UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549~~

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

ý ~~QUARTERLY~~Quarterly ~~REPORT~~Report ~~PURSUANT~~Pursuant TOto ~~SECTION~~Section 13 ORor 15(Dd) OFof ~~THE~~the ~~SECURITIES~~Securities ~~EXCHANGE~~Exchange ~~ACT~~Act OFof 1934

For the quarterly period ended ~~June~~ September 30, 2002 or

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

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number:

333-18687

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)

Not Applicable (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ý No: o

On ~~August 1~~ October 31, 2002, ~~1,000~~ 100 shares of Registrant'’s Common Stock were outstanding.

ALARIS MEDICAL SYSTEMS, INC.

INDEX

			Page
PART I. FINANCIAL INFORMATION
	Item 1—Financial Information:
		Condensed consolidated statement of operations for the three and six months ended June 30, 2002 and 2001 (unaudited)	3
		Condensed consolidated balance sheet at June 30, 2002 (unaudited) and December 31, 2001	4
		Condensed consolidated statement of cash flows for the six months ended June 30, 2002 and 2001 (unaudited)	5
		Condensed consolidated statement of changes in stockholder's equity for the period from December 31, 2001 to June 30, 2002 (unaudited)	6
		Notes to the condensed consolidated financial statements	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		27
PART II. OTHER INFORMATION
	Item 6—Exhibits and Reports on Form 8-K		29

PART I. FINANCIAL INFORMATION

Item 1 — Financial Information:

Condensed consolidated statement of operations for

the three and nine months ended September 30, 2002 and 2001 (unaudited)

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)

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

Form 10~~—Q Part 1—Item~~ ~~1 Financial~~- ~~Information ALARIS MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (Dollars in thousands)~~ Q

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Sales		$	108,520		$	98,470		$	212,920		$	197,359
Cost of sales			54,390			49,920			107,078			100,979
Gross profit			54,130			48,550			105,842			96,380
Selling and marketing expenses			21,077			19,686			42,513			38,378
General and administrative expenses			10,030			12,553			19,470			24,183
Research and development expenses			7,580			6,897			13,782			13,628
Restructuring and other non-recurring items			—			1,156			(585	)		6,899
	Total operating expenses		38,687			40,292			75,180			83,088
Interest income from sales-type capital leases			1,122			1,377			2,311			2,653
	Income from operations		16,565			9,635			32,973			15,945
Other income (expenses):
	Interest income		269			585			482			1,219
	Interest expense		(9,884	)		(10,860	)		(19,764	)		(20,498	)
	Other, net		193			(202	)		(301	)		(1,141	)
Total other expense			(9,422	)		(10,477	)		(19,583	)		(20,420	)
Income (loss) from continuing operations before income taxes			7,143			(842	)		13,390			(4,475	)
Provision for (benefit from) income taxes			2,858			510			5,356			(290	)
Income (loss) from continuing operations			4,285			(1,352	)		8,034			(4,185	)
Discontinued operations:
	Gain on disposal of business (net of applicable income tax expense of $2,492)		—			—			—			3,737
Total income from discontinued operations			—			—			—			3,737
Net income (loss)		$	4,285		$	(1,352	)	$	8,034		$	(448	)

Part 1 - Item 1

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

3ALARIS MEDICAL SYSTEMS, INC.

CONDENSED ~~ALARIS MEDICAL SYSTEMS, INC. CONDENSED~~ CONSOLIDATED ~~BALANCE~~STATEMENT ~~SHEET (Dollar~~OF ~~amounts~~OPERATIONS ~~in thousands, except per share data~~(Unaudited)

			June 30, 2002			December 31, 2001
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	46,722		$	50,826
	Receivables, net			74,035			67,893
	Inventories			65,188			69,408
	Prepaid expenses and other current assets			31,785			33,456
		Total current assets		217,730			221,583
Net investment in sales-type capital leases, less current portion				20,141			24,225
Property, plant and equipment, net				55,758			57,607
Other non-current assets				26,541			28,013
Goodwill, net				142,570			142,570
Other intangible assets, net				91,225			92,394
			$	553,965		$	566,392
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
	Accounts payable		$	21,680		$	23,856
	Accrued expenses and other current liabilities			48,384			51,733
		Total current liabilities		70,064			75,589
Long-term debt				350,000			350,000
Other non-current liabilities				46,387			47,676
		Total non-current liabilities		396,387			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 June 30, 2002 and December 31, 2001			203,775			203,716
	Accumulated deficit			(94,984	)		(101,562	)
	Loan to Holdings (note 6)			(14,993	)		—
	Accumulated other comprehensive loss			(6,284	)		(9,027	)
		Total stockholder's equity		87,514			93,127
			$	553,965		$	566,392

(Dollars in thousands)

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

	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

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

~~ALARIS MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in thousands)~~ 3

					Six Months Ended June 30,
					2002			2001
Cash flows from operating activities:
	Net income (loss)				$	8,034		$	(448	)
		Adjustments to reconcile net income (loss) to net cash provided by operating activities:
			Depreciation and amortization			11,365			15,629
			Net loss on disposal of property, plant and equipment			129			96
			Debt issue costs amortization			1,105			1,018
			Accretion of paid-in-kind interest			—			423
			Gain on sale of Instromedix			—			(3,737	)
			(Increase) decrease in assets:
				Receivables, net		(3,905	)		13,147
				Inventories		4,511			(3,727	)
				Prepaid expenses and other current assets		1,708			1,151
				Net investment in sales-type capital leases, non-current portion		4,084			(893	)
				Other non-current assets		(117	)		(149	)
			Increase (decrease) in liabilities:
				Accounts payable		(2,929	)		5,695
				Accrued expenses and other current liabilities		(3,866	)		4,931
				Other non-current liabilities		(1,289	)		1,196
	Net cash provided by operating activities				$	18,830		$	34,332
Cash flows from investing activities:
	Net capital expenditures					(6,435	)		(6,146	)
	Payments for product licenses and distribution rights					—			(625	)
	Patents, trademarks and other					(647	)		(268	)
	Loan to Holdings (note 6)					(14,812	)		—
	Net proceeds from sale of discontinued business					—			8,073
Net cash (used in) provided by investing activities						(21,894	)		1,034
Cash flows from financing activities:
	Principal payments on long-term debt and capital lease obligations					—			(9,994	)
	Deferred financing costs					—			(658	)
	Dividends to Holdings					(1,456	)		(1,239	)
Net cash used in financing activities						(1,456	)		(11,891	)
Effect of exchange rate changes on cash						416			(221	)
Net (decrease) increase in cash						(4,104	)		23,254
Cash and cash equivalents at beginning of period						50,826			30,618
Cash and cash equivalents at end of period					$	46,722		$	53,872

ALARIS MEDICAL SYSTEMS, INC.

~~The~~CONDENSED CONSOLIDATED ~~accompanying~~BALANCE ~~notes are an integral part of these condensed consolidated financial statements.~~SHEET

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

~~ALARIS MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (Unaudited) (Dollar amounts in thousands)~~ ASSETS

			Common Stock And Capital In Excess Of Par Value
		September 30,			December 31,
											Loan Receivable From Holdings
		2002			2001
								Accumulated Deficit						Other Comprehensive Loss			Total Stockholder's Equity			Comprehensive Income
		(Unaudited)
			Shares		Amount
Current assets:
Balance at December 31, 2001			100		$	203,716		$	(101,562	)	$	—		$	(9,027	)	$	93,127
Cash and cash equivalents		$	57,405		$	50,826
Comprehensive income:
Receivables, net		82,254			67,893
	Net income for the period		—			—			8,034			—			—			8,034		$	8,034
Inventories		67,207			69,408
	Equity adjustment from foreign currency translation		—			—			—			—			2,917			2,917			2,917
Prepaid expenses and other current assets		33,839			33,456
	Effects of cash flow hedges included in other comprehensive income (net of tax of $116)		—			—			—			—			(174	)		(174	)		(174	)
Total current assets		240,705			221,583
Comprehensive income																				$	10,777
Net investment in sales-type capital leases, less current portion		17,846			24,225
Tax benefit from exercise of Holdings stock options			—			59			—			—			—			59
Property, plant and equipment, net		55,755			57,607
Loan to Holdings (Note 6)												(14,993	)					(14,993	)
Other non-current assets		26,457			28,013
Dividends to Holdings			—			—			(1,456	)		—			—			(1,456	)
Goodwill, net		142,570			142,570
Balance at June 30, 2002			100		$	203,775		$	(94,984	)	$	(14,993	)	$	(6,284	)	$	87,514
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.

ALARIS MEDICAL SYSTEMS, INC. ~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands)~~

~~NOTE~~CONDENSED CONSOLIDATED ~~1—BUSINESS AND~~ STATEMENT OF ~~ACCOUNTING~~CASH ~~POLICY~~ FLOWS (Unaudited)

~~The~~(Dollars ~~Company:~~ in thousands)

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 wholly-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."

	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

~~Statement~~The accompanying notes are an integral part of ~~accounting~~these ~~policy:~~ condensed consolidated financial statements.

The accompanying financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures herein are adequate to make the information not misleading. 5

~~In the~~ALARIS ~~opinion~~MEDICAL ~~of the Company~~SYSTEMS, the accompanying financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company's financial position as of June 30, 2002, the results of its operations for the three and six months ended June 30, 2002 and 2001, and its cash flows for the six months ended June 30, 2002 and 2001INC.

~~Use~~CONDENSED ofCONSOLIDATED ~~estimates:~~ STATEMENT OF CHANGES IN

~~The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that~~STOCKHOLDER’S ~~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~~EQUITY ~~nature of estimates is that actual results will likely be different from the estimates made.~~ (Unaudited)

~~Shipping~~(Dollar ~~and~~amounts ~~handling~~in ~~fees and costs:~~ thousands)

The Company records costs for shipping and handling revenue for customer sales as a selling and marketing expense. Shipping and handling costs for customer sales for the three and six months ended June 30, 2002 were $1,917 and $3,790, respectively. Shipping and handling costs for customer sales for the three and six months ended June 30, 2001, were $2,474 and $4,454, respectively.

	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

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

~~Certain prior period amounts have been reclassified to conform to the current period presentation.~~ 6

7ALARIS MEDICAL SYSTEMS, INC.

~~NOTE~~NOTES ~~2—GOODWILL~~TO CONDENSED ~~AND~~CONSOLIDATED ~~OTHER~~FINANCIAL ~~INTANGIBLE ASSETS—ADOPTION OF FASB~~ STATEMENTS ~~141~~ ~~AND 142~~ (Unaudited)

~~Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets~~ (~~"FAS 142") and No. 141, Business Combinations ("FAS 141"), which were~~Dollars ~~issued by the Financial Accounting Standards Board in July 2001. Under 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 deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and eliminates the pooling-of-interests-method of accounting. Intangible assets that do not meet certain defined criteria in FAS 141 for recognition apart from goodwill shall be reclassified as goodwill as of the date FAS 142 is initially applied in its entirety. As required by FAS 142, the Company has completed an assessment of the categorization of its existing intangible assets and goodwill in accordance with the new criteria and has reported them appropriately on the condensed consolidated balance sheet. In accordance with FAS 141, the Company reclassified its workforce, net of its related deferred tax liability, as goodwill. The Company performed a transitional goodwill impairment test and determined the asset not to be impaired. thousands)

~~Upon~~NOTE ~~adoption of FAS 142, the Company determined that intangible assets related to the "IVAC" tradename and trademarks had an indefinite life and in accordance with~~ ~~FAS 142,~~1 ~~should~~— ~~not~~BUSINESS beAND ~~amortized~~STATEMENT asOF ~~there~~ACCOUNTING are no legal, regulatory, contractual, economic or other factors that limit the useful life of these intangible assets to the reporting units. As of June 30, 2002, there was no impairment loss associated with such indefinite-lived intangible assets as their fair value exceeds the carrying amount. POLICY

~~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 assets.~~

~~Under these~~ ALARIS ~~standards~~Medical Systems, ~~the~~Inc. (“ALARIS ~~Company~~Medical ~~ceased~~Systems”) ~~amortizing~~develops ~~goodwill~~practical ~~totaling~~solutions ~~$142,570,~~for ~~including~~medication ~~$2,714~~safety at ~~($4,523~~the ~~before~~point ~~tax effect)~~ of ~~its~~care. ~~workforce~~ALARIS ~~previously~~Medical ~~classified~~Systems asdesigns, anmanufactures ~~other~~and ~~intangible~~markets ~~asset,~~ intravenous (IV) medication delivery and ~~trademarks~~infusion ~~totaling~~therapy ~~$74~~devices,~~750~~ asneedle-free disposables ofand ~~January 1,~~patient ~~2002~~monitoring equipment. ~~Adoption~~ALARIS ofMedical Systems was formed by the ~~new~~merger ~~standards~~of ~~resulted~~two pioneers in ~~not~~infusion ~~recognizing $2~~systems,~~301~~ IMED Corporation (“IMED”) and $4IVAC Medical Systems (“IVAC”),~~602~~ Inc. on November 26, ~~respectively~~1996. ALARIS Medical Systems, ina ~~amortization~~wholly-owned ~~expense~~subsidiary ~~for~~of ~~the~~ALARIS ~~three and~~Medical, ~~six~~Inc. ~~months~~(“Holdings”), formerly ~~ended~~Advanced ~~June 30~~Medical, ~~2002~~Inc., ~~that~~was ~~would~~incorporated ~~have~~on ~~been~~October ~~recognized~~14, ~~had~~1994 under the laws ~~previous~~of ~~standards~~the ~~been~~State inof ~~effect~~Delaware. ALARIS Medical Systems and its subsidiaries are collectively referred to as the “Company” or “ALARIS.”

