowings of a $245 million term loan under ~~our~~the ~~new $275 million~~ Credit Facility at an annual interest rate of 4.05%; (iv) the repurchase of all of our outstanding indebtedness pursuant to tender offers as described in ~~Note~~note 2 to the ~~unaudited~~ ~~Condensed~~ Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2003; and (v) other debt repurchases made in the first half of 2003.

The pro forma data isare being presented to give management and investors an enhanced understanding of the effect of the recapitalization on our operating results. Management believes that the significant reduction in future interest expense resulting from the recapitalization is material to an understanding of our business and will have a significant impact on cash flow and earnings. We have excluded the effect of the recapitalization expenses from the pro forma data because such expenses will not have a continuing impact on the Company. The pro forma data are not necessarily indicative of ~~the~~ the results of operations that would have been achieved had the transactions reflected ~~therein~~ therein been consummated prior to the period presented.

	Nine Months Ended September 30, 2003
	Three Months Ended March 31, 2003
	(dollars and share amounts in thousands)
Net loss, as reported	$	(22,400	)
Net income, as reported	$	2,547
Adjustments to exclude recapitalization expenses:
Recapitalization expenses		671,~~695~~545
Income tax benefit		(~~26,279~~600	)
Net income, excluding recapitalization expenses		193,~~016~~492
Pro forma adjustments:
Interest expense		158,~~958~~125
Other, net		(7537	)
Provision for taxes		(63,~~007~~156	)
Net income, pro forma	$	288,~~892~~424
Net loss per common share, diluted, as reported	$	(.35	)
Net income per common share, diluted, as reported	$	.04
Net income per common share, diluted, excluding
Recapitalization expenses	$	.28
recapitalization expenses	$	.05
Net income per common share, diluted, pro forma	$	.3911
Weighted average common shares outstanding, as reported		63,684
Weighted average common shares outstanding, diluted, as reported		63,776
Dilutive common stock equivalents		4,349
Pro forma adjustment:
Weighted average common shares
Weighted average effect of sale of common stock		10,000
outstanding, diluted, assuming net income for period		68,033
Weighted average common shares outstanding, diluted, pro forma		73,776
Pro forma adjustment:
Weighted average effect of sale of common stock		6,490
Weighted average common shares
outstanding diluted, pro forma		74,523

-23 20 -

Liquidity and Capital Resources

We expect to meet our short-term liquidity needs, including capital expenditure requirements, with cash flow from operations and cash on hand. In addition, due to the introduction of pre-payable bank debt and a revolving credit line into our capital structure as a result of the June 2003 recapitalization, we expect to operate with lower cash balances than has been the case during the past several years. Therefore, we may also from time to time borrow under the revolving portion of the Credit Facility. We will continue to use our funds primarily for operating expenses, including planned expenditures for new research and development programs, minor acquisitions of intellectual property orand to supplement our manufacturing strategies, ~~capital~~ capital expenditures, scheduled interest payments on outstanding indebtedness, and reductions of our indebtedness through principal payments on our bank debt.

We As ~~were~~part ~~required~~of atour ~~September~~mid-year 2003 recapitalization, we established our new Credit Facility, which provides for a six-year $245 million term loan and a five-year $30 million revolving credit facility. We also sold $175 million aggregate principal amount of Notes and 10 million shares of common stock. We received net proceeds from the sale of the Notes of $170.6 million and net proceeds from the sale of our common stock of $117.5 million. We used the net proceeds from the Notes and common stock offerings, borrowings ~~2003~~under the term loan portion of the Credit Facility and a portion of our existing cash on hand to repurchase ~~maintain~~substantially $4all of our outstanding indebtedness.7 The recapitalization, along with earlier repurchases of debt during 2003, reduced our outstanding indebtedness at June 30, 2003 by $107 million infrom ~~collateralized~~the ~~deposit~~amount outstanding at December 31, 2002, reduced ~~accounts~~our projected annual interest expense by approximately $33 million, when compared with our ~~commercial~~full ~~banks~~year as2002 ~~security~~interest ~~against~~expense, ~~open~~and ~~foreign~~simplified and ~~exchange~~added ~~contracts~~greater flexibility to our capital structure through the introduction of pre-payable bank debt. During the second half of 2003, we repaid $61.2 million of the term loan, closing the year with $358.8 ~~primarily~~million ~~forward~~of ~~contracts~~debt.

