---

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

| | (Mark One)
| | ----------

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

| | For
the quarterly period ended September 30, 2003 or
| | ----------------------------------------------------

|[   ] | Transition  Report Pursuant to Section 13 or 15(d) of the Securities  Exchange
                              Act of 1934
|----- | ------------------------------------------------------------------------------------------------------------------------

| | For
the transition period from ___________ to ___________
| | ---------------------------------------------------------

Commission File Number:      
                  
                  
        

1-10207
                  
                  
                  
______________________________________________

|                                                                                    |                                     
|----------------------------------------------------------------------------------- | ------------------------------------
|ALARIS MEDICAL SYSTEMS, INC.                                                       
|                                                                                   
|(Exact name of registrant as specified in its charter)                             
|Delaware                                                                            | 13-3492624                          
|                                                                                   
|(State or other jurisdiction of incorporation or organization)                      | (I.R.S. Employer Identification No.)
|10221 Wateridge Circle, San Diego, CA 92121                                         |                                     
|                                                                                   
|(Address of principal executive offices)
               (Zip Code)                  |                                     
|(858) 458-7000                                                                     
|                                                                                   
|(Registrant's telephone number, including area code)                               
|                                                                                   
|                                                                                   
|(Former name, former address, and former fiscal year, if changed since last report)

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

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

As of October 8, 2003, the registrant had 71,013,793 shares of common stock outstanding.

Page 1 of 35

---

# ALARIS MEDICAL
SYSTEMS, INC.

---

# INDEX

|                                                                          | 
|------------------------------------------------------------------------- | 
|PART I. FINANCIAL INFORMATION                                             | 
|                                                                          | 
|Item 1 - Financial Statements:                                            | 
|                                                                          | 
|Condensed consolidated statement of operations for the three and nine     | 
|months ended September 30, 2003 and 2002 (unaudited)                      | 
|                                                                          | 
|Consolidated balance sheet at September 30, 2003 (unaudited) and          | 
|December 31, 2002                                                         | 
|                                                                          | 
|Condensed consolidated statement of cash flows for the nine months ended  | 
|September 30, 2003 and 2002 (unaudited)                                   | 
|                                                                          | 
|Condensed consolidated statement of changes in stockholders' equity and   | 
|comprehensive loss for the period from December 31, 2002 to September     | 
|30, 2003 (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                                          | 
|                                                                          | 
|PART II. OTHER INFORMATION                                                | 
|                                                                          | 
|Item 6 - Exhibits and Reports on Form 8-K                                 | 

---

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

---

FORM 10  Q PART 1-ITEM 1 FINANCIAL STATEMENTS

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

---

|                                            | Three Months Ended
September 30, | Nine Months Ended
September 30, |   |        
|------------------------------------------- | -------------------------------- | ------------------------------- | - | -------
|
|Sales                                       |                                  |                                 | $ | 130,454
|Cost of sales                               |                                  |                                 |   | 60,035 
|                                            |                                  |                                 |   |        
|Gross profit                                |                                  |                                 |   | 70,419 
|                                            |                                  |                                 |   |        
|Selling and marketing expenses              |                                  |                                 |   | 25,284 
|General and administrative expenses         |                                  |                                 |   | 11,902 
|Research and development expenses           |                                  |                                 |   | 9,635  
|Restructuring and other non-recurring items |                                  |                                 |   | -      
|                                            |                                  |                                 |   |        
|Total operating expenses                    |                                  |                                 |   | 46,821 
|                                            |                                  |                                 |   |        
|Interest income from sales-type             |                                  |                                 |   |        
|capital leases                              |                                  |                                 |   | 780    
|                                            |                                  |                                 |   |        
|Income from operations                      |                                  |                                 |   | 24,378 
|                                            |                                  |                                 |   |        
|Other income (expenses):                    |                                  |                                 |   |        
|Interest income                             |                                  |                                 |   | 119    
|Interest expense                            |                                  |                                 |   | (6,612 
|Recapitalization expenses                   |                                  |                                 |   | -      
|Other, net                                  |                                  |                                 |   | (261   
|                                            |                                  |                                 |   |        
|Total other expense                         |                                  |                                 |   | (6,754 
|                                            |                                  |                                 |   |        
|Income (loss) before income taxes           |                                  |                                 |   | 17,624 
|Provision for (benefit from) income taxes   |                                  |                                 |   | 6,695  
|                                            |                                  |                                 |   |        
|Net  income (loss)                          |                                  |                                 | $ | 10,929 
|                                            |                                  |                                 |   |        
|                                            |                                  |                                 |   |        
|Net income (loss) per common share, basic   |                                  |                                 | $ | .15    
|                                            |                                  |                                 |   |        
|Net income (loss) per common share, diluted |                                  |                                 | $ | .15    
|                                            |                                  |                                 |   |        
|Weighted average common shares              |                                  |                                 |   |        
|outstanding, basic                          |                                  |                                 |   | 70,716 
|                                            |                                  |                                 |   |        
|Weighted average common shares              |                                  |                                 |   |        
|outstanding, diluted                        |                                  |                                 |   | 75,250 
|                                            |                                  |                                 |   |        

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

---

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

---

# ASSETS

|                                                                  | September 30,
      2003 | December 31,
      2002
|----------------------------------------------------------------- | ------------------------ | -----------------------
|                                                                  | (Unaudited)              |                        
|Current assets:                                                   |                          |                        
|Cash and cash equivalents                                         |                          |                        
|Receivables, net                                                  |                          |                        
|Inventories                                                       |                          |                        
|Deferred tax assets, net, current                                 |                          |                        
|Prepaid expenses and other current assets                         |                          |                        
|                                                                  |                          |                        
|Total current assets                                              |                          |                        
|                                                                  |                          |                        
|Net investment in sales-type capital leases, less current portion |                          |                        
|Property, plant and equipment, net                                |                          |                        
|Other non-current assets                                          |                          |                        
|Goodwill                                                          |                          |                        
|Intangible assets, net                                            |                          |                        
|                                                                  |                          |                        
|                                                                  |                          |                        
|                                                                  |                          |                        
|                                                                  |                          |                        

# LIABILITIES AND
STOCKHOLDERS' EQUITY

|                                                                                              |  | 
|--------------------------------------------------------------------------------------------- |  | 
|Current liabilities:                                                                          |  | 
|Current portion of long-term debt                                                             |  | 
|Accounts payable                                                                              |  | 
|Accrued expenses and other current liabilities                                                |  | 
|                                                                                              |  | 
|Total current liabilities                                                                     |  | 
|                                                                                              |  | 
|Long-term debt                                                                                |  | 
|Other non-current liabilities                                                                 |  | 
|                                                                                              |  | 
|Total non-current liabilities                                                                 |  | 
|                                                                                              |  | 
|Contingent liabilities and commitments (Note 9)                                               |  | 
|                                                                                              |  | 
|Stockholders' equity:                                                                         |  | 
|Non-redeemable preferred stock, authorized 9,000 shares,                                      |  | 
|issued and outstanding: none                                                                  |  | 
|Common stock, authorized 85,000 shares at $.01 par value;                                     |  | 
|issued 71,449 and 60,045 shares at September 30, 2003                                         |  | 
|and December 31, 2002, respectively                                                           |  | 
|Capital in excess of par value                                                                |  | 
|Accumulated deficit                                                                           |  | 
|Treasury stock, at cost, 453 shares issued at  September 30, 2003
      and December 31, 2002 |  | 
|Accumulated other comprehensive loss                                                          |  | 
|                                                                                              |  | 
|Total stockholders' equity                                                                    |  | 
|                                                                                              |  | 
|                                                                                              |  | 
|                                                                                              |  | 
|                                                                                              |  | 

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

---

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

|                                                                                        | Nine Months Ended
September 30, | 
|--------------------------------------------------------------------------------------- | ------------------------------- | 
|
|Cash flows from operating activities:                                                   |                                 | 
|Net (loss) income                                                                       |                                 | 
|Adjustments to reconcile net income to net cash                                         |                                 | 
|provided by operating activities:                                                       |                                 | 
|Depreciation and amortization                                                           |                                 | 
|Stock options granted to non-employees for service                                      |                                 | 
|Net loss on disposal/write-off of property, plant and equipment
        and intangibles |                                 | 
|Debt discount and issue costs amortization and write-offs                               |                                 | 
|Accretion of bond interest                                                              |                                 | 
|Recapitalization expenses                                                               |                                 | 
|(Increase) decrease in assets:                                                          |                                 | 
|Receivables, net                                                                        |                                 | 
|Inventories                                                                             |                                 | 
|Prepaid expenses and other current assets                                               |                                 | 
|Deferred tax assets, net, current                                                       |                                 | 
|Net investment in sales-type capital leases, non-current portion                        |                                 | 
|Other non-current assets                                                                |                                 | 
|Increase (decrease) in liabilities:                                                     |                                 | 
|Accounts payable                                                                        |                                 | 
|Accrued expenses and other current liabilities                                          |                                 | 
|Other non-current liabilities                                                           |                                 | 
|                                                                                        |                                 | 
|Net cash provided by operating activities                                               |                                 | 
|                                                                                        |                                 | 
|Cash flows from investing activities:                                                   |                                 | 
|Capital expenditures                                                                    |                                 | 
|Patents, trademarks and other                                                           |                                 | 
|                                                                                        |                                 | 
|Net cash used in investing activities                                                   |                                 | 
|                                                                                        |                                 | 
|Cash flows from financing activities:                                                   |                                 | 
|Repurchase of debt and related costs                                                    |                                 | 
|Principal payments on long-term debt                                                    |                                 | 
|Proceeds from term loan borrowing                                                       |                                 | 
|Proceeds from issuance of long-term debt                                                |                                 | 
|Proceeds from exercise of stock options                                                 |                                 | 
|Proceeds from sale of common stock                                                      |                                 | 
|Equity issuance costs                                                                   |                                 | 
|Debt issuance costs                                                                     |                                 | 
|                                                                                        |                                 | 
|Net cash used in financing activities                                                   |                                 | 
|                                                                                        |                                 | 
|Effect of exchange rate changes on cash                                                 |                                 | 
|                                                                                        |                                 | 
|Net (decrease) increase in cash                                                         |                                 | 
|Cash and cash equivalents at beginning of period                                        |                                 | 
|                                                                                        |                                 | 
|Cash and cash equivalents at end of period                                              |                                 | 
|                                                                                        |                                 | 

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

---

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

---

|                                           | Common StockShares   Amount | Capital in
Excess ofPar Value | AccumulatedDeficit | Treasury StockShares   Amount | Accumulated
Other
Compre-
hensiveLoss | Total
Stock-
holdersEquity | Compre-
hensiveLoss |  |  
|------------------------------------------ | --------------------------- | ----------------------------- | ------------------ | ----------------------------- | ------------------------------------- | --------------------------- | ------------------- |  | -
|
|Balance at December 31, 2002               |                             |                               |                    | 60,045                        |                                       | $                           | 600                 |  | $
|                                           |                             |                               |                    |                               |                                       |                             |                     |  |  
|Comprehensive loss:                        |                             |                              
|Net loss for the period                    |                             |                               |                    |                               |                                       |                             |                     |  |  
|Equity adjustment from foreign             |                             |                              
|currency translation                       |                             |                               |                    |                               |                                       |                             |                     |  |  
|Effects of cash flow hedges included       |                             |                               |                    |                               |                                       |                             |                     |  |  
|in other comprehensive loss                |                             |                               |                    |                               |                                       |                             |                     |  |  
|(net of tax benefit of $779)               |                             |                               |                    |                               |                                       |                             |                     |  |  
|                                           |                             |                               |                    |                               |                                       |                             |                     |  |  
|Comprehensive loss                         |                             |                               |                    |                               |                                       |                             |                     |  |  
|                                           |                             |                               |                    |                               |                                       |                             |                     |  |  
|Sale of common stock                       |                             |                               |                    | 10,000                        |                                       |                             | 100                 |  |  
|Exercise of stock options                  |                             |                               |                    | 1,404                         |                                       |                             | 14                  |  |  
|Tax benefit from exercise of stock options |                             |                               |                    |                               |                                       |                             |                     |  |  
|                                           |                             |                               |                    |                               |                                       |                             |                     |  |  
|Balance at September 30, 2003              |                             |                               |                    | 71,449                        |                                       | $                           | 714                 |  | $
|                                           |                             |                               |                    |                               |                                       |                             |                     |  |  

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

---

# ALARIS MEDICAL
SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited) (Dollars and share
amounts in thousands, except per share data)

---

# NOTE 1  BUSINESS
AND STATEMENT OF ACCOUNTING POLICY

# The Company:

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

# Statement of accounting
policy:

The
accompanying Condensed Consolidated Financial Statements have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to those rules and regulations, although the Company
believes that the disclosures herein are adequate.

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

# Use of estimates:

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

# Collateral deposit:

The
Company was required at September 30, 2003 to maintain $4,686, in collateralized deposit
accounts with commercial banks as security against open foreign exchange contracts,
primarily forward contracts. Such amounts are classified as cash and cash equivalents in
the Companys Consolidated Balance Sheet. This collateral amount will fluctuate as
open foreign exchange contracts are settled throughout 2003 and 2004. Under the secured
credit agreement (discussed in Note 5), the Company has the ability to enter into similar
foreign exchange contracts with lenders who will not require restricted cash balances to
be maintained.

-7-

---

# NOTE 1  BUSINESS
AND STATEMENT OF ACCOUNTING POLICY (Continued)

# Shipping and handling
costs:

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

# Product warranties and
deferred service revenues:

Generally,
the Companys standard warranty for infusion instruments is a one- or two-year
warranty (based on the specific product) that covers both parts and labor. In some
instances, a customer may elect to have parts-only warranty coverage, which adds a year to
the coverage period. Patient monitoring products generally have a three-year parts and
labor warranty. For patient monitoring products the Company sells that are manufactured by
a third party, the Company passes on to the customer the warranty provided by the
manufacturer. The Company provides for the estimated cost of product warranties at the
time revenue is recognized. Product warranties are recorded in other current and other
non-current liabilities.

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

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

Changes
in the liability for product warranty and deferred revenue associated with these service
programs for the period ended September 30, 2003 was as follows:

|                                                 | 
|------------------------------------------------ | 
|Product warranties:                              | 
|Balance at December 31, 2002                     | 
|Accruals for warranties issued during the period | 
|Adjustments to pre-existing warranties           | 
|Settlements made during the period               | 
|                                                 | 
|Balance at September 30, 2003                    | 
|                                                 | 
|                                                 | 
|Deferred service revenues:                       | 
|Balance at December 31, 2002                     | 
|Amounts added to deferred revenue                | 
|Amounts recorded as revenue during the period    | 
|                                                 | 
|Balance at September 30, 2003                    | 
|                                                 | 

-8-

---

# NOTE 1  BUSINESS
AND STATEMENT OF ACCOUNTING POLICY (Continued)

# Net income per common
share:

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

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

# Stock-based compensation:

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

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

-9-

---

# NOTE 1  BUSINESS
AND STATEMENT OF ACCOUNTING POLICY (Continued)

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

|                                                      | Three Months Ended
September 30, | Nine Months Ended
September 30, |   |       
|----------------------------------------------------- | -------------------------------- | ------------------------------- | - | ------
|
|Net income (loss), as reported                        |                                  |                                 | $ | 10,929
|Deduct:  Total stock-based employee compensation      |                                  |                                
|expense determined under fair value based method      |                                  |                                
|for all awards, net of related tax effects            |                                  |                                 |   | (843  
|                                                      |                                  |                                 |   |       
|Pro forma net income (loss)                           |                                  |                                 | $ | 10,086
|                                                      |                                  |                                 |   |       
|                                                      |                                  |                                 |   |       
|Earnings per share:                                   |                                  |                                
|Net income (loss) per common share, basic             |                                  |                                 | $ | .15   
|                                                      |                                  |                                 |   |       
|Net income (loss) per common share, diluted           |                                  |                                 | $ | .15   
|                                                      |                                  |                                 |   |       
|Net income (loss) per common share, pro forma basic   |                                  |                                 | $ | .14   
|                                                      |                                  |                                 |   |       
|Net income (loss) per
common share, pro forma diluted |                                  |                                 | $ | .13   
|                                                      |                                  |                                 |   |       

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

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

-10-

---

# NOTE 2 
RECAPITALIZATION EXPENSES

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

In
April 2003, Former AMS repurchased $2,500 principal amount of its 11-5/8% Senior Secured
Notes due 2006 (Senior Secured Notes), at a total cost of $2,925, representing
a premium of 17% over such principal amount. Such premium, along with a write-off of
unamortized debt issuance costs related to the purchased Senior Secured Notes, was
recorded as a charge of $503 in the Companys second quarter 2003 operating results.

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

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

The
Company used the net proceeds from the sale of the Notes and the common stock, borrowings
under the $245,000 bank term loan and approximately $51,000 of its existing cash: (i) to
repurchase, pursuant to the tender offers described above: (a) all outstanding Senior
Discount Notes at a price of 105.375% of the principal amount thereof at maturity, (b) all
outstanding Senior Secured Notes at a price of 122% of principal amount thereof, plus
accrued interest and (c) all (except $25, which was not tendered) Senior Subordinated
Notes at a price of 103.75% of principal amount thereof, plus accrued interest;
and (ii) to pay related fees and expenses. All of such transactions occurred in June
2003. In August 2003, ALARIS Medical Systems retired the remaining $25 of Senior
Subordinated Notes at a price of 103.25%.

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

-11-

---

# NOTE 2 
RECAPITALIZATION EXPENSES (Continued)

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

# NOTE 3 INTANGIBLE
ASSETS

Acquired intangible assets were as
follows:

|                                      | September 30, 2003 | December 31, 2002 |   |        
|------------------------------------- | ------------------ | ----------------- | - | -------
|
|Patents                               |                    |                   | $ | 29,021 
|Distribution rights and license       |                    |                  
|agreements                            |                    |                   |   | 8,462  
|                                      |                    |                   |   |        
|Subtotal other intangible assets, net |                    |                   |   |        
|(subject to amortization)             |                    |                   |   | 37,483 
|Acquired other intangible assets      |                    |                  
|(not subject to amortization):        |                    |                  
|IVAC trade name                       |                    |                   |   | 74,750 
|                                      |                    |                   |   |        
|Intangible assets, net                |                    |                   | $ | 112,233
|                                      |                    |                   |   |        
|                                      |                    |                   |   |        

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

|            | 
|----------- | 
|
|Fiscal Year | 
|2003 (A)    | 
|2004        | 
|2005        | 
|2006        | 
|2007        | 

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

-12-

---

# NOTE 4  INVENTORIES

Inventories comprise the following:

|                | September 30,
2003 | December 31,
2002
|--------------- | ------------------ | -----------------
|
|Raw materials   |                    |                  
|Work-in-process |                    |                  
|Finished goods  |                    |                  
|                |                    |                  
|                |                    |                  
|                |                    |                  
|                |                    |                  

# NOTE 5  LONG-TERM
DEBT

Long-term debt consists of the
following:

|                                                | September 30,
2003 | December 31,
2002
|----------------------------------------------- | ------------------ | -----------------
|
|Bank credit facility, total term loans due 2009 |                    |                  
|7-1/4% senior subordinated notes due 2011       |                    |                  
|9-3/4% senior subordinated notes due 2006       |                    |                  
|11-5/8% senior secured notes due 2006           |                    |                  
|11-1/8% senior discount notes due 2008          |                    |                  
|                                                |                    |                  
|                                                |                    |                  
|Current portion                                 |                    |                  
|                                                |                    |                  
|Long-term debt                                  |                    |                  
|                                                |                    |                  
|                                                |                    |                  

# Bank credit facility:

As
part of the recapitalization described in Note 2, on June 30, 2003, the Company
established a $275,000 bank credit facility (the Credit Facility) consisting
of a six-year $245,000 term loan and a five-year $30,000 revolving credit facility. The
Company has not borrowed any portion of the revolving credit facility. The term loan bears
interest at an annual rate equal to current LIBOR (or, at the Companys option, a
fluctuating base rate), plus 2.75%. The Company can elect to use either a one-, two-,
three-, or six-month LIBOR rate. The Company has made elections resulting in a weighted
average interest rate at September 30, 2003 of 3.87% (1.12% plus the margin of 2.75%) per
annum. Payments of 0.25% of the original principal balance on the term loan plus accrued
interest are due each quarter, with any unpaid principal balance due at maturity. The
Company is required to pay a quarterly commitment fee at an annual rate of 0.5% on the
unused portion of the revolving credit facility. As a result of the Companys receipt
of proceeds from the sale of 900 additional shares of common stock on July 2, 2003, in
connection with the exercise by the underwriters of their over-allotment option to
purchase common stock, on July 10, 2003, the Company made a $10,000 prepayment of
principal under the term loan. Utilizing cash flow from operations, the Company made two
additional principal prepayments of $10,000 each during the third quarter of 2003, along
with the first scheduled principal payment of $613 on September 30, 2003.
Non-cash  charges of $748 for the  write-off of financing  costs related to the  prepayments  were recorded in the
Companys interest expense in the third quarter.

Subsequently,  in October
 2003,  the Company  made a principal  prepayment  of $10,000  utilizing  cash flow from
operations.  A non-cash  charge of $241 for the write-off of financing  costs related to
the  prepayment  will be recorded in the Companys interest expense in the fourth quarter.

-13-

---

# NOTE 5  LONG-TERM
DEBT (Continued)

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

The
Credit Facility contains various operating, financial and reporting covenants. As of
September 30, 2003, the Company was in compliance with all such covenants.

# Senior subordinated
notes:

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

# NOTE 6 
RESTRUCTURING AND OTHER NON-RECURRING ITEMS

During
the first quarter of 2002, the Company recorded a non-recurring benefit of $1,125 for an
insurance settlement. The settlement related to damages and losses incurred at one of the
Companys disposable products manufacturing plants in Mexico in 1993 as a result of
flooding. The contingency related to the insurance settlement was resolved in the first
quarter of 2002, when the Company received proceeds of $1,000 and notification of an
additional payment due of $125, which was received during April 2002.

Also
during the first quarter of 2002, the Company initiated a plan to restructure its
technical services operations in Central Europe. In this connection, the Company recorded
a charge of $540 which included $400 for severance costs for 21 positions affected by the
relocation of the German operation and $140 related to lease termination expenses. As of
September 30, 2003, all severance payments have been made to the identified employees and
$47 in lease termination payments have been made.

-14-

---

# NOTE 7  SEGMENT
INFORMATION

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

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

The
table below presents information about reported segments for the:

Three months ended September 30:

|                       | North
America | International | Total
|---------------------- | ------------- | ------------- | -----
|
|2003                   |               |               |      
|Sales                  |               |               | $    
|Income from operations |               |               |      
|2002                   |               |               |      
|Sales                  |               |               | $    
|Income from operations |               |               |      

Nine months ended September 30:

|                       | North
America | International | Total
|---------------------- | ------------- | ------------- | -----
|
|2003                   |               |               |      
|Sales                  |               |               | $    
|Income from operations |               |               |      
|2002                   |               |               |      
|Sales                  |               |               | $    
|Income from operations |               |               |      

# NOTE 8  CASH FLOW
INFORMATION

For
the nine months ended September 30, 2003 and 2002, federal, state and foreign income taxes
paid, net of tax refunds, totaled $3,193 and $7,097, respectively. Interest paid during
the nine months ended September 30, 2003 and 2002 totaled $22,513 and $21,706,
respectively.

-15-

---

# NOTE 9 
CONTINGENCIES AND LITIGATION

# Litigation:

In May
2003, the Company purchased from Filtertek, Inc. a worldwide, unrestricted patent license
related to needle-free valve products. The purchase price of the license of $7,300 has
been capitalized and is included in the Companys balance sheet under the caption
Other non-current assets and is being amortized on a straight-line basis over
a 10 year estimated useful life. All remaining claims in a patent litigation relating to
needle-free systems between Filtertek and the Company (and one of its customers), as
discussed in note 14 to our Consolidated Financial Statements contained in our Annual
Report on Form 10-K (filed under our former name ALARIS Medical, Inc.) for the
year ended December 31, 2002, have been dismissed by the United States District Court for
the District of Northern Illinois.

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

# Cal Pacifico:

During
the years 1988 through 1995, Cal Pacifico acted as the Companys United States
customs broker and importer of record with respect to the importation into the United
States of finished products assembled at the Companys two maquiladora assembly
plants in Tijuana, Mexico. Cal Pacifico received 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 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.

# Intellectual Property
Indemnification:

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

-16-

---

# PART I  ITEM 2

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS

---

# FORWARD-LOOKING
STATEMENTS

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

# The Company:

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

# Overview:

We develop and market  products for the safe  delivery of  intravenous  (IV)  medications.  The  Companys IV  medication  and
infusion  therapy  delivery  systems,  software  applications,  needle-free  disposables  and  related  monitoring
equipment  are  marketed  in the  United  States  and  internationally.  ALARIS  Medical  Systems  smart pumps, with the
proprietary  Guardrails  Safety  Software,  help to reduce  the risks and costs of  medication  errors,  help to  safeguard
patients and clinicians and gather and record clinical information for review, analysis and interpretation.

-17-

---

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

# Critical Accounting
Policies and Estimates:

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

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 estimates: 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. However, the inherent nature of estimates is that actual results will likely
be different from these estimates. Our accounting practices are discussed in more detail
in Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations and Note 2 to our Consolidated Financial Statements contained
in our Annual Report on Form 10-K (filed under our former name ALARIS Medical,
Inc.) for the year ended December 31, 2002.

# Results of Operations:

The
following table sets forth, for the periods indicated, selected financial information
expressed as a percentage of sales:

|                                               | Three Months Ended
September 30, | Nine Months Ended
September 30, |   |      
|---------------------------------------------- | -------------------------------- | ------------------------------- | - | -----
|
|
|Sales                                          |                                  | 100.0                           | % | 100.0
|Cost of sales                                  |                                  | 46.0                            |   | 49.1 
|                                               |                                  |                                 |   |      
|Gross margin                                   |                                  | 54.0                            |   | 50.9 
|Selling and marketing expenses                 |                                  | (19.4                           | ) | (19.9
|General and administrative expenses            |                                  | (9.1                            | ) | (8.9 
|Research and development expenses              |                                  | (7.4                            | ) | (7.1 
|Restructuring and other non-recurring items    |                                  | -                               |   | -    
|Interest income from sales-type capital leases |                                  | 0.6                             |   | 0.9  
|                                               |                                  |                                 |   |      
|Income from operations                         |                                  | 18.7                            |   | 15.9 
|Interest expense, net                          |                                  | (5.0                            | ) | (12.8
|Recapitalization expenses                      |                                  | -                               |   | -    
|Other, net                                     |                                  | (0.2                            | ) | (0.3 
|                                               |                                  |                                 |   |      
|Income (loss) before income taxes              |                                  | 13.5                            |   | 2.8  
|(Provision for) benefit from income taxes      |                                  | (5.1                            | ) | (1.1 
|                                               |                                  |                                 |   |      
|Net income (loss)                              |                                  | 8.4                             | % | 1.7  
|                                               |                                  |                                 |   |      
|                                               |                                  |                                 |   |      

-18-

---

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

|                              | Three Months Ended
September 30, | Nine Months Ended
September 30, |   |       |  |  
|----------------------------- | -------------------------------- | ------------------------------- | - | ----- |  | -
|
|
|
|North America                 |                                  |                                 |   |       |  |  
|Infusion Instruments          |                                  |                                 | $ | 24.5  |  | $
|Dedicated Disposables         |                                  |                                 |   | 37.8  |  |  
|Other Disposables and Service |                                  |                                 |   | 22.0  |  |  
|                              |                                  |                                 |   |       |  |  
|Subtotal                      |                                  |                                 |   | 84.3  |  |  
|Patient Monitoring            |                                  |                                 |   | 6.1   |  |  
|                              |                                  |                                 |   |       |  |  
|North America Total           |                                  |                                 | $ | 90.4  |  | $
|                              |                                  |                                 |   |       |  |  
|International                 |                                  |                                
|Infusion Instruments          |                                  |                                 | $ | 9.9   |  | $
|Dedicated Disposables         |                                  |                                 |   | 22.3  |  |  
|Other Disposables and Service |                                  |                                 |   | 6.6   |  |  
|                              |                                  |                                 |   |       |  |  
|Subtotal                      |                                  |                                 |   | 38.8  |  |  
|Patient Monitoring            |                                  |                                 |   | 1.3   |  |  
|                              |                                  |                                 |   |       |  |  
|International Total           |                                  |                                 | $ | 40.1  |  | $
|                              |                                  |                                 |   |       |  |  
|ALARIS Medical Systems Total  |                                  |                                 | $ | 130.5 |  | $
|                              |                                  |                                 |   |       |  |  

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

Sales.
          For the three months ended September 30, 2003, sales were $130.5 million, an
          increase of $17.4 million, or 15%, over the same period in the prior year. If
          currency exchange rates for the third quarter of 2003 had prevailed during the
          third quarter of 2002, sales would have been $117.3 million for the third
          quarter of 2002. Thus, excluding the effects of currency changes, the increase
          in sales for the third quarter of 2003 was $13.2 million, or 11%, over the third
          quarter of 2002.

Higher
volumes of both drug infusion instruments and disposable administration sets were the
primary factors leading to the increase in North America sales of $12.3 million, or 16%,
over the prior year. The increase in infusion instruments was primarily due to sales of
the Medley Medication Safety System and our proprietary Guardrails Safety Software. We
believe the increase in sales of dedicated disposables was due to an increase in our
installed base of infusion devices. The growth in other disposables and service was due to
an increase of approximately $2.6 million in sales of SmartSite Needle-Free Systems along
with an increase in professional services over the third quarter of 2002. The increase in
sales of drug infusion products in North America was partially offset by lower volumes of
patient monitoring instruments and associated disposables compared with the prior year.

International
sales for the third quarter of 2003 increased $5.1 million, or 15%, compared with the same
period in the prior year. Excluding the effects of currency changes, International sales
for the third quarter of 2003, increased 3% over the third quarter of 2002. This increase
was due to higher volumes of, and revenues from, dedicated disposable administration sets,
SmartSiteNeedle-Free Systems and service.

-19-

---

Gross
Profit. Gross profit increased $12.9 million, or 22%, for the quarter ended
September 30, 2003, compared with the same quarter in the prior year. The gross margin
percentage increased to 54.0% for the third quarter of 2003, from 50.9% for the third
quarter of 2002. Excluding the effects of currency changes, gross profit for the third
quarter of 2003 would have increased $10.3 million from the third quarter of 2002 and the
gross margin percentage for the third quarter of 2002 would have been 51.3%. In both Business Units,
the improved margin percentage was due to increased volume of
products manufactured and sold, an increased percentage of revenues from sales of software
products that carry a higher margin than equipment and disposables, lower warranty costs,
and generally lower product costs resulting from improved manufacturing efficiencies.

Selling
and Marketing Expenses. Selling and marketing expenses increased $2.8
million, or 12%, for the quarter ended September 30, 2003, compared with the same period
in 2002, primarily due to increased selling costs associated with higher sales volume in
the third quarter of 2003 compared with the third quarter of 2002 and to higher sales and
marketing costs related to increased personnel, consulting and related activities
supporting the continued deployment of our medication safety strategy. As a percentage of
sales, selling and marketing expenses decreased to 19.4% for the third quarter of 2003
from 19.9% for the third quarter of 2002. Excluding the effects of currency changes, the
increase in selling and marketing expenses for the third quarter of 2003 would have been
$2.0 million, or 8%, compared with the third quarter of 2002.

General
and Administrative Expenses. General and administrative expenses increased
$1.8 million, or 18%, for the quarter ended September 30, 2003, compared with the