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

~~SECURITIES~~(Mark ~~AND EXCHANGE COMMISSION~~One)

~~Washington, DC 20549~~[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

~~FORM~~For ~~10-Q~~the quarterly period ended March 31, 2003 or

~~(Mark~~[ ~~One~~] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

ýFor ~~Quarterly Report Pursuant to Section 13 or 15(d) of~~ the ~~Securities~~transition ~~Exchange~~period ~~Act~~from of___________ ~~1934~~to ___________

~~For~~Commission ~~the quarterly~~File ~~period~~Number: 333-18687 ~~ended September 30, 2002 or~~

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


ALARIS MEDICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)
Delaware	13-3800335

(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)

~~For~~Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the ~~transition~~Securities ~~period~~Exchange ~~from~~ 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:[ ]

~~Commission~~ The ~~File~~registrant ~~Number:~~is ~~333~~an accelerated filer (as defined in Rule 12b-~~18687~~2 of the Act). Yes [ ] No [ X ]

~~ALARIS~~ As ~~MEDICAL~~of April ~~SYSTEMS~~22, ~~INC.~~2003, ~~(Exact~~the ~~name~~registrant ofhad ~~registrant~~100 asshares ~~specified~~of inCommon ~~its~~Stock ~~charter)~~outstanding.

Delaware	13-3800335
(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)

Page 1 of 33

(858)ALARIS 458-7000MEDICAL (Registrant’s telephone numberSYSTEMS, including area code) (Former name, former address and former fiscal year, if changed since last report)INC.

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: ý No: oINDEX

On October 31, 2002, 100 shares of Registrant’s Common Stock were outstanding.


PART I. FINANCIAL STATEMENTS
Item 1 - Financial Statements:
	Page
Condensed consolidated statement of operations for
the three months ended March 31, 2003 and 2002 (unaudited)		3
Condensed consolidated balance sheet at
March 31, 2003 (unaudited) and December 31, 2002		4
Condensed consolidated statement of cash flows for
the three months ended March 31, 2003 and 2002 (unaudited)		5
Condensed consolidated statement of changes
in stockholder's equity and comprehensive income for the period from
December 31, 2002 to March 31, 2003 (unaudited)		6
Notes to the condensed consolidated financial statements (unaudited)		7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations		16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk		26
Item 4 - Controls and Procedures		27
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K		28

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

~~INDEX~~- 2 -

FORM 10 – Q PART I1 — ITEM 1FINANCIAL STATEMENTS ALARIS MEDICAL SYSTEMS, INC. FINANCIALCONDENSED INFORMATIONCONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

~~Item 1 — Financial Information: Condensed consolidated statement of operations for the three and nine months ended September 30, 2002 and 2001~~ (~~unaudited)~~Dollar amounts Condensed consolidated balance sheet at September 30, 2002 (unaudited) and December 31, 2001 Condensed consolidated statement of cash flows for the nine months ended September 30, 2002 and 2001 (unaudited) Condensed consolidated statement of changes in ~~stockholder’s equity for the period from December 31, 2001 to September 30, 2002 (unaudited~~thousands) Notes to the condensed consolidated financial statements (unaudited) Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 3 — Quantitative and Qualitative Disclosures About Market Risk Item 4 — Controls and Procedures Item 5 — Other Information PART II. OTHER INFORMATION Item 6 — Exhibits and Reports on Form 8-K

	Three Months Ended March 31,
	2003			2002

Sales	$	121,174		$	104,400
Cost of sales		58,000			52,688

Gross profit		63,174			51,712
Selling and marketing expenses		24,242			21,436
General and administrative expenses		10,725			9,441
Research and development expenses		8,798			6,202
Restructuring and other non-recurring items		-			(585	)

Total operating expenses		43,765			36,494

Interest income from sales-type capital leases		873			1,189

Income from operations		20,282			16,407
Other income (expenses):
Interest income		219			214
Interest expense		(9,840	)		(9,880	)
Other, net		189			(494	)

Total other expense		(9,432	)		(10,160	)

Income before income taxes		10,850			6,247
Provision for income taxes		4,232			2,498

Net income	$	6,618		$	3,749

~~Form~~ The accompanying 10notes -are Qan integral part of these condensed consolidated financial statements.

~~Part 1~~ - ~~Item 1~~3-

FinancialALARIS InformationMEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEET

~~ALARIS~~(Dollar amounts ~~MEDICAL~~in ~~SYSTEMS,~~thousands ~~INC.~~except share data)

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)ASSETS

(Dollars in thousands)

	March 31, 2003		December 31, 2002
	(Unaudited)

Current assets:
Cash and cash equivalents	$	69,297	$	68,483
Receivables, net		71,611		90,050
Inventories		59,122		56,924
Prepaid expenses and other current assets		19,610		22,289

Total current assets		219,640		237,746

Net investment in sales-type capital leases, less current portion		15,103		16,050
Property, plant and equipment, net		58,221		56,448
Other non-current assets		24,437		25,627
Goodwill		142,570		142,570
Intangible assets, net		89,523		90,074

	$	549,494	$	568,515

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2002			2001			2002			2001
Sales	$	113,063		$	103,624		$	325,983		$	300,983
Cost of sales	55,519			53,776			162,597			154,756
Gross profit	57,544			49,848			163,386			146,227
Selling and marketing expenses	22,512			19,301			65,025			57,679
General and administrative expenses	9,739			11,683			29,210			35,866
Research and development expenses	8,064			6,480			21,846			20,108
Restructuring and other non-recurring items	—			—			(585		)	6,899
Total operating expenses	40,315			37,464			115,496			120,552
Interest income from sales-type capital leases	1,080			1,252			3,391			3,905
Income from operations	18,309			13,636			51,281			29,580
Other income (expenses):
Interest income	141			453			624			1,672
Interest expense	(9,883		)	(11,110		)	(29,647		)	(31,608		)
Other, net	(334		)	56			(635		)	(1,084		)
Total other expense	(10,076		)	(10,601		)	(29,658		)	(31,020		)
Income (loss) from continuing operations before income taxes	8,233			3,035			21,623			(1,440		)
Provision for income taxes	3,293			1,698			8,649			1,408
Income (loss) from continuing operations	4,940			1,337			12,974			(2,848		)
Discontinued operations: Gain on disposal of business (net of applicable income tax expense of $2,492)	—			—			—			3,737
Net income	$	4,940		$	1,337		$	12,974		$	889

LIABILITIES AND STOCKHOLDER’S EQUITY

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


Current liabilities:
Accounts payable	$	21,551		$	19,139
Accrued expenses and other current liabilities		51,735			50,551

Total current liabilities		73,286			69,690

Long-term debt		350,000			350,000
Other non-current liabilities		49,080			47,943


Total non-current liabilities		399,080			397,943


Contingent liabilities and commitments (Note 9)

Stockholder’s equity:
Common stock and capital in excess of par value, authorized 3,000 shares at $.01 par value; 100 issued and outstanding at March 31, 2003 and December 31, 2002		172,963			203,857
Accumulated deficit		(76,626	)		(83,244	)
Loan to Holdings		(14,993	)		(14,993	)
Accumulated other comprehensive loss		(4,216	)		(4,738	)

Total stockholder’s equity		77,128			100,882

	$	549,494		$	568,515

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

~~ALARIS MEDICAL SYSTEMS, INC.~~-4-

ALARIS MEDICAL SYSTEMS, INC.CONDENSED CONSOLIDATED BALANCESTATEMENT SHEETOF CASH FLOWS (Unaudited)

(Dollar amounts in ~~thousands, except~~ ~~per share data~~thousands)

ASSETS

	Three Months Ended March 31,
	2003			2002

Cash flows from operating activities:
Net income	$	6,618		$	3,749

Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		6,299			5,712
Net loss (gain) on disposal of property, plant and equipment		246			(51	)
Debt discount and issuance costs amortization		552			551
(Increase) decrease in assets:
Receivables, net		18,439			2,575
Inventories		(2,198	)		169
Prepaid expenses and other current assets		2,918			1,684
Net investment in sales-type capital leases, non-current portion		947			1,373
Other non-current assets		224			16
Increase (decrease) in liabilities:
Accounts payable		2,412			(299	)
Accrued expenses and other current liabilities		1,286			881
Other non-current liabilities		1,137			9

Net cash provided by operating activities		38,880			16,369

Cash flows from investing activities:
Net capital expenditures		(7,012	)		(3,387	)
Patents, trademarks and other		(113	)		(363	)

Net cash used in investing activities		(7,125	)		(3,750	)

Cash flows from financing activities:
Loan to Holdings		-			(14,812	)
Return of capital to Holdings		(31,132	)		(806	)

Net cash used in financing activities		(31,132	)		(15,618	)

Effect of exchange rate changes on cash		191			(12	)

Net increase (decrease) in cash		814			(3,011	)
Cash and cash equivalents at beginning of period		68,483			50,826

Cash and cash equivalents at end of period	$	69,297		$	47,815

	September 30,			December 31,
	2002			2001
	(Unaudited)
Current assets:
Cash and cash equivalents	$	57,405		$	50,826
Receivables, net	82,254			67,893
Inventories	67,207			69,408
Prepaid expenses and other current assets	33,839			33,456
Total current assets	240,705			221,583
Net investment in sales-type capital leases, less current portion	17,846			24,225
Property, plant and equipment, net	55,755			57,607
Other non-current assets	26,457			28,013
Goodwill, net	142,570			142,570
Other intangible assets, net	90,664			92,394
	$	573,997		$	566,392
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	23,166		$	23,856
Accrued expenses and other current liabilities	63,972			51,733
Total current liabilities	87,138			75,589
Long-term debt	350,000			350,000
Other non-current liabilities	44,799			47,676
Total non-current liabilities	394,799			397,676
Contingent liabilities and commitments (note 11)
Stockholder’s equity:
Common stock and capital in excess of par value, authorized 3,000 common shares at $.01 par value; 100 issued and outstanding at September 30, 2002 and December 31, 2001	203,791			203,716
Accumulated deficit	(90,398		)	(101,562		)
Loan to Holdings (note 6)	(14,993		)	—
Accumulated other comprehensive loss	(6,340		)	(9,027		)
Total stockholder’s equity	92,060			93,127
	$	573,997		$	566,392

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

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~-5-

4ALARIS MEDICAL SYSTEMS, INC.CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME(Unaudited)

~~ALARIS~~(Dollar amounts ~~MEDICAL~~in ~~SYSTEMS~~thousands, ~~INC.~~except share data)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

					Accumulated Deficit			Loan Receivable from Holdings			Other Compre- hensive Loss			Accumulated Total Stock- holder’s Equity			Compre- hensive Income

Balance at December 31, 2002	100	$	203,857		$	(83,244	)	$	(14,993	)	$	(4,738	)	$	100,882

Comprehensive income:
Net income for the period						6,618									6,618		$	6,618
Equity adjustment from foreign
currency translation												1,049			1,049			1,049
Effects of cash flow hedges included in other comprehensive income (net of tax expense of $349)												(527	)		(527	)		(527	)

Comprehensive income																	$	7,140

Tax benefit from exercise of Holdings
stock options			238												238
Return of capital to Holdings			(31,132	)											(31,132	)

Balance at March 31, 2003	100	$	172,963		$	(76,626	)	$	(14,993	)	$	(4,216	)	$	77,128

~~(Dollars~~ The accompanying innotes ~~thousands)~~are an integral part of these condensed consolidated financial statements.

	Nine Months Ended
	September 30,
	2002			2001
Cash flows from operating activities:
Net income	$	12,974		$	889
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	17,409			23,502
Net loss on disposal of property, plant and equipment	442			112
Debt issue costs amortization	1,659			1,782
Accretion of paid-in-kind interest	—			1,697
Gain on sale of Instromedix	—			(3,737		)
(Increase) decrease in assets:
Receivables, net	(12,563		)	7,036
Inventories	2,407			(10,177		)
Prepaid expenses and other current assets	(310		)	1,921
Net investment in sales-type capital leases, non-current portion	6,379			102
Other non-current assets	(866		)	(715		)
Increase (decrease) in liabilities:
Accounts payable	(1,232		)	2,536
Accrued expenses and other current liabilities	12,023			15,756
Other non-current liabilities	(2,880		)	1,890
Net cash provided by operating activities	35,442			42,594
Cash flows from investing activities:
Net capital expenditures	(11,699		)	(9,597		)
Payments for product licenses and distribution rights	—			(625		)
Patents, trademarks and other	(922		)	(478		)
Loan to Holdings (note 6)	(14,812		)	—
Net proceeds from sale of discontinued business	—			8,069
Net cash used in investing activities	(27,433		)	(2,631		)
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations	—			(14,930		)
Deferred financing costs	—			(658		)
Dividends to Holdings	(1,810		)	(2,080		)
Net cash used in financing activities	(1,810		)	(17,668		)
Effect of exchange rate changes on cash	380			(186		)
Net increase in cash	6,579			22,109
Cash and cash equivalents at beginning of period	50,826			30,618
Cash and cash equivalents at end of period	$	57,405		$	52,727

-6-

The accompanyingALARIS notesMEDICAL areSYSTEMS, anINC.NOTES integralTO partCONDENSED ofCONSOLIDATED theseFINANCIAL condensedSTATEMENTS consolidated financial statements.(Unaudited)

5(Dollar amounts in thousands, except share data)

ALARISNOTE MEDICAL1 SYSTEMS,— INC.BUSINESS AND STATEMENT OF ACCOUNTING POLICY

CONDENSEDThe CONSOLIDATED STATEMENT OF CHANGES INCompany:

~~STOCKHOLDER’S~~ ALARIS Medical Systems, Inc. (“ALARIS Medical Systems”) develops practical solutions for medication safety at the point of care. ~~EQUITY~~ALARIS Medical Systems designs, manufactures and markets intravenous (~~Unaudited~~IV) medication delivery and infusion therapy devices, needle-free disposables and patient monitoring equipment. ALARIS Medical Systems was formed by the merger of two pioneers in infusion systems, IMED Corporation (“IMED”) and IVAC Medical Systems, Inc. (“IVAC”) on November 26, 1996. ALARIS Medical Systems, a wholly-owned subsidiary of ALARIS Medical, Inc. (“ALARIS Medical” or “Holdings”), formerly Advanced Medical, Inc., was incorporated on October 14, 1994 under the laws of the State of Delaware. ALARIS Medical Systems and its subsidiaries are collectively referred to as the “Company” or “ALARIS.”

(DollarStatement amountsof inaccounting thousands)policy:

	Common Stock			Accumulated Deficit			Loan Receivable From Holdings			Other Compre-hensive Loss			Total Stockholder’s Equity				Compre- hensive Income
	And Capital
	In Excess Of Par Value
	Shares	Amount
Balance at December 31, 2001	100	$	203,716	$	(101,562	)	$	—		$	(9,027	)	$		93,127
Comprehensive income:
Net income for the period	—	—		12,974			—			—			12,974				$	12,974
Equity adjustment from foreign currency translation	—	—		—			—			2,784			2,784				2,784
Effects of cash flow hedges included in other comprehensive income (net of tax of $70)	—	—		—			—			(97		)	(97			)	(97		)
Comprehensive income																	$	15,661
Tax benefit from exercise of Holdings stock options	—	75		—			—			—			75
Loan to Holdings (Note 6)							(14,993		)				(14,993			)
Dividends to Holdings	—	—		(1,810		)	—			—			(1,810			)
Balance at September 30, 2002	100	$	203,791	$	(90,398	)	$	(14,993	)	$	(6,340	)	$	92,060

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 to make the information not misleading.

~~The~~ In the opinion of the Company, the accompanying ~~notes~~Condensed ~~are~~Consolidated anFinancial ~~integral~~Statements ~~part~~contain all adjustments, consisting of ~~these~~normal ~~condensed~~recurring ~~consolidated~~adjustments, necessary for a fair statement of the Company’s financial ~~statements~~position as of March 31, 2003, the results of its operations for the three months ended March 31, 2003 and 2002, and its cash flows for the three months ended March 31, 2003 and 2002.

6Use of estimates:

~~ALARIS~~ The preparation of financial statements in conformity with generally accepted accounting ~~MEDICAL~~principles ~~SYSTEMS~~requires management to make estimates and assumptions that affect the reported amounts of revenues, ~~INC~~costs, and expenses, assets, liabilities and related disclosure of contingent amounts. While we believe our estimates and assumptions are reasonable, the inherent nature of estimates is that actual results will likely be different from the estimates made.

NOTESShipping TO CONDENSEDand CONSOLIDATEDhandling FINANCIAL STATEMENTS (Unaudited)costs:

~~(Dollars~~ Shipping and handling costs for customer sales are classified as a selling and marketing expense. inShipping ~~thousands)~~and handling costs for customer sales, for the three months ended March 31, 2003 and 2002, were $1,940 and $1,873, respectively.

NOTE 1Product —warranties BUSINESSand ANDdeferred STATEMENTservice OF ACCOUNTING POLICYrevenues:

Generally, the Company’s 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 and limits coverage to parts only. Patient monitoring products generally have a 3 year parts and labor warranty. For patient monitoring products the Company 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 revenue is recognized. Product warranties are recorded in other current and other non-current liabilities.

ALARIS Medical Systems, Inc. (“ALARIS Medical Systems”) develops practical solutions for medication safety at the point of care. ALARIS Medical Systems designs, manufactures and markets intravenous (IV) medication delivery and infusion therapy devices, needle-free disposables and patient monitoring equipment. ALARIS Medical Systems was formed by the merger of two pioneers in infusion systems, IMED Corporation (“IMED”) and IVAC Medical Systems (“IVAC”), Inc. on November 26, 1996. ALARIS Medical Systems, a wholly7-owned subsidiary of ALARIS Medical, Inc. (“Holdings”), formerly Advanced Medical, Inc., was incorporated on October 14, 1994 under the laws of the State of Delaware. ALARIS Medical Systems and its subsidiaries are collectively referred to as the “Company” or “ALARIS.”