As Utilizing ~~part~~cash offlow ~~the~~from ~~recapitalization~~operations ~~discussed~~and incash ~~Note~~on ~~2 to the Condensed Consolidated Financial Statements~~hand, we ~~established~~made ~~our~~two ~~new~~principal ~~Credit~~prepayments ~~Facility,~~on ~~which~~the ~~provides~~term ~~for~~loan aof ~~six-year~~ $~~245~~10 million ~~term~~each ~~loan~~ and a ~~five-year~~scheduled ~~$30~~quarterly ~~million~~principal ~~revolving~~payment ~~credit~~of ~~facility~~$0.6 Wemillion ~~also~~during ~~sold $175~~the ~~million~~first ~~aggregate~~quarter ~~principal~~of 2004. ~~amount~~At ofMarch ~~Notes~~31, ~~and~~2004, ~~9.1~~giving ~~million~~effect ~~shares~~to ofthe ~~common~~principal ~~stock.~~payments Wemade ~~received~~in ~~proceeds from~~ the ~~sale~~first quarter of the ~~Notes~~ year of $~~170~~20.6 million, ~~net~~we ofhad ~~the underwriting discount and proceeds from the sale of our common stock of~~ $~~106~~338.92 million, ~~net~~ of ~~the~~outstanding ~~underwriting~~indebtedness ~~discount~~composed ~~and other expenses~~ of a $6163.92 million. ~~We used the net proceeds from the Notes and common stock offerings, borrowings under the~~ term loan ~~portion~~under of the Credit Facility and a portion of our existing cash on hand to repurchase (pursuant to tender offers and consent solicitations which we commenced in May 2003) substantially all of our outstanding indebtedness. On July 2, 2003, the underwriters of the common stock offering exercised their over-allotment option to purchase an additional 1.35 million shares at $12175.~~50 per share, which consisted of~~ 0~~.9 million shares purchased from us and 0.45 million~~ ~~shares purchased from our executive officers. We received proceeds from the sale of the 0.9~~ million ~~shares,~~ of ~~$10.7 million, net of~~ the ~~underwriting discount of $0~~Notes.6 ~~million. The~~We ~~recapitalization,~~have ~~along~~not ~~with~~borrowed ~~earlier~~any ~~repurchases~~portion of ~~debt during 2003, reduced our outstanding indebtedness at June 30, 2003 by $107 million from~~ the ~~amount~~revolving ~~outstanding~~credit at December 31, 2002, reduced our projected annual interest expense by approximately $33 million, when compared with our full year 2002 interest expense, and simplified and added greater flexibility to our capital structure through the introduction of pre-payable bank debtfacility.

As On aDecember ~~result~~19, of2003, ~~our~~we ~~receipt~~obtained ofan amendment to the ~~proceeds~~Credit ~~from~~Facility to reduce the ~~sale~~interest ofrate on the term loan by 0.925% ~~million~~and to provide us with improved flexibility to make investments in our international operations. The amendment provides for up to two additional ~~shares~~interest rate reductions of 0.25% ~~common~~each upon achieving certain ratings of the ~~stock~~bank ondebt ~~July~~by 2both Moody’s Investors Service and Standard & Poor’s Ratings Services. In February 2004, ~~2003~~we inobtained ~~connection~~the ~~with~~first level of ratings improvement and accordingly, the ~~exercise~~interest rate was then reduced by ~~the~~0.25%. ~~common~~The ~~stock~~term ~~underwriters~~loan, ofas amended and ~~their~~after ~~over-allotment~~giving effect ~~option,~~to onthis ~~July~~first ~~10,~~rate ~~2003~~reduction, webears ~~made~~interest aat ~~$10~~an ~~million~~annual ~~prepayment~~rate ofequal ~~principal~~to ~~under~~current ~~the~~LIBOR ~~term~~or ~~loan~~a ~~portion~~fluctuating base ofrate, ~~the~~plus ~~Credit~~a ~~Facility~~margin of 2.25%. ~~Utilizing~~We ~~cash~~can ~~flow~~elect ~~from~~to use ~~operations,~~either wea ~~made~~one-, two-, ~~additional~~three-, ~~principal~~or ~~prepayments~~six-month ofLIBOR rate. ~~$10~~We ~~million~~have ~~each~~made ~~during~~elections ~~the~~in 2004 ~~third~~resulting ~~quarter~~in a current weighted average interest rate of ~~2003,~~3.36% per asannum ~~well~~(1.11% asplus the margin ~~first~~of ~~scheduled~~2.25%). ~~principal~~Payments ~~payment~~ of $0.6 million (0.25% of the original principal balance on ~~September~~the ~~30,~~term ~~2003~~loan) plus accrued interest are due each quarter, ~~and~~with aany ~~subsequent~~unpaid principal balance due ~~prepayment~~at maturity. We are required to pay a quarterly commitment fee at the rate of ~~$10~~0.5% ~~million~~per inannum ~~October~~on the ~~2003~~unused portion of the revolving credit facility.