8Statement of accounting policy

The accompanying financial ~~following~~ statements ~~table~~have ~~presents~~been prepared by the ~~impact~~Company ofwithout ~~FAS 141~~audit pursuant to the rules and ~~FAS 142~~regulations onof ~~income~~the ~~from~~Securities ~~operations~~and Exchange Commission. Certain information and ~~net~~footnote ~~(loss)~~disclosures normally ~~income,~~included asin iffinancial ~~they~~statements ~~had~~prepared in accordance with generally accepted accounting principles have been incondensed ~~effect~~or ~~for~~omitted ~~the~~pursuant ~~three~~to those rules and ~~six~~regulations, ~~months~~although the Company believes that the disclosures ~~ended~~ herein ~~June 30,~~are ~~2001.~~adequate to make the information not misleading.

		Three Months Ended June 30, 2001			Six Months Ended June 30, 2001
Income from operations, as reported		$	9,635		$	15,945
	Goodwill amortization		1,425			2,850
	Workforce amortization		126			252
	Tradename and trademark amortization		750			1,500
Pro forma operating income		$	11,936		$	20,547
Loss from continuing operations, as reported		$	(1,352	)	$	(4,185	)
	Goodwill amortization		1,425			2,850
	Workforce amortization		126			252
	Tradename and trademark amortization		750			1,500
	Tax effect		(350	)		(700	)
Pro forma income (loss) from continuing operations		$	599		$	(283	)
	Net loss, as reported	$	(1,352	)	$	(448	)
	Goodwill amortization		1,425			2,850
	Workforce amortization		126			252
	Tradename and trademark amortization		750			1,500
	Tax effect		(350	)		(700	)
Pro forma net income		$	599		$	3,454

In the opinion of the Company, the accompanying financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s financial position as of September 30, 2002, the results of its operations for the three and nine months ended September 30, 2002 and 2001, and its cash flows for the nine months ended September 30, 2002 and 2001.

~~Acquired other~~Use ~~intangible~~of ~~assets were as follows:~~ estimates

		June 30, 2002				December 31, 2001
		Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Patents		$	28,946	$	17,341	$	28,946	$	16,550
Distribution rights and license agreements			8,578		3,708		8,578		3,330
	Subtotal other intangible assets, net (subject to amortization)		37,524		21,049		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	$	36,299	$	127,524	$	35,130

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.

9Reclassifications

~~For~~ Certain ~~the~~prior ~~quarter~~period ~~ended~~amounts have ~~June 30,~~been ~~2002~~reclassified ~~and~~to ~~2001,~~conform ~~amortization~~to ~~expense for other intangible assets, net was $580 and $1,341, respectively. For~~ the ~~six~~current ~~months~~period ~~ended June 30, 2002 and 2001, amortization expense for other intangible assets, net was $1,169 and $2,680, respectively~~presentation. ~~The estimated future annual amortization expense for other intangible assets, net is as follows:~~


2002 (A)	$	1,182
2003		2,219
2004		2,182
2005		2,182
2006		2,130
2007		1,774

Shipping and handling fees and costs

~~NOTE~~ Shipping ~~3—DERIVATIVE~~and ~~INSTRUMENTS~~handling ~~AND~~costs ~~HEDGING~~for customer ~~ACTIVITIES~~ 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.

~~Foreign currency:~~ 7

AsNOTE of2 June 30,— 2002,GOODWILL theAND Company'sOTHER onlyINTANGIBLE derivativesASSETS in— placeADOPTION wereOF forward contracts valued at negative $111 and designated as hedges of anticipated cash flows in various foreign currencies and foreign currency option contracts valued at $177 to hedge anticipated transactions (primarily the Euro). FASB

~~As part~~STATEMENTS of141 ~~the~~AND 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 first half of 2002. 142

~~The effective~~Effective ~~portion~~January 1, 2002, the Company adopted Statement of ~~any~~Financial ~~changes~~Accounting inStandards ~~the~~No. ~~fair~~142, ~~value~~Goodwill ofand ~~the~~Intangible ~~derivative~~Assets (“FAS ~~instruments~~142”) and No. 141, ~~designated~~Business asCombinations ~~cashflow~~(“FAS ~~hedges~~141”), iswhich were ~~recorded~~issued by the Financial Accounting Standards Board in ~~other~~July ~~comprehensive~~2001. ~~income~~Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (~~OCI~~or more frequently if impairment indicators arise) ~~until~~for ~~the~~impairment. Separable ~~hedged~~intangible assets that are not ~~forecasted~~ deemed ~~transaction~~to ~~occurs~~have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). ~~Once~~FAS 141 ~~the~~requires ~~forecasted~~all ~~transaction~~business combinations ~~occurs~~initiated after September 30, 2001 to be accounted for using the ~~effective~~purchase ~~portion~~method and eliminates the pooling-of-interests–method ~~any~~of accounting. Intangible ~~related~~assets ~~gains~~that ordo not ~~losses~~meet oncertain ~~the~~defined ~~cash~~criteria ~~flow~~in ~~hedge~~FAS 141 isfor ~~reclassified~~recognition apart from goodwill ~~OCI~~shall tobe ~~earnings~~reclassified as goodwill as of the date FAS 142 is initially applied in its entirety. InAs required by FAS 142, the ~~event~~Company has completed an assessment of the ~~hedged~~categorization ~~forecasted~~of ~~transaction~~its ~~does~~existing ~~not~~intangible assets ~~occur,~~and orgoodwill itin ~~becomes~~accordance ~~probable~~with ~~that~~the itnew ~~will~~criteria ~~not~~and ~~occur,~~has reported them appropriately on the ~~effective~~condensed ~~portion~~consolidated ofbalance ~~any~~sheet. In ~~gain~~accordance orwith ~~loss~~FAS on141, the Company reclassified its workforce, net of its related ~~cashflow~~deferred ~~hedge~~tax ~~would~~liability, beas goodwill. The ~~reclassified~~Company ~~from~~performed ~~OCI~~a to transitional ~~earnings~~goodwill atimpairment ~~that~~test ~~time.~~and determined the asset not to be impaired.

~~For the~~Upon ~~three~~adoption ~~and~~of ~~six~~FAS ~~months ended June 30~~142, ~~2002,~~ the Company ~~recognized~~determined ~~net~~that intangible ~~charges~~assets related to the ~~designated~~“IVAC” ~~cashflow~~tradename ~~hedges~~and oftrademarks ~~forecasted~~had ~~transactions~~an indefinite life and in ~~the~~accordance ~~amounts~~with ofFAS ~~$136~~142, should not be amortized as there ~~and~~ are ~~$198~~no legal, ~~respectively~~regulatory, incontractual, economic or other ~~expense,~~factors ~~which~~that ~~consisted~~limit ~~entirely~~the useful life of ~~premium~~these ~~costs~~intangible ~~for~~assets ~~option~~to ~~contacts~~the reporting units. As Atof ~~June~~ September 30, 2002, ~~$435~~there ~~($261 after tax)~~ was ~~included in accumulated other comprehensive~~no impairment loss. ~~This~~associated ~~represents~~with ~~the~~such ~~remaining~~indefinite-lived ~~option~~intangible ~~premium~~assets ~~costs~~as their ~~net~~fair ~~of the market~~ value ofexceeds the ~~open~~carrying ~~option contracts~~ amount.

10 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 assets.

Under these standards, the ~~that~~ Company ~~are~~ceased ~~used~~amortizing goodwill totaling $142,570, including $2,714 ($4,523 before tax effect) of its workforce previously classified as ~~cash~~an ~~flow~~other ~~hedges~~intangible asset, and trademarks totaling $74,750 as of January 1, 2002. Adoption ~~This~~of ~~loss~~the isnew ~~expected~~standards toresulted bein not ~~charged~~recognizing to$2,301 ~~earnings~~and ~~over~~$6,903, respectively, in amortization expense for the ~~next~~three ~~six~~and nine months asended September 30, 2002, that would have been recognized had the ~~hedged~~previous ~~transactions~~standards ~~occur.~~been in effect.

In addition to forecasted cashflow 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 six months ended June 30, 2002 was $1,247 and is included in other expense. This loss was substantially offset by unrealized gains on the underlying assets hedged. For the six months ended June 30, 2002, the net charge to other income and expense for all foreign exchange transactions, realized and unrealized, was $30. 8

~~NOTE~~The ~~4—SALE~~following table OFpresents ~~INSTROMEDIX~~ 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.

On August 31, 2000, pursuant to an Asset Purchase Agreement dated as of August 17, 2000, the Company sold the assets and certain liabilities of its Instromedix division to Card Guard Technologies, Inc. ("Buyer") for $30,000 in cash (the "Sale").

	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

~~The Asset~~Acquired ~~Purchase Agreement and the~~ other ~~agreements executed in connection with the Sale required the Company to assist Buyer in setting up a fully independent headquarters and~~ ~~manufacturing facility in San Diego, California. Pursuant to these agreements, $5,000 of the $30,000 purchase price was placed in escrow. The Company received such escrowed amount, after certain~~ ~~offsets,~~intangible ~~upon~~assets ~~completion~~were ofas its obligations under the agreements in the first quarter of 2001 and recognized a gain. The total after-tax gain recorded related to the Sale was $5,576, with $3,737 recorded during 2001 and $1,839 recorded in 2000. follows:

NOTE 5—INVENTORIES

	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

~~Inventories comprise the following:~~ 9

	June 30, 2002		December 31, 2001
Raw materials	$	39,298	$	40,546
Work-in-process		4,852		4,993
Finished goods		21,038		23,869
	$	65,188	$	69,408

For the 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 follows:

NOTE 6—LONG-TERM DEBT

Fiscal Year
2002 (A)	$	621
2003	2,219
2004	2,182
2005	2,182
2006	2,130
2007	1,774

~~Convertible~~(A) ~~Debentures~~Amount represents ofremaining ~~Holdings:~~ estimated amortization expense for 2002.

AtNOTE ~~December 31,~~3 ~~2001~~— ~~Holdings~~DERIVATIVE ~~had outstanding $15,969 of convertible debentures ("Convertible Debentures") which were retired at their scheduled maturity~~INSTRUMENTS on AND ~~January 15,~~HEDGING ~~2002.~~ ACTIVITIES

~~The indentures~~Foreign governing the 115/8% senior secured notes and the 93/4% 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 currency

11 As of September 30, 2002, the Company’s only derivatives in place were forward contracts valued at negative $99 and designated as hedges of anticipated cash flows in various foreign currencies and foreign currency option contracts valued at $69 to hedge anticipated transactions (primarily the Euro).

As part of the Company’s risk ~~option~~ management ~~exercise~~strategy, ~~proceeds~~management ~~resulted~~put ~~from~~in place a hedging program beginning in 2001 under which the ~~exercise~~Company byenters ~~some~~into offorward ~~our~~foreign ~~executive~~exchange ~~officers~~and currency option contracts to hedge a portion of ~~stock~~forecasted ~~options.~~cash Inreceipts ~~connection~~and ~~with~~payments denominated in currencies other than the ~~exercise,~~U.S. ~~three~~dollar. These ofcontracts ~~our~~are ~~executive~~entered ~~officers~~into ~~received~~to ~~interest-bearing,~~reduce the risk that the ~~short-term~~ Company’s ~~loans,~~earnings ~~aggregating~~and ~~$620,~~cashflows resulting from ~~ALARIS~~certain ~~Medical~~forecasted ~~Systems~~transactions will be affected by changes in foreign currency exchange rates. However, ~~These~~the ~~loans~~Company ~~were~~may ~~subsequently~~be ~~repaid~~impacted by changes in ~~full.~~foreign ~~Holdings~~exchange ~~was~~rates ~~entitled~~related to ~~require~~the ~~such~~unhedged ~~executive~~portion ~~officers~~of tothe forecasted ~~exercise~~transactions. ~~such~~The success of the hedging program depends, in part, ~~options~~ on forecasts of Company transactions in ~~order~~various tocurrencies ~~provide~~(primarily ~~Holdings~~the Euro). Hedges are placed for periods consistent with ~~sufficient~~identified ~~funds~~exposures, tobut ~~retire~~generally no longer than the ~~Convertible~~end ~~Debentures~~of the year for which we have substantially completed our annual business plan. The ~~Such~~Company ~~options~~may ~~were~~experience ~~granted~~unanticipated foreign currency exchange gains or losses to ~~these~~the extent that there are timing differences between forecasted and ~~executive~~ actual ~~officers~~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 ~~anticipation~~fair value of ~~Holdings'~~contracts ~~need~~should tobe ~~require~~highly effective ~~such~~in ~~exercise~~offsetting the change in ~~order~~value toof ~~complete~~the expected cash flows from the forecasted ~~retirement~~transaction. The ineffective portion of any changes in the ~~Convertible~~fair ~~Debentures~~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.