StatementNOTE of1 accounting— policyBUSINESS AND STATEMENT OF ACCOUNTING POLICY (Continued)

The ~~accompanying financial~~ ~~statements have been prepared by the~~ Company’s ~~without~~product ~~audit~~warranty ~~pursuant~~liability toreflects ~~the rules~~management’s ~~and~~best ~~regulations~~estimate of probable ~~the~~liability ~~Securities~~under ~~and~~its ~~Exchange~~product ~~Commission~~warranties. ~~Certain~~ ~~information~~Management ~~and~~estimates ~~footnote~~the ~~disclosures normally~~liability ~~included in financial statements prepared in accordance with generally~~based ~~accepted~~on ~~accounting~~the ~~principles~~Company’s ~~have~~stated ~~been~~warranty ~~condensed~~policies ~~or omitted pursuant to those rules~~ and ~~regulations~~practices, ~~although~~ the ~~Company~~historical ~~believes~~frequency ~~that~~of claims, and the ~~disclosures herein~~cost ~~are~~to ~~adequate~~replace toor ~~make~~repair ~~the~~its ~~information~~products ~~not~~under ~~misleading~~warranty.

In The Company ~~the~~also ~~opinion~~engages ofin the ~~Company, the~~sale ~~accompanying~~of ~~financial~~professional ~~statements~~and ~~contain~~technical ~~all~~services ~~adjustments,~~for ~~consisting~~which ofrevenue ~~normal~~is ~~recurring~~deferred ~~adjustments,~~and ~~necessary~~recognized ~~for~~upon acompletion ~~fair statement~~ of the ~~Company’s financial~~service. ~~position as of September 30~~Additionally, ~~2002,~~ the ~~results~~Company ~~of its operations for~~sells ~~the~~extended ~~three~~on-site ~~and~~service ~~nine~~programs ~~months~~for ~~ended~~which ~~September~~revenue ~~30,~~is ~~2002~~deferred and ~~2001,~~recognized ~~and~~over ~~its cash flows~~the ~~for~~service ~~the~~period. ~~nine~~Deferred ~~months~~service ~~ended~~revenue ~~September~~is ~~30,~~recorded ~~2002~~in ~~and~~other ~~2001~~non-current liabilities.

~~Use~~ Changes ofin ~~estimates~~the liability for product warranty and deferred service revenue associated with these service programs for the period ended March 31, 2003 was as follows :

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues, costs and expenses, assets, liabilities and related disclosure of contingent amounts. While we believe our estimates and assumptions are reasonable, the inherent nature of estimates is that actual results will likely be different from the estimates made.


Product warranties:
Balance at December 31, 2002	$	8,557
Accruals for warranties issued during the period		2,696
Settlements made during the period		(2,346	)

Balance at March 31, 2003	$	8,907


Deferred service revenue:
Balance at December 31, 2002	$	14,061
Amounts added to deferred revenue		1,346
Amounts recorded as revenue during the period		(1,648	)

Balance at March 31, 2003	$	13,759

ReclassificationsStock-based compensation:

~~Certain~~ The Company ~~prior~~measures ~~period~~compensation ~~amounts~~expense for ALARIS Medical’s stock-based employee ~~have~~compensation ~~been~~plans ~~reclassified~~using tothe ~~conform~~intrinsic tovalue method and provides pro forma disclosures of net income as if the ~~current~~fair ~~period~~value-based ~~presentation~~method had been applied in measuring compensation expense.

~~Shipping~~ At March 31, 2003, Holdings had several stock-based compensation plans from which incentive stock options may be granted to key employees of the Company and ~~handling~~non-qualified stock ~~fees~~options may be granted to key employees, directors, officers, independent contractors, and ~~costs~~consultants. The Company accounts for options issued to employees, directors and officers under those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees, and Related Interpretations.” Generally, no stock-based employee compensation cost is reflected in net income, as all options granted under those plans have an exercise price equal to the market value of the underlying common stock on 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 re-measured to 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.

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, 2002 were $2,369 and $6,160, respectively. Shipping and handling costs for customer sales for the three and nine months ended September 30, 2001, were $2,110 and $6,564, respectively.-8-

7NOTE 1 — BUSINESS AND STATEMENT OF ACCOUNTING POLICY (Continued)

~~NOTE~~ The following 2table —illustrates ~~GOODWILL~~the ~~AND~~effect ~~OTHER~~on ~~INTANGIBLE~~net ~~ASSETS~~income —and ~~ADOPTION~~earnings OFper 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.

STATEMENTS 141 AND 142

		Three Months Ended March 31,
		2003		2002

Net income, as reported	$	6,618		$	3,749

Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects		(415	)		(727	)

Pro forma net income	$	6,203		$	3,022

~~Effective~~ These pro ~~January~~forma amounts 1,may ~~2002,~~not ~~the Company adopted Statement~~ be representative of ~~Financial~~future ~~Accounting~~costs ~~Standards~~since ~~No.~~the estimated fair ~~142,~~value ~~Goodwill~~of ~~and~~stock options ~~Intangible~~is ~~Assets (“FAS~~amortized ~~142”) and No. 141, Business Combinations (“FAS 141”), which~~to ~~were~~expense over ~~issued by~~ the vesting period ~~Financial~~and additional options may ~~Accounting~~be granted ~~Standards Board~~ in ~~July 2001~~future years. The ~~Under~~fair value ~~FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise)~~ for ~~impairment. Separable intangible assets that are not~~these options was ~~deemed~~estimated toat ~~have~~the ~~indefinite~~date ~~lives~~of ~~will~~grant ~~continue to be amortized over their useful lives (but with no maximum life). FAS 141 requires all business combinations initiated after September 30, 2001 to be accounted for~~ using ~~the~~ ~~purchase method and eliminates~~ the ~~pooling~~ Black-~~of-interests–method~~Scholes option ~~of accounting. Intangible~~pricing ~~assets~~model ~~that~~with ~~do not~~the ~~meet~~following weighted ~~certain~~average assumptions ~~defined criteria in FAS 141~~ for ~~recognition apart from goodwill shall be reclassified as goodwill as of~~ the ~~date FAS 142 is~~ ~~initially~~three ~~applied~~months inended ~~its~~March ~~entirety.~~31, As2003 ~~required~~and ~~by FAS 142~~2002, ~~the~~respectively–dividend yields ~~Company has completed an assessment~~ of ~~the~~0%, ~~categorization~~expected volatility of ~~its~~50% ~~existing intangible assets~~ and ~~goodwill~~75%, inrisk ~~accordance with the new criteria and has reported them~~free ~~appropriately~~interest onrates ~~the~~of ~~condensed consolidated balance sheet~~3. In4% ~~accordance~~and ~~with FAS 141~~3.4%, ~~the~~and ~~Company reclassified~~expected ~~its~~lives ~~workforce, net~~ of ~~its~~7 ~~related deferred tax liability, as goodwill~~years. ~~The Company performed a~~ ~~transitional~~ ~~goodwill impairment test and determined the asset not to be impaired.~~

~~Upon~~ The Black-Scholes ~~adoption~~option ofvaluation ~~FAS~~model ~~142,~~was developed for use in estimating the ~~Company~~fair ~~determined~~value ~~that~~of traded options which have no vesting restrictions and are fully transferable. In addition, ~~intangible~~option ~~assets~~valuation ~~related~~models torequire the ~~“IVAC”~~input ~~tradename~~of ~~and~~highly ~~trademarks~~subjective ~~had~~assumptions anincluding the expected stock price volatility. Because ALARIS Medical’s employee stock options have ~~indefinite~~characteristics ~~life~~significantly ~~and~~different infrom ~~accordance~~those ~~with~~of ~~FAS~~traded ~~142~~options, ~~should~~and ~~not~~because bechanges in ~~amortized~~subjective asinput ~~there are~~assumptions nocan ~~legal,~~materially ~~regulatory~~affect the fair value estimates, ~~contractual~~in management’s opinion, ~~economic~~the orexisting ~~other~~models ~~factors~~do ~~that~~not ~~limit~~necessarily ~~the~~provide a reliable ~~useful~~single ~~life~~measure of ~~these~~the ~~intangible~~fair ~~assets~~value toof ~~the~~its ~~reporting~~employee ~~units~~stock based compensation plans. As ofTo ~~September~~comply with ~~30,~~disclosure ~~2002~~requirements, ~~there~~the ~~was~~Company ~~no impairment~~has ~~loss~~valued ~~associated~~its ~~with~~options ~~such~~using ~~indefinite~~the Black-~~lived~~Scholes option ~~intangible~~valuation ~~assets~~model asbut plans to assess other valuation models and assumptions that may ~~their~~more ~~fair~~accurately reflect the value ~~exceeds~~of ~~the~~these ~~carrying~~stock ~~amount~~options.

Intangible assets with finite lives will continue to be amortized over the expected economic lives of the intangible assets. The Company reassessed the useful lives of its intangible assets and determined no change in useful lives to be required for its finite-~~lived~~9- ~~assets.~~

UnderNOTE these standards, the Company ceased amortizing goodwill totaling $142,570, including $2,714 ($4,523 before— taxGOODWILL effect)AND ofOTHER itsINTANGIBLE workforce previously classified as an other intangible asset, and trademarks totaling $74,750 as of January 1, 2002. Adoption of the new standards resulted in not recognizing $2,301 and $6,903, respectively, in amortization expense for the three and nine months ended September 30, 2002, that would have been recognized had the previous standards been in effect.ASSETS

8Acquired other intangible assets were as follows:

The following table presents the impact of FAS 141 and FAS 142 on income (loss) from operations and net income, as if they had been in effect for the three and nine months ended September 30, 2001.

	March 31, 2003				December 31, 2002
	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization

Patents	$	29,021	$	18,534	$	29,021	$	18,135

Distribution rights and license agreements		8,462		4,176		8,462		4,024

Subtotal other intangible assets, net
(subject to amortization)		37,483		22,710		37,483		22,159

Acquired other intangible assets
(not subject to amortization):
IVAC trade name		74,750		-		74,750		-

Other intangible assets, net	$	112,233	$	22,710	$	112,233	$	22,159

	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2001			2001
Income from operations, as reported	$	13,636		$	29,580
Goodwill amortization	1,425			4,275
Workforce amortization	126			378
Tradename and trademark amortization	750			2,250
Pro forma income from operations	$	15,937		$	36,483
Income (loss) from continuing operations, as reported	$	1,337		$	(2,848	)
Goodwill amortization	1,425			4,275
Workforce amortization	126			378
Tradename and trademark amortization	750			2,250
Tax effect	(350		)	(1,050		)
Pro forma income from continuing operations	$	3,288		$	3,005
Net income, as reported	$	1,337		$	889
Goodwill amortization	1,425			4,275
Workforce amortization	126			378
Tradename and trademark amortization	750			2,250
Tax effect	(350		)	(1,050		)
Pro forma net income	$	3,288		$	6,742

For the three months ended March 31, 2003 and 2002, amortization expense for other intangible assets, net was $551 and $589, respectively. The estimated future annual amortization expense for other intangible assets, net is as follows:

Acquired other intangible assets were as follows:


Fiscal Year
2003 (A)	$	1,630
2004		2,182
2005		2,182
2006		2,130
2007		1,774

	September 30, 2002				December 31, 2001
	Gross		Accumulated		Gross		Accumulated
	Amount		Amortization		Amount		Amortization
Patents	$	28,946	$	17,736	$	28,946	$	16,550
Distribution rights and license agreements	8,578		3,874		8,578		3,330
Subtotal other intangible assets, net (subject to amortization)	37,524		21,610		37,524		19,880
Acquired other intangible assets (not subject to amortization):
IVAC tradename and trademarks	90,000		15,250		90,000		15,250
Other intangible assets, net	$	127,524	$	36,860	$	127,524	$	35,130

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

9NOTE 3 — INVENTORIES

~~For~~Inventories ~~the~~comprise ~~quarter ended September 30, 2002 and 2001, amortization expense for other intangible assets, net was $561 and $1,338, respectively. For~~ the ~~nine~~ months ended September 30, 2002 and 2001, amortization expense for other intangible assets, net was $1,730 and $4,018, respectively. The estimated future annual amortization expense for other intangible assets, net is as followsfollowing:

			March 31,		December 31,
Fiscal Year
2002 (A)	$	621
			2003		2002
2003	2,219
Raw materials			$	30,708	$	27,946
2004	2,182
Work-in-process				4,084		2,322
2005	2,182
Finished goods				24,330		26,656
2006	2,130
			$	59,122	$	56,924
2007	1,774

~~(A) Amount represents remaining estimated amortization expense for 2002.~~-10-

NOTE 34 — DERIVATIVELONG-TERM INSTRUMENTS AND HEDGING ACTIVITIESDEBT

ForeignSenior currencysecured notes:

As In ofApril ~~September 30~~2003, ~~2002~~ALARIS Medical Systems repurchased $2,500 principal amount ~~the Company’s~~of ~~only~~its ~~derivatives~~11-5/8% Senior inSecured ~~place~~Notes ~~were~~due ~~forward~~2006 ~~contracts~~(“Senior Secured Notes”), at ~~valued~~a attotal ~~negative $99~~cost ~~and~~of ~~designated~~$2,925 asor ~~hedges~~117% of ~~anticipated~~principal ~~cash~~amount. Such ~~flows~~premium, along inwith ~~various~~a ~~foreign~~write-off of unamortized debt issuance ~~currencies~~costs related ~~and~~to ~~foreign~~the purchased amount ~~currency~~of ~~option~~debt ~~contracts~~will ~~valued~~be atrecorded ~~$69~~as toa ~~hedge anticipated~~charge ~~transactions~~of $503 (~~primarily~~approximately $300 ~~the~~after ~~Euro~~tax) in the Company’s second quarter operating results.

AsSenior partdiscount ofnotes the Company’s risk management strategy, management put in place a hedging program beginning in 2001 under which the Company enters 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. These contracts are entered into to reduce the risk that the Company’s earnings and cashflows resulting from certain forecasted transactions will be affected by changes in foreign currency exchange rates. However, the Company may be impacted by changes in foreign exchange rates related to the unhedged portion of the forecasted transactions. The success of the hedging program depends, in part, on forecasts of Company 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. The Company 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 change in value of the expected cash flows from the forecasted transaction. The ineffective portion of any changes in the fair value of option contracts designated as hedges is recognized immediately in earnings. The Company did not recognize material gains or losses resulting from either hedge ineffectiveness or changes in forecasted transactions during the nine months ended September 30, 2002.Holdings:

10 In July 1998, ALARIS Medical completed the sale of $109,892 of 11-1/8% Senior Discount Notes due 2008 (“Senior Discount Notes”), receiving net proceeds of $106,321.

~~The~~ Due ~~effective~~to ~~portion~~the ~~of any~~$25,000 ~~changes~~ debt repurchase in the ~~fair~~first ~~value~~quarter of 2003 described below, the ~~derivative~~Senior ~~instruments~~Discount Notes accrete to $164,000 principal amount ~~designated~~on asAugust ~~cash~~1, 2003. Prior thereto, interest accruing on the Senior Discount Notes is added to the outstanding principal balance through July 31, 2003. Interest on the Senior Discount Notes ~~flow~~accruing subsequent ~~hedges~~to July 31, 2003 is ~~recorded~~payable in ~~other~~cash semi-annually ~~comprehensive~~in ~~income~~arrears ~~(OCI)~~on ~~until~~February ~~the~~1 ~~hedged forecasted~~and ~~transaction~~August ~~occurs~~1, commencing February 1, 2004. ~~Once~~ The indentures governing the ~~forecasted~~ ~~transaction~~Senior ~~occurs,~~Secured Notes and the ~~effective~~9-3/4% ~~portion~~Senior ofSubordinated ~~any~~Notes ~~related~~due ~~gains~~2006 or(“Senior Subordinated Notes”), ~~losses~~ onpermit ALARIS Medical Systems to make distributions, or “restricted payments,” to ALARIS Medical if at the ~~cash~~time ~~flow~~of ~~hedge~~the isrestricted ~~reclassified~~payment, ~~from~~ALARIS ~~OCI~~Medical toSystems ~~earnings. In~~satisfies the ~~event~~two conditions described in the ~~hedged~~following paragraphs. Additionally, payments ~~forecasted~~to ALARIS Medical to ~~transaction~~fund ~~does~~up ~~not~~to ~~occur~~$1,500 annually in ALARIS Medical operating or itcapital expenditures are ~~becomes~~defined ~~probable~~as ~~that~~restricted payments itbut ~~will~~do not ~~occur~~require meeting these conditions. Based on its operating results for the year ended December 31, 2002, ALARIS Medical Systems met the two required ~~ineffective~~conditions ~~portion~~to ofmake restricted payments ~~any~~for ~~gain~~the orfirst ~~loss~~time onin the ~~related~~first ~~cash~~quarter ~~flow~~of ~~hedge~~2003. Additionally, ALARIS Medical Systems ~~would be~~met ~~reclassified~~the ~~from~~two ~~OCI~~required toconditions ~~earnings~~as atof ~~that~~March ~~time~~31, 2003 which permitted additional restricted payments in the second quarter of 2003.

~~For~~ The ~~the~~first condition ~~three~~which ~~and~~must ~~nine~~be ~~months ended~~satisfied prior ~~September~~to ~~30,~~making ~~2002,~~a restricted payment ~~the~~is ~~Company~~that ~~recognized~~at ~~net~~the ~~charges~~time ~~related~~of to the distribution, ALARIS ~~designated~~Medical Systems ~~cash~~must ~~flow~~have ~~hedges~~a ofFixed ~~forecasted~~Charge Coverage Ratio ~~transactions~~(as calculated in accordance with the ~~amounts~~indentures as described below) of ~~$300~~at ~~and~~least ~~$498,~~2.5 ~~respectively,~~to in1 ~~other~~calculated ~~expense,~~for ~~which~~the ~~consisted~~four ~~entirely~~complete ofcalendar quarters preceding ~~premium~~the distribution as though the distribution had been made ~~costs~~at ~~for~~the ~~option~~beginning ~~contacts~~of such period. At The ~~September 30,~~Fixed ~~2002,~~Charge ~~$312~~Coverage Ratio is determined by dividing ALARIS Medical Systems’ Consolidated EBITDA (~~$184~~as defined ~~after~~in ~~tax~~the indentures) by ~~was~~its Consolidated Interest Expense ~~included~~(as defined in ~~accumulated~~the indentures). Based ~~other~~on ~~comprehensive~~the ALARIS ~~loss. This~~Medical ~~represents~~Systems interest expense for the ~~remaining option~~twelve ~~premium~~months ~~costs~~ended ~~net~~March of31, 2003, the ~~market~~actual ~~value~~amount of ~~the~~interest expense ~~open~~to ~~option~~be ~~contracts~~included ~~that~~in ~~are~~the ~~designated~~calculation asof ~~cash~~the ~~flow~~Fixed ~~hedges~~Charge Coverage Ratio was approximately $38,700. As a result, the minimum required Consolidated EBITDA to meet the ratio for the twelve months ended March 31, 2003, was approximately $96,800 while the actual Consolidated EBITDA was ~~This~~approximately $105,100. Assuming ~~loss~~no isfuture ~~expected~~changes to bethe ~~charged~~amount toor ~~earnings~~terms ~~over~~of outstanding debt ~~the~~of ~~next~~ALARIS ~~three~~Medical Systems at March 31, 2003, ~~months~~approximately $96,800 represents asthe minimum required Consolidated EBITDA for future four quarter calculations of the ~~hedged~~Fixed ~~transactions~~Charge Coverage ~~occur~~Ratio.

In addition to forecasted cash flow transactions, the Company hedges the majority of its net recognized foreign currency transactional exposures with forward foreign exchange contracts to reduce the risk that the Company’s earnings and cashflows will be affected by changes in foreign currency exchange rates. These derivative instruments do not subject the Company’s earnings or cash flows to material risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the assets and liabilities being hedged. These forward foreign exchange contracts are generally entered into for periods of one to six months. The loss on forward foreign exchange contracts for the nine months ended September 30, 2002 was $1,339 and is included in other expense. This loss was substantially offset by unrealized gains on the underlying assets hedged. For the nine months ended September 30, 2002, the net charge to other income and expense for all foreign exchange transactions, realized and unrealized, was $73.-11-

11NOTE 4 — LONG-TERM DEBT (Continued)

~~NOTE~~ Under the 4indentures, —Consolidated ~~SALE~~EBITDA OFis ~~INSTROMEDIX~~defined as follows: “With respect to any Person for any period, the Consolidated Net Income of such Person and its Restricted Subsidiaries for such period, plus, to the extent deducted in computing Consolidated Net Income: (i) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period; (ii) Consolidated Interest Expense of such Person for such period; and (iii) depreciation and amortization (including amortization of goodwill and other intangibles) and all other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period; and (iv) any extraordinary or non-recurring loss and any net loss realized in connection with either an Asset Sale or the extinguishment of indebtedness, in each case, on a consolidated basis determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Restricted Subsidiary of a Person shall be added to Consolidated Net Income to compute Consolidated EBITDA only to the extent (and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person.”

On The second ~~August~~condition ~~31,~~which must be satisfied prior to making a restricted payment is that the ~~2000~~distribution, ~~pursuant~~together with certain other restricted payments, may not exceed a sum determined by reference to anALARIS ~~Asset~~Medical ~~Purchase~~Systems’ ~~Agreement~~cumulative ~~dated~~Consolidated Net Income (as ofdefined ~~August~~in 17the indentures) for the period since January 1, ~~2000~~1997 and cash capital contributions received after such date, ~~the~~less restricted payments made. This condition ~~Company~~provides ~~sold~~that the ~~assets~~Consolidated ~~and~~Net ~~certain~~Income ~~liabilities~~ of ~~its~~ALARIS ~~Instromedix~~Medical ~~division~~Systems will be added to the ~~Card~~amount ~~Guard~~available ~~Technologies,~~each ~~Inc.~~quarter until such time as historical net losses (~~“Buyer”~~of $17,312 through March 31, 2003) ~~for~~are ~~$30~~exhausted. Subsequent to such time,~~000~~ in50% ~~cash~~of (future ALARIS Medical Systems’ net income will be added to the ~~“Sale”)~~amount available.

~~The~~ ~~Asset~~For ~~Purchase~~the ~~Agreement~~year ~~and~~ended ~~the~~December ~~other~~31, ~~agreements executed~~2002, inALARIS ~~connection~~Medical ~~with~~Systems met the requirements ~~Sale~~under ~~required~~ the ~~Company~~indentures to ~~assist~~make ~~Buyer~~a restricted payment in the first quarter ~~setting~~of up2003. As a ~~fully~~result, ~~independent~~in ~~headquarters~~February ~~and~~2003, ~~manufacturing~~ALARIS ~~facility~~Medical inSystems ~~San~~made distributions to ~~Diego,~~ALARIS ~~California~~Medical in the amount of $30,800. ~~Pursuant~~ALARIS Medical used a portion of such distributions to ~~these~~repurchase ~~agreements,~~in a private transaction $525,000 principal amount of ~~the~~Senior Discount Notes at a total cost of $3025,000, ~~purchase price~~representing ~~was~~a ~~placed~~premium inof ~~escrow~~$1,171 or 4.7% ~~The~~over the ~~Company~~then ~~received~~accreted ~~such~~carrying ~~escrowed~~value. ~~amount~~Such premium, ~~after certain~~along ~~offsets,~~with ~~upon~~a ~~completion~~write-off of ~~its~~unamortized ~~obligations~~debt issuance costs ~~under~~related ~~the~~to ~~agreements in~~ the ~~first~~ ~~quarter~~purchased amount of ~~2001~~debt, ~~and~~was ~~recognized~~recorded as a ~~gain.~~charge ~~The~~of ~~total~~$1,545 (approximately $900 after- tax) ~~gain~~in ~~recorded~~the Company’s first quarter 2003 operating results. ~~related~~At toMarch 31, 2003, the ~~Sale~~amount available for future restricted payments was $56,~~576,~~321. ~~with $3~~In April 2003,~~737~~ ~~recorded~~ALARIS ~~during~~Medical ~~2001~~Systems ~~and~~made ~~$1,839~~a restricted ~~recorded~~payment to ALARIS Medical in ~~2000~~the amount of $6,300.

NOTE 5 — INVENTORIESRESTRUCTURING AND OTHER NON-RECURRING ITEMS

Inventories comprise the following:	September 30,		December 31,
	2002		2001
Raw materials	$	37,808	$	40,546
Work-in-process	5,703		4,993
Finished goods	23,696		23,869
	$	67,207	$	69,408

During the first quarter of 2002, the Company recorded a non-recurring benefit of $1,125 for an insurance settlement. The settlement related to damages and losses incurred at one of the Company's 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 the Company received proceeds of $1,000 during the first quarter, and notification of an additional payment due of $125, which was received during April 2002.

~~NOTE 6 — LONG~~-~~TERM DEBT~~12-

ConvertibleNOTE Debentures5 of— HoldingsRESTRUCTURING AND OTHER NON-RECURRING ITEMS (Continued)

At Also during ~~December~~the 31first quarter of 2002, ~~2001~~the ~~Holdings~~Company initiated a plan to restructure its ~~had~~technical ~~outstanding~~services ~~$15~~operations in Central Europe. In this connection,~~969~~ the Company recorded a charge of ~~convertible~~$540 ~~debentures~~which ~~(“Convertible~~included ~~Debentures”)~~$400 for severance costs for 21 positions affected by the ~~which~~relocation ~~were~~of ~~retired~~the atGerman ~~their~~operation ~~scheduled~~and ~~maturity~~$140 onrelated ~~January~~to 15lease termination. As of March 31, 2003, ~~2002~~all severance payments have been made to the identified employees and $11 in lease payments have been made.

TheNOTE indentures6 governing— ALARISSEGMENT Medical Systems’ 11-5/8% senior secured notes and 9-3/4% senior subordinated notes permit ALARIS Medical Systems to use $15,000 of its cash on hand to invest in a wholly owned unrestricted subsidiary. ALARIS Medical Systems made such investment and the unrestricted subsidiary used a portion of the proceeds of such investment to acquire $183 in principal amount of the Convertible Debentures at an approximate 1% discount in the open market in 2001. In 2002, the remaining $14,812 was loaned to Holdings, which used the proceeds of such loan and proceeds from the exercise of stock options to retire the $15,969 of Convertible Debentures. A portion of the stock option exercise proceeds resulted from the exercise by some of our executive officers of stock options. In connection with the exercise, three of our executive officers received interest-bearing, short-term loans, aggregating $620, from ALARIS Medical Systems. These loans were subsequently repaid in full. Holdings were entitled to require such executive officers to exercise such options in order to provide Holdings with sufficient funds to retire the Convertible Debentures. Such options were granted to these executive officers in anticipation of Holdings’ need to require such exercise in order to complete the retirement of the Convertible Debentures.INFORMATION

12 The Company’s segment performance is based on results of two geographical business segments within the same line of business—North America and International.

The Company ~~retirement~~is oforganized ~~the~~primarily ~~Convertible~~based ~~Debentures~~on ~~resulted in~~geographic ~~notes~~location ~~payable~~with ~~from~~the ~~Holdings~~United toStates ~~the~~and Canada ~~wholly-owned~~drug ~~subsidiary~~infusion ofand ~~ALARIS~~patient ~~Medical Systems~~monitoring ~~of $14~~business,~~993~~ ~~which~~and ~~include~~Mexico amanufacturing ~~note~~activities, representing ~~issued~~the inNorth ~~December,~~America ~~2001~~segment. ~~for~~All ~~$181 related~~other tointernational ~~the~~operations, ~~purchase~~including Europe, ofAsia, ~~the~~Australia, ~~debentures~~ and ~~one~~Latin ~~issued~~America, inrepresent ~~January,~~the ~~2002,~~International ~~for $14,812~~segment.

The accounting ~~notes~~policies ~~bear~~of ~~interest~~the atsegments aare ~~rate~~the ofsame ~~7-1/4%~~as ~~per~~those ~~annum, compounded~~described ~~semi-annually~~in ~~and~~the ~~are~~Consolidated Financial ~~due~~Statements onincluded ~~December~~in ~~31, 2008. Due to~~ the ~~parent/subsidiary~~Company’s ~~relationship between~~Annual ~~the~~Report ~~borrowing~~on ~~and~~Form ~~lending~~10-K ~~companies,~~for the year ~~notes~~ended ~~receivable~~December ~~have~~31, ~~been recorded~~2002. asThe ageographical ~~reduction~~data ofdoes ~~the~~not ~~consolidated~~include ~~ALARIS Medical Systems~~intersegment ~~stockholder’s equity~~revenues. ~~Because~~ ofAll ~~this relationship,~~expenses ~~although~~associated ~~the~~with ~~notes~~corporate ~~bear~~headquarters ~~interest~~appear atin ~~7-1/4%,~~the ~~interest~~North ~~income is~~America ~~not~~segment. ~~recorded~~The inCompany evaluates the ~~ALARIS~~performance ~~Medical~~of ~~Systems~~its ~~consolidated~~segments ~~income~~based ~~statement~~on sales and operating income.

~~NOTE~~The 7table —below presents information ~~SEGMENT~~about ~~INFORMATION~~reported segments for the three months ended March 31:

The Company’s segment performance is based on results of two geographical business segments within the same line of business - North America and International.

	North America		International		Total

2003
Sales	$	79,980	$	41,194	$	121,174
Income from operations		9,317		10,965		20,282
2002
Sales	$	69,446	$	34,954	$	104,400
Income from operations		8,816		7,591		16,407

TheNOTE Company7 is— organized primarilyCASH basedFLOW 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 and Latin America, represent the International segment.INFORMATION

~~The accounting policies of the~~ During ~~segments are~~ the ~~same~~quarters ~~as those described in the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year~~ ended ~~December~~March 31, ~~2001.~~2003 The geographical data does not include intersegment revenues. All expenses associated with the corporate headquarters appear in the North America business unit. The Company evaluates the performance of its segments based on operating income and ~~adjusted~~ ~~earnings before interest~~2002, ~~taxes~~Federal, ~~depreciation,~~state and ~~amortization (EBITDA).~~foreign ~~Adjusted EBITDA represents~~ income ~~from~~taxes ~~operations before restructuring~~paid, ~~other non-recurring items, depreciation and amortization. Adjusted EBITDA does not represent~~ net ~~income~~of ortax ~~cash flows from operations~~refunds, ~~as these~~totaled ~~terms~~$679 ~~are defined under generally accepted accounting principles,~~ and ~~should~~$382, ~~not~~respectively. No beinterest ~~considered~~was aspaid anduring ~~alternative to net income as an indicator of~~ the ~~Company’s~~ ~~operating~~quarters ~~performance~~ended orMarch to31, ~~cash~~2003 ~~flows as a measure of liquidity~~and 2002.

-13-

~~Three~~ Pursuant ~~months~~to ~~ended~~ALARIS Medical Systems’ tax sharing agreement with Holdings, for Federal income tax purposes, ALARIS Medical Systems is required to calculate its current income tax liability on a stand-alone basis as if it were not included in the Holdings ~~September~~consolidated income 30tax return. The resulting tax liability is payable to Holdings. The pro-forma income taxes payable recorded on ALARIS Medical Systems on a stand alone basis at March 31, 2003 and December 31, 2002 are $9,077 and $7,900, respectively, and are recorded in other non-current liabilities as a payable to Holdings. Such amounts eliminate in the Condensed Consolidated Financial Statements of ALARIS Medical.

	North
	America		International		Total
2002
Sales	$	78,060	$	35,003	$	113,063
Operating income	10,367		7,942		18,309
Adjusted EBITDA	14,537		9,816		24,353
2001
Sales	$	74,475	$	29,149	$	103,624
Operating income	8,255		5,381		13,636
Adjusted EBITDA	14,392		7,118		21,510

NOTE 9 — CONTINGENCIES AND LITIGATION

Reconciliation of total segment adjusted EBITDA to consolidated income from continuing operations before income taxesLitigation:

	2002			2001
Adjusted EBITDA
Total adjusted EBITDA	$	24,353		$	21,510
Depreciation and amortization	(6,044		)	(7,874		)
Interest, net	(9,742		)	(10,657		)
Other reconciling items	(334		)	56
Consolidated income from continuing operations before income taxes	$	8,233		$	3,035

On December 5, 2000, the Company filed a lawsuit in the United States District Court for the Southern District of California against Filtertek, Inc., seeking a declaration that the Company’s own needle-free system does not infringe a Filtertek patent relating to a Filtertek needle-free device as well as seeking unspecified damages and equitable relief from Filtertek, for infringement of a patent relating to a needle-free system licensed to the Company on an exclusive basis by Medex, Inc. On March 9, 2001, Filtertek filed a lawsuit in the United States District Court for the Northern District of Illinois seeking unspecified damages and equitable relief from the Company claiming that the Company’s needle-free system infringes the Filtertek patent as well as seeking a declaration, against Medex only, that Filtertek’s needle-free device does not infringe the needle-free system patent licensed to the Company by Medex. The Company subsequently withdrew its claim for damages and equitable relief relating to the Medex patent. As a result of motions made by the parties, the California action was transferred to the Illinois court. The Court-appointed Special Master conducted a claims construction hearing and provided the Court with recommendations on how the single claim of the Filtertek patent at issue should be construed, which the Court has since adopted.

~~Nine~~ The Company ~~months~~believes ~~ended~~that it has meritorious defenses to all of Filtertek’s claims and it intends to defend itself vigorously. The Company has offered to submit to mediation or ~~September~~arbitration 30to expedite the resolution of this case, but the parties have not reached agreement to do so. On November 15, 2002, the Company moved for a summary adjudication of the claims. If that does not resolve all claims, the Company will press for a prompt trial of the remaining claims. There can be no assurance that the Company’s defenses will defeat all of Filtertek’s claims and the failure to do so could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

	North
	America		International		Total
2002
Sales	$	224,965	$	101,018	$	325,983
Operating income	29,105		22,176		51,281
Adjusted EBITDA	40,098		28,007		68,105
2001
Sales	$	207,462	$	93,521	$	300,983
Operating income	11,484		18,096		29,580
Adjusted EBITDA	36,623		23,358		59,981

The Company is also a defendant in various actions, claims and legal proceedings arising from its normal business operations. Management believes the Company has meritorious defenses 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.

-14-

ReconciliationNOTE of total9 segment— adjustedCONTINGENCIES EBITDAAND toLITIGATION consolidated income (lossContinued) from continuing operations before income taxes:

	2002			2001
Adjusted EBITDA
Total adjusted EBITDA	$	68,105		$	59,981
Depreciation and amortization	(17,409		)	(23,502		)
Interest, net	(29,023		)	(29,936		)
Restructuring and other non-recurring items	585			(6,899		)
Other reconciling items	(635		)	(1,084		)
Consolidated income (loss) from continuing operations before income taxes	$	21,623		$	(1,440	)

Other Matters:

~~NOTE~~ During the 8years —1988 ~~CASH~~through ~~FLOW~~1995, ~~INFORMATION~~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 a pre-penalty notice of intent from the United States Customs Service (“Customs”) to assess additional duties and penalties 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 is unlikely that Customs will assess any portion of the disputed amounts against the Company. Customs has not initiated any proceedings against the Company in respect of such matters. 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 ultimate outcome of such proceeding cannot be predicted, nor is the Company able to estimate the possible loss resulting from such proceeding, should one occur. 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 Cal Pacifico dispute will result in a material claim against the Company, it will continue to monitor the matter.

For the nine months ended September 30, 2002, Federal, state and foreign income taxes paid, net of tax refunds, totaled $7,636. Federal, state and foreign income taxes paid, net of tax refunds, resulted in a cash inflow of $1,770 for the nine months ended September 30, 2001. Interest paid during the nine months ended September 30, 2002 and 2001 totaled $21,127 and $21,336, respectively.-15-

NOTEPART 9I —– RESTRUCTURINGITEM AND OTHER NON-RECURRING ITEMS2

The Company did not record restructuring or non-recurring items during the second or third quarters of 2002. During the first quarter of 2002, the Company recorded a non-recurring benefit of $1,125 for an insurance settlement. The settlement related to damages and losses incurred at one of the CompanyMANAGEMENT’sS disposableDISCUSSION productsAND manufacturingANALYSIS plantsOF in MexicoFINANCIAL inCONDITION 1993AND asRESULTS aOF result of flooding. The contingency related to the insurance settlement was resolved in the first quarter of 2002, when the Company received proceeds of $1,020 during the quarter and notification of an additional payment due of $105, which was received during April 2002.OPERATIONS

DuringFORWARD-LOOKING the first quarter of 2002, the Company initiated a plan to restructure its technical services operations in Central Europe. In this connection, the Company recorded a charge of $540, which included $400 of severance costs for 21 positions affected by the relocation of the German operation and $140 related to lease termination. As of September 30, 2002, all of the severance costs have been paid to the identified employees.STATEMENTS

~~Restructuring~~ Certain of the matters discussed in this report, including, without limitation, matters discussed under Item 2, “Management’s Discussion and ~~other~~Analysis of Financial Condition and ~~non~~Results of Operations,” may constitute forward-~~recurring~~looking ~~charges~~statements within the meaning of $6Section 21E of the Securities Exchange Act of 1934,~~899~~ ~~during~~as amended. Certain of these forward-looking statements can be identified by the ~~nine~~use ~~months~~of ~~ended~~forward-looking ~~September~~terminology such 30as “believes,” ~~2001~~“expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” ~~included~~“plans,” $3“estimates,~~520~~” or “anticipates” or the negative of these ~~legal~~terms or other comparable terminology, ~~advisory~~or ~~and~~by ~~consultant~~discussions ~~expenses~~of ~~related~~strategy, toplans ~~obtaining~~or anintentions. ~~amendment~~Statements tocontained ~~the~~in ~~ALARIS~~this ~~Medical~~report ~~Systems’~~that ~~bank~~are ~~credit~~not ~~agreement~~historical facts are forward-looking statements. ~~This~~ ~~amendment~~Without ~~was~~limiting ~~completed~~the generality of the preceding statement, all statements in ~~April~~this report concerning or relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are ~~2001~~forward-looking statements. ~~The~~ ~~Company~~In ~~also~~addition, ~~recorded~~through $3our senior management,~~379~~ from time to time we make forward-looking statements concerning our expected future operations and ~~for~~performance ~~restructuring~~and ~~activities~~other developments. ~~These~~ Such forward-looking statements are necessarily ~~activities~~estimates ~~related~~reflecting toour ~~streamlining~~best judgment based upon current information and involve a number of ~~operations~~risks inand uncertainties. Other factors may affect the ~~North~~accuracy ~~American~~of ~~business~~these forward-looking statements and ~~resulted~~our inactual results may differ materially from the ~~elimination~~results ofanticipated 71in these ~~positions~~forward-looking statements. ~~The~~ ~~restructuring~~While ~~charges~~it ~~were~~is ~~composed~~impossible ofto ~~severance~~identify ~~and~~all ~~related~~such factors, factors that could cause actual results to differ materially from those estimated by us ~~benefits~~include, ofbut $are not limited to, those factors or conditions described under this Item 2,~~879~~ “Management’s Discussion and ~~consulting~~Analysis ~~fees~~of Financial Condition and Results of Operations” ~~approximately~~in ~~$500. Adjusted~~this ~~EBITDA~~report ~~for~~and ~~the~~under ~~nine~~Item ~~months~~7, ~~ended~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting ~~September~~Policies 30and Estimates” and “Factors That Could Affect Future Financial Condition and Results” in our Annual Report on Form 10-K for the year ended December 31, 2002, and ~~2001~~general ~~excludes~~conditions in the ~~non-recurring~~economy ~~items~~and capital markets.

15Overview:

~~NOTE~~ We 10develop —and ~~RELATED~~provide ~~PARTY~~practical ~~ARRANGEMENTS~~solutions for medication safety. We design, manufacture and market intravenous (IV)medication delivery and infusion therapy devices, needle-free disposables and related monitoring equipment in the United States and internationally. Our proprietary Guardrails Safety Software, our other “smart” technologies and our “smart” services help to reduce the risks and costs of medication errors, help to safeguard patients and clinicians and also gather and record clinical information for review, analysis and transcription. Our intravenous infusion systems are used to deliver to patients one or more fluids, primarily pharmaceuticals or nutritionals, and consist of medication safety systems, single and multi-channel large volume infusion pumps, syringe pumps and dedicated and non-dedicated disposable administration sets.

~~Pursuant~~ toWe ~~ALARIS~~have ~~Medical Systems’~~one ~~tax~~of ~~sharing~~the ~~agreement~~largest installed bases ~~with~~of ~~Holdings,~~large ~~for~~volume ~~Federal~~pump ~~income~~delivery ~~tax~~lines ~~purposes,~~in the United ~~ALARIS~~States hospital market, representing approximately 32% ~~Medical~~of ~~Systems~~such installed lines. We isalso believe ~~required~~that towe ~~calculate~~have ~~its~~the ~~current~~number ~~income~~one ~~tax~~or ~~liability~~number ontwo amarket ~~stand-alone~~position ~~basis~~in asthe iflarge itvolume ~~were~~pump ~~not~~segment ~~included~~or in the ~~Holdings consolidated~~syringe ~~income~~pump ~~tax~~segment, ~~return. The resulting~~or ~~tax~~both ~~liability~~segments, in isBelgium, France, ~~payable~~Italy, The toNetherlands, Norway, Spain, ~~Holdings. The~~Sweden, ~~pro-forma~~the ~~income~~United ~~taxes~~Kingdom, Australia, Canada, ~~payable~~New ~~recorded~~Zealand onand ~~ALARIS~~South ~~Medical Systems~~Africa. onIn addition, we are a leading ~~stand-alone~~provider ~~basis~~of atpatient ~~September~~monitoring products ~~30,~~that ~~2002~~measure and ~~December 31~~monitor temperature, with ~~2001~~a ~~are~~substantial installed base of hospital ~~$6,163~~thermometry systems in the United States. We also provide products which measure and ~~$11~~monitor pulse,~~426~~ pulse oximetry, and ~~respectively,~~blood pressure. We ~~and~~sell ~~are~~our ~~recorded~~products primarily into ~~other~~the ~~non-current liabilities~~hospital asmarket through a ~~payable~~worldwide direct tosales ~~Holdings.~~ force of over 200 salespersons and ~~Such~~more ~~amounts~~than ~~eliminate~~100 distributors to over 5,000 hospitals in ~~the~~more ~~consolidated~~than ~~financial~~120 ~~statements~~countries ~~of Holdings~~worldwide.

~~NOTE 11 — LITIGATION AND CONTINGENCIES~~-16-

LitigationCritical Accounting Policies and Estimates:

~~On December 5, 2000, the~~ Our ~~Company~~discussion ~~filed~~and aanalysis ~~lawsuit in the United States District Court for the Southern District~~ of ~~California~~our ~~against~~operating ~~Filtertek,~~results ~~Inc., seeking a declaration that the Company’s own needle-free system does not infringe a Filtertek patent relating to a Filtertek needle-free device as well as seeking unspecified damages~~ and ~~equitable~~ ~~relief~~financial ~~from~~condition ~~Filtertek,~~is ~~for~~based ~~infringement~~upon ofour ~~a patent relating to a needle-free~~Condensed ~~system~~Consolidated ~~licensed~~Financial ~~to the Company on an exclusive basis by Medex~~Statements, ~~Inc. On~~which ~~March 9,~~have ~~2001,~~been ~~Filtertek~~prepared ~~filed a lawsuit~~ in ~~the~~accordance United States District Court for the Northern District of Illinois seeking unspecified damages and equitable relief from the Company claiming that the Company’s needle-free system infringes the Filtertek patent and seeking, as well, a declaration, against Medex only, that Filtertek’s needle-free device does not infringe the needle-free system patent licensed to the Company by Medex. The Company subsequently withdrew its claim for damages and equitable relief relating to the Medex patent. As a result of motions made by the parties, the California action was transferred to the Illinois court. The Illinois court granted the Company’s motion to bifurcate discovery related to liability and damages. Discovery relating to liability recently ended, while discovery relating to damages is currently abated. The Court-appointed Special Master conducted a claims construction hearing and provided the Court with ~~recommendations on~~United ~~how~~States ~~the~~generally ~~single~~accepted ~~claim~~accounting ~~of the patent which is at issue should be construed, which the Court has since adopted~~principles.

~~The~~ Critical ~~Company~~accounting ~~believes~~policies are those that itinvolve ~~has meritorious~~subjective ~~defenses~~or tocomplex ~~all~~judgments, ofoften as ~~Filtertek’s~~a ~~claims~~result ~~and~~of itthe ~~intends~~need to ~~defend itself~~make ~~vigorously~~estimates. The ~~Company~~following ~~has offered~~areas toall ~~submit~~require tothe ~~mediation~~use orof judgments ~~arbitration~~and toestimates: ~~expedite~~inventory ~~the~~valuation, ~~resolution~~allowances offor uncollectible accounts ~~this~~receivable ~~case~~and estimated rebates, ~~but~~cost ~~the~~of ~~Company~~field ~~and~~corrective ~~Filtertek~~actions, ~~have~~deferred ~~not~~tax ~~reached~~asset valuation ~~agreement~~and tocarrying dovalue soof intangible assets. ~~Based~~ onEstimates ~~the~~in ~~evidence~~each toof ~~date,~~these ~~the~~areas ~~Company~~are ~~intends~~based toon ~~move~~historical ~~for~~experience aand ~~summary~~various ~~adjudication~~judgments ofand ~~the~~assumptions ~~claims. If~~ that ~~does~~we ~~not~~believe ~~resolve~~are appropriate. ~~all claims~~However, the ~~Company~~ ~~will~~inherent ~~press~~nature ~~for~~of aestimates ~~prompt~~is ~~trial~~that ofactual ~~the~~results ~~remaining~~will ~~claims~~likely be different from these estimates. ~~There~~ ~~can~~Our beaccounting nopractices ~~assurance~~are ~~that~~discussed ~~the~~in ~~Company~~more detail in “Management’s ~~defenses~~ ~~will~~Discussion ~~defeat~~and ~~all~~Analysis of ~~Filtertek’s~~Financial Condition ~~claims~~and Results of Operations” and ~~the~~note ~~failure~~2 to doour soConsolidated ~~could~~Financial ~~have~~Statements acontained ~~material~~in ~~adverse~~our ~~effect~~Annual Report on ~~the~~Form ~~Company’s~~10-K ~~business,~~for ~~financial~~the ~~condition, results~~year ofended ~~operations~~December ~~and cash flows~~31, 2002.

UnitedResults Statesof Customs Service MatterOperations:

~~During~~ The following ~~the~~table ~~years~~sets ~~1988 through 1995~~forth, ~~Cal Pacifico~~for ~~acted as~~ the ~~Company’s~~periods ~~United~~indicated, ~~States~~selected ~~customs~~financial ~~broker and importer of~~information ~~record~~expressed ~~with~~as ~~respect~~a topercentage ~~the importation into the United States~~ of ~~finished products~~sales: ~~assembled at the Company’s two maquiladora assembly plants in Tijuana, Mexico. Cal Pacifico received~~

	Three Months Ended March 31,
	2003			2002

Sales		100.0	%		100.0	%

Cost of sales		47.9			50.5

Gross margin		52.1	%		49.5	%
Selling and marketing expenses		20.0			20.5
General and administrative expenses		8.8			9.0
Research and development expenses		7.3			5.9
Restructuring and other non-recurring items		-			(0.6	)
Interest income from sales-type capital leases		(0.7	)		(1.1	)

Income from operations		16.7			15.8
Interest expense, net		(7.9	)		(9.3	)
Other, net		0.2			(0.5	)

Income before income taxes		9.0			6.0
Provision for income taxes		3.5			2.4

Net income		5.5	%		3.6	%

~~a pre~~-penalty notice of intent from the United States Customs Service (“Customs”) to assess additional duties and penalties 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 is unlikely that Customs will assess any portion of the disputed amounts against the Company. Customs has not initiated any proceedings against the Company in respect of such matters. 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 ultimate outcome of such proceeding cannot be predicted, nor is the Company able to estimate the possible loss resulting from such proceeding, should one occur. 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 Cal Pacifico dispute will result in a material claim against the Company, it will continue to monitor the matter.17-

~~Other~~ Our sales results are reported consistent with our two geographical segments: North America and International. The following table summarizes sales to customers by each segment.

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

	Three Months Ended March 31,
	2003		2002
	(dollars in millions)
North America
Infusion Instruments	$	19.0	$	12.5


Dedicated Disposables		35.9		33.8
Other Disposables and Service		19.5		17.0

Subtotal		74.4		63.3

Patient Monitoring		5.6		6.1
North America Total	$	80.0	$	69.4

International
Infusion Instruments	$	13.9	$	12.5
Dedicated Disposables		20.6		17.1
Other Disposables and Service		5.6		4.2

Subtotal		40.1		33.8

Patient Monitoring		1.1		1.2

International Total	$	41.2	$	35.0

ALARIS Medical Total	$	121.2	$	104.4

17Three Months Ended March 31, 2003 Compared with Three Months Ended March 31, 2002

~~Part~~ Sales. For Ithe —three months ~~Item~~ended March 31, 2003, sales were $121.2 million, an increase of $16.8 million, or 16%, over the same period in the prior year. If currency exchange rates for the first quarter of 2003 had prevailed during the first quarter of 2002, sales would have been $110.2 million for the first quarter of 2002. Thus, excluding the effects of currency changes, the increase in sales for the first quarter of 2003 was $11.0 million, or 10%, over the first quarter of 2002.

~~Management’s~~ Higher volumes ~~Discussion~~of both drug infusion instruments and disposable administration sets ~~Analysis~~were the primary factors leading to the increase in North America revenues of $10.6 million, or 15%, over the prior year. The increase in infusion instruments was largely due to sales of ~~Financial~~our ~~Condition~~proprietary Guardrails Safety Software, primarily in the Medley Medication Safety System. The increase in dedicated disposables was due to an increase in our installed base of infusion devices. The increase in other disposables and ~~Results~~service was due to approximately $2.7 million in additional sales of ~~Operations~~SmartSite Needle-Free systems. The increases in drug infusion products in North America were partially offset by lower volumes of patient monitoring instruments and disposables compared with the prior year. International sales increased $6.2 million, or 18%, due to higher volumes and revenues of large volume pumps, dedicated disposable administration sets, and SmartSite Needle-Free systems compared with the same period in the prior year. Excluding the effects of currency changes, International sales for the first quarter of 2003 increased 1% over the first quarter of 2002.

~~FORWARD-LOOKING~~ Gross Profit. ~~STATEMENTS~~Gross profit increased $11.5 million, or 22%, for the quarter ended March 31, 2003, compared with the same quarter last year. The gross margin percentage increased to 52.1% for the first quarter of 2003, from 49.5% for the first quarter of 2002. Excluding the effects of currency changes, gross profit for the first quarter of 2003 would have increased $7.2 million from the first quarter of 2002 and the gross margin percentage for the first quarter of 2002 would have been 50.8%. In both North America and International, the improved margin percentage was due to increased volume of products sold, an increased percentage of software products that carry a higher margin than equipment and disposables and generally lower product costs resulting from improved manufacturing efficiencies.

Certain of the matters discussed in this report, including, without limitation, matters discussed under 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. 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 forward18-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 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 That Could Affect Future Financial Condition and Results” in our Form 10-K for the year ended December 31, 2001, and general conditions in the economy and capital markets.

~~Overview~~ Selling and Marketing Expenses. Selling and marketing expense increased $2.8 million, or 13%, for the quarter ended March 31, 2003, compared with the same period in 2002, primarily due to increased selling costs associated with higher sales volume in the first quarter of 2003 compared with the prior year and to higher sales and marketing costs related to increased personnel, consulting and related activities supporting the continued deployment of our medication safety strategy. As a percentage of sales, selling and marketing expenses decreased to 20.0% for the first quarter of 2003 from 20.5% for the first quarter of 2002. Excluding the effects of currency changes, the increase in selling and marketing expenses for the first quarter of 2003 would have been $1.5 million, or 7%, compared with the first quarter of 2002.

~~ALARIS~~ General and ~~was~~Administrative ~~formed~~Expenses. General inand administrative expense ~~1996~~increased by$1.3 million, or 13.6%, for the quarter ended March 31, 2003, ~~merger~~ ofcompared ~~IMED~~with ~~Corporation~~the ~~and~~same ~~IVAC~~period ~~Medical~~in ~~Systems~~the prior year. As a percentage of sales, general ~~Inc~~and administrative expense decreased to 8.8% for the first quarter of 2003, from ~~two~~9.0% ~~pioneers~~for inthe first quarter of 2002. Excluding the effects of currency changes, the ~~area~~increase in general and administrative expenses for the first quarter of ~~infusion~~2003 ~~technology~~would have been $.8 million, or ~~each~~8%, compared with ~~leading~~the ~~brand~~first quarter ~~names~~of ~~and~~2002. Increases atin administrative expense ~~least~~were 30largely due to spending on our business process reengineering project, which began in 2002. This project is designed to enable us to achieve efficiencies ~~years~~throughout ofour business ~~operating~~and ~~history~~to design a new enterprise-wide information system. The current year first quarter also included higher depreciation, legal and other professional services, and insurance expense over the prior year first quarter.

~~We develop practical solutions~~ Research ~~for~~and ~~medication~~Development ~~safety at the point of care~~Expenses. Research ~~We design, manufacture~~ and ~~market intravenous~~development expense increased approximately $2.6 ~~(IV) medication delivery and infusion therapy devices~~million, or ~~needle-free disposables and patient monitoring equipment. Our “smart” technology~~42%, ~~tools~~for ~~and services are designed to reduce~~ the ~~risks~~ ~~and~~quarter ~~costs~~ended ofMarch ~~medication errors~~31, ~~and safeguard patients and clinicians. We provide our products~~2003, ~~professional and technical support and training services~~ compared towith ~~over 5,000 hospital and health care systems, as well as alternative care sites in more than 120 countries through a worldwide direct sales force and distributors. We have one of~~ the ~~largest~~same ~~installed~~period ~~bases of large volume pump delivery lines~~ in the ~~United~~prior ~~States hospital market, representing approximately 32% of such installed lines~~year. We ~~also~~The ~~believe~~increase ~~that we~~was ~~have~~due ~~the~~to ~~number~~spending associated ~~one~~with ornew ~~number two market position in the large volume pump~~product development primarily related ~~segment~~to orour medication safety strategy ~~the~~and ~~syringe~~increased spending ~~pump~~on ~~segment,~~new orproducts ~~both~~for ~~segments, in Belgium, France, Italy, The Netherlands, Norway, Spain, Sweden,~~ the international market. This ~~United Kingdom, Australia,~~higher spending ~~Canada~~included increased salaries, ~~New Zealand~~ benefits, and ~~South~~consulting ~~Africa~~fees. In Research ~~addition,~~and wedevelopment expense increased ~~are~~to a7.3% ~~leading provider~~ of ~~patient~~sales ~~monitoring~~for ~~products~~the ~~that~~first ~~measure~~quarter ~~and~~of ~~monitor temperature~~2003, compared with a5.9% ~~substantial installed base~~ of ~~hospital~~ ~~thermometry~~sales ~~systems~~for in the ~~United~~first ~~States. We~~quarter ~~also~~of ~~provide products which measure and monitor pulse, pulse~~2002. ~~oximetry~~ ~~and blood pressure.~~

18 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 during the quarter and notification of an additional payment due of $.1 million, which was received during April 2002.

~~Critical~~ During the ~~Accounting~~first ~~Policies~~quarter ~~and~~of 2002, we initiated a plan to restructure our Central European technical services. In this connection, we recorded a charge of $.5 million which included ~~Estimates~~$.4 million for severance costs for 21 positions affected by the relocation of the German operation and $.1 million related to lease termination. As of March 31, 2003, all severance payments had been made to the identified employees.

~~Our~~ Interest Expense. Interest expense ~~discussion~~was ~~and~~constant during ~~analysis~~the ofquarter ended ~~our~~March ~~operating~~31, ~~results and~~2003, compared with ~~financial~~the ~~condition~~same isquarter ~~based~~in ~~upon~~2002. There ~~our~~have ~~condensed~~been ~~consolidated financial~~no ~~statements,~~changes ~~which~~to ~~have~~the ~~been~~amounts ~~prepared~~of indebtedness during inthese periods ~~accordance~~and ~~with~~the ~~United~~Senior Secured Notes ~~States~~and ~~generally~~Senior Subordinated Notes both have ~~accepted~~fixed ~~accounting~~interest ~~principles~~rates.

~~Critical accounting policies are~~ Interest ~~those that involve subjective or complex judgments, often as a result of the need to make estimates~~Income. ~~The~~ Interest income ~~following areas~~was ~~all~~constant during ~~require~~ the ~~use~~quarter ended ofMarch ~~judgments and estimates: inventory valuation~~31, ~~allowances~~ ~~for uncollectible accounts receivable and estimated rebates~~2003, compared with ~~cost~~the ~~of field~~same ~~corrective~~quarter ~~actions, deferred tax asset valuation 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~~2002. ~~Actual~~ While ~~results may differ from these estimates. Our critical accounting policies are~~the ~~discussed~~average incash ~~more~~balance ~~detail~~was inhigher ~~“Management’s~~than ~~Discussion~~the ~~and~~same ~~Analysis~~period ~~of Financial Condition and Results of Operations” and note 2 to our consolidated financial statements contained~~ in ~~our~~2002, the ~~Annual~~yield ~~Report~~earned on ~~Form~~such ~~10-K~~cash ~~for~~was ~~the~~lower ~~year~~due ~~ended December~~to ~~31, 2001~~lower interest rates.

~~Results of Operations~~-19-

~~The following table~~ Other, ~~sets~~net. ~~forth~~Other, net increased $.7 million for the ~~periods~~quarter ended ~~indicated,~~March ~~selected financial information expressed as a percentage of sales. Beginning January 1~~31, ~~2002~~ 2003, ~~in accordance~~ compared with ~~new~~the ~~accounting standards, goodwill and~~same ~~certain~~ ~~other~~quarter ~~intangibles~~in ~~are~~the ~~no longer amortized. As required by FAS 142,~~ prior year ~~data~~due into ~~the~~an increase ~~following~~in ~~tables has~~gains ~~not~~on ~~been~~foreign ~~restated~~currency ~~and,~~transactions ~~therefore,~~of ~~contains~~$.5 ~~amortization~~million ~~expense~~over ~~that~~the issame ~~not included~~quarter in ~~current year information. (See note 2 to~~ the ~~condensed~~prior ~~consolidated financial statements~~year.)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2002		2001		2002		2001
Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	49.1		51.9		49.9		51.4
Gross margin	50.9		48.1		50.1		48.6
Selling and marketing expenses	19.9		18.6		19.9		19.2
General and administrative expenses	8.6		11.3		9.0		11.9
Research and development expenses	7.1		6.3		6.7		6.7
Restructuring and other non-recurring items	—		—		(0.2	)	2.3
Interest income from sales-type capital leases	0.9		1.2		1.0		1.3
Income from operations	16.2		13.1		15.7		9.8
Interest expense, net	(8.6	)	(10.3	)	(8.9	)	(9.9	)
Other, net	(0.3	)	0.1		(0.2	)	(0.3	)
Income (loss) from continuing operations before income taxes	7.3		2.9		6.6		(0.4	)
Provision for income taxes	2.9		1.6		2.6		0.5
Income (loss) from continuing operations	4.4		1.3		4.0		(0.9	)
Gain on disposal of discontinued business (net of income taxes)	—		—		—		1.2
Net income	4.4	%	1.3	%	4.0	%	0.3	%
Other Data:
Adjusted EBITDA	21.5	%	20.8	%	20.9	%	19.9	%

Liquidity and Capital Resources

19 We expect to continue to meet our short-term liquidity needs, including capital expenditure requirements, with cash flow from operations and cash on hand. We will continue to use our funds primarily for operating expenses, including planned expenditures for new research and development programs, capital expenditures and scheduled interest payments on outstanding indebtedness. Additionally, we anticipate using a portion of these funds to purchase some of our long-term debt from time to time in open market or privately negotiated transactions or otherwise to the extent that the indentures governing such indebtedness permit us to do so.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2002		2001		2002		2001
	(in millions)				(in millions)
Adjusted EBITDA (1)	$	24.4	$	21.5	$	68.1	$	60.0
Restructuring and other non-recurring items	—		—		.6		(6.9)
Depreciation and amortization (2)	(6.1)		(7.9)		(17.4)		(23.5)
Interest income	.1		.4		.6		1.7
Interest expense	(9.9)		(11.1)		(29.6)		(31.6)
Other, net	(.3)		.1		(.6)		(1.1)
Provision for income taxes	(3.3)		(1.7)		(8.7)		(1.4)
Net income (loss) from continuing operations	$	4.9	$	1.3	$	13.0	$	(2.8)

At March 31, 2003, we had $350.0 million outstanding indebtedness composed of $170.0 million of 11-5/8% Senior Secured Notes which were issued on October 16, 2001 and $180.0 million of 9-3/4% Senior Subordinated Notes due 2006 (“Senior Subordinated Notes”). The Senior Secured Notes bear interest at 11-5/8%, payable semi-annually in arrears on June 1 and December 1, with all principal due at maturity on December 1, 2006. The Senior Subordinated Notes bear interest at 9-3/4%, payable semi-annually in arrears on June 1 and December 1, with all principal due at maturity on December 1, 2006.

~~(1)~~ ~~Adjusted EBITDA~~Holdings ~~represents~~also ~~income~~had outstanding ~~from~~at ~~operations~~March ~~before restructuring~~31, ~~other non-recurring items~~2003, ~~discontinued operations, interest, taxes, other, net, depreciation and amortization~~ $158.2 ~~Adjusted~~million accreted amount EBITDA does ot represent net income or cash flows from operations, as these terms are defined under generally accepted accounting principles, and should not be considered as an alternative to net income as an indicator of ~~our~~its ~~operating~~11 ~~performance~~1/8% orSenior Discount toNotes ~~cash~~due ~~flows~~2008 as a measure of liquidity. We have included information concerning Adjusted EBITDA herein because we use such information as a measure of assessing cash flows and ability to service debt and understand that such information is used by investors as one measure of an issuer’s ability to service debt. Restructuring and other one-time items are excluded from Adjusted EBITDA as we believe that (the ~~inclusion of these items would not be helpful to an investor’s~~ ~~understanding~~“Senior ofDiscount ~~our ability to service debt~~Notes”). ~~Our computation of Adjusted EBITDA may not be comparable to similar titled measures of other companies.~~

~~(2)~~ Due to the $25 million debt repurchase in the first quarter of 2003, the Senior Discount Notes accrete to $164.0 million principal amount on August 1, 2003. Prior thereto, interest accruing on the ~~Depreciation~~Senior Discount Notes is added to the outstanding principal balance through July 31, 2003. Interest on the Senior Discount Notes accruing subsequent to July 31, 2003 is payable in cash semi-annually in arrears on February 1 and August 1, commencing February 1, 2004. The indentures governing the Senior Secured Notes and ~~amortization~~the ~~excludes~~Senior Subordinated Notes ~~amortization~~permit ALARIS Medical Systems to make distributions, or “restricted payments,” to ALARIS Medical if at the time of ~~debt~~the ~~discount~~restricted ~~and~~payment, ALARIS ~~issuance~~Medical ~~costs~~Systems satisfies the two conditions described in the following paragraphs. Additionally, payments to ALARIS Medical to fund up to $1.5 million ~~included~~annually in ~~interest~~ALARIS Medical operating ~~expense~~or capital expenditures are defined as restricted payments but do not require meeting these conditions. Based on its operating results for the year ended December 31, 2002, ALARIS Medical Systems met the two required conditions to make restricted payments for the first time in the first quarter of 2003. Additionally, ALARIS Medical Systems met the two required conditions as of March 31, 2003, which permitted ALARIS Medical Systems to make additional restricted payments in the second quarter of 2003.

~~Our~~ ~~sales~~The ~~results~~first condition which ~~are~~must ~~reported~~be satisfied prior to making a restricted payment is that at the time of the distribution, ~~consistent~~ALARIS Medical Systems must have a Fixed Charge Coverage Ratio (as calculated in accordance with ~~our~~the ~~two~~indentures ~~geographical~~as ~~business~~described below) of ~~units:~~at ~~North~~least ~~America~~2.5 ~~and~~to 1 calculated for the four complete calendar quarters preceding the distribution as though the distribution had been made at the beginning of such period. The Fixed Charge Coverage Ratio is determined by dividing ALARIS Medical Systems’ ~~International~~Consolidated EBITDA (as defined in the indentures) by its Consolidated Interest Expense (as defined in the indentures). Based ~~The~~on ALARIS ~~following~~Medical Systems’ interest expense ~~table~~for ~~summarizes~~the ~~sales~~twelve months ended March 31, 2003, the actual amount of interest expense included in the calculation of the Fixed Charge Coverage Ratio was approximately $38.7 million. As a result, the minimum required Consolidated EBITDA to ~~customers~~meet bythe ~~each~~ratio for the twelve months ended March 31, 2003, was approximately $96.8 million while the actual Consolidated EBITDA was approximately $105.1 million. Assuming no future changes to the amount or terms of outstanding ~~geographical~~debt ~~business~~of ~~unit~~ALARIS Medical Systems at March 31, 2003, approximately $96.8 million represents the minimum required Consolidated EBITDA for future four quarter calculations of the Fixed Charge Coverage Ratio.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2002		2001		2002		2001
	(in millions)				(in millions)
North America business unit
Infusion instruments	$	18.4	$	19.4	$	49.1	$	42.1
Dedicated disposables	34.9		32.2		103.3		98.3
Other disposables and service	18.3		15.5		53.4		46.4
Subtotal	71.6		67.1		205.8		186.8
Patient monitoring	6.5		7.4		19.2		20.7
North America business unit total	$	78.1	$	74.5	$	225.0	$	207.5

-20-

20 Under the indentures, Consolidated EBITDA is defined as follows: “With respect to any Person for any period, the Consolidated Net Income of such Person and its Restricted Subsidiaries for such period, plus, to the extent deducted in computing Consolidated Net Income: (i) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period; (ii) Consolidated Interest Expense of such Person for such period; and (iii) depreciation and amortization (including amortization of goodwill and other intangibles) and all other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period; and (iv) any extraordinary or non-recurring loss and any net loss realized in connection with either an Asset Sale or the extinguishment of indebtedness, in each case, on a consolidated basis determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Restricted Subsidiary of a Person shall be added to Consolidated Net Income to compute Consolidated EBITDA only to the extent (and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person.”

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2002		2001		2002		2001
	(in millions)				(in millions)
International business unit
Infusion instruments	$	9.9	$	7.6	$	29.8	$	27.4
Dedicated disposables	18.5		16.1		53.0		50.9
Other disposables and service	5.3		3.9		14.1		11.3
Subtotal	33.7		27.6		96.9		89.6
Patient monitoring	1.3		1.5		4.1		3.9
International business unit total	$	35.0	$	29.1	$	101.0	$	93.5
ALARIS Medical Systems, Inc. total	$	113.1	$	103.6	$	326.0	$	301.0

Consolidated EBITDA, per the indentures, as calculated for the twelve months ended March 31, 2003, reconciled to ALARIS Medical Systems’ Consolidated Net Income was as follows:

Three Months Ended September 30, 2002 Compared with Three Months Ended September 30, 2001

	Twelve Months Ended March 31, 2003
	(dollars in thousands)

ALARIS Medical Systems' Consolidated Net Income, as reported	$	23,224
Provision for income taxes		14,935
Interest expense		39,489
Depreciation and amortization		24,544
Non-cash items		1,375
Extraordinary/non-recurring items		1,544

Consolidated EBITDA, per indentures	$	105,111

~~Sales~~ The second condition which must be satisfied prior to making a restricted payment is that the distribution, together with certain other restricted payments previously made, may not exceed a sum determined by reference to ALARIS Medical Systems’ cumulative Consolidated Net Income (as defined in the indentures) for the period since January 1, 1997 and cash capital contributions received after such date, less restricted payments made. This condition provides that the Consolidated Net Income of ALARIS Medical Systems will be added to the amount available each quarter until such time as historical net losses (of $17.3 million through March 31, 2003) are exhausted. Subsequent to such time, 50% of future ALARIS Medical Systems’ net income will be added to the amount available. At March 31, 2003, the amount available for future restricted payments was $6.3 million.

Sales increased $9.4 million, an increase of 9% (7% in constant currency) for the quarter ended September 30, 2002 compared with the same quarter last year. North America sales were $78.1 million, an increase of $3.6 million, or 5%, compared with the third quarter of 2001. The increase was primarily due to higher volumes of drug infusion dedicated and non-dedicated disposable administration sets. International sales were $35.0 million, an increase of 20% (11% in constant currency). The increase was primarily due to increased volume of drug infusion volumetric and syringe pumps and dedicated and non21-~~dedicated disposable administration sets compared with the same period in the prior year.~~

~~Gross~~ The following ~~Profit~~represents the changes in the amount available for Restricted Payments pursuant to the ALARIS Medical Systems’ indentures:

Gross profit increased $7.7 million, or 15%, during the quarter ended September 30, 2002, compared with the same quarter last year. The gross margin percentage increased to 50.9% in the third quarter of 2002, from 48.1% in the third quarter of 2001. The improved margin percentage was due to increased volume of disposables (which have higher margins than instruments) and to a higher percentage of international sales, which have higher margins.

	1997 through 2001			Full Year 2002			First Quarter 2003
	(dollars in thousands)

Available for Restricted Payments - beginning
of period	$	-		$	28,176		$	30,836

ALARIS Medical Systems' net (loss) / income
for the period (1)		(43,610	)		19,680			6,618

Restricted Payments (2)
Dividends to ALARIS Medical
for operating expenses		(5,438	)		(1,452	)		(333	)
Interest payment on Convertible Debentures		(5,855	)		(585	)		-
Due from ALARIS Medical, Inc.		-			(170	)		-
Fund unrestricted subsidiary to purchase
Convertible Debentures		(187	)		(14,813	)		-

Restricted payment paid by ALARIS
Medical Systems		-			-			(30,800	)
Cash capital contributions received by
ALARIS Medical Systems		83,266			-			-


Available for Restricted Payments -
end of period	$	28,176		$	30,836		$	6,321

Change in Net Loss:
Cumulative net loss - beginning of period	$	-		$	(43,610	)	$	(23,930	)
ALARIS Medical Systems' net (loss) / income
for the period		(43,610	)		19,680			6,618

Cumulative net loss - end of period	$	(43,610	)	$	(23,930	)	$	(17,312	)

~~Selling~~ (1) The ~~and~~amount ~~Marketing~~of net income included in determining the amount available for restricted payments is based on the “Net Income” definition per the ~~Expenses~~ indentures and is different from the net income reported in accordance with generally accepted accounting principles.

~~Selling and marketing expenses increased $3.~~ (2 ~~million, or 17%, during the quarter ended September 30, 2002,~~) ~~compared~~ The ~~with~~indentures ~~the~~allow ~~same~~certain ~~period~~“restricted inpayments” ~~2001 as a result of higher sales volume in the third quarter of 2002 compared with the prior year, as well as higher selling and marketing costs related~~ to ~~increased~~be ~~personnel~~made ~~and related activities~~without ~~supporting~~ meeting the ~~North~~Fixed ~~America~~Charge ~~launch~~Coverage ~~of the MEDLEY™ Medication Safety System~~Ratio. ~~Also~~ contributing to this increase were higher marketing expenses related to new product strategies. These increases were partially offset by reductions in our distribution costs over the prior year. As a percentage of sales, selling and marketing expenses increased to 19.9% for the third quarter of 2002 from 18.6% in the third quarter of 2001.

~~General~~ The preceding description of the provisions of the indentures which govern restricted payments, including the defined terms, is a summary only and ~~Administrative~~is ~~Expenses~~qualified in its entirety by the text of the indentures, which ALARIS Medical and ALARIS Medical Systems have previously filed with the Securities and Exchange Commission.

~~General~~ ~~and~~For ~~administrative expenses~~the ~~decreased~~year ~~$1.9~~ended ~~million~~December 31, ~~or 17%~~2002, ~~during~~ALARIS ~~the~~Medical ~~three~~Systems ~~months~~met ~~ended~~the ~~September~~requirements ~~30,~~under ~~2002,~~its ~~compared~~debt ~~with~~agreements ~~the~~to ~~three~~make ~~months~~a ~~ended~~restricted ~~September~~payment ~~30,~~in the first quarter ~~2001~~of 2003. As a ~~percentage~~result, ofin ~~sales~~February 2003, ~~general and~~ALARIS ~~administrative~~Medical ~~expenses~~Systems ~~decreased~~made distributions to ALARIS ~~8.6%~~Medical in the ~~third~~amount ~~quarter~~ of ~~2002~~$30.8 ~~from 11~~million.3% inALARIS ~~the~~Medical ~~third~~used ~~quarter~~a portion of ~~2001~~such distributions to repurchase in a private transaction $25.0 ~~This~~million ~~decrease~~principal ~~was~~amount ~~due~~of tothe Senior Discount Notes at a total cost of $225.30 million representing a premium of $1.2 million or 4.7% over the then accreted carrying value. Such premium, along with a ~~reduction~~write-off inof ~~amortization~~unamortized ~~expense~~debt ~~resulting~~issue ~~from~~cost ~~our~~related ~~adoption~~to the purchased amount of ~~new~~debt, ~~accounting~~was ~~requirements~~recorded ~~effective~~as ~~January~~a charge of $1,.5 ~~2002,~~million ~~under~~(approximately ~~which~~$.9 ~~our~~million after tax) in the Company’s first quarter 2003 operating results.

21-22-

~~goodwill~~ Due to the February 2003 Senior Discount Note repurchase and principal reduction discussed in the previous paragraph, semi-annual interest payments on the Senior Discount Notes have been reduced from the originally scheduled $10.5 million to ~~certain~~$9.1 ~~other~~million ~~amortization~~and ALARIS Medical’s consolidated projected interest expense ~~ceased~~for 2003 will be reduced by $2. 3 million ($2.8 ~~Had~~million ~~the~~on ~~newly~~an ~~adopted~~annualized basis). After ~~accounting~~receiving restricted payments ~~standards~~from ~~been~~ALARIS inMedical ~~effect~~Systems ~~during~~and after purchasing the ~~third~~$25 ~~quarter~~million of ~~2001~~Senior Discount Notes, ALARIS ~~general~~Medical, Inc., ~~and~~on ~~administrative~~a ~~expense~~stand-alone basis, had ~~for~~a ~~such~~cash ~~quarter~~balance of $8.7 million as ~~would~~of ~~have~~March ~~been~~31, 92003.1% Based on 2003 first quarter results of operations, ALARIS Medical Systems ~~sales.~~met ~~(See~~the ~~note~~required tests 2to make additional restricted payments to ALARIS Medical in the ~~condensed~~second ~~consolidated financial~~quarter ~~statements~~of 2003.) ~~Other~~As ~~cost~~a ~~increases~~result, ALARIS Medical Systems made a restricted payment to ALARIS Medical in ~~general~~the ~~and~~amount ~~administrative~~of $6.3 million in April 2003. Management anticipates ALARIS ~~expenses~~Medical ~~were~~will ~~generally~~have ~~offset~~cash byavailable sufficient ~~lower~~to ~~bonus~~meet ~~expense~~the first scheduled semi-annual interest payment, due February 1, 2004, on the Senior Discount Notes.

~~Research~~ In ~~and~~April ~~Development~~2003, ALARIS ~~Expenses~~Medical Systems repurchased $2.5 million principal amount of the Senior Secured Notes at a total cost of $2.9 million or 117% of principal amount. Such premium, along with a write-off of unamortized debt issue cost related to the purchased amount of debt will be recorded as a charge of $.5 million (approximately $.3 million after tax) in our second quarter operating results.

~~Research~~ Although there ~~and~~can ~~development expenses~~be ~~increased~~no ~~approximately~~assurances ~~$1.6~~that ~~million,~~ALARIS orMedical ~~24%,~~Systems ~~during~~will meet the ~~three~~required ~~months~~tests to make future restricted payments, based on projected ALARIS Medical Systems’ net ~~ended~~income ~~September~~and 30Consolidated EBITDA, ~~2002~~we ~~compared~~believe ~~with~~that ALARIS Medical Systems will continue to meet the ~~three~~required ~~months~~Fixed ~~ended~~Charge ~~September~~Coverage 30Ratio and, ~~2001~~ ~~due~~through toits angeneration of net income, increase the amount available for restricted payments in ~~personnel~~each successive calendar quarter. As a ~~percentage~~result, management plans to continue to make quarterly restricted payments from ALARIS Medical Systems to ALARIS Medical to the extent of ~~sales,~~the ~~spending~~amount onavailable ~~research~~to do so under the indentures and ~~development~~subject ~~was~~to 7cash availability.1% Management currently plans to use such payments from ALARIS Medical Systems either for interest payments on the ~~third~~Senior Discount ~~quarter~~Notes or for periodic repurchases by ALARIS Medical of ~~2002,~~additional ~~compared~~Senior ~~with~~Discount Notes ~~6.3%~~to the extent such Senior Discount Notes are available for ~~the~~sale ~~third~~at ~~quarter~~prices ofwhich ~~2001~~ALARIS Medical is willing to pay.

~~Restructuring~~ ALARIS Medical Systems is required over the next twelve months (through March 31, 2004) to make interest payments on the Senior Secured Notes in the amount of $19.8 million ($9.9 million in June of 2003 and ~~Non-Recurring~~$9.9 ~~Items~~million in December of 2003) and interest payments on the Senior Subordinated Notes in the amount of $17.6 million ($8.8 million in June of 2003 and $8.8 million in December of 2003). ALARIS Medical is required over the next twelve months to make an interest payment on the Senior Discount Notes of $9.1 million in February 2004.

We Although we ~~did~~have ~~not~~no ~~incur~~further ~~any~~principal ~~restructuring~~amortization orrequirements ~~non-recurring~~until the maturity of the Senior ~~items~~Secured Notes and the Senior Subordinated Notes in December 2006, management is monitoring the ~~third~~capital ~~quarter~~markets offor ~~2002~~opportunities orto ~~2001~~improve our capital structure prior to such time.

~~Income~~ The indenture ~~from~~governing ~~Operations~~the Senior Secured Notes permits ALARIS Medical Systems to use any proceeds of an ALARIS Medical equity offering which are contributed to ALARIS Medical Systems to redeem up to 35% in aggregate principal amount of Senior Secured Notes, prior to December 1, 2003, at a redemption price equal to 111.625% of the principal amount thereof plus accrued and unpaid interest. Proceeds of an equity offering which are contributed to ALARIS Medical Systems would increase the amount available to ALARIS Medical Systems (under the indentures governing both the Senior Secured Notes and the Senior Subordinated Notes) to make restricted payments. Any offering proceeds not so contributed could be used by ALARIS Medical to purchase Senior Discount Notes. Beginning August 1, 2003, the Senior Discount Notes are also callable at 105.563%, with the call price decreasing each subsequent August 1.

Income from operations increased $4.7 million during the three months ended September 30, 2002, compared with the three months ended September 30, 2001, primarily due to an increase in gross profit and lower amortization expense.-23-

~~Adjusted~~ We anticipate ~~EBITDA~~that we will refinance our remaining debt structure prior to December 2006 since we believe that it is unlikely that ALARIS Medical Systems will generate sufficient cash flow from operations to repay the remaining Senior Secured Notes and Senior Subordinated Notes at maturity in 2006 and to permit it to make distributions to ALARIS Medical to enable it to repay the remaining Senior Discount Notes at maturity in 2008. Such refinancing may involve an offering of debt securities of ALARIS Medical Systems or ALARIS Medical, or both, an offering of equity securities of ALARIS Medical to reduce the level of indebtedness of ALARIS Medical Systems or ALARIS Medical, or both, or a combination of any of the foregoing. The ability of ALARIS Medical Systems or ALARIS Medical, or both, to obtain such debt or equity financing will be dependent upon many factors, including overall financial market and economic conditions and our operating performance and expectations at such time.

~~Adjusted EBITDA increased $2.8~~ ~~million~~On ~~during~~April 17, 2003 ALARIS Medical filed ~~the~~a ~~three~~shelf registration statement on ~~months~~Form ~~ended~~S-3 ~~September 30, 2002, compared~~ with the Securities and Exchange ~~three~~Commission (SEC). The ~~months~~shelf registration statement will ~~ended~~allow ~~September~~the ~~30,~~Company ~~2001.~~to Asissue acommon ~~percentage of sales~~stock, ~~Adjusted~~ debt securities, and ~~EBITDA~~other ~~increased~~types of securities from ~~20.8%~~time to time, up orto an aggregate of $21550 million.5 If ~~million,~~declared effective ~~during~~by the ~~three~~SEC, ~~months ended~~the ~~September~~shelf registration statement ~~30,~~would ~~2001,~~enable tothe ~~21.5%,~~Company orto ~~$24.4~~raise ~~million,~~funds ~~during~~from the ~~three~~offering ~~months~~of ~~ended~~any individual security covered ~~September~~by ~~30,~~the ~~2002~~registration statement, as ~~due~~well toas ~~the~~any ~~reasons~~combination ~~discussed~~of ~~above.~~the ~~(See~~securities, subject ~~note~~to 1market ~~under “Results~~conditions ofand ~~Operations~~the Company’s capital needs.”)

~~Interest~~ As disclosed in ~~Expense~~the registration statement, we expect to use the net proceeds from the sale of the securities covered by the registration statement to reduce or refinance some or all of the outstanding indebtedness of ALARIS Medical or ALARIS Medical Systems, or both, and for general corporate purposes. ALARIS Medical is seeking approval from its shareholders at its annual meeting of shareholders on April 30, 2003 to increase by 10 million the number of shares of common stock it is authorized to issue. If such additional shares are authorized, ALARIS Medical currently intends to seek to offer for sale some or all of these additional 10 million shares under the registration statement. Additionally, in connection with a debt refinancing as contemplated by the registration statement, we currently expect to use a portion of our existing cash balances, in order to decrease our total debt and to seek to obtain a revolving credit facility for increased liquidity and operating flexibility. Our ability to effect any of these transactions will depend on many factors, including overall financial market and economic conditions and our operating performance and expectations at such time.

~~Interest~~ Should ALARIS ~~expense~~Medical ~~decreased~~Systems ~~$1.2 million,~~not orrepay ~~11%~~its indebtedness at maturity in 2006, ~~during~~should ALARIS Medical not repay the ~~three~~Senior ~~months~~Discount ~~ended~~Notes ~~September~~in 302008, ~~2002~~or ~~compared~~should ~~with~~ALARIS Medical Systems not ~~the~~be ~~three~~able ~~months~~to ~~ended~~continue ~~September~~to ~~30,~~make ~~2001.~~distributions ~~The~~to ~~decrease~~ALARIS ~~resulted~~Medical ~~from~~in ~~lower~~order to permit ALARIS ~~overall~~Medical to make cash interest ~~rates~~payments on the Senior Discount Notes, these events could have a material adverse effect on our ~~outstanding~~business, ~~indebtedness~~financial ~~due~~condition toand ~~the~~results ~~replacement~~of operations and could result in a default by ALARIS Medical, ALARIS Medical Systems, or ofboth, ~~the~~and ~~Company’s~~possible ~~bank~~acceleration ~~credit~~of ~~facility~~all ~~with~~or a ~~public~~portion ~~debt~~of ~~offering~~such inindebtedness, ~~October~~unless ALARIS Medical, ALARIS Medical Systems, or both, could refinance such indebtedness or obtain the ~~2001~~required funds from other sources.

~~Interest~~ In response ~~Income~~to customer requests to finance their payments related to equipment purchases over time, we work with an unrelated third party financing company to assist our customers in such area. In recent years, $16 million to $30 million annually of drug infusion equipment sales to North American customers have been financed by this third party. If such third party financing source were no longer available to our customers, it could require us to find another party or to finance such customer purchases and require use of our cash. 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.

Interest income decreased $0.3 million during the quarter ended September 30, 2002 compared with the same quarter in 2001 due to lower interest rates earned on cash balances in 2002 compared with 2001.-24-

~~Other~~ In December 2002, ~~net~~the Company filed for a tax accounting change with the Internal Revenue Service (“IRS”) seeking approval of a more favorable income tax treatment for certain sales to third party distributors. The Company anticipates this tax accounting change will be approved by the IRS, and, accordingly reflected the benefit as a reduction in its estimated current income tax liability for 2002. This change resulted in an $8 million cash tax savings in 2002 with an anticipated refund for income taxes previously paid in 2002 of an additional $4 million. This change does not impact the amount of the income tax expense included in the Condensed Consolidated Statement of Operations. Although management anticipates obtaining the requested approval from the IRS during 2003, there can be no assurances that the IRS will approve the Company’s request. Should the tax treatment not be approved by the IRS, the Company would be required to make tax payments, which it would have otherwise been able to defer indefinitely, of approximately $12 million plus interest.

~~Other~~ As identified in the Condensed Consolidated Statement of Cash Flows, net ~~decreased~~cash toprovided by operating activities for the three months ended March 31, 2003, was $038.39 million compared with $16.4 million ofprovided ~~expense~~by ~~during~~operating activities in 2002. Net cash used in investing activities for the ~~quarter~~three months ended ~~September~~March 3031, 2003 and 2002, ~~compared~~was ~~with~~$7.1 million and $3.8 million, respectively. Cash used in investing activities also includes $7.0 million and $3.14 million ofin ~~income~~net capital expenditures for the ~~same~~three ~~period~~months ended March 31, 2003 and 2002, respectively. We anticipate making capital expenditures of approximately $23 million in the ~~prior~~remaining ~~year~~quarters in 2003. ~~The~~Net ~~change~~cash isused ~~due~~in financing activities for the three months ended March 31, 2003 and 2002, was $31.1 million and $15.6 million, respectively, and was primarily composed of a return of capital to anHoldings ~~increase~~in 2003 and a loan to Holdings in 2002. During the quarter ending March 31, 2003, federal, state and foreign ~~currency~~taxes ~~transaction~~paid ~~losses~~(net of refunds), ~~approximately~~related ~~$0.2~~to ~~million~~continuing ~~from~~operations ~~the~~were ~~prior~~$.7 ~~year~~million.

22 The following schedule summarizes our contractual obligations and commitments to make future payments as of March 31, 2003:

Nine Months Ended September 30, 2002 Compared with Nine Months Ended September 30, 2001

	Contractual Obligations & Commitments
			(dollars in millions)

Payments Due by Period	Long-term Debt		Operating Leases		Interest Payments		Total

2003 (A)	$	-	$	4.8	$	37.3	$	42.1
2004		-		6.3		37.3		43.6
2005		-		6.0		37.3		43.3
2006		350.0		2.1		37.3		389.4
2007		-		1.4		-		1.4
Thereafter		-		5.5		-		5.5

Total Contractual Cash Obligations	$	350.0	$	26.1	$	149.2	$	525.3

~~Sales~~(A) Amount represents remaining contractual obligation during 2003.

For the nine months ended September 30, 2002, sales were $326.0 million, an increase of $25.0 million, or 8% (also 8% in constant currency as the slight favorable foreign currency benefit of a weaker U.S dollar was less than 1% of consolidated sales) compared with $301.0 million over the same period in the prior year. Higher volumes of both drug infusion instruments and disposable administration sets in North America resulted in an increase in revenues of $17.5 million, or 8%, over the prior year. Contributing to the North America increase was $14.6 million in sales of our new MEDLEY™ Medication Safety System, compared with $5.5 million during the nine month period in 2001. The increases in drug infusion products in North America were partially offset by lower volumes of patient monitoring instruments and disposables compared with the prior year. International sales increased $7.5 million, or 8% (6% in constant currency), due to higher volumes and revenues of non-dedicated disposable administration sets, large volume pumps and syringe pumps compared with the prior year. The increase in large volume pump sales for the International business is primarily attributable to the Asena GW, a new product launched in late 2001.Backlog

~~Gross~~ The amount ~~Profit~~of unfilled orders, believed to be firm, at March 31, 2003 and 2002, was $4.3 million and $8.4 million, respectively.

Gross profit increased $17.2 million, or 12%, during the nine months ended September 30, 2002, compared with the nine months ended September 30, 2001 due to higher sales and an increase in gross margin percentage. The gross margin percentage increased to 50.1% in the nine months ended September 30, 2002, from 48.6% in the nine months ended September 30, 2001. The improved margin percentage was due to increased volume of disposables (which have higher margins than instruments) and higher overall margins on drug infusion instruments and disposables and on patient monitoring products.-25-

SellingForeign Operations and MarketingCurrency ExpensesExchange Rates

~~Selling and marketing expenses~~ ~~increased~~We ~~$7.3~~have ~~million,~~significant foreign oroperations ~~13%~~and, ~~during~~as ~~the~~a ~~nine months ended September 30~~result, ~~2002,~~ are ~~compared~~subject ~~with~~to ~~the~~various ~~nine~~risks ~~months~~arising ~~ended September 30~~therefrom, including ~~2001, due to increased~~foreign ~~selling~~currency risks. This ~~costs~~risk ~~resulting~~did ~~from~~not materially change during ~~higher sales volume in~~ the first ~~nine~~quarter ~~months~~ of ~~2002~~ ~~compared~~2003. For ~~with~~ the ~~prior~~quarters ended ~~year~~March 31, 2003 and to2002, approximately 37% ~~higher sales~~ and ~~marketing~~35%, respectively, of ~~costs related~~our tosales ~~increased~~were denominated ~~personnel~~in ~~and~~currencies other ~~related~~than ~~activities supporting~~ the ~~North~~U.S. ~~America~~dollar. ~~launch~~For of the ~~MEDLEY™~~quarters ~~Medication~~ended ~~Safety~~March ~~System. These~~31, ~~increases~~2003 ~~were~~and ~~partially~~2002, approximately ~~offset~~32% ~~by reductions~~and in31%, respectively, of our ~~distribution~~operating ~~costs~~expenses were ~~over~~denominated ~~the~~in ~~same~~currencies ~~period~~other inthan the ~~prior year~~U. AsS. dollar. These aforeign currencies ~~percentage~~are primarily those of ~~sales,~~Western ~~selling~~Europe, Canada, Mexico, and ~~marketing expenses increased to 19~~Australia.9% Additionally, substantially ~~for~~all of the ~~first~~receivables ~~nine~~and ~~months~~payables of ~~2002~~our foreign subsidiaries ~~from~~are ~~19.2%~~denominated ~~for~~in ~~the~~currencies ~~same~~other ~~period~~than inthe ~~2001~~U.S. dollar.

~~General~~ We ~~and~~address certain ~~Administrative~~financial exposures through ~~Expenses~~a controlled program of risk management that includes the use of derivative financial instruments. At March 31, 2003, we recorded a liability in our Condensed Consolidated Balance Sheet of $.6 million for foreign currency forward contracts. As of December 31, 2002, forward contracts valued at $.1 million were recorded as a current asset in the Company’s Consolidated Balance Sheet.

~~General and administrative expenses decreased $6.7~~ ~~million,~~For ~~or 19%, during~~ the ~~nine~~three months ended ~~September~~March 3031, ~~2002,~~2003 ~~compared~~and ~~with the nine months ended September 30~~2002, ~~2001.~~we Asrecognized anet ~~percentage~~charges related ~~of sales, general and administrative expense decreased~~ to ~~9.0% during~~ the ~~nine~~designated cash ~~months~~flow ~~ended~~hedges ~~September~~of ~~30,~~forecasted foreign currency exchange transactions ~~2002 compared with 11.9% for the same period~~ in the ~~prior~~amounts ~~year~~of $.3 ~~This decrease~~million isand ~~due to a~~ $6.91 million ~~reduction~~ , respectively, in ~~amortization~~ other expense, which consisted primarily ~~resulting from our adoption~~ of ~~new~~premium ~~accounting~~costs ~~requirements~~for ~~effective~~currency option contacts. At ~~January~~March 131, ~~2002~~2003, $1.1 million ($.7 ~~under~~million ~~which~~after ~~our~~tax) ~~goodwill~~was ~~and~~included ~~certain~~in accumulated other comprehensive income. This represents ~~amortization~~the ~~expense~~remaining option ~~ceased. Had~~premium ~~these~~costs ~~accounting~~net ~~requirements~~of ~~been in effect during~~ the ~~first~~fair ~~three~~value ~~quarters~~ of ~~2001,~~ ~~general~~the ~~and~~open ~~administrative~~option contracts ~~expense~~that ~~for~~are designated ~~such~~as ~~period~~cash ~~would~~flow ~~have been 9~~hedges.~~6% of~~ This ~~sales. (See~~loss ~~note~~is 2expected to ~~the condensed~~ ~~consolidated~~be ~~financial~~charged ~~statements.)~~to ~~Overall~~earnings ~~cost~~during ~~increases~~2003 inas ~~general~~the ~~and administrative~~hedged ~~expenses~~transactions ~~were generally offset by lower bonus expense in the current period~~occur.

23 Due to changes in foreign currency exchange rates during 2003 and 2002, primarily a weakening of the U.S. dollar against many European currencies, we recognized foreign currency transaction gains of $.2 million and losses of $.4 million during 2003 and 2002, respectively. Such gains and losses were recorded in other, net in the losses of Condensed Consolidated Statement of Operations.

ResearchITEM and3. DevelopmentQUANTITATIVE ExpensesAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Research andForeign developmentExchange expensesRisk increased approximately $1.7 million, or 9%, during the nine months ended September 30, 2002 compared with the nine months ended September 30, 2001 due to an increase in personnel in the current period. As a percentage of sales, spending on research and development was 6.7% for the nine months ended September 30, 2002, consistent with the prior year comparative period.Management

~~Restructuring~~ As part of our risk management strategy, we put in place a hedging program beginning in 2001 under which we enter into forward foreign exchange and ~~Non-Recurring~~currency ~~Items~~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. 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 related to the unhedged portion of the forecasted transactions. The success of the 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 first quarter of 2003.

We As ~~did~~a ~~not~~matter ~~record~~of ~~restructuring~~policy, orwe ~~non-recurring~~will ~~items during~~only ~~the~~enter ~~second~~into currency contracts with counterparties that orhave ~~third~~at ~~quarters~~least ofan investment grade ~~2002.~~ or ~~During~~equivalent credit ~~the~~rating ~~first~~from ~~quarter~~a ofmajor ~~2002,~~rating weagency. The counterparties ~~recorded~~to athese ~~non-recurring~~contracts ~~benefit~~are ~~of $1~~major financial institutions.1 We ~~million~~do not ~~for~~have significant exposure anto ~~insurance~~any ~~settlement~~one counterparty. ~~The~~ We ~~settlement~~believe ~~related~~the torisk ~~damages~~of ~~and~~loss related ~~losses~~to counterparty default ~~incurred~~is atremote ~~one of our~~and ~~disposable~~would ~~products~~only ~~manufacturing~~consist ~~plants~~of inthe ~~Mexico~~net inmarket ~~1993~~value asgain a(if ~~result~~any) of ~~flooding~~ the underlying instrument. The ~~contingency~~contracts have ~~related to~~varying maturities with ~~the~~none exceeding eighteen months. Costs associated with entering into contracts ~~insurance~~are ~~settlement~~not ~~was~~expected ~~resolved~~to inbe ~~the~~material ~~first~~to ~~quarter~~our offinancial results. ~~2002,~~( ~~when~~See weItem ~~received~~2, ~~proceeds~~“Management’s ofDiscussion ~~$1.0~~and ~~million~~Analysis ~~during~~of ~~the~~Financial ~~quarter~~Condition and ~~notification~~Results of ~~an additional~~ ~~payment~~Operations–Foreign ~~due~~Operations ofand ~~$0.1~~Currency ~~million,~~Exchange ~~which was received during April 2002~~Rates.”)

During the first quarter of 2002, we initiated a plan to restructure our technical services operations in Central Europe. In this connection, we recorded a charge of $0.5 million which included $0.4 million for severance costs for 21 positions affected by the relocation of the German operation and $0.1 million related to lease termination. As of September 30, 2002, all severance payments have been made to the identified employees.-26-

RestructuringITEM and other non-recurring charges of $6.9 million during the nine months ended September 30, 2001 included $3.5 million of legal, advisory, and other consultant expenses related to obtaining an amendment to the ALARIS Medical Systems bank credit agreement. This amendment was completed in April 2001. We also recorded $3.4 million for restructuring activities. TheseCONTROLS activitiesAND related to streamlining of operations in the North American business and resulted in the elimination of 71 positions. The restructuring charges were composed of severance and related benefits of $2.9 million and consulting fees of $0.5 million. Adjusted EBITDA for the nine months ended September 30, 2002 and 2001 excludes non-recurring items.PROCEDURES

~~Adjusted~~ Evaluation of ~~EBITDA~~Disclosure Controls and Procedures

~~Adjusted~~ As of ~~EBITDA~~March ~~increased~~31, ~~$8.1~~2003, an evaluation was performed under the supervision and with the ~~million~~participation ~~during~~of the ~~nine~~Company’s ~~months~~management, ~~ended~~including ~~September~~the 30Chief Executive Officer and Chief Financial Officer, ~~2002~~of ~~compared~~the ~~with~~effectiveness of the ~~nine~~design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange ~~months~~Act ~~ended~~of ~~September~~1934 ~~30,~~Rule ~~2001~~13a-14). AsBased aon ~~percentage~~that ofevaluation, ~~sales~~the Company’s management, ~~Adjusted~~including ~~EBITDA~~the ~~increased from~~Chief ~~19.9%,~~Executive orOfficer ~~$60.0~~and ~~million~~Chief Financial Officer, ~~during~~concluded that the ~~nine~~Company’s ~~months~~disclosure ~~ended~~controls ~~September~~and ~~30,~~procedures ~~2001~~were effective as of March 31, 2003, to ~~20.9%,~~ensure orthat ~~$68.1~~information ~~million,~~required ~~during~~to be disclosed by the ~~nine~~Company ~~months~~in ~~ended~~the ~~September~~reports that 30it files or submits under the Exchange Act is recorded, ~~2002~~processed, ~~due~~summarized and toreported within the ~~reasons~~time ~~discussed~~periods ~~above.~~specified ~~(See~~in ~~note~~the 1Commission’s ~~under~~rules ~~“—Results~~and ~~of Operations~~forms.”)

~~Interest~~Changes ~~Expense~~in Internal Controls

~~Interest expense decreased $2.0~~ There ~~million,~~have orbeen ~~6%,~~no ~~during~~significant ~~the~~changes ~~nine~~(including ~~months~~corrective ~~ended~~actions ~~September~~with ~~30,~~regard ~~2002~~to ~~compared with~~significant ~~the~~deficiencies ~~nine~~or ~~months~~material ~~ended~~weaknesses) ~~September~~in ~~30,~~our ~~2001.~~internal ~~The~~controls ~~decrease~~or ~~resulted~~in ~~from~~other ~~lower~~factors that ~~overall~~could ~~interest~~significantly ~~rates~~affect oninternal ~~our~~controls ~~outstanding~~subsequent ~~indebtedness due~~ to ~~the~~March ~~replacement of the Company’s bank credit facility with a public debt offering in October~~31, ~~2001~~ 2003.

~~Interest Income~~-27-

InterestPART income decreased $1.0 million during the nine months ended September 30, 2002 compared with the same period in 2001 due to lower interest rates earned on cash balances in 2002 compared with 2001.II

24OTHER INFORMATION

Other,ITEM net6. EXHIBITS AND REPORTS ON FORM 8-K

Other expense decreased $0.4 million during the nine months ended September 30, 2002, compared with the same period in the prior year. Our foreign currency transaction losses decreased $1.4 million in the current year and were partially offset by an increase in cost of $0.5 million related to the hedging program. Banking fees decreased approximately $.2 million due to the elimination of ALARIS Medical Systems’ bank credit facility during the prior year, and other income decreased approximately $0.9 million from the prior year. During the first quarter of 2001, we received $0.5 million of other income relating to the sale of (a ~~tradename.~~ ) ~~We did not receive comparable income in the current year.~~Exhibits

Discontinued Operations


99.1	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

99.2	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

~~During the third quarter of 2000, we sold our Instromedix® division to Card Guard Technologies, Inc.~~ (~~“Card Guard”~~b)~~. The agreement with Card Guard provided that we would assist the buyer~~ inReports ~~setting~~on upForm a8-K fully independent headquarters and manufacturing facility. During the first quarter of 2001, we completed our obligations related to the agreement and recorded a gain of $3.7 million, net of taxes.

~~Liquidity~~ None. ~~and Capital Resources~~

~~We expect to continue to meet our short~~-term liquidity needs, including capital expenditure requirements, with cash flow from operations and cash on hand. We will continue to use our funds primarily for operating expenses, including planned expenditures for new research and development programs, capital expenditures and scheduled interest payments on outstanding indebtedness.28-

AtSIGNATURES September 30, 2002, we had $350.0 million outstanding indebtedness composed of $170.0 million of 11-5/8% senior secured notes due 2006 (“Senior Secured Notes”), which were issued on October 16, 2001 and $180.0 million of 9-3/4% senior subordinated notes due 2006 (“Senior Subordinated Notes”). The Senior Secured Notes bear interest at 11-5/8%, payable semi-annually in arrears beginning June 1, 2002, with all principal due at maturity on December 1, 2006. The Senior Subordinated Notes bear interest at 9-3/4%, payable semi-annually on June 1 and December 1, with all principal due at maturity on December 1, 2006.

~~Holdings also had~~ Pursuant ~~outstanding~~to atthe ~~September~~requirements ~~30,~~of ~~2002,~~the ~~$172.8~~Securities ~~million~~Exchange ~~accreted~~Act ~~amount~~ of ~~its 11–1/8%~~1934, ~~Senior~~the ~~Discount~~registrant ~~Notes~~has ~~due~~duly ~~2008 (“Senior Discount Notes”).~~caused Asthis ~~disclosed~~report ~~below,~~to ~~the~~be ~~Holdings~~signed ~~Convertible~~on ~~Debentures~~its ~~were~~behalf ~~repaid~~by atthe ~~their scheduled~~undersigned, ~~maturity~~thereunto onduly ~~January 15, 2002~~authorized.

The Senior Discount Notes accrete to $189.0 million principal amount by August 1, 2003. Prior thereto, interest accruing on the Senior Discount Notes is added to the outstanding principal balance through July 31, 2003. Interest on the Senior Discount Notes accruing subsequent to July 31, 2003 is payable in cash semi-annually in arrears on February 1 and August 1, commencing February 1, 2004. The indentures governing the Senior Secured Notes and the Senior Subordinated Notes permit ALARIS ~~Medical~~MEDICAL ~~Systems to make distributions~~SYSTEMS, ~~or “restricted payments,” to Holdings if at the time of the restricted payment, ALARIS Medical Systems satisfies the two conditions described in the following paragraphs~~INC. Additionally, dividends to Holdings to fund interest payments on the now retired Convertible Debentures, and to fund up to $1.5 million annually in other Holdings operating or capital expenses are defined as restricted payments but do not require meeting the Fixed Charge Coverage Ratio. Management believes that when Holdings is required to begin making cash interest payments on the Senior Discount Notes in 2004, ALARIS Medical Systems will have satisfied these conditions.(Registrant)

25Date: April 30, 2003 BY: /s/ WILLIAM C. BOPPWilliam C. Bopp Senior Vice President and Chief Financial Officer (Principal Financial Officer)

~~The~~BY: ~~first~~/s/ ~~condition~~ROBERT which must be satisfied prior to making a restricted payment is that at the time of the distribution, ALARIS Medical Systems must have a Fixed Charge Coverage Ratio (as calculated in accordance with the indentures as described below) of at least 2F.5 toMATHEWSRobert ~~1 calculated for the four complete calendar quarters preceding the distribution as though the distribution had been made at the beginning of such period~~F. ~~The~~ ~~Fixed~~Mathews ~~Charge~~Vice ~~Coverage~~President ~~Ratio will~~- beFinance ~~determined~~and byTreasurer ~~dividing ALARIS Medical Systems’ Consolidated EBITDA~~ (~~as defined~~Principal inAccounting ~~the indentures~~Officer) by its Consolidated Interest Expense (as defined in the indentures). Based on the interest rate on and the amount of debt outstanding at ALARIS Medical Systems at September 30, 2002, the interest expense to be included in future calculations of the Fixed Charge Coverage Ratio are approximately $38.9 million. As a result, the minimum required annual Consolidated EBITDA to meet the ratio will be approximately $97.3 million.

TheCERTIFICATION calculationBY ofDAVID Consolidated EBITDA for purposes of the indentures is different from our calculation of Adjusted EBITDA described elsewhere in this reportL. UnderSCHLOTTERBECK thePURSUANT indentures, ConsolidatedTO EBITDASECURITIES isEXCHANGE definedACT asRULE follows: “With respect to any Person for any period, the Consolidated Net Income of such Person and its Restricted Subsidiaries for such period, plus, to the extent deducted in computing Consolidated Net Income: (i) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period; (ii) Consolidated Interest Expense of such Person for such period; and (iii) depreciation and amortization (including amortization of goodwill and other intangibles) and all other non13a-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period; and (iv) any extraordinary or non-recurring loss and any net loss realized in connection with either an Asset Sale or the extinguishment of indebtedness, in each case, on a consolidated basis determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Restricted Subsidiary of a Person shall be added to Consolidated Net Income to compute Consolidated EBITDA only to the extent (and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person.”14

~~Consolidated~~I, ~~EBITDA~~David L. Schlotterbeck, ~~per~~certify that: 1. I have reviewed this quarterly report on Form 10-Q of ALARIS Medical Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements ~~indentures~~made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as ~~calculated~~of, and for, the periods presented in this quarterly report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the ~~three~~registrant and ~~nine~~we ~~months~~have: ~~ended~~ a) ~~September~~designed ~~30,~~such ~~2002~~disclosure ~~reconciled~~controls and procedures to ~~those~~ensure that material information relating to the registrant, including its consolidated subsidiaries, ~~reported~~ is made known to us by ~~ALARIS~~others ~~Medical~~within ~~Systems~~those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as ~~follows~~of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and 6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

	Three Months Ended			Nine Months Ended
	September 30, 2002			September 30, 2002
	(dollars in thousands)
ALARIS Medical Systems consolidated net income, as reported	$	4,940		$	12,974
Provision for income taxes	3,293			8,649
Interest expense	9,882			29,647
Depreciation and amortization	6,044			17,409
Non-cash items	626			(970		)
Extraordinary/non-recurring items	—			540
Consolidated EBITDA, per indentures	24,785			68,249
Less insurance settlement	—			(1,125		)
Less non-cash items	(626		)	970
Less interest income	(141		)	(624		)
Other, net	335			635
ALARIS Medical Systems Adjusted EBITDA, as reported	$	24,353		$	68,105

Date: April 30, 2003
/s/ DAVID L. SCHLOTTERBECK
David L. Schlotterbeck
President and Chief Executive Officer

26CERTIFICATION BY WILLIAM C. BOPP PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14

~~The~~I, ~~second~~William ~~condition~~C. ~~which~~Bopp, ~~must~~certify that: 1. I have reviewed this quarterly report on Form 10-Q of ALARIS Medical Systems, Inc.; be 2. ~~satisfied~~Based ~~prior~~on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to ~~making~~state a ~~restricted~~material ~~payment~~fact isnecessary ~~that~~to make the statements ~~distribution~~made, in light of the circumstances under which such statements were ~~together~~ made, not misleading with ~~certain~~respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other ~~restricted~~financial information ~~payments~~included in this quarterly report, ~~may~~fairly ~~not~~present ~~exceed~~in aall ~~sum~~material respects the financial condition, results of operations and cash flows of the ~~determined~~ registrant byas ~~reference~~of, toand ~~ALARIS~~for, ~~Medical~~the ~~Systems’~~periods ~~cumulative~~presented ~~Consolidated~~in ~~Net~~this quarterly report; 4. The ~~Income~~ registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ~~the~~Act ~~indentures~~Rules 13a-14 and 15d-14) for the ~~period~~registrant ~~since~~and ~~January~~we 1,have: a) ~~1997~~designed such disclosure controls and ~~cash~~ ~~capital~~procedures ~~contributions~~to ~~received~~ensure ~~after~~that ~~such~~material information ~~date~~relating to the registrant, ~~less~~including ~~restricted~~its ~~payments~~consolidated subsidiaries, is made~~. This~~ ~~condition~~known ~~provides~~to ~~that~~us by others within those entities, particularly during the period in which this quarterly report is being prepared; ~~Consolidated~~ b) ~~Net~~evaluated ~~Income~~the effectiveness of ~~ALARIS~~the ~~Medical~~registrant’s ~~Systems~~disclosure ~~will~~controls beand ~~added~~procedures as of a date within 90 days prior to the ~~amount~~filing date of this quarterly report (the “Evaluation Date”); and ~~available~~ c) ~~each~~presented ~~quarter~~in ~~until~~this ~~such~~quarterly ~~time~~report asour conclusions ~~historical~~about ~~net~~the ~~losses~~effectiveness of ~~$30.6~~the disclosure controls and procedures ~~million~~ based ~~are~~on ~~exhausted~~our evaluation as of the Evaluation Date; 5. ~~Subsequent~~The toregistrant’s other ~~such~~certifying ~~time~~officer and I have disclosed, ~~50%~~based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s ~~future~~board ~~ALARIS~~of ~~Medical~~directors (or persons performing the equivalent function): ~~Systems~~ a) ~~net~~all ~~income~~significant ~~will~~deficiencies bein ~~added~~the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s ~~amount~~auditors ~~available. At~~any ~~September~~material 30weaknesses in internal controls; and b) any fraud, ~~2002~~whether or not material, that involves management or other employees who have a significant role in the ~~amount~~registrant’s ~~available~~internal controls; and 6. The registrant’s other certifying officer and I have indicated in this ~~for~~ quarterly ~~future~~report ~~restricted~~whether ~~payments~~or ~~was~~not ~~$24.5~~there ~~million~~were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

~~The~~Date: ~~following~~April ~~represents~~30, ~~the changes~~2003 in/s/ ~~the~~WILLIAM ~~amount~~C. ~~available~~BOPP ~~for~~William ~~restricted~~C. ~~payments:~~Bopp Senior Vice President and Chief Financial Officer

	1997 through			Full Year			First Quarter			Second Quarter			Third Quarter
	2000			2001			2002			2002			2002
	(dollars in thousands)
Available for restricted payments — beginning of period	$	—		$	28,850		$	28,176		$	16,306		$	19,941
ALARIS Medical Systems’ net income/ (loss) for the period	(45,504		)	1,894			3,749			4,285			4,940
Restricted Payments: (A)
Dividends to ALARIS Medical
for operating expenses	(4,228		)	(1,210		)	(221		)	(650		)	(355		)
Interest payment on Convertible Debentures	(4,684		)	(1,171		)	(585		)
Fund unrestricted subsidiary to purchase Convertible Debentures				(187		)	(14,813		)
Cash capital contributions received by ALARIS Medical Systems	83,266
Available for Restricted Payments — end of period	$	28,850		$	28,176		$	16,306		$	19,941		$	24,526
Change in Net Loss:
Cumulative net loss — beginning of period	$	—		$	(45,504	)	$	(43,610	)	$	(39,861	)	$	(35,576	)
ALARIS Medical Systems’ net income/ (loss) for the period	(45,504		)	1,894			3,749			4,285			4,940
Cumulative net loss — end of period	$	(45,504	)	$	(43,610	)	$	(39,861	)	$	(35,576	)	$	(30,636	)

(A) The ALARIS Medical Systems' indentures allow certain “restricted payments” to be made without meeting the Fixed Charge Coverage Ratio.

The preceding description of the provisions of the indentures which govern restricted payments, including the defined terms, is a summary only and is qualified in its entirety by the text of the indentures, which ALARIS Medical Systems has previously filed with the Securities and Exchange Commission.

Holdings’ Convertible Debentures were retired at their scheduled maturity on January 15, 2002. The indentures governing the Senior Secured Notes and the Senior Subordinated Notes permitted ALARIS Medical Systems to use $15 million of its cash on hand to invest in a wholly owned unrestricted subsidiary. ALARIS Medical Systems made such investment and the unrestricted subsidiary used a portion of the proceeds of such investment to acquire $0.2 million Convertible Debentures in the open market in 2001. In 2002, the remaining $14.8 million was loaned to Holdings, which used the proceeds of such loan and proceeds from the exercise of stock options to retire the Convertible Debentures. A portion of the stock option exercise proceeds resulted from the exercise by some of our executive officers of stock options. In

connection with the exercise, three of our executive officers received interest-bearing, short-term loans, aggregating $0.6 million, from ALARIS Medical Systems. These loans were subsequently repaid in full. Holdings were entitled to require such executive officers to exercise such options in order to provide Holdings with sufficient funds to retire the Convertible Debentures. Such options were granted to these executive officers in anticipation of Holdings’ need to require such exercise in order to complete the retirement of the Convertible Debentures. (See note 6 to the condensed consolidated financial statements.)

ALARIS Medical Systems is required over the next twelve months (through September 30, 2003) to make interest payments on the Senior Secured Notes in the amount of $19.8 million ($9.9 million in December of 2002 and 9.9 million in June of 2003) and interest payments on the Senior Subordinated Notes in the amount of $17.6 million ($8.8 million in December of 2002 and $8.8 million in June of 2003).

Although we have no further principal amortization requirements until the maturity of the Senior Secured Notes and the Senior Subordinated Notes in December 2006, management is monitoring the capital markets for opportunities to improve ALARIS Medical Systems’ and Holdings’ capital structure prior to such time.

Management anticipates that ALARIS Medical Systems and Holdings will refinance their entire debt structure prior to December 2006 since it believes that it is unlikely that ALARIS Medical Systems will generate sufficient cash flow from operations to repay the Senior Secured Notes and the Senior Subordinated Notes at maturity in 2006 and to permit it to make distributions to Holdings to enable it to repay the Senior Discount Notes at maturity in 2008. Such refinancing may involve an offering of debt securities of ALARIS Medical Systems or Holdings, or both, an offering of equity securities of Holdings to reduce the level of indebtedness of ALARIS Medical Systems or Holdings, or both, or a combination of any of the foregoing. The ability of ALARIS Medical Systems or Holdings, or both, to obtain such debt or equity financing will be dependent upon many factors, including overall financial market and economic conditions and our operating performance and expectations at such time.

Should ALARIS Medical Systems not repay its indebtedness at maturity in 2006, should Holdings not repay the Senior Discount Notes in 2008, or should ALARIS Medical Systems not be able to make distributions to Holdings commencing in 2004 in order to permit Holdings to make cash interest payments on the Senior Discount Notes, these events could have a material adverse effect on our business, financial condition and results of operations and could result in a default by Holdings, ALARIS Medical Systems, or both, and possible acceleration of all or a portion of such indebtedness, unless Holdings, ALARIS Medical Systems, or both, could refinance such indebtedness or obtain the required funds from other sources.

In response to customer requests to finance their payments related to equipment purchases over time, we have identified an unrelated third party financing company to assist our customers in such area. In recent years, $12 million to $16 million annually of drug infusion equipment sales to North American customers have been financed by this third party. If such third party financing source were no longer available to our customers, it could require us to find another party or to finance such customer purchases and require use of our cash. 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.

As identified in the condensed consolidated statement of cash flows, net cash provided by operating activities for the nine months ended September 30, 2002 was $35.4 million compared with $42.6 million provided by operating activities in the first nine months of 2001. Net cash used in investing activities for the nine months ended September 30, 2002 was $27.4 million. Net cash used in investing activities for the nine months ended September 30, 2001 was $2.6 million, which included $8.1 million of net proceeds from the sale of a discontinued operation. Net cash used in financing activities for the nine months ended September 30, 2002 and 2001 was $1.8 million and $17.7 million, respectively, and was

composed of dividend payments to Holdings in the current and prior period and principal payments on long-term debt of $14.9 million in the prior year.

We made capital expenditures of approximately $11.8 million during the nine months ended September 30, 2002 and anticipate additional capital expenditures not to exceed $8 million during the remainder of 2002.

The following schedule summarizes our contractual obligations and commitments to make future payments as of September 30, 2002.

Contractual Obligations & Commitments
	Long-term		Operating		Interest
Payments Due by Period	Debt		Leases		Payments		Total
2002 (A)	$	—	$	1.7	$	18.7	$	20.4
2003	—		6.2		37.3		43.5
2004	—		5.9		37.3		43.2
2005	—		5.9		37.3		43.2
2006	350.0		1.7		37.3		389.0
Thereafter	—		5.6		—		5.6
Total Contractual Cash Obligations	$	350.0	$	27.0	$	167.9	$	544.9

(A) Amount represents remaining contractual obligation during 2002.

Backlog

The amount of unfilled orders, believed to be firm, at September 30, 2002 and 2001 was $12.9 million and $10.6 million, respectively. Included in the $12.9 million was $6.4 million of orders related to our MEDLEY™ Medication Safety System

Foreign Operations

We have significant foreign operations and, as a result, are subject to various risks arising therefrom, including foreign currency risks. This risk did not materially change during the first nine months of 2002. For the nine months ended September 30, 2002 and 2001, approximately 32% and 36%, respectively, of our sales and 31% and 27% of our operating expenses, respectively, were denominated in currencies other than the U.S. dollar. These foreign currencies are primarily those of Western Europe, Canada, Mexico and Australia. Additionally, substantially all of the receivables and payables of our foreign subsidiaries are denominated in currencies other than the U.S. dollar. During the first nine months of 2002, the net effect of foreign currency transactions to the income statement was approximately $0.1 million. Due to changes in foreign currency exchange rates during the first nine months of 2001, primarily a strengthening of the U.S. dollar against many European currencies, we recognized foreign currency transaction losses of $1.3 million. Such losses were recorded in other expense in the statement of operations. (See note 3 to the condensed consolidated financial statements.)

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Risk Management — Foreign Currency Hedging Program, Derivative Financial Instruments and Market Risk

As part of our risk management strategy, we put in 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. These contracts are entered into to reduce the risk that our earnings and cashflows, 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 related to the unhedged portion of the forecasted transactions. The success of the 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 is recognized immediately in earnings. We did not recognize material gains or losses resulting from either hedge ineffectiveness or changes in forecasted transactions during 2002.

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. Costs associated with entering into contracts are not expected to be material to our financial results. (See note 3 to the condensed consolidated financial statements.)

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2002, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2002.

Changes in Internal Controls

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2002.

Item 5. Other Information

At the May 2002 meeting of the Board of Directors of Holdings (“the Board”), the Board established a third committee, granting it the authority to establish, review and recommend qualifications and nominations to the Board and to consider matters relating to corporate governance.

This committee, known as the Nominating and Corporate Governance Committee, has since approved its charter, which was approved by the Board at its October 29, 2002 meeting.

The Nominating and Corporate Governance Committee has also begun to review the subject matter within its area of responsibility. Among other things, it has reviewed the independence of Holdings’ directors, reviewed the committee structure and reported that all members of the three committees of the Board are independent directors as defined by the American Stock Exchange. As a consequence of its work, the Nominating and Corporate Governance Committee makes the following report regarding Holdings’ directors and their independence:

• Hank Brown has served as a member of the Board since July 2000. Mr. Brown serves as Chair of the Audit Committee and serves as a member of the Compensation Committee and Nominating and Corporate Governance Committee. Mr. Brown is the Chief Executive Officer of the Daniels Fund, a charitable foundation. From 1998 to mid-2002, Mr. Brown served as President of the University of Northern Colorado. From January 1997 to July 1998, Mr. Brown served as Director of the Center for Public Policy at the University of Denver. From 1990 to 1997, Mr. Brown served as a United States Senator from the State of Colorado. From 1980 to 1990, Mr. Brown served five consecutive terms in the U. S. House of Representatives, representing Colorado’s 4th Congressional District. From 1972 to 1976, Mr. Brown served in the Colorado State Senate. From 1968 to 1980, Mr. Brown served as Vice President of Monfort of Colorado, Inc., a meat packing company subsequently acquired by ConAgra Foods, Inc. Mr. Brown served as a director of U.S. West from 1998 until its acquisition by Qwest Communications International, Inc. and thereafter served as a director of Qwest until September 2002. Mr. Brown is a director of Sealed Air Corporation and StarTek, Inc. Mr. Brown is a certified public accountant and holds a doctor of law degree and a master of law degree in taxation.

• Norman M. Dean has served as a member of the Board, including through a predecessor company of Holdings, since 1989 and as Chair of the Board since May 2000. Mr. Dean serves as Chair of the Nominating and Corporate Governance Committee and as a member of the Audit Committee and Compensation Committee. Previously, Mr. Dean served as Chairman of the board of directors and President of United Bank of Greeley, United Bank of Brighton and United Bank of La Salle. Previously, Mr. Dean served as Chairman of the board of directors of Montana Bancsystems, Inc. and as a member of the board of directors of United Banks of Colorado. Since May 1990, Mr. Dean has served as Chairman of the board of directors of Miller Diversified Corp, a company involved in commercial cattle feeding, trucking, oil and gas and purified water.

• Henry Green has served as a member of the Board, including through a predecessor company of Holdings, since 1991. Mr. Green serves as a member of the Audit Committee. From 1993 to his retirement in 1997, Mr. Green served as an executive officer of Physician Computer Network, Inc. (“PCN”). He also has been a director of PCN and its successor since 1993. In December 1999, PCN filed for bankruptcy and its bankruptcy plan was confirmed in March 2000. Before its bankruptcy, PCN was controlled by Holdings’ largest shareholder, Jeffry M. Picower. From 1988 to 1990, Mr. Green was Vice President of Johnson and Johnson International. From 1980 to 1988, Mr. Green served as President of Vistakon, Inc., a subsidiary

of Johnson and Johnson. Prior to joining Johnson and Johnson, Mr. Green held a variety of management positions at Warner Lambert Company. Mr. Green serves as a director of a biomedical company controlled by Mr. Picower which is not publicly traded.

• Barry D. Shalov has served as a member of the Board since May 2000. Mr. Shalov has been a partner in the law firm of Piper Rudnick LLP since May 2000. Previously, Mr. Shalov was a partner in the law firm of Gordon Altman Weitzen Shalov & Wein LLP for more than 20 years. Piper Rudnick performs legal services for Holdings and its operating subsidiaries primarily as general corporate and securities counsel and as lead counsel in certain patent litigation. Holdings and its operating subsidiaries paid Piper Rudnick $1.4 million for legal services through the first nine months of 2002, $2.2 million in 2001 and $0.6 million in 2000. Holdings paid Gordon Altman Weitzen Shalov & Wein $0.1 million for legal services in 2000. Piper Rudnick has served from time to time as legal counsel to Holdings’ largest shareholder, Jeffry Picower, and to other entities controlled by Mr. Picower. Mr. Shalov serves as a director of a biomedical company controlled by Mr. Picower which is not publicly traded. Previously, Mr. Shalov served as trustee of a private medical research organization founded by Mr. Picower.

• David L. Schlotterbeck has served as a member of the Board and as our President and Chief Executive Officer since November 1999. From April 1999 to November 1999, Mr. Schlotterbeck served as our President and Chief Operating Officer. From 1997 to March 1998, Mr. Schlotterbeck was President and Chief Operating Officer of Pacific Scientific Company, an international manufacturer of motion control, process measurement and safety products and former New York Stock Exchange company, subsequently acquired by Danaher Corporation. From 1995 to 1997, Mr. Schlotterbeck was President and Chief Executive Officer of Vitalcom, Inc., a medical network manufacturer. From 1991 to 1994, Mr. Schlotterbeck was Executive Vice President and Chief Operating Officer of Nellcor, Inc., a medical device manufacturer subsequently acquired by Mallinckrodt, Inc. Mr. Schlotterbeck holds a B.S. in Electrical Engineering from General Motors Institute. Mr. Schlotterbeck holds an M.S. in Electrical Engineering from Purdue University and completed the Executive Institute at Stanford University.

• William T. Tumber has served as a member of the Board since May 2000. Mr. Tumber serves as Chair of the Compensation Committee. From 1996 to his retirement in 1998, Mr. Tumber was Senior Vice President of C.R. Bard, Inc., a medical products manufacturer. From 1991 to 1996, Mr. Tumber served as Group Vice President, responsible for several of Bard’s operating divisions. Since 1980, Mr. Tumber has held various other positions with Bard, including President of its Davol division. Prior to joining Bard, Mr. Tumber held a variety of management positions with the General Electric Company.

Audit Committee Approval

The Audit Committee of ALARIS Medical, Inc. has approved the Company's independent auditors, PricewaterhouseCoopers, to provide tax services to the Company.

Part II

Other Information

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

99.3		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
99.4		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

None

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 31, 2002	By:	/s/ WILLIAM C. BOPP
		William C. Bopp
		Senior 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)

CERTIFICATION BY DAVID L. SCHLOTTERBECK PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14

I, David L. Schlotterbeck, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ALARIS Medical Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: October 31, 2002

/s/ DAVID L. SCHLOTTERBECK David L. Schlotterbeck President and Chief Executive Officer

CERTIFICATION BY WILLIAM C. BOPP PURSUANT TO

Filing Compare · ALARIS MEDICAL SYSTEMS INC