At Pursuant ~~September~~to ~~30, 2003, giving effect~~ the ~~principal~~terms ~~payments~~of ~~made in~~ the ~~quarter~~Credit ~~of $30.6 million~~Facility, we ~~had~~are ~~$389.4~~required ~~million~~to ofeffectively ~~outstanding~~fix ~~indebtedness~~the ~~composed of a $214.4 million~~variable ~~term~~ ~~loan~~interest ~~under~~rate ~~the~~exposure ~~Credit~~on ~~Facility~~at ~~and~~least ~~$175.0~~50% ~~million~~ of ~~the~~our ~~Notes~~total outstanding debt. We have ~~not~~met ~~borrowed~~this ~~any~~requirement ~~portion~~by entering ofinto ~~the~~two ~~revolving~~separate ~~credit~~interest ~~facility.~~rate ~~The~~swap ~~term~~agreements ~~loan~~in ~~bears~~July ~~interest~~2003 atand August an2003 ~~annual rate~~whereby ~~equal~~$202.0 million toof ~~current~~the ~~LIBOR~~term orloan is effectively converted to a weighted ~~fluctuating~~average ~~base~~fixed rate, ~~plus~~of 24.7585%. Weafter ~~can~~giving effect ~~elect~~ to ~~use either~~the aFebruary ~~one-,~~2004 ~~two-,~~rate reduction ~~three-,~~of or0.25% ~~six-month~~as ~~LIBOR~~previously ~~rate~~discussed. WeThe ~~have~~July ~~made~~2003 ~~elections~~swap ~~resulting~~agreement has in a ~~weighted~~notional amount ~~average~~of ~~interest~~$30.0 ~~rate~~million atand ~~September~~expires on December 30, ~~2003 of 3~~2005.~~87%~~ ~~per~~The ~~annum~~August ~~(presently~~2003 ~~1.12%~~swap agreement ~~plus~~ ~~the~~has ~~margin~~an oforiginal ~~2.75%).~~notional ~~Payments~~amount of 0$172.~~25%~~0 ofmillion ~~the~~that ~~original~~decreases ~~principal~~quarterly ~~balance~~to ona ~~the term~~final ~~loan~~notional ~~plus~~amount of ~~accrued~~$54.0 ~~interest~~million ~~are~~and ~~due~~expires ~~each~~on ~~quarter~~December 29, 2006. ~~with~~Our ~~any~~management ~~unpaid~~will ~~principal~~continue to ~~balance~~evaluate ~~due~~our ~~at maturity.~~short term Weand ~~are~~long ~~required~~term strategies related to ~~pay~~the ainterest ~~quarterly~~rate ~~commitment~~risk associated ~~fee~~with atour ~~the~~variable rate ~~of 0~~debt.5% See ~~per~~Item ~~annum on~~3 ~~the~~– ~~unused~~“Quantitative ~~portion~~and Qualitative ofDisclosures ~~the~~about ~~revolving~~Market ~~credit facility~~Risk.”

-24 21 -

~~Pursuant~~ Our toindebtedness ~~the~~under ~~terms of~~ the Credit Facility, weis ~~are~~guaranteed ~~required~~by toour ~~effectively~~direct ~~fix~~and ~~the~~indirect ~~variable~~domestic ~~interest~~ ~~rate~~subsidiaries. ~~exposure~~Our onobligations atand ~~least~~the ~~50%~~obligations of our ~~total~~subsidiary ~~outstanding~~guarantors ~~debt. We have met this~~are ~~requirement~~collateralized by ~~fixing~~a ~~our~~security interest ~~LIBOR~~in ~~rate~~substantially ~~for~~all ~~the remainder~~ of ~~2003~~our ~~and~~assets ~~entering into two separate interest rate swap agreements in July 2003~~ and ~~September 2003 whereby $202.0 million of~~ the ~~term~~assets ~~loan is effectively converted to a weighted average fixed rate~~ of our ~~5.36%~~subsidiary ~~beginning January 2~~guarantors, ~~2004.~~including ~~The July 2003 swap agreement has~~ a pledge ~~notional amount~~ of ~~$30.0~~ ~~million~~the ~~and~~capital ~~expires~~stock ~~on December 30, 2005. The September 2003 swap agreement has an original notional amount~~ of ~~$172.0~~our ~~million~~direct ~~that decreases on a quarterly basis to a final~~and ~~notional~~indirect ~~amount~~domestic ofsubsidiaries ~~$54.0 million~~ and ~~expires~~any onnotes ~~December~~we ~~29,~~or ~~2006.~~they own ~~Our management will continue to evaluate our short term~~ and ~~long~~65% ~~term~~of ~~strategies related to~~ the ~~interest~~capital ~~rate~~stock ~~risk~~of ~~associated with~~ our ~~variable~~and ~~rate~~any ~~debt.~~subsidiary ~~See~~guarantor’s ~~Item~~directly 3owned –foreign ~~“Quantitative and Qualitative Disclosures about Market Risk~~subsidiaries.”

The Notes bear interest at an annual rate of 7-1/4%, which is payable semi-annually in ~~arrears~~ arrears on July 1 and January 1 of each year, ~~commencing January 1, 2004,~~ and mature on July 1, 2011. The Notes are redeemable at our option, in whole or in part, at any time on or after July 1, 2007 at an initial redemption price of 103.625%, plus accrued and unpaid interest, if any, to the date of redemption, with the redemption price declining annually thereafter. In addition, subject to certain limitations, we may redeem up to 35% principal amount of the Notes on or before July 1, 2006 with the net cash proceeds of one or more ~~equity~~ equity offerings, at a price of 107.25%, plus accrued and unpaid interest, if any, to the ~~date~~ date of redemption. In the event of a change of control, as defined in the indenture governing the Notes, holders of the Notes may require us to purchase their Notes in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase.

The Credit Facility contains various operating, financial, reporting and ~~reporting~~other restrictive covenants, including requirements to maintain certain financial ratios, limitations on capital expenditures, limitations on the creation of liens or additional indebtedness, and restrictions on the prepayment of subordinated debt, the payment of dividends, mergers and consolidations, investments and asset dispositions. The Notes ~~contain~~ contain certain restrictive and reporting covenants. As of ~~September~~March 3031, ~~2003~~2004, we were in compliance with all such covenants.

After giving effect to the $3020.6 million of principal payments ofon the term loan ~~under~~in the ~~Credit~~first ~~Facility~~ quarter of 2004, we are required during the next twelve months (through ~~September~~March 3031, ~~2004~~2005) to to make quarterly interest payments on the term loan and settlements on the two swaps totaling $118.90 million (assuming current interest rates) and principal amortization payments totaling $2.5 million. InWe ~~addition,~~ will also be required to make semi-annual interest payments on the Notes ~~in the amounts~~ of $6.~~4 million and $6.~~3 million ~~are~~ ~~due~~each on ~~January~~July 1, 2004 and ~~July~~ January 1, ~~2004, respectively~~2005.

Our ability to make principal and interest payments on our indebtedness, and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our forecasts, we believe our cash flow from operations, together with our available cash and availability under our revolving credit facility, will be ~~adequate~~ adequate to meet our liquidity needs for at least the next twelve months. WeAlthough we consider it unlikely, we may need to refinance all or a portion of our indebtedness at maturity.

In We ~~response~~were torequired ~~customer~~at ~~requests~~March ~~to finance their payments related to equipment purchases over time~~31, we2004 ~~refer customers~~ to anmaintain ~~unrelated third party financing company~~$3.6 ~~In recent years, $16~~ million toin ~~$30~~collateralized ~~million annually, and $30 million through September 30, 2003, of drug~~deposit ~~infusion~~accounts with ~~equipment~~commercial ~~sales~~banks toas ~~North~~security ~~American~~against ~~customers~~open ~~have~~foreign ~~been~~exchange ~~financed by this third party. If such third party financing source were no longer available to our customers~~contracts, it ~~could~~primarily ~~require~~forward ~~us to find another party or to finance such customer purchases and require use of our cash~~contracts. Additionally, our operating results could also be affected, as it is possible that customers could look to make their purchases from our competitors who might be able to finance such purchases at a lower cost of funds.

In Net ~~September~~cash ~~2003,~~provided weby ~~received~~operating ~~approval~~activities ~~from~~for the ~~Internal~~quarter ~~Revenue~~ended ~~Service~~March ~~(“IRS”)~~31, of ~~our~~2004, ~~application~~was of$17.8 million compared ~~December~~with ~~31,~~$38.5 ~~2002,~~million ~~for~~provided aby ~~more~~operating ~~favorable~~activities ~~income~~in ~~tax~~the ~~treatment~~same ~~for~~period ~~sales~~of to2003. ~~third~~Net ~~party~~cash ~~distributors.~~used in Weinvesting ~~have~~activities ~~previously~~for ~~reflected~~ the ~~benefit~~quarter ~~for~~ended ~~this~~March ~~tax~~31, 2004 and ~~accounting~~2003, ~~change~~was as$13.0 amillion ~~reduction~~and $7.1 million, respectively. Cash used in ~~our~~investing activities ~~estimated~~includes ~~current~~$12.7 million ~~income~~and ~~tax~~$7.0 million ~~liability~~in capital ~~for~~expenditures ~~2002~~for the quarters ended March 31, 2004 and 2003, respectively. ~~This~~Capital ~~change~~expenditures for ~~resulted~~the first inquarter anof 2004 included $84.3 million ~~cash~~for ~~tax~~a ~~savings~~new inenterprise-wide ~~2002~~information ~~with an~~system. ~~anticipated~~We anticipate ~~refund~~making ~~for~~capital ~~income~~expenditures ~~taxes~~of ~~previously~~approximately ~~paid~~$27 inmillion ~~2002~~during the remainder of an2004. ~~additional~~Net cash used in financing activities for the quarter ended March 31, 2004 was $418.9 million. ~~Based~~ onThis ~~our~~was ~~continued~~primarily composed ~~expected~~of ~~growth~~principal inpayments ~~sales~~under tothe Credit ~~third~~Facility ~~party~~totaling ~~distributors,~~$20.6 wemillion ~~anticipate~~in the first quarter of 2004, partially ~~that~~offset ~~additional~~by ~~cash~~proceeds ~~tax~~received ~~savings~~from ~~will~~the beexercise of ~~realized~~stock inoptions ~~future~~of ~~years~~$1.7 ~~This~~million. ~~change~~During ~~affects only~~the ~~cash~~first ~~flow~~quarter ~~and~~of ~~does~~2004, ~~not~~net ~~impact~~payments ~~the~~of ~~amount~~federal, state and foreign taxes, net of ~~the~~refunds, were ~~income~~$1.3 ~~tax~~million ~~expense~~and ~~included~~interest inpayments ~~the Condensed~~on ~~Consolidated~~long-term ~~Statement~~debt ofwere ~~Operations~~$9.8 million.

-25 22 -

~~Net~~ Due ~~cash~~to ~~provided~~the bycharges ~~operating~~we ~~activities~~recorded ~~for~~during the ~~nine~~second ~~months~~quarter ~~ended~~of ~~September 30,~~ 2003, ~~was $92.0~~in ~~million~~connection ~~compared~~ with ~~$33.7 million provided by operating activities for~~ the ~~same~~ ~~period~~recapitalization and inresulting ~~2002.~~payment ~~Net~~of ~~cash~~accreted ~~used~~interest inon ~~investing activities for~~ the ~~nine~~repurchased ~~months ended September~~11-1/8% ~~30,~~senior ~~2003~~discount ~~and 2002~~notes, ~~was~~we ~~$30.4~~generated a ~~million~~tax ~~and~~net ~~$12.6~~operating ~~million~~loss, ~~respectively.~~or ~~Cash~~NOL, ~~used~~for in2003, ~~investing~~estimated ~~activities~~to ~~includes~~be ~~$21.9 million~~approximately ~~and~~ $~~11.7~~ 106 million. inWe ~~capital expenditures~~expect ~~for~~that such ~~the~~NOL ~~nine~~will ~~months~~effectively eliminate ~~ended~~federal ~~September 30, 2003~~ and ~~2002,~~state ~~respectively.~~income ~~Current year~~taxes ~~capital~~payable ~~spending~~in ~~includes~~2004 ~~$8.3~~as ~~million~~well ~~for~~as ~~our~~allow us ~~new enterprise-wide information~~to ~~system.~~carryback Weand ~~anticipate~~recover ~~making capital expenditures of~~ approximately $101.06 million ~~during the remainder~~ of ~~2003.~~income ~~Spending~~taxes ~~from~~we ~~investing~~paid ~~activities~~in ~~also includes $7~~previous years.3 ~~million~~Income tax ~~for the~~payments ~~purchase~~in of2004 anwill ~~unrestricted~~primarily ~~patent~~be ~~license~~in ~~for~~foreign ~~certain~~jurisdictions ~~needle-free~~and ~~technology. Net~~we ~~cash~~estimate ~~used~~such inpayments ~~financing~~to ~~activities~~be approximately ~~for the nine months ended September 30, 2003 was~~ $~~93.~~4 million. ~~This~~The ~~was~~tax-effected ~~primarily~~value ~~composed~~ of ~~repurchases~~our estimated ofNOL ~~debt~~at ofMarch ~~$25.0~~31, ~~million~~2004 inwas ~~the first quarter,~~ $~~566~~34.83 million ~~in the second quarter~~, which ~~and~~we ~~principal~~expect ~~prepayments~~to ~~under~~fully ~~the~~utilize ~~Credit~~by ~~Facility of $30.6 in~~ the ~~third~~end ~~quarter, offset by cash received in connection with the recapitalization, including net debt proceeds~~ of ~~$407~~2005.8 ~~million~~Of ~~and~~this ~~net~~estimated ~~proceeds~~NOL, ~~from the sale of common stock of~~ $~~117~~18.59 million. ~~Net~~is ~~cash used~~ included in ~~financing~~deferred ~~activities for the nine~~tax ~~months~~assets, ~~ended September 30~~net, ~~2002~~current ~~was~~and $1415.34 million, ~~and~~is ~~was~~included ~~primarily~~in ~~composed~~other ofnon-current ~~principal payments~~assets on ~~long-term debt in 2002. During~~ the ~~nine months ended September 30, 2003,~~ ~~federal,~~ ~~state~~Consolidated ~~and~~Balance ~~foreign~~Sheet ~~taxes~~as ~~paid (net~~ of ~~refunds)~~March ~~were~~31, $32004.2 ~~million.~~

With ~~Due~~the toexception of the ~~charges~~interest werate ~~recorded during~~reduction ~~the~~and ~~second quarter~~prepayments ofagainst ~~2003~~our inCredit ~~connection with~~Facility ~~the recapitalization and~~described ~~resulting payment~~above, ofthere ~~accreted interest~~have onbeen ~~the~~no ~~Senior~~significant ~~Discount~~changes ~~Notes,~~to weour ~~anticipate generating substantial~~contractual ~~tax~~obligations, as ~~net~~discussed in ~~operating~~Item ~~losses (~~7– “~~NOL”)~~Management’s ~~for~~Discussion ~~2003.~~and WeAnalysis ~~expect~~of Financial ~~that~~Condition ~~such~~and ~~losses~~Results ~~will~~of ~~effectively~~Operations” of ~~eliminate Federal~~our ~~income~~Annual ~~taxes~~Report ~~payable~~on Form 10-K for the year ended December 31, 2003. ~~and~~As ~~2004~~a ~~as well~~result asof ~~allow~~the usinterest torate ~~carryback~~ reduction of 0.25% and ~~recover income taxes~~$20.0 ~~paid~~million in ~~previous years. The~~prepayments ~~tax effected value~~under ofthe ~~our~~Credit ~~estimated~~Facility ~~NOL~~term ~~is included~~loan in ~~current~~the ~~deferred~~quarter ~~tax~~ended ~~assets~~March 31, ~~net~~2004, onreduced long-term debt and future interest payment obligations are shown in the following ~~Consolidated~~schedule ~~Balance~~of ~~Sheet~~contractual obligations as of ~~September~~March 3031, ~~2003~~2004.

The following schedule summarizes our contractual obligations and commitments to make future payments as of September 30, 2003:

	Payments Due by Period
	(dollars in millions)
Contractual Obligations on Long-term Debt	Total		Less than 1 Year (B)		Year 2		Year 3		Year 4		Year 5		More than 5 Years
Long-term Debt	$	338.2	$	1.8	$	2.5	$	2.5	$	2.5	$	2.5	$	326.4
Interest Payments (A)		130.1		12.6		20.1		19.4		18.1		18.0		41.9

Total Contractual Cash Obligations
on Long-term Debt	$	468.3	$	14.4	$	22.6	$	21.9	$	20.6	$	20.5	$	368.3

	Contractual Obligations & Commitments (dollars in millions)
Payments Due by Period	Long-term Debt	Interest Payments(B)	Operating Leases	Purchase Obligations	Total
2003 (A)	$ 0.6	$ 2.2	$ 1.9	$ 0.6	$ 5.3
2004	2.5	25.3	7.8	3.6	39.2
2005	2.5	22.9	7.5	4.0	36.9
2006	2.5	22.2	3.3	4.0	32.0
2007	2.5	20.9	2.5	4.0	29.9
Thereafter	378.8	64.7	12.7	1.0	457.2
Total Contractual Cash Obligations	$ 389.4	$ 158.2	$ 35.7	$ 17.2	$ 600.5

(A)

Interest payment obligations include interest payable quarterly under the variable interest term loan under the Credit Facility at the March 31, 2004 interest rate of 3.36% per annum, interest payable semi-annually on the Notes at a fixed annual rate of 7-1/4% plus quarterly contractual settlements under the two swap agreements.

(A)	Amount represents remaining contractual obligation during 2003.
(B)	Interest payment obligations include interest payable quarterly against the variable interest term loan under the Credit Facility at the current interest rate of 3.87% per annum, interest payable semi-annually on the Notes at a fixed annual rate of 7-1/4% plus quarterly contractual settlements under the two swap agreements.

(B)	Amount represents remaining contractual obligation during 2004.

-26-

Seasonality

Infusion instrument sales are typically highest in the fourth quarter due to sales compensation plans that reward the achievement of annual quotas and the seasonal characteristics of ~~the~~ the industry, including hospital purchasing patterns. We anticipate that this trend will continue but are unable to predict the effect, if any, from increased competitive pressures. Approximately 3632% of our ~~2002~~2003 sales of drug infusion instruments occurred during the fourth quarter of ~~2002~~2003.

Backlog

The amount of unfilled orders, believed to be firm, at ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003, was $95.02 million and $124.93 million, respectively.

- 23 -

Foreign Operations and Currency Exchange Rates

We have significant foreign operations and, as a result, are subject to various risks ~~arising~~ arising therefrom, including foreign currency risks. This risk did not materially change ~~during~~ during the ~~third~~first quarter of ~~2003~~2004. For the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003, approximately 3337% ~~and 32%, respectively,~~ of our sales were denominated in currencies other than the U.S. dollar. For the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003, approximately 32 36% and 3032%, respectively, of our operating expenses were denominated in currencies other than the U.S. dollar. These foreign currencies are primarily those of Western Europe, Canada, Mexico, Australia, New Zealand and South Africa. Additionally, substantially all of the receivables and payables of our foreign subsidiaries are denominated in currencies other than the U.S. dollar.

We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. At ~~September~~March 3031, ~~2003~~2004, we recorded a liability in our Consolidated Balance Sheet ~~of $.6 million~~ for foreign currency forward contracts valued ~~and~~at ~~an asset of~~ $.5 million and an asset for option contracts valued at $.1 million. As of December 31, ~~2002~~2003, we recorded liabilities in our Consolidated Balance Sheet for foreign currency forward contracts valued at $.16 million ~~were~~and ~~recorded~~for asoption acontracts ~~current~~valued ~~asset~~at $.2 ~~in the Company’s Consolidated Balance Sheet~~million.

For the ~~nine~~three months ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003, we recognized net charges related to the designated cash flow hedges of forecasted foreign currency exchange transactions in ~~the~~ the amounts of $1.6 3 million ~~and~~for ~~$.5~~both ~~million,~~periods ~~respectively,~~ in other expense, which consisted primarily of costs ~~losses~~ incurred to settle ~~currency~~hedges for ~~option~~which offsetting gains were reflected in operating income, costs to adjust foreign currency contracts for changes in hedged forecasted cash flows and premium costs for currency option ~~contacts~~contracts. Such costs were recorded in ~~other~~ Other, net in the ~~Condensed~~ Consolidated Statement of Operations. At ~~September~~March 3031, ~~2003~~2004, $1.10 million ($.7 6 million after tax) was included in ~~accumulated~~Accumulated other comprehensive ~~loss~~ income. This represents the remaining option premium costs net of the fair value of the open option contracts that are designated as cash flow hedges. This ~~loss~~cost is expected to be charged to earnings during ~~2003~~ 2004 as the hedged transactions occur.

Due to changes in foreign currency exchange rates during ~~2003~~three ~~and~~months ~~2002~~ended March 31, 2004 and 2003, primarily a weakening of the U.S. dollar against many European currencies, we recognized foreign currency net transaction ~~gains~~losses of $.21 million and ~~less~~net ~~than~~gains of $.1 2 million during the ~~nine~~three months ended ~~September~~ 30March 31, ~~2003~~2004 and ~~2002~~2003, respectively. Such gains and losses were recorded in ~~other~~Other, net in the ~~Condensed~~ Consolidated Statement of Operations.

-27 24 -

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk Management

As A part of our risk management strategy, weis ~~put~~our incurrency ~~place a~~ hedging program, ~~beginning in 2001~~ under which we enter into forward foreign exchange and currency option contracts to hedge a portion of forecasted cash receipts and payments denominated in currencies other than the U.S. dollar. We categorize these instruments as entered into for purposes other than trading. As Wepart of our policy, if a derivative instrument does not qualify for hedge accounting, we would record costs associated with that contract as a charge to earnings. However, we do not utilize derivative instruments for trading or speculative purposes. These contracts are entered into to reduce the risk that our earnings and cash flows, resulting from certain forecasted transactions, will be affected by changes in foreign currency exchange rates. However, we may be impacted by changes in foreign exchange ~~rates~~ rates related to the unhedged portion of the forecasted transactions. The success of the ~~hedging~~ hedging program depends, in part, on forecasts of our transactions in various currencies (primarily the Euro). Hedges are placed for periods consistent with identified exposures, but generally no longer than the end of the year for which we have substantially completed our annual business plan. We may experience unanticipated foreign currency exchange gains or losses to the extent that there are timing differences between forecasted and actual activity during periods of currency volatility. However, since the critical terms of contracts designated as cash flow hedges are the same as the underlying forecasted transaction, changes in fair value of contracts should be highly effective in offsetting the present value of changes in the expected cash flows from the forecasted transaction. The ineffective portion of any changes in the fair value of option contracts designated as hedges, if any, is recognized immediately in earnings. We did not recognize material gains or losses resulting from either hedge ineffectiveness or changes in forecasted transactions during the ~~nine~~three months ended ~~September~~March ~~30, 2003 or the year ended December~~ 31, ~~2002~~2004.

As a matter of policy, we will only enter into currency contracts with counterparties that have at least an investment grade or equivalent credit rating from a major rating agency. The counterparties to these contracts are major financial institutions. We do not have significant exposure to any one counterparty. We believe the risk of loss related to counterparty default is remote and would only consist of the net market value gain (if any) of the underlying instrument. The contracts have varying maturities with ~~none~~ none exceeding eighteen months. Costs associated with entering into contracts are not ~~expected~~ expected to be material to our financial results. (See above Item 2, – “Management’s ~~Discussion~~ Discussion and Analysis of Financial Condition and Results of Operations–Foreign Operations and Currency Exchange Rates.”)

Interest Rate Risk

We are exposed to market risk from changes in interest rates, which could impact our results of operations and financial condition. The term loan under the Credit Facility bears interest at a variable rate tied to LIBOR or other index at our option. ~~Consistent~~To ~~with our risk management policy to~~ reduce the effect of interest rate volatility and stabilize cash flows, ~~and as required under the Credit Facility,~~ we ~~have~~ fixed ~~our~~the ~~LIBOR~~interest ~~rate for~~on ~~the~~our ~~remainder~~term ofloan ~~2003~~by ~~and~~entering ~~entered~~ into two interest rate swap agreements ~~in July 2003 and August 2003 whereby $202 million of the term loan is effectively converted to a fixed rate and is effective beginning January 2, 2004~~. Since entering into the swap agreements, the fair value of the swaps has become negative. At ~~September~~March 3031, ~~2003~~2004, the negative market value of the swaps was $1.25 million and is included in other liabilities and the corresponding expense of $1.5 million ($1.70 million after tax) ~~and~~ is included in accumulated other comprehensive ~~loss~~income. Should we terminate the swaps in advance of their expiration, the cost to us could be material. Absent such swaps, a one percentage point change in the interest rate on our term loan (assuming no further principal prepayments and $163.2 million outstanding principal at March 31, 2004) would result in an approximate $21.146 million annual change in interest expense.

-28 25 -

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-1415 under the Exchange Act) that are designed to ensure that information required to be disclosed in our ~~Exchange~~ Exchange Act reports is recorded, processed, summarized and reported within the time ~~periods~~ periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide ~~only~~ only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As Our ofmanagement ~~September~~performed ~~30, 2003,~~ an evaluation, ~~was performed~~ under the supervision and with the participation of our ~~management, including our~~ Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. as of March 31, 2004. Based on that evaluation, our Chief Executive Officer and Chief Financial ~~Officer~~ Officer concluded that our disclosure controls and procedures were effective at the ~~reasonable~~ reasonable assurance level.

Changes in Internal Controls

There ~~have~~was ~~been~~ no ~~significant~~change ~~changes~~in ~~(including~~our ~~corrective~~internal ~~actions~~control ~~with~~over ~~regard~~financial toreporting ~~significant~~(as defined in Rule ~~deficiencies~~13a-15(f) under orthe ~~material~~Exchange ~~weaknesses~~Act) identified in ~~our~~connection with the evaluation of our internal ~~controls~~control orperformed during inour ~~other~~last ~~factors~~fiscal quarter that ~~could~~ ~~significantly~~has ~~affect~~materially ~~internal~~affected, or ~~controls~~is ~~subsequent~~reasonably likely to ~~September~~materially 30affect, our ~~2003~~internal control over financial reporting.

-29 26 -

PART IIIIOTHER INFORMATION

OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit No.	Description of Exhibit	Status of Filing
3.2	ALARIS Medical Systems, Inc. By-Laws (as amended through June 30, 2003).	Incorporated by reference to Exhibit 2.3 to the Form 8-A12B filed September 19, 2003.
31.1	Certification by David L. Schlotterbeck Pursuant to Securities Exchange Act Rule 13a-14.	Filed herewith
31.1	Certification by David L. Schlotterbeck Pursuant to Securities Exchange Act Rule 13a-15.	Filed herewith
31.2	Certification by William C. Bopp Pursuant to Securities Exchange Act Rule 13a-14.	Filed herewith
31.2	Certification by William C. Bopp Pursuant to Securities Exchange Act Rule 13a-15.	Filed herewith
32.1	Certification by David L. Schlotterbeck Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith
32.2	Certification by William C. Bopp Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith

(b) Reports on Form 8-K

We filed or furnished the following Current Reports on 8-K during the quarter ended ~~September 30~~March 31, ~~2003~~2004:

1. ~~July~~January 114, ~~2003~~2004, ~~reporting~~discussing under Item 512 aan earnings press release ~~announcing~~dated ~~the~~January ~~completion~~14, of2004 reporting our ~~recapitalization~~preliminary ~~and~~earnings ~~the~~results ~~merger~~ of ~~ALARIS~~operations ~~Medical~~for ~~Systems,~~the ~~Inc.~~year ~~into~~and ~~ALARIS~~three ~~Medical~~months ended December 31, ~~Inc~~2003.

2. ~~July~~March 34, ~~2003~~2004, ~~reporting~~discussing under Item 512 aan earnings press release ~~announcing~~dated ~~that~~March ~~the~~4, ~~underwriters~~2004 ofreporting our ~~recent~~results ~~public offering~~ of ~~common~~operations ~~stock~~for ~~have~~the ~~exercised~~year ~~their~~and ~~over-allotment~~three ~~option~~months inended ~~full~~December ~~to purchase an additional 1~~31,~~350,000~~ ~~shares of common stock~~2003.

3. ~~July~~- ~~14,~~27 ~~2003,~~- reporting information under Items 5 and 7, and including the following exhibits : (i) Underwriting Agreement dated June 25, 2003, between ALARIS Medical, Inc. and Bear, Stearns & Co. Inc., Citigroup Global Markets Inc., UBS Securities LLC, CIBC World Markets Corp., and Jefferies & Company, Inc., relating to the offering of the Notes; (ii) Underwriting Agreement dated June 25, 2003, between ALARIS Medical, Inc. and Bear, Stearns & Co. Inc., CIBC World Markets Corp., and UBS Securities LLC, relating to the Company’s common stock offering; (iii) Certificate of Ownership and Merger of ALARIS Medical Systems, Inc. into ALARIS Medical, Inc.; and (iv) the Supplemental Indenture dated June 25, 2003 between ALARIS Medical Systems, Inc. and The Bank of New York, as trustee.

4. July 30, 2003, discussing under Item 12 an earnings press release dated July 30, 2003 reporting our results for the three and six months ended June 30, 2003.

-30-

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 SYSTEMS, INC.
(Registrant)

Date: ~~October~~April 2827, ~~2003~~2004 By: /s/ WILLIAM C. BOPP—————————————— William C. BoppSenior Vice President and Chief Financial Officer (Principal Financial Officer)

By: /s/ ROBERT F. MATHEWS
——————————————
Robert F. Mathews
Vice President - Finance and Treasurer
(Principal Accounting Officer)

-31 28 -

UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, DC 20549FORM 10-Q

INDEX

ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITY

NOTE 1 – BUSINESS AND STATEMENT OF ACCOUNTING POLICY

The Company:

Statement of accounting policy:

Use of estimates:

CollateralConcentrations depositof credit risk:

NOTE 1 – BUSINESS AND STATEMENT OF ACCOUNTING POLICY (Continued)

Collateral deposit:

Shipping and handling costs:

Product warranties and deferred service revenues:

NOTE 1 – BUSINESS AND STATEMENT OF ACCOUNTING POLICY (Continued)

Net income per common share:

NOTE 1 – BUSINESS AND STATEMENT OF ACCOUNTING POLICY (Continued)

Stock-based compensation:

NOTE 2 – RECAPITALIZATION EXPENSES

NOTE 2 – RECAPITALIZATION EXPENSES (Continued)

NOTE 3 –INTANGIBLE ASSETS

NOTE 4 – INVENTORIES

NOTE 5 – LONG-TERM DEBT

Bank credit facility:

NOTE 5 – LONG-TERM DEBT (Continued)

Senior subordinated notes:

NOTE 6 – RESTRUCTURINGPENSION AND OTHER NON-RECURRING ITEMSPLANS

NOTE 7 – SEGMENT INFORMATION

NOTE 8 – CASH FLOW INFORMATION

NOTE 9 – CONTINGENCIES AND LITIGATION

Litigation:

NOTE 9 – CONTINGENCIES AND LITIGATION (Continued)

Cal Pacifico:

Intellectual Property Indemnification:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The Company:

Overview:

Our discussionCritical andAccounting analysis of our operating results and financial condition is based upon our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with United States generally accepted accounting principles. Estimates:

The followingSummary tableStatement sets forth, for the periods indicated, selected financial information expressed as a percentage of sales: Operations

Three Months Ended September 30, 2003 Compared with Three Months Ended September 30, 2002

Supplemental Schedule Reconciling GAAP Data to Pro Forma Non-GAAP Data

Liquidity and Capital Resources

Seasonality

Backlog

Foreign Operations and Currency Exchange Rates

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk Management

Interest Rate Risk

ITEM 4. CONTROLS AND PROCEDURES

OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q

Filing Compare · ALARIS MEDICAL SYSTEMS INC