The retirement of the Convertible Debentures resulted in notes payable from Holdings to the wholly-owned subsidiary of ALARIS Medical Systems of $14,993 which include a note issued in December, 2001 for $181 related to the purchase of the debentures and one issued in January, 2002, for $14,812. 10

The ~~notes~~ ~~bear~~effective ~~interest~~portion atof aany changes ~~rate~~in the fair value of ~~71/4%~~the ~~per~~derivative ~~annum~~instruments, ~~compounded~~designated ~~semi-annually~~as ~~and~~cash flow ~~are~~hedges, ~~due~~is onrecorded ~~December 31,~~in ~~2008.~~other ~~Due~~comprehensive toincome (OCI) until the ~~parent/subsidiary~~hedged ~~relationship~~ forecasted ~~between~~transaction occurs. Once the forecasted ~~borrowing~~transaction ~~and lending companies~~occurs, the ~~notes~~effective ~~receivable~~portion ~~have~~of ~~been~~any ~~recorded~~related asgains aor losses ~~reduction~~on of the ~~consolidated~~cash ~~ALARIS~~flow ~~Medical~~hedge ~~Systems~~is ~~stockholder's~~reclassified ~~equity~~from OCI to earnings. In ~~Because~~the ofevent ~~this~~the hedged forecasted ~~relationship~~ transaction does not occur, ~~although~~or ~~the~~it ~~notes~~becomes ~~bear~~probable ~~interest~~that atit ~~71/4%~~will not occur, ~~interest~~the ineffective ~~income~~portion isof ~~not~~any ~~recorded~~gain inor loss on the ~~ALARIS~~related ~~Medical~~cash ~~Systems~~flow ~~consolidated~~hedge ~~income~~would ~~statement.~~be reclassified from OCI to earnings at that time.

~~NOTE~~ For ~~7—SEGMENT~~the ~~INFORMATION~~ three and nine months ended September 30, 2002, the Company recognized net charges related to the designated cash flow hedges of forecasted transactions in the amounts of $300 and $498, respectively, in other expense, which consisted entirely of premium costs for option contacts. At September 30, 2002, $312 ($184 after tax) was included in accumulated other comprehensive loss. This represents the remaining option premium costs net of the market value of the open option contracts that are designated as cash flow hedges. This loss is expected to be charged to earnings over the next three months as the hedged transactions occur.

~~The~~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 ~~segment~~earnings ~~performance~~and iscashflows ~~based~~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 ~~results~~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 ~~two~~one ~~geographical~~to ~~business~~six ~~segments~~months. ~~within~~The loss on forward foreign exchange contracts for the ~~same~~nine ~~line~~months ofended ~~business—North~~September ~~America~~30, 2002 was $1,339 and is included in other expense. This loss was substantially offset by unrealized gains on the ~~International~~ 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.

The Company is organized primarily based on geographic location with the United States and Canada drug infusion and patient monitoring business, and Mexico manufacturing activities, representing the North America segment. All other international operations, including Europe, Asia, Australia and Latin America, represent the International segment. 11

~~The accounting~~NOTE ~~policies~~4 of— ~~the~~SALE ~~segments~~OF are the same as those described in the consolidated financial statements. 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, taxes, depreciation, and amortization (EBITDA). Adjusted EBITDA represents income from operations before restructuring, other non-recurring items, depreciation and amortization. Adjusted EBITDA does not represent net income or cash flows from operations, as these terms are defined under generally accepted accounting principles, and should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. INSTROMEDIX

12On August 31, 2000, pursuant to an Asset Purchase Agreement dated as of August 17, 2000, the Company sold the assets and certain liabilities of its Instromedix division to Card Guard Technologies, Inc. (“Buyer”) for $30,000 in cash (the “Sale”).

The Asset Purchase Agreement and the other agreements executed in connection with the Sale required the Company to assist Buyer in setting up a fully independent headquarters and manufacturing facility in San Diego, California. Pursuant to these agreements, $5,000 of the $30,000 purchase price was placed in escrow. The ~~table~~Company ~~below~~received ~~presents~~such ~~information~~escrowed ~~about~~amount, ~~reported~~after certain ~~segments~~offsets, ~~for~~upon completion of its obligations under the: agreements in the first quarter of 2001 and recognized a gain. The total after-tax gain recorded related to the Sale was $5,576, with $3,737 recorded during 2001 and $1,839 recorded in 2000.

Three months ended June 30,		North America		International		Total
2002
	Sales	$	77,459	$	31,061	$	108,520
	Operating income		9,922		6,643		16,565
	Adjusted EBITDA		13,863		8,355		22,218
2001
	Sales	$	68,775	$	29,695	$	98,470
	Operating income		4,769		4,866		9,635
	Adjusted EBITDA		12,102		6,582		18,684

NOTE 5 — INVENTORIES

Reconciliation of total segment adjusted EBITDA to consolidated income (loss) from continuing operations before income taxes:

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

			2002			2001
Adjusted EBITDA
	Total adjusted EBITDA		$	22,218		$	18,684
	Depreciation and amortization			(5,653	)		(7,893	)
	Interest, net			(9,615	)		(10,275	)
	Restructuring and other non-recurring charges			—			(1,156	)
	Other reconciling items			193			(202	)
		Consolidated income (loss) from continuing operations before income taxes	$	7,143		$	(842	)

NOTE 6 — LONG-TERM DEBT

Six months ended June 30,		North America		International		Total
2002
	Sales	$	146,905	$	66,015	$	212,920
	Operating income		18,739		14,234		32,973
	Adjusted EBITDA		25,562		18,191		43,753
2001
	Sales	$	132,988	$	64,371	$	197,359
	Operating income		3,230		12,715		15,945
	Adjusted EBITDA		22,232		16,241		38,473

Convertible Debentures of Holdings

~~Reconciliation of~~ At ~~total~~December ~~segment~~31, ~~adjusted~~2001 ~~EBITDA~~Holdings had tooutstanding ~~consolidated~~$15,969 ~~income~~of convertible debentures (~~loss~~“Convertible Debentures”) which ~~from~~were ~~continuing~~retired ~~operations~~at ~~before~~their ~~income~~scheduled ~~taxes:~~maturity on January 15, 2002.

			2002			2001
Adjusted EBITDA
	Total adjusted EBITDA		$	43,753		$	38,473
	Depreciation and amortization			(11,365	)		(15,629	)
	Interest, net			(19,282	)		(19,279	)
	Restructuring and other non-recurring items			585			(6,899	)
	Other reconciling items			(301	)		(1,141	)
		Consolidated income (loss) from continuing operations before income taxes	$	13,390		$	(4,475	)

The indentures governing ALARIS 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.

1312

~~NOTE~~The ~~8—CASH~~retirement ~~FLOW~~of ~~INFORMATION~~ the Convertible Debentures resulted in notes payable from Holdings to the wholly-owned subsidiary of ALARIS Medical Systems of $14,993 which include a note issued in December, 2001 for $181 related to the purchase of the debentures and one issued in January, 2002, for $14,812.

~~For~~The ~~the~~notes ~~six~~bear ~~months~~interest ~~ended~~at ~~June 30,~~a ~~2002,~~rate ~~Federal,~~of ~~state~~7-1/4% ~~and~~per ~~foreign~~annum, compounded ~~income~~semi-annually ~~taxes~~and ~~paid,~~are ~~net~~due ofon ~~tax~~December ~~refunds~~31, ~~totaled $4,366~~2008. Due ~~Federal,~~to ~~state~~the ~~and~~parent/subsidiary ~~foreign income~~relationship ~~taxes~~ between ~~paid,~~the ~~net~~borrowing ofand ~~tax~~lending ~~refunds~~companies, ~~resulted~~the innotes areceivable ~~cash~~have ~~inflow~~been recorded ofas ~~$2,545~~a ~~for~~reduction of the ~~six~~consolidated ~~months~~ALARIS ~~ended~~Medical ~~June 30,~~Systems stockholder’s ~~2001~~equity. Because ~~Interest~~of ~~paid~~this relationship, ~~during~~although the ~~six~~notes ~~months~~bear ~~ended~~interest ~~June 30~~at 7-1/4%, ~~2002~~interest ~~and~~income ~~2001 totaled~~is ~~$21,127~~ not ~~and~~recorded ~~$17,556,~~in ~~respectively.~~the ALARIS Medical Systems consolidated income statement.

NOTE 97 —~~RESTRUCTURING~~ SEGMENT ~~AND OTHER NON-RECURRING ITEMS~~ INFORMATION

The Company did not record restructuring or non-recurring items during the second quarter 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 Company'’s ~~disposable products manufacturing~~segment ~~plants~~ performance inis ~~Mexico~~based inon ~~1993~~results ~~as a result~~ of ~~flooding.~~two ~~The~~geographical ~~contingency~~business ~~related~~segments to within the ~~insurance~~same ~~settlement~~line ~~was resolved in the first quarter~~ of ~~2002,~~business ~~when~~- ~~the~~North ~~Company~~America ~~received proceeds of $1,020 during the quarter~~ and ~~notification of an additional payment due of $105, which was received during April 2002~~International.

~~During the~~ The ~~first~~Company ~~quarter~~is oforganized primarily ~~2002,~~based ~~the~~on ~~Company~~geographic ~~initiated~~location awith ~~plan~~the toUnited ~~restructure~~States ~~its~~and ~~Central~~Canada ~~European~~drug infusion ~~technical~~and ~~services.~~patient Inmonitoring ~~this connection~~business, ~~the~~and ~~Company~~Mexico ~~recorded~~manufacturing ~~a charge of $540~~activities, ~~which~~ ~~included~~ representing ~~$400 of severance costs for 21 positions affected by~~ the ~~relocation~~North ofAmerica ~~the German operation and $140 related to lease termination~~segment. AsAll ofother ~~June 30,~~international ~~2002~~operations, ~~approximately $68 of severance~~ ~~costs~~ including ~~has~~Europe, ~~been~~Asia, ~~paid~~Australia toand 13Latin ~~employees.~~America, ~~The~~represent ~~restructuring is anticipated to be completed during~~ the ~~third quarter of 2002~~International segment.

~~Restructuring and~~ The ~~other~~accounting ~~non-recurring~~policies ~~charges~~ of ~~$6,899~~the segments ~~during~~are the ~~first~~same ~~six~~as ~~months~~those ofdescribed ~~2001~~in ~~included~~the ~~$3,520~~consolidated offinancial statements ~~legal,~~included ~~advisory~~in ~~and~~the ~~consultant~~Company’s ~~expenses~~Annual ~~related~~Report toon ~~obtaining~~Form ~~an amendment~~10-K tofor the ~~ALARIS~~year ended ~~Medical~~December ~~Systems'~~31, ~~bank credit agreement~~2001. ~~This~~The ~~amendment~~geographical ~~was~~data ~~completed~~does innot ~~April 2001~~include intersegment revenues. All ~~The~~expenses ~~Company~~associated ~~also~~with the ~~recorded~~corporate ~~$3,379~~headquarters appear in ~~restructuring~~the ~~and~~North ~~other~~America ~~non-recurring~~business unit. The ~~charges~~ Company ~~during~~evaluates the ~~first~~performance ~~half~~ of ~~2001.~~its ~~These~~segments ~~activities~~based ~~related~~on tooperating ~~streamlining~~income ofand adjusted ~~operations~~earnings inbefore ~~the~~interest, ~~North~~taxes, ~~American~~depreciation, ~~business~~ and ~~resulted~~amortization (EBITDA). inAdjusted ~~the~~EBITDA ~~elimination~~represents ofincome 71from ~~positions.~~operations ~~The~~ before restructuring, ~~and~~ other non-recurring ~~charges~~items, indepreciation ~~the~~and ~~first~~amortization. Adjusted ~~six~~EBITDA ~~months~~does ofnot ~~2001~~represent ~~were~~net ~~composed~~income ofor ~~severance~~cash ~~and~~flows ~~related~~from ~~benefits~~operations, ofas these $2terms are defined under generally accepted accounting principles,~~879~~ and should ~~consulting~~not ~~fees~~be ofconsidered ~~approximately~~as ~~$500.~~an ~~Adjusted~~alternative ~~EBITDA~~to ~~for~~net income as an indicator of the ~~first~~ Company’s ~~half~~operating ofperformance ~~2002~~or ~~and~~to ~~2001~~cash ~~excludes~~flows ~~the~~as ~~non-recurring~~a ~~items.~~measure of liquidity.

~~NOTE 10—RELATED PARTY ARRANGEMENTS~~ 13

Pursuant to 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 consolidated income tax return. The ~~resulting~~table ~~tax liability is payable to Holdings. The~~below ~~pro-forma income taxes payable recorded on ALARIS Medical Systems on a stand-alone basis at June 30, 2002 and December 31, 2001 are $8,125 and $11,426, respectively, and are~~ ~~recorded~~presents ininformation ~~other~~about ~~non-current~~reported ~~liabilities~~segments asfor ~~a payable to Holdings. Such amounts eliminate in~~ the ~~consolidated financial statements of Holdings.~~ :

~~NOTE~~Three ~~11—LITIGATION~~months ~~AND~~ended September ~~CONTINGENCIES~~ 30,

Litigation

	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

OnReconciliation ~~December 5, 2000, the Company filed a lawsuit in the United States District Court for the Southern District~~ of ~~California against~~ ~~Filtertek, Inc.,~~ total ~~seeking~~segment aadjusted ~~declaration~~EBITDA ~~that the Company's own needle-free system does not infringe a Filtertek patent relating~~ to aconsolidated ~~Filtertek~~income ~~needle-free device as well as seeking unspecified damages and equitable relief~~ from ~~Filtertek,~~continuing ~~for infringement of a patent relating to a needle-free system licensed to the Company on an exclusive basis by~~operations ~~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~~before ~~Company~~income ~~claiming that the Company's~~ taxes:

	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

~~needle-free~~Nine ~~system~~months ~~infringes the Filtertek patent and seeking, as well, a declaration, against Medex only, that Filtertek's needle-free device does not infringe the~~ended ~~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~~September ~~made by the parties~~30, 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 a Special Master to conduct a claims construction hearing. The Special Master has made recommendations to the Court on the construction of the single claim of the patent which is at issue and the Court is currently considering those recommendations.

The Company believes 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 arbitration to expedite the resolution of this case, but the Company and Filtertek have not reached agreement to do so. Based on the evidence to date, the Company intends to move 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 and 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

~~United States Customs Service Matter~~ 14

~~During~~Reconciliation ~~the years 1988 through 1995, Cal Pacifico acted as the Company's United States customs broker and importer~~ of ~~record with respect to the importation into~~ ~~the United States of finished products assembled at the Company's two maquiladora assembly plants in Tijuana, Mexico. Cal Pacifico received a pre-penalty notice of intent from the United~~ ~~States~~total ~~Customs~~segment ~~Service~~adjusted ~~("Customs")~~EBITDA to ~~assess~~consolidated ~~additional~~income 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~~continuing ~~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~~operations ~~Pacifico~~before ~~dispute~~income ~~will result in a material claim against the Company, it will continue to monitor the matter.~~ taxes:

Other

	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	)

~~The~~NOTE ~~Company~~8 is— ~~also~~CASH aFLOW 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. INFORMATION

15 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.

NOTE 9 ~~Part I~~—~~Item~~ ~~2 Management's~~RESTRUCTURING ~~Discussion~~AND ~~and~~OTHER NON-RECURRING ~~Analysis of Financial Condition and Results of Operations~~ ITEMS

~~FORWARD~~The Company did not record restructuring or non-~~LOOKING~~recurring ~~STATEMENTS~~ 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 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 $1,020 during the quarter and notification of an additional payment due of $105, which was received during April 2002.

~~Certain~~During of the ~~matters~~first ~~discussed~~quarter ~~in this report, including, without limitation, matters discussed under Item 2, "Management's Discussion and Analysis~~ of ~~Financial Condition and Results of Operations~~2002," ~~may constitute forward-looking statements within~~ the ~~meaning~~Company initiated ofa ~~Section 21E~~plan ofto ~~the~~restructure ~~Securities~~its ~~Exchange~~technical ~~Act~~services ofoperations ~~1934,~~in ~~as amended~~Central Europe. In ~~Certain~~this ofconnection, ~~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,"~~Company ~~"estimates,"~~ recorded ora ~~"anticipates"~~charge ~~or the negative~~ of ~~these terms or other comparable terminology~~$540, orwhich byincluded ~~discussions~~$400 of ~~strategy,~~severance ~~plans~~costs orfor ~~intentions. Statements contained in this report that are not~~21 ~~historical~~ positions ~~facts~~affected ~~are~~by ~~forward-looking statements. Without limiting~~ the ~~generality~~relocation of the ~~preceding~~German ~~statement,~~operation ~~all statements in this report concerning or relating to estimated~~ and ~~projected~~$140 ~~earnings,~~related ~~margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, through our senior management, from time~~ to ~~time~~lease ~~we make forward-looking statements concerning our expected future operations and performance and other developments~~termination. As ~~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~~September ~~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~~30, ~~those factors or conditions described under Item 2~~2002, ~~"Management's~~all ~~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~~severance ~~ended~~costs ~~December 31,~~have ~~2001,~~been ~~and~~paid ~~general~~to ~~conditions in~~ the ~~economy and capital markets~~identified employees.

~~Overview~~ Restructuring and other non-recurring charges of $6,899 during the nine months ended September 30, 2001 included $3,520 of legal, advisory and consultant expenses related to obtaining an amendment to the ALARIS Medical Systems’ bank credit agreement. This amendment was completed in April 2001. The Company also recorded $3,379 for restructuring activities. These activities 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 $2,879 and consulting fees of approximately $500. Adjusted EBITDA for the nine months ended September 30, 2002 and 2001 excludes the non-recurring items.

ALARIS was formed in 1996 by the merger of IMED Corporation and IVAC Medical Systems, Inc., two pioneers in the area of infusion technology, each with leading brand names and at least 30 years of operating history. 15

~~We develop~~NOTE ~~practical~~10 ~~solutions~~— ~~for~~RELATED ~~medication~~PARTY safety at the point of care. We design, manufacture and market intravenous (IV) medication delivery and infusion therapy devices, needle-free disposables and patient monitoring equipment. Our "smart" technology, tools and services are designed to reduce the risks and costs of medication errors, and safeguard patients and clinicians. We provide our products, professional and technical support and training services to over 5,000 hospital and health care systems, as well as alternative care sites in more than 120 countries through a worldwide direct sales force and distributors. We have one of the largest installed bases of large volume pump delivery lines in the United States hospital market, representing approximately 32% of such installed lines. We also believe that we have the number one or number two market position in the large volume pump segment or the syringe pump segment, or both segments, in Belgium, France, Italy, The Netherlands, Norway, Spain, Sweden, the United Kingdom, Australia, Canada, New Zealand and South Africa. In addition, we are a leading provider of patient monitoring products that measure and monitor temperature, with a substantial installed base of hospital thermometry systems in the United States. We also provide products which measure and monitor pulse, pulse oximetry, blood pressure and depth of consciousness during anesthesia. ARRANGEMENTS

16 Pursuant to 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 consolidated income tax 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 September 30, 2002 and December 31, 2001 are $6,163 and $11,426, respectively, and are recorded in other non-current liabilities as a payable to Holdings. Such amounts eliminate in the consolidated financial statements of Holdings.

~~Critical~~NOTE ~~Accounting~~11 ~~Policies~~— ~~and~~LITIGATION ~~Estimates~~ AND CONTINGENCIES

Our discussion and analysis of our operating results and financial condition is based upon our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Litigation

~~Critical~~ On December 5, 2000, the ~~accounting~~ Company ~~policies~~filed ~~are~~a ~~those~~lawsuit ~~that~~in ~~involve~~the ~~subjective~~United orStates ~~complex~~District ~~judgments~~Court for the Southern District of California against Filtertek, ~~often~~Inc., asseeking a ~~result~~declaration ofthat the Company’s ~~need~~own needle-free system does not infringe a Filtertek patent relating to ~~make~~a ~~estimates.~~Filtertek ~~The~~needle-free ~~following~~device ~~areas~~as ~~all~~well ~~require~~as ~~the~~seeking ~~use~~unspecified ofdamages ~~judgments~~ and equitable ~~estimates:~~relief ~~inventory~~from ~~valuation~~Filtertek, ~~allowances~~ for ~~uncollectible~~infringement ~~accounts~~of ~~receivable~~a ~~and~~patent ~~estimated~~relating ~~rebates,~~to ~~cost~~a ofneedle-free system ~~field~~licensed ~~corrective~~to ~~actions~~the Company on an exclusive basis by Medex, ~~deferred~~Inc. On ~~tax~~March 9, ~~asset~~2001, ~~valuation~~Filtertek ~~and~~filed ~~carrying~~a lawsuit ~~value~~in the United States District Court for the Northern District of ~~intangible~~ Illinois ~~assets.~~seeking ~~Estimates~~unspecified indamages ~~each~~and ofequitable ~~these~~relief ~~areas~~from ~~are~~the ~~based~~Company claiming onthat ~~historical~~the ~~experience~~Company’s ~~and~~needle-free ~~various~~system ~~judgments~~infringes the Filtertek patent and ~~assumptions~~seeking, as well, a declaration, against Medex only, that weFiltertek’s needle-free ~~believe~~device ~~are~~does ~~appropriate~~not infringe the needle-free system patent licensed to the Company by Medex. ~~Actual~~The ~~results~~Company ~~may~~subsequently ~~differ~~withdrew ~~from~~its ~~these~~claim for damages ~~estimates~~ and equitable relief relating to the Medex patent. ~~Our~~As ~~accounting~~a ~~practices~~result ~~are~~of ~~discussed~~motions inmade by ~~more~~the ~~detail~~parties, inthe ~~"Management'~~California action was transferred to the Illinois court. The Illinois court granted the Company’s ~~Discussion~~motion ~~and~~to ~~Analysis~~bifurcate ofdiscovery ~~Financial~~related ~~Condition~~to liability and ~~Results~~damages. Discovery ofrelating ~~Operations"~~to ~~and~~liability ~~note 2~~recently ended, while discovery relating to ~~our~~damages ~~consolidated~~is currently abated. The Court-appointed Special Master conducted ~~financial~~ a ~~statements~~claims ~~contained~~construction inhearing ~~our~~and ~~Annual~~provided ~~Report~~the Court with recommendations on how ~~Form 10-K~~the ~~for~~single claim of the ~~year~~patent ~~ended~~which ~~December 31~~is at issue should be construed, ~~2001.~~which the Court has since adopted.

17 The Company believes 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 arbitration to expedite the resolution of this case, but the Company and Filtertek have not reached agreement to do so. Based on the evidence to date, the Company intends to move 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 and cash flows.

~~Results~~United ofStates ~~Operations~~ Customs Service Matter

~~The~~ During ~~following~~the ~~table~~years ~~sets~~1988 ~~forth,~~through ~~for the periods indicated~~1995, ~~selected~~Cal Pacifico ~~financial~~acted ~~information expressed~~ as athe ~~percentage~~Company’s ofUnited ~~sales.~~States ~~Beginning~~customs ~~January 1,~~broker ~~2002,~~and inimporter of ~~accordance~~ record with ~~new~~respect ~~accounting~~to ~~standards,~~the ~~goodwill~~importation ~~and~~into ~~certain other intangibles are no longer amortized. As required by FAS 142, prior year data in~~ the ~~following~~United ~~tables~~States ~~has~~of ~~not been restated~~finished ~~and,~~ products ~~therefore,~~assembled ~~contains~~at ~~amortization~~the ~~expense~~Company’s ~~that~~two ismaquiladora ~~not~~assembly ~~included~~plants in ~~current year information~~Tijuana, Mexico. ~~(See~~Cal ~~note 2~~Pacifico ~~to the condensed consolidated financial statements.)~~ received

	Three Months Ended June 30,				Six Months Ended June 30,
	2002		2001		2002		2001
Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	50.1		50.7		50.3		51.2
Gross margin	49.9		49.3		49.7		48.8
Selling and marketing expenses	19.4		20.0		20.0		19.4
General and administrative expenses	9.2		12.8		9.1		12.2
Research and development expenses	7.0		7.0		6.5		6.9
Restructuring and other non-recurring items	—		1.2		(0.3	)	3.5
Interest income from sales-type capital leases	1.0		1.4		1.1		1.3
Income from operations	15.3		9.7		15.5		8.1
Interest expense, net	(8.9	)	(10.4	)	(9.1	)	(9.8	)
Other, net	0.2		(0.2	)	(0.1	)	(0.6	)
Income (loss) from continuing operations before income taxes	6.6		(0.9	)	6.3		(2.3	)
Provision for (benefit from) income taxes	2.6		0.5		2.5		(0.2	)
Income (loss) from continuing operations	4.0		(1.4	)	3.8		(2.1	)
Gain on disposal of discontinued business (net of income taxes)	—		—		—		1.9
Net income (loss)	4.0	%	(1.4	)%	3.8	%	(0.2	)%
Other Data:
Adjusted EBITDA	20.5	%	19.0	%	20.5	%	19.5	%

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Adjusted EBITDA (1)	$	22,218		$	18,684		$	43,753		$	38,473
Restructuring and other non-recurring items		—			(1,156	)		585			(6,899	)
Depreciation and amortization (2)		(5,653	)		(7,893	)		(11,365	)		(15,629	)
Interest income		269			585			482			1,219
Interest expense		(9,884	)		(10,860	)		(19,764	)		(20,498	)
Other, net		193			(202	)		(301	)		(1,141	)
(Provision for) benefit from income taxes		(2,858	)		(510	)		(5,356	)		290
Net income (loss) from continuing operations	$	4,285		$	(1,352	)	$	8,034		$	(4,185	)

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.

18Other

~~We have~~ The ~~included~~Company ~~information~~is ~~concerning~~also ~~Adjusted~~a ~~EBITDA~~defendant in ~~herein~~various ~~because~~actions, weclaims, ~~use~~and ~~such~~legal ~~information~~proceedings asarising afrom ~~measure~~its ofnormal business ~~assessing~~operations. ~~cash~~Management ~~flows~~believes ~~and~~they ~~ability~~have tomeritorious ~~service~~defenses ~~debt~~ and ~~understand that such information is~~ ~~used~~ intends byto ~~investors~~vigorously asdefend ~~one~~against ~~measure~~all ofallegations anand ~~issuer's~~claims. ~~ability~~As tothe ultimate ~~service~~outcome ~~debt.~~of ~~Restructuring~~these ~~and~~matters ~~other~~is ~~one-time~~uncertain, ~~items~~no ~~are~~contingent ~~excluded~~liabilities ~~from~~or provisions ~~Adjusted~~have ~~EBITDA~~been asrecorded wein ~~believe~~the ~~that~~accompanying ~~the~~financial ~~inclusion~~statements offor ~~these~~such ~~items~~ matters. ~~would~~However, ~~not~~in bemanagement’s ~~helpful~~opinion, tobased anon ~~investor's~~discussions ~~understanding~~with oflegal counsel, ~~our~~liabilities ~~ability~~arising tofrom ~~service~~such ~~debt.~~matters, ~~Our~~if ~~computation~~any, ofwill ~~Adjusted~~not ~~EBITDA~~have ~~may~~a material ~~not~~adverse beeffect ~~comparable~~on tothe ~~similar~~Company’s ~~titled~~business, ~~measures~~financial condition, results of ~~other~~operations ~~companies.~~or cash flows.

Our sales results are reported consistent with our two geographical business units: North America and International. The following table summarizes sales to customers by each geographical business unit. 17

		Three Months Ended June 30,				Six Months Ended June 30,
		2002		2001		2002		2001
		(in millions)				(in millions)
North America business unit
Infusion instruments		$	18.3	$	13.3	$	30.7	$	22.7
Dedicated disposables			34.6		32.8		68.4		66.1
Other disposables and service			18.0		16.2		35.1		30.9
	Subtotal		70.9		62.3		134.2		119.7
Patient monitoring			6.6		6.5		12.7		13.3
	North America business unit total	$	77.5	$	68.8	$	146.9	$	133.0
International business unit
Infusion instruments		$	7.4	$	6.9	$	19.9	$	19.8
Dedicated disposables			17.5		17.9		34.5		34.8
Other disposables and service			4.5		3.7		8.8		7.4
	Subtotal		29.4		28.5		63.2		62.0
Patient monitoring			1.6		1.2		2.8		2.4
	International business unit total	$	31.0	$	29.7	$	66.0	$	64.4
ALARIS Medical Systems, Inc. total		$	108.5	$	98.5	$	212.9	$	197.4

Part I — Item 2

~~Three~~Management’s ~~Months~~Discussion ~~Ended~~and ~~June 30,~~Analysis of ~~2002~~Financial ~~Compared~~Condition ~~with~~and ~~Three~~Results ~~Months~~of ~~Ended June 30, 2001~~ Operations

~~Sales~~ FORWARD-LOOKING STATEMENTS

~~Sales~~ Certain ~~increased~~of ~~$10.0 million~~the matters discussed in this report, anincluding, ~~increase~~without limitation, matters discussed under Item 2, “Management’s Discussion and Analysis of ~~10%~~Financial ~~(also~~Condition ~~10%~~and inResults ~~constant~~of Operations,” ~~currency~~may asconstitute forward–looking statements within the ~~favorable~~meaning of ~~foreign~~Section ~~currency~~21E ~~benefit~~of the Securities Exchange Act of a1934, ~~weaker~~as Uamended.S. ~~dollar~~Certain ~~was less~~of ~~than~~ these 1%forward–looking ofstatements ~~consolidated~~can ~~sales)~~be ~~for~~identified by the ~~quarter~~use ~~ended~~of ~~June 30~~forward–looking terminology such as “believes,” ~~2002~~“expects,” ~~compared~~“may,” ~~with~~“will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or the negative ~~same~~of ~~quarter~~these ~~last~~terms ~~year~~or other comparable terminology, or by discussions of strategy, plans or intentions. ~~North~~Statements ~~America~~contained ~~sales~~in ~~were~~this ~~$77~~report that are not historical facts are forward-looking statements.~~5 million,~~ Without anlimiting ~~increase~~the generality of ~~$8.7 million~~the preceding statement, all statements in this report concerning or ~~13%~~relating to estimated and projected earnings, ~~compared~~margins, ~~with~~costs, ~~the~~expenditures, ~~second~~cash ~~quarter~~flows, ofgrowth ~~2001~~rates and financial results are forward-looking statements. ~~The~~In ~~increase~~addition, ~~was~~through ~~primarily~~our ~~due~~senior management, from time to ~~higher~~time ~~volumes~~we ofmake ~~drug~~forward-looking ~~infusion~~statements ~~instruments~~concerning our expected future operations and ~~disposable~~performance ~~administration~~and ~~sets~~other developments. ~~The~~Such forward-looking ~~increase~~statements inare ~~drug~~necessarily ~~infusion~~estimates reflecting our best ~~instruments~~ judgment ~~was~~based ~~primarily~~upon ~~from~~current ~~sales~~information and involve a number of ~~our~~risks ~~new~~and uncertainties. ~~MEDLEY™~~Other ~~Medication~~factors ~~Safety~~may ~~System~~affect the accuracy of $6these forward–looking statements and our actual results may differ materially from the results anticipated in these forward–looking statements.~~2 million~~ While it is impossible to identify all such factors, ~~which~~factors ~~product~~that ~~was~~could cause actual results to differ materially from those estimated by us include, but are not ~~sold~~limited ~~during~~to, ~~the~~those factors ~~second~~or ~~quarter~~conditions described under Item 2, “Management’s Discussion and Analysis of ~~2001.~~Financial ~~International~~Condition ~~sales~~and Results of Operations” in this report and ~~were~~ under ~~$31.0 million~~Item 7, an“Management’s ~~increase~~Discussion and Analysis of 5%Financial ~~(3%~~Condition and Results of Operations—Critical Accounting Policies and Estimates” and “Factors That Could Affect Future Financial Condition and Results” in ~~constant~~our ~~currency).~~Form 10-K for the year ended December 31, 2001, and general conditions in the economy and capital markets.

19Overview

~~The~~ ALARIS ~~increase~~ was ~~primarily~~formed ~~due~~in to1996 ~~increased~~by ~~volume~~the merger of ~~drug~~IMED ~~infusion~~Corporation ~~syringe~~and ~~pumps~~IVAC ~~and~~Medical ~~non-dedicated~~Systems, ~~disposable~~Inc., ~~administration~~two ~~sets~~pioneers ~~compared~~in the area of infusion technology, each with ~~the~~leading ~~same~~brand ~~period~~names inand ~~the~~at ~~prior~~least ~~year.~~30 years of operating history.

~~Gross~~ We ~~Profit~~ develop practical solutions for medication safety at the point of care. We design, manufacture and market intravenous (IV) medication delivery and infusion therapy devices, needle-free disposables and patient monitoring equipment. Our “smart” technology, tools and services are designed to reduce the risks and costs of medication errors, and safeguard patients and clinicians. We provide our products, professional and technical support and training services to over 5,000 hospital and health care systems, as well as alternative care sites in more than 120 countries through a worldwide direct sales force and distributors. We have one of the largest installed bases of large volume pump delivery lines in the United States hospital market, representing approximately 32% of such installed lines. We also believe that we have the number one or number two market position in the large volume pump segment or the syringe pump segment, or both segments, in Belgium, France, Italy, The Netherlands, Norway, Spain, Sweden, the United Kingdom, Australia, Canada, New Zealand and South Africa. In addition, we are a leading provider of patient monitoring products that measure and monitor temperature, with a substantial installed base of hospital thermometry systems in the United States. We also provide products which measure and monitor pulse, pulse oximetry and blood pressure.

Gross profit increased $5.6 million, or 11%, during the quarter ended June 30, 2002, compared with the same quarter last year. The gross margin percentage increased to 49.9% in the second quarter of 2002, from 49.3% in the second quarter of 2001. The improved margin percentage was due to increased volume of disposables (which have higher margins than instruments) and to lower product costs resulting from continuing manufacturing efficiencies and improvements, including the benefits from higher production volumes and related favorable utilization. 18

~~Selling~~Critical ~~and~~Accounting ~~Marketing~~Policies ~~Expenses~~ and Estimates

~~Selling~~Our discussion and ~~marketing~~analysis ~~expenses increased $1.4 million, or 7%, during the quarter ended June 30, 2002 compared with the same period in 2001 as a result~~ of ~~higher~~our ~~sales~~operating ~~volume in the second quarter of 2002 compared with the prior year, as well as higher sales~~ results and ~~marketing~~financial ~~costs~~condition ~~related~~is tobased ~~increased~~upon ~~personnel~~our ~~and~~condensed ~~related~~consolidated ~~activities supporting~~financial ~~the North America launch of the MEDLEY™ Medication Safety System. Also contributing to this increase were higher marketing expenses related to new product launch strategies. These~~ ~~increases~~statements, ~~were~~which ~~partially~~have ~~offset~~been byprepared ~~reductions~~ in ~~our~~accordance ~~distribution~~with ~~costs~~United ~~over~~States ~~the prior year. As a percentage of sales, selling and marketing expenses decreased to 19.4% for the second quarter of 2002~~generally ~~from~~ accepted ~~20.0%~~accounting ~~in the second quarter of 2001~~principles.

~~General~~ Critical accounting policies are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments and ~~Administrative~~estimates: ~~Expenses~~ inventory valuation, allowances for uncollectible accounts receivable and estimated rebates, cost of field corrective 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. Actual results may differ from these estimates. Our critical accounting policies are discussed in more detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 2 to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2001.

~~General~~Results ~~and administrative expenses decreased $2.5 million, or 20%, during the three months ended June 30, 2002, compared with the three months ended June 30, 2001. As a percentage~~ of sales, general and administrative expenses decreased to 9.2% in the second quarter of 2002 from 12.8% in the second quarter of 2001. This decrease was due to a $2.3 million reduction in amortization expense resulting from our adoption of new accounting requirements effective January 1, 2002, under which our goodwill and certain other amortization expense ceased. Had the newly adopted accounting standards been in effect during the second quarter of 2001, general and administrative expense for such quarter would have been 10.4% of sales. Overall cost increases in general and administrative expenses were generally offset by lower bonus expense. (See note 2 to the condensed consolidated financial statements.) Operations

~~Research~~ The following table sets forth, for the periods indicated, selected financial information expressed as a percentage of sales. Beginning January 1, 2002, in accordance with new accounting standards, goodwill and certain ~~Development~~other ~~Expenses~~ intangibles are no longer amortized. As required by FAS 142, prior year data in the following tables has not been restated and, therefore, contains amortization expense that is not included in current year information. (See note 2 to the condensed consolidated financial statements.)

Research and development expenses increased approximately $0.7 million, or 10%, during the three months ended June 30, 2002, compared with the three months ended June 30, 2001. As a percentage of sales, spending on research and development was 7.0% for the second quarter of 2002, which was consistent with the prior year period.

	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	%

~~Restructuring and Non-Recurring Items~~ 19

We did not incur any restructuring or non-recurring items in the second quarter of 2002. We recorded a non-recurring charge of $1.2 million in the second quarter of 2001 for legal and advisory expenses related to obtaining an amendment to ALARIS Medical Systems' bank credit agreement.

	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)

~~Income~~(1) Adjusted EBITDA represents income from ~~Operations~~ operations before restructuring, other non-recurring items, discontinued operations, interest, taxes, other, net, depreciation and amortization. Adjusted 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 operating performance or to cash flows 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 of our ability to service debt. Our computation of Adjusted EBITDA may not be comparable to similar titled measures of other companies.

~~Income~~(2) Depreciation and ~~from~~amortization ~~operations~~excludes ~~increased~~amortization ~~$6.9 million~~of ~~during~~debt ~~the~~discount ~~three~~and ~~months~~issuance ~~ended June 30, 2002, compared with the three months ended June 30,~~costs ~~2001,~~ included ~~primarily due to an increase~~ in ~~gross~~interest ~~profit and lower amortization~~ expense.

20 Our sales results are reported consistent with our two geographical business units: North America and International. The following table summarizes sales to customers by each geographical business unit.

Adjusted EBITDA

	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

Adjusted EBITDA increased $3.5 million during the three months ended June 30, 2002, compared with the three months ended June 30, 2001. As a percentage of sales, Adjusted EBITDA increased from 19.0%, or $18.7 million, during the three months ended June 30, 2001, to 20~~.5%, or $22.2 million, during the three months ended June 30, 2002, due to the reasons discussed above. (See note 1 under "Results of Operations.")~~

Interest Expense

	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

~~Interest~~Three ~~expense~~Months ~~decreased~~Ended ~~$1.0 million,~~September ~~or 9%, during the three months ended June~~ 30, 2002 ~~compared~~Compared with ~~the~~Three ~~three~~Months ~~months~~Ended ~~ended~~September ~~June~~ 30, ~~2001.~~ ~~The decrease in interest is due to lower overall interest rates in the current year over prior year.~~ 2001

~~Interest Income~~ Sales

~~Interest~~ Sales ~~income~~increased ~~decreased~~ $09.3 4 million, ~~during~~an increase of 9% (7% in constant currency) for the quarter ended ~~June~~ September 30, 2002 compared with the same quarter inlast 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 ~~lower~~higher ~~interest~~volumes ~~rates~~of drug infusion ~~earned~~ dedicated onand ~~cash~~non-dedicated ~~balances~~disposable administration sets. International sales were $35.0 million, an increase of 20% (11% in ~~2002~~constant currency). The increase was primarily due to increased volume of drug infusion volumetric and syringe pumps and dedicated and non-dedicated disposable administration sets compared with ~~2001.~~the same period in the prior year.

~~Other,~~Gross ~~net~~ Profit

~~Other,~~Gross ~~net~~profit increased to $07.2 7 million, ofor ~~income~~15%, during the quarter ended ~~June~~ September 30, 2002, compared with $0the same quarter last year.~~2 million~~ ofThe ~~expense~~gross ~~for~~margin ~~the~~percentage ~~same~~increased to 50.9% ~~period~~ in the third quarter of 2002, from 48.1% in the ~~prior~~third ~~year~~quarter of 2001. ~~This~~The improved ~~improvement~~margin percentage was ~~primarily~~ due to ~~changes~~increased involume ~~currency~~of ~~rates~~disposables ~~generating~~(which have ~~foreign~~higher ~~currency~~margins ~~transaction~~than ~~losses~~instruments) inand ~~the~~to ~~prior~~a ~~year~~higher ~~and~~percentage ~~gains~~of international insales, ~~the~~which ~~current~~have ~~quarter.~~higher margins.

~~Six~~Selling ~~Months~~and ~~Ended June 30, 2002 Compared with Six Months Ended June 30, 2001~~ Marketing Expenses

~~Sales~~ Selling and marketing expenses increased $3.2 million, or 17%, during the quarter ended September 30, 2002, compared with the same period in 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 personnel and related activities supporting the North America launch of the MEDLEY™ Medication Safety System. 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.

~~For~~General the six months ended June 30, 2002, sales were $212.9 million, an increase of $15.6 million, or 8% (9% in constant currency) compared with $197.4 million reported for the same period in the prior year. Higher volumes of both drug infusion instruments and ~~disposable~~Administrative administration sets in North America resulted in an increase in revenues of $13.9 million, or 10%, over the prior year. Contributing to the North America increase was $8.0 million in sales of our new MEDLEY™ Medication Safety System, which product was not sold during the first half of 2001. The increases in drug infusion products were partially offset by lower volumes of patient monitoring instruments and disposables compared with the prior year. International sales increased $1.6 million, or 3% (5% in constant currency), due to higher volumes of non-dedicated disposable administration sets and large volume pumps offset by lower syringe pump volumes and revenue compared with the prior year. The increase in large volume pump sales for the International business is primarily attributed to the Asena GW, a new product launched in late 2001. Expenses

~~Gross~~ General ~~Profit~~ and administrative expenses decreased $1.9 million, or 17%, during the three months ended September 30, 2002, compared with the three months ended September 30, 2001. As a percentage of sales, general and administrative expenses decreased to 8.6% in the third quarter of 2002 from 11.3% in the third quarter of 2001. This decrease was due to a $2.3 million reduction in amortization expense resulting from our adoption of new accounting requirements effective January 1, 2002, under which our

Gross profit increased $9.5 million, or 10%, during the six months ended June 30, 2002, compared with the six months ended June 30, 2001 due to higher sales and an increase in gross margin percentage. The gross margin percentage increased to 49.7% in the six months ended June 30, 2002, from 48.8% in the six months ended June 30, 2001. The improved margin percentage was due to increased volume of disposables (which have higher margins than instruments), higher overall margins on drug infusion instruments and patient monitoring products in North America, and to lower product costs resulting from continuing manufacturing efficiencies and improvements, including the benefits from higher production volumes and related favorable utilization. 21

21goodwill and certain other amortization expense ceased. Had the newly adopted accounting standards been in effect during the third quarter of 2001, general and administrative expense for such quarter would have been 9.1% of sales. (See note 2 to the condensed consolidated financial statements.) Other cost increases in general and administrative expenses were generally offset by lower bonus expense.

~~Selling~~Research and ~~Marketing~~Development Expenses

~~Selling~~ Research and ~~marketing~~ development expenses increased approximately $4.1 .6 million, or 1124%, during the ~~six~~three months ended ~~June~~ September 30, 2002, compared with the ~~six~~three months ended ~~June~~ September 30, 2001, due to ~~increased~~an ~~selling~~increase ~~costs resulting from higher sales volume~~ in ~~the first six months of 2002 compared with the prior year and to higher sales and marketing costs related to increased~~ personnel ~~and related activities supporting the North America launch of the MEDLEY™ Medication Safety System~~. ~~These increases were partially offset by reductions~~ ~~in our distribution costs over the prior year.~~ As a percentage of sales, ~~selling~~spending ~~and~~on ~~marketing~~research ~~expenses~~and ~~increased~~development towas 207.01% for the ~~first~~third ~~six~~quarter ~~months~~ of 2002, ~~from~~compared 19with 6.43% for the ~~same~~third ~~period~~quarter in of 2001.

~~General~~Restructuring and ~~Administrative~~Non-Recurring ~~Expenses~~ Items

~~General~~We ~~and~~did ~~administrative~~not ~~expenses~~incur ~~decreased~~any ~~$4.7 million,~~restructuring or ~~19%, during the six months ended June 30, 2002, compared with the six months ended~~non-recurring ~~June 30,~~ items ~~2001. As a percentage of sales, general and administrative expense decreased to 9.1% during the six months ended June 30, 2002 compared with 12.2% for the same period~~ in the ~~prior~~ ~~year.~~third ~~This~~quarter ~~decrease is due to a $4.6 million reduction in amortization expense resulting from our adoption~~ of ~~new accounting requirements effective January 1,~~ 2002, ~~under~~or ~~which our goodwill and certain other amortization expense ceased. Had these accounting requirements been in effect during the first two quarters of~~ 2001~~, general and administrative expense for such period would have been 9~~.~~9% of sales. Overall cost increases in general and administrative expenses were generally offset by lower bonus expense. (See note 2 to the condensed consolidated financial statements.)~~

~~Research~~Income ~~and~~from ~~Development Expenses~~ Operations

~~Research~~ Income ~~and~~from ~~development~~operations ~~expenses~~ increased ~~approximately~~ $04.2 7 million, ~~or 1%,~~ during the ~~six~~three months ended ~~June~~ September 30, 2002, compared with the ~~six~~ three months ended ~~June~~ September 30, 2001~~. As a percentage of sales~~, ~~spending~~primarily ondue ~~research and development decreased~~ to ~~6.5%~~an ~~for~~increase ~~the~~in gross ~~first~~profit ~~six~~and ~~months~~lower ofamortization ~~2002, compared with 6~~expense.~~9% for the prior year comparative period.~~

~~Restructuring~~Adjusted ~~and Non-Recurring Items~~ EBITDA

We Adjusted ~~did~~EBITDA ~~not~~increased ~~record~~$2.8 million ~~restructuring or non-recurring items~~ during the ~~second~~three ~~quarter~~months ofended ~~2002.~~September ~~During~~30, ~~the first quarter of~~ 2002, wecompared ~~recorded~~with athe ~~non-recurring~~ three ~~benefit~~months ofended ~~$1.1 million~~September ~~for~~30, ~~an insurance settlement~~2001. ~~The~~As ~~settlement~~a ~~related~~percentage ~~to damages and losses incurred at one~~ of ~~our~~sales, ~~disposable products manufacturing plants in~~Adjusted ~~Mexico~~ EBITDA inincreased ~~1993~~from as20.8%, aor ~~result of flooding~~$21.5 ~~The~~million, ~~contingency~~during ~~related to~~ the ~~insurance~~three ~~settlement~~months ~~was~~ended September ~~resolved~~30, in2001, ~~the~~to ~~first quarter of 2002~~21.5%, ~~when~~or ~~we received proceeds of~~ $124.0 4 million, during the ~~quarter~~ ~~and~~three ~~notification~~months ofended September an30, ~~additional~~2002, ~~payment~~ due ofto $0the reasons discussed above.~~1 million,~~ ~~which~~(See ~~was~~note ~~received~~1 ~~during~~under “Results ~~April 2002.~~of Operations.”)

~~During the~~Interest first quarter of 2002, we initiated a plan to restructure our Central European technical services. 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 June 30, 2002, approximately $0.1 million of severance costs has been paid to 13 employees. The restructuring is anticipated to be completed during the third quarter of 2002. Expense

~~Restructuring and~~ Interest ~~other~~expense ~~non-recurring~~decreased ~~charges of~~ $61.9 2 million, or 11%, during the ~~six~~three months ended ~~June~~ September 30, ~~2001~~2002 ~~included~~compared ~~$3.5 million of legal, advisory, and~~with ~~other consultant expenses related to obtaining an amendment to~~ the ~~ALARIS~~three ~~Medical~~months ~~Systems~~ended ~~bank~~September ~~credit~~30, ~~agreement~~2001. ~~This~~The ~~amendment~~decrease ~~was~~resulted ~~completed~~from inlower overall ~~April 2001.~~interest Werates ~~also~~on ~~recorded~~our ~~$3.4 million for~~outstanding ~~restructuring~~indebtedness ~~activities.~~due ~~These activities related~~ to ~~streamlining~~the replacement of ~~operations in~~ the ~~North~~Company’s ~~American~~bank ~~business~~credit ~~and~~facility ~~resulted~~with ina ~~the~~public ~~elimination~~debt ofoffering 70in ~~positions. The restructuring charges were~~October, ~~composed of severance and related benefits of $2~~ 2001.~~9 million~~

22Interest Income

~~and~~ Interest ~~consulting~~income ~~fees~~decreased of $0.5 3 million. ~~Adjusted~~during ~~EBITDA for~~ the ~~six~~quarter ~~months~~ ended ~~June~~ September 30, 2002 ~~and~~compared with the same quarter in 2001 ~~excludes~~due ~~non-recurring~~to ~~items.~~lower interest rates earned on cash balances in 2002 compared with 2001.

~~Adjusted~~Other, ~~EBITDA~~ net

~~Adjusted~~ Other, ~~EBITDA~~net ~~increased~~decreased to $50.3 million of expense during the ~~six~~quarter ~~months~~ ended ~~June~~ September 30, 2002, compared with ~~the six months ended June 30, 2001~~ $0.1 Asmillion ~~a percentage~~ of ~~sales,~~income ~~Adjusted~~for ~~EBITDA~~the ~~increased~~same ~~from~~period ~~19.5%,~~in ~~or $38.5 million, during~~ the ~~six~~prior ~~months~~year. ~~ended~~The ~~June 30,~~change ~~2001~~is due primarily to ~~20.5%,~~an orincrease ~~$43.8 million,~~in ~~during~~foreign ~~the~~currency ~~six~~transaction ~~months~~losses ~~ended~~of ~~June 30,~~ approximately ~~2002~~$0.2 ~~due~~million tofrom the ~~reasons~~prior ~~discussed above~~year. ~~(See note 1 under "Results of Operations.")~~

~~Interest Expense~~ 22

~~Interest~~Nine ~~expense~~Months ~~decreased~~Ended ~~$0.7 million,~~September ~~or 4%, during the six months ended June~~ 30, 2002 ~~compared~~Compared with ~~the~~Nine ~~six~~Months ~~months~~Ended ~~ended~~September ~~June~~ 30, 2001~~. The decrease in interest is due to lower overall interest rates in the current year over prior year.~~

~~Interest Income~~ Sales

~~Interest~~ For ~~income~~the ~~decreased~~nine months ended September 30, 2002, sales were $326.0 million, an increase of $25.7 0 million, ~~during~~or 8% (also 8% in constant currency as the ~~six~~slight ~~months~~favorable ~~ended~~foreign ~~June 30~~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, ~~2002~~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 ~~same~~nine month period in 2001. The ~~due~~increases toin drug infusion products in North America were partially offset by lower ~~interest~~volumes ~~rates~~of patient monitoring instruments and disposables compared ~~earned~~ with onthe ~~cash~~prior ~~balances~~year. International sales increased $7.5 million, or 8% (6% in constant ~~2002~~currency), ~~compared~~due to higher volumes and revenues of non-dedicated disposable administration sets, large volume pumps and syringe pumps compared with ~~2001~~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.

~~Other,~~Gross ~~net~~ Profit

~~Other~~Gross ~~expense~~profit ~~decreased~~increased $017.8 2 million, ~~during~~or 12%, during the ~~six~~nine months ended ~~June~~ September 30, 2002, compared with the ~~same~~nine ~~period~~months inended September ~~the~~30, ~~prior~~2001 ~~year.~~due ~~Foreign~~to ~~currency transaction~~higher ~~losses~~sales ~~decreased~~and $1an increase in gross margin percentage.~~6 million~~ ~~and~~The ~~other~~gross ~~income~~margin ~~decreased~~percentage ~~approximately~~increased $0to 50.~~5 million~~1% ~~from~~in the ~~prior~~nine ~~year~~months ended September 30, 2002, from 48.6% ~~During~~in the ~~first~~nine ~~quarter~~months ofended ~~2001,~~September we30, ~~received $0~~ 2001.~~5 million~~ ofThe ~~other~~improved ~~income~~margin ~~relating~~percentage was due to ~~the~~increased ~~sale~~volume of adisposables (which ~~tradename.~~have Wehigher ~~did~~margins ~~not~~than ~~receive~~instruments) ~~comparable~~and ~~income~~higher inoverall ~~the~~margins ~~current~~on ~~year.~~drug infusion instruments and disposables and on patient monitoring products.

~~Discontinued~~Selling ~~Operations~~ and Marketing Expenses

~~During~~ Selling ~~the~~and ~~third~~marketing ~~quarter~~expenses increased of$7.3 ~~2000~~million, weor ~~sold~~13%, ~~our~~during ~~Instromedix®~~the ~~division~~nine tomonths ~~Card~~ended ~~Guard~~September ~~Technologies~~30, ~~Inc.~~ 2002, ~~("Card~~compared ~~Guard").~~with ~~The~~the ~~agreement~~nine ~~with~~months ~~Card~~ended September 30, 2001, due to increased ~~Guard~~ selling ~~provided~~costs ~~that~~resulting wefrom ~~would~~higher ~~assist~~sales volume in the ~~buyer~~first innine ~~setting~~months upof 2002 acompared ~~fully~~with ~~independent~~the ~~headquarters~~prior year and ~~manufacturing~~to ~~facility.~~higher ~~During~~sales and marketing costs related to increased personnel and related activities supporting the ~~first~~North America ~~quarter~~launch of ~~2001,~~the weMEDLEY™ ~~completed~~Medication Safety System. These increases were partially offset by reductions in our ~~obligations~~distribution ~~related~~costs toover the ~~agreement~~ ~~and~~same ~~recorded~~period in the prior year. As a ~~gain~~percentage of ~~$3.7 million~~sales, ~~net~~selling and marketing expenses increased to 19.9% for the first nine months of ~~taxes~~2002 from 19.2% for the same period in 2001.

~~Liquidity~~General and ~~Capital~~Administrative ~~Resources~~ Expenses

WeGeneral ~~expect~~and toadministrative ~~continue~~expenses todecreased ~~meet~~$6.7 million, ~~our~~or ~~short-term~~19%, ~~liquidity~~during ~~needs,~~the ~~including~~nine ~~capital~~months ~~expenditure~~ended ~~requirements~~September 30, 2002, compared with the ~~cash~~nine ~~flow~~months ~~from~~ended ~~operations~~September 30, 2001. As a percentage of sales, general and administrative ~~cash~~expense ondecreased to 9.0% during the nine months ended September ~~hand~~ 30, 2002 compared with 11.9% Wefor ~~will~~the ~~continue~~same period in the prior year. This decrease is due to ~~use~~a ~~our~~$6.9 ~~funds~~million ~~primarily~~reduction ~~for~~in ~~operating~~amortization ~~expenses,~~expense ~~including~~resulting from ~~planned~~our ~~expenditures~~adoption ~~for~~of new ~~research~~accounting ~~and~~requirements ~~development~~effective ~~programs~~January 1, ~~capital~~2002, under ~~expenditures~~which our goodwill and ~~scheduled~~certain ~~interest~~other ~~payments~~amortization expense ceased. Had on these ~~outstanding~~accounting ~~indebtedness~~requirements been in effect during the first three quarters of 2001, general and administrative expense for such period would have been 9.6% of sales. (See note 2 to the condensed consolidated financial statements.) Overall cost increases in general and administrative expenses were generally offset by lower bonus expense in the current period.

At June 30, 2002, we had $350.0 million outstanding indebtedness composed of $170.0 million of 115/8% senior secured notes due 2006 ("Senior Secured Notes"), which were issued on October 16, 2001 and $180.0 million of 93/4% senior subordinated notes due 2006 ("Senior Subordinated Notes"). The Senior Secured Notes bear interest at 115/8%, 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 93/4%, payable semi-annually in arrears on June 1 and December 1, with all principal due at maturity on December 1, 2006. 23

23Research and Development Expenses

~~Holdings~~ Research ~~also~~ and ~~had~~development ~~outstanding~~expenses atincreased ~~June 30,~~approximately ~~2002,~~ $~~168.~~1 .7 million, ~~accreted~~or ~~amount~~9%, ofduring the ~~its~~nine ofmonths ~~111/8%~~ended ~~Senior~~September ~~Discount~~30, ~~Notes~~2002 ~~due~~compared ~~2008~~with ~~("Senior~~the ~~Discount~~nine ~~Notes").~~months Asended ~~disclosed~~ September ~~below~~30, ~~the~~2001 ~~Holdings~~due ~~Convertible~~to ~~Debentures~~an ~~were~~increase ~~repaid~~in atpersonnel ~~their~~in ~~scheduled~~the ~~maturity~~current period. As a percentage of sales, spending on research ~~January 15~~and development was 6.7% for the nine months ended September 30, 2002., consistent with the prior year comparative period.

~~The Senior~~Restructuring ~~Discount~~and 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 semiNon-~~annually~~Recurring 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 Systems to make distributions, 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. 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. Items

~~The first~~We ~~condition~~did ~~which~~not ~~must~~record berestructuring ~~satisfied~~or ~~prior~~non-recurring toitems during ~~making~~the asecond ~~restricted~~or ~~payment~~third isquarters ~~that~~of at2002. During the ~~time~~first quarter of ~~the distribution~~2002, ~~ALARIS~~we ~~Medical~~recorded ~~Systems must have~~ a ~~Fixed~~non-recurring ~~Charge~~benefit ~~Coverage Ratio (as calculated in accordance with the indentures as described below)~~ of ~~at least 2~~ $1.~~5 to~~ 1 ~~calculated~~million for ~~the~~an ~~four~~insurance ~~complete~~settlement. The ~~calendar~~settlement ~~quarters~~related ~~preceding~~to ~~the~~damages ~~distribution~~and aslosses ~~though~~incurred ~~the distribution had been made~~ at ~~the~~one ~~beginning~~ of ~~such~~our disposable ~~period.~~products ~~The~~manufacturing ~~Fixed~~plants ~~Charge~~in ~~Coverage~~Mexico ~~Ratio~~in ~~will~~1993 beas ~~determined~~a byresult ~~dividing~~of flooding. The ~~ALARIS~~contingency ~~Medical~~related ~~Systems'~~to the ~~Consolidated~~insurance ~~EBITDA~~settlement ~~(as~~was ~~defined~~resolved in the ~~indentures)~~first byquarter ~~its~~of ~~Consolidated Interest~~2002, ~~Expense~~when ~~(as~~we ~~defined~~received proceeds inof ~~the indentures)~~$1.0 ~~Based~~million onduring the ~~interest~~quarter ~~rate on~~ and ~~the~~notification ~~amount~~ of ~~debt~~an ~~outstanding at ALARIS Medical Systems at June 30, 2002, the interest expense to be included~~additional in payment ~~future~~due ~~calculations~~ of ~~the Fixed Charge Coverage Ratio is approximately~~ $380.~~9 million.~~1 ~~As a result~~million, ~~the~~which ~~minimum~~was ~~required~~received ~~Consolidated~~during ~~EBITDA~~April ~~to meet the ratio will be approximately $97~~2002.~~3 million.~~

~~The calculation~~During ofthe ~~Consolidated~~first ~~EBITDA~~quarter ~~for purposes~~ of ~~the~~2002, ~~indentures~~we isinitiated ~~different~~a ~~from~~plan to restructure our ~~calculation~~technical ofservices ~~Adjusted~~operations ~~EBITDA described elsewhere~~ in ~~this~~Central ~~report~~Europe. In ~~Under~~this ~~the indentures~~connection, ~~Consolidated~~ ~~EBITDA~~we isrecorded ~~defined~~a ascharge ~~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~~ $0.5 inmillion ~~computing~~which ~~Consolidated~~included ~~Net~~$0.4 ~~Income:~~million ~~(i) provision~~ for ~~taxes~~severance ~~based~~costs ~~on income or profits of such Person and its Restricted Subsidiaries~~ for ~~such~~21 ~~period; (ii) Consolidated~~positions ~~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~~affected ~~any~~by ~~such non-cash charge to~~ the ~~extent~~relocation ~~that it represents an accrual~~ of orthe ~~reserve~~German ~~for~~operation ~~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~~$0.1 ~~Restricted~~million ~~Subsidiaries~~related ~~for such period; and (iv) any extraordinary or non-recurring loss and any net loss realized in connection with~~to ~~either~~ lease antermination. As ~~Asset Sale or the extinguishment~~ of ~~indebtedness,~~September ~~in each case~~30, ~~on a consolidated basis determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes based on~~ ~~the income or profits of~~ 2002, ~~and~~all ~~the~~severance ~~depreciation~~payments ~~and~~have ~~amortization~~been ~~and~~made ~~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~~identified ~~(and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person~~employees. "

24 Restructuring 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. These activities 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.

~~Consolidated EBITDA,~~Adjusted ~~per the indentures, as calculated for the six months ended June 30, 2002 reconciled to those reported by ALARIS Medical Systems is as follows:~~ EBITDA

	Six Months Ended June 30, 2002
	(Dollars in thousands)
ALARIS Medical Systems consolidated net income, as reported	$	8,034
Provision for income taxes		5,356
Interest expense		19,764
Depreciation and amortization		11,365
Non-cash items		(1,596	)
Extraordinary/non-recurring items		540
Consolidated EBITDA, per indentures		43,463
Less insurance settlement		(1,125	)
Less non-cash items		1,596
Less interest income		(482	)
Other, net		301
ALARIS Medical Systems Adjusted EBITDA, as reported	$	43,753

Adjusted EBITDA increased $8.1 million during the nine months ended September 30, 2002 compared with the nine months ended September 30, 2001. As a percentage of sales, Adjusted EBITDA increased from 19.9%, or $60.0 million, during the nine months ended September 30, 2001 to 20.9%, or $68.1 million, during the nine months ended September 30, 2002 due to the reasons discussed above. (See note 1 under “—Results of Operations.”)

~~The second~~Interest condition which must be satisfied prior to making a restricted payment is that the distribution, together with certain other restricted payments, 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 $38.6 million are exhausted. Subsequent to such time, 50% of future ALARIS Medical Systems net income will be added to the amount available. At June 30, 2002, the amount available for future restricted payments was $16.9 million. Expense

~~The preceding~~ Interest ~~description~~expense ofdecreased ~~the~~$2.0 million, ~~provisions~~or of6%, during the ~~indentures~~nine ~~which~~months ~~govern~~ended ~~restricted~~September ~~payments~~30, ~~including~~2002 compared with the ~~defined~~nine ~~terms,~~months isended aSeptember ~~summary~~30, ~~only~~2001. ~~and~~The isdecrease ~~qualified~~resulted infrom ~~its~~lower overall ~~entirety~~interest byrates ~~the text~~on ofour ~~the~~outstanding ~~indentures,~~indebtedness ~~which~~due ~~ALARIS~~to ~~Medical~~the ~~Systems~~replacement of ~~has~~the ~~previously~~Company’s ~~filed~~bank credit facility with ~~the~~a ~~Securities~~public ~~and~~debt ~~Exchange~~offering ~~Commission.~~in October, 2001.

~~Holdings' Convertible~~Interest 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 was 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.) Income

25 Interest 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.

ALARIS Medical Systems is required over the next twelve months (through June 30, 2003) to make interest payments on the Senior Secured Notes in the amount of $19.8 million and interest payments on the Senior Subordinated Notes in the amount of $17.6 million. 24

~~Although we have no further principal amortization requirements until the maturity of the Senior Secured Notes and the Senior Subordinated Notes in December 2006~~Other, management will continue to monitor the capital markets prior to such time for opportunities to improve ALARIS Medical Systems' and Holdings' capital structure. 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. net

~~Should ALARIS~~ Other ~~Medical~~expense ~~Systems~~decreased ~~not~~$0.4 million ~~repay~~during ~~its~~the ~~indebtedness~~nine atmonths ~~maturity~~ended inSeptember ~~2006~~30, ~~should~~2002, ~~Holdings~~compared ~~not~~with ~~repay~~ the ~~Senior~~same period ~~Discount Notes~~ in ~~2008,~~the orprior ~~should~~year. ~~ALARIS~~Our ~~Medical~~foreign ~~Systems~~currency ~~not~~transaction belosses ~~able to~~decreased ~~make~~ $1.4 ~~distributions~~million toin ~~Holdings~~the ~~commencing~~current inyear ~~2004~~and inwere ~~order~~partially tooffset ~~permit~~by ~~Holdings~~an toincrease ~~make~~in cost ~~cash~~of ~~interest~~$0.5 ~~payments~~million onrelated to the ~~Senior~~hedging ~~Discount~~program. ~~Notes,~~Banking ~~these~~fees ~~events~~decreased approximately ~~could~~$.2 ~~have~~million adue ~~material~~to ~~adverse~~the ~~effect~~elimination onof ~~our~~ALARIS Medical Systems’ ~~business,~~ bank ~~financial~~credit ~~condition~~facility ~~and~~during ~~results~~the ofprior ~~operations~~year, and ~~could~~other ~~result~~income indecreased approximately a$0.9 ~~default~~million byfrom ~~Holdings,~~the ~~ALARIS~~prior ~~Medical~~year. During ~~Systems,~~the orfirst ~~both,~~quarter ~~and possible acceleration~~ of ~~all~~2001, orwe areceived ~~portion~~$0.5 million of ~~such indebtedness,~~other ~~unless~~ income ~~Holdings,~~relating ~~ALARIS~~to ~~Medical~~the ~~Systems,~~sale orof ~~both,~~a ~~could~~tradename. We ~~refinance~~did ~~such~~not ~~indebtedness~~receive orcomparable ~~obtain~~income in the ~~required~~current ~~funds from other sources~~year.

~~In response~~Discontinued 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. Operations

~~As identified~~ During in the ~~condensed~~third ~~consolidated~~quarter ~~statement~~ of ~~cash flows~~ 2000, ~~net~~we ~~cash~~sold ~~provided~~our byInstromedix® ~~operating~~division ~~activities~~to ~~for~~Card ~~the~~Guard ~~six months ended June 30~~Technologies, ~~2002 was $18~~Inc.~~8 million compared~~ ~~with $34~~(“Card Guard”).~~3 million~~ ~~provided~~The byagreement ~~operating~~with ~~activities~~Card inGuard ~~the~~provided ~~first~~that ~~six~~we ~~months~~would ofassist ~~2001.~~the ~~Net cash used~~ buyer in ~~investing~~setting ~~activities~~up ~~for~~a ~~the~~fully ~~six~~independent ~~months~~headquarters ~~ended~~and ~~June 30,~~manufacturing ~~2002 was $21~~facility.~~9 million.~~ During ~~Net cash provided by investing activities for~~ the ~~six~~first ~~months~~quarter ~~ended~~of ~~June 30,~~ 2001 ~~was $1.0 million~~, ~~which included $8.1 million of net proceeds from the sale~~we of completed aour ~~discontinued~~obligations ~~operation.~~related ~~Net~~to ~~cash used in financing activities for~~ the ~~six~~agreement ~~months ended June 30, 2002~~ and ~~2001~~recorded ~~was~~a ~~$1.5 million~~gain ~~and~~of $113.9 7 million, ~~respectively,~~net ~~and was composed~~ of ~~dividend payments to Holdings and principal payments on long-term debt~~taxes.

~~We made~~Liquidity ~~capital expenditures of approximately $6.5 million during the six months ended June 30, 2002~~ and ~~anticipate~~Capital ~~additional capital expenditures of approximately $13.5 million during the remainder of 2002.~~ Resources

26 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.

~~The~~ At September 30, 2002, we had ~~following~~ $350.0 ~~schedule~~million ~~summarizes~~outstanding ~~our~~indebtedness ~~contractual~~composed ~~obligations~~of ~~and~~$170.0 ~~commitments~~million toof ~~make~~11-5/8% senior ~~future~~secured ~~payments~~notes asdue 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 30 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.

~~Contractual~~ Holdings ~~Obligations &~~also ~~Commitments~~ had outstanding at September 30, 2002, $172.8 million accreted amount of its 11–1/8% Senior Discount Notes due 2008 (“Senior Discount Notes”). As disclosed below, the Holdings Convertible Debentures were repaid at their scheduled maturity on January 15, 2002.

Payments Due by Period	Long-term Debt		Operating Leases		Interest Payments		Total
2002 (A)	$	—	$	3.1	$	18.7	$	21.8
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	$	28.4	$	167.9	$	546.3

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 Systems to make distributions, 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. 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.

~~Backlog~~ 25

The ~~amount~~first ofcondition ~~unfilled~~which ~~orders,~~must be ~~believed~~satisfied prior to bemaking ~~firm,~~a restricted payment is that at ~~June 30~~the time of the distribution, ~~2002~~ALARIS ~~and~~Medical ~~2001~~Systems ~~was~~must ~~$9.2 million~~have ~~and~~a ~~$15~~Fixed Charge Coverage Ratio (as calculated in accordance with the indentures as described below) of at least 2.~~6 million,~~5 ~~respectively~~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 ~~Included~~Fixed Charge Coverage Ratio will be determined by dividing ALARIS Medical Systems’ Consolidated EBITDA (as defined in the indentures) by its Consolidated Interest Expense (as defined in the $9indentures).~~2 million~~ Based ~~was~~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 $338.5 9 million. As ofa ~~orders~~result, ~~related~~the minimum required annual Consolidated EBITDA to ~~our~~meet ~~MEDLEY~~the ~~Medication~~ratio ~~Safety~~will ~~System~~be approximately $97.3 million.

~~Foreign~~The ~~Operations~~ calculation of Consolidated EBITDA for purposes of the indentures is different from our calculation of Adjusted EBITDA described elsewhere in this report. 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.”

WeConsolidated ~~have~~EBITDA, ~~significant~~per ~~foreign~~the ~~operations and~~indentures, as ~~a result, are subject to various risks arising therefrom, including foreign currency risks. This risk did not~~calculated ~~materially~~ for ~~change during~~ the ~~first~~three ~~six~~and ~~months~~nine ~~of 2002. For the six~~ months ended ~~June 30,~~September ~~2002 and 2001, approximately 33% and 35%, respectively, of our sales and~~ 30~~% and 26% of our operating expenses were denominated in currencies other than the U.S. dollar. These foreign currencies are primarily those of Western Europe~~, Canada, Mexico 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 six months of 2002, ~~the~~reconciled ~~net effect of foreign currency transactions~~ to ~~the~~ ~~income statement was approximately thirty thousand dollars. Due to changes in foreign currency exchange rates during the first six months of 2001, primarily a strengthening of the U.S. dollar~~those ~~against many European currencies, we recognized foreign currency transaction losses of $1.5 million. Such losses were recorded in other expense in the statement of operations. (See~~ ~~note 3~~reported toby ~~the~~ALARIS ~~condensed~~Medical ~~consolidated~~Systems ~~financial~~is ~~statements.)~~as follows:

Item 3. Quantitative and Qualitative Disclosures About Market Risk

	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

~~Risk Management—Foreign Currency Hedging Program, Derivative Financial Instruments and Market Risk~~ 26

AsThe ~~part~~second ofcondition ~~our~~which ~~risk~~must be ~~management~~satisfied ~~strategy,~~prior weto ~~put~~making ~~in place~~ a ~~hedging~~restricted ~~program~~payment ~~beginning~~is inthat ~~2001~~the ~~under~~distribution, together ~~which~~with wecertain ~~enter~~other ~~into~~restricted ~~forward~~payments, ~~foreign~~may ~~exchange~~not ~~and~~exceed ~~currency~~a sum ~~option~~ determined ~~contracts~~by reference to ~~hedge~~ALARIS aMedical ~~portion~~Systems’ ofcumulative ~~forecasted~~Consolidated ~~cash~~Net Income ~~receipts~~(as ~~and~~defined ~~payments denominated~~ in ~~currencies~~the ~~other~~indentures) ~~than~~for the ~~U.S.~~period ~~dollar.~~since ~~These~~January ~~contracts~~1, ~~are~~1997 ~~entered~~and cash ~~into~~capital tocontributions ~~reduce~~received ~~the~~after ~~risk~~such ~~that our earnings and cashflows~~date, ~~resulting~~less ~~from~~restricted ~~certain~~payments made. This ~~forecasted~~condition ~~transactions,~~provides ~~will~~that bethe Consolidated ~~affected~~Net byIncome ~~changes~~of inALARIS ~~foreign~~Medical ~~currency~~Systems ~~exchange~~will ~~rates.~~be ~~However,~~added weto ~~may~~the beamount available ~~impacted~~each byquarter ~~changes~~until insuch ~~foreign~~time ~~exchange~~as ~~rates~~historical ~~related to~~net ~~the~~losses ~~unhedged portion~~ of ~~the~~$30.6 million ~~forecasted~~are ~~transactions~~exhausted. ~~The~~Subsequent ~~success~~to ofsuch ~~the hedging program depends~~time, in50% ~~part,~~of onfuture ~~forecasts~~ALARIS ofMedical Systems ~~our~~net ~~transactions~~income inwill ~~various~~be ~~currencies~~added ~~(primarily~~to the ~~Euro)~~amount available. At ~~Hedges~~September ~~are placed~~30, ~~for periods consistent with identified exposures~~2002, ~~but generally no longer than~~ the ~~end~~amount ~~of the year~~ available for ~~which~~future werestricted ~~have~~payments ~~substantially~~was $24.5 million.

27The following represents the changes in the amount available for restricted payments:

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.

	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	)

~~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.~~ (A) The ~~counterparties~~ toALARIS ~~these~~Medical ~~contracts~~Systems' ~~are~~indentures ~~major~~allow ~~financial institutions. We do not have significant exposure to any one counterparty. We believe the risk of loss related to counterparty default is remote~~certain ~~and~~ “restricted ~~would~~payments” ~~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~~made towithout ~~our~~meeting ~~financial results. (See note 3 to~~ the ~~condensed~~Fixed ~~consolidated~~Charge ~~financial statements~~Coverage Ratio.)

28The 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 ~~Part II Other~~ Notes ~~Information~~ 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

~~Item 6. Exhibits and Reports on Form 8-K~~ 27

10.2	Addendum to the Employment Letter dated April 13, 1999 by and between David L. Schlotterbeck, ALARIS Medical and ALARIS Medical Systems dated May 22, 2002.	Filed herewith
99.1	Certification 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 Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith

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.)

~~None~~ 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).

29 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 ~~SIGNATURES~~ 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.

~~Pursuant~~ Should toALARIS ~~the~~Medical ~~requirements~~Systems not ofrepay ~~the~~its ~~Securities~~indebtedness ~~Exchange~~at ~~Act~~maturity ofin ~~1934~~2006, should Holdings not repay the Senior ~~registrant~~Discount ~~has~~Notes ~~duly~~in ~~caused~~2008, ~~this~~or ~~report~~should toALARIS Medical Systems not be ~~signed~~able to make distributions to Holdings commencing in 2004 in order to permit Holdings to make cash interest payments on ~~its~~the ~~behalf~~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 ~~the~~Holdings, ~~undersigned~~ALARIS Medical Systems, or both, and possible acceleration of all or a portion of such ~~thereunto~~ indebtedness, ~~duly~~unless ~~authorized.~~Holdings, ALARIS Medical Systems, or both, could refinance such indebtedness or obtain the required funds from other sources.

	ALARIS MEDICAL SYSTEMS, INC. (Registrant)
Date: August 8, 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)

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.

~~QuickLinks~~ 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 4^th 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

SECURITIES EXCHANGE ACT RULE 13a-14

I, William C. Bopp, certify that:

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

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;

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

Date: October 31, 2002

/s/ WILLIAM C. BOPP
William C. Bopp
Senior Vice President and Chief Financial Officer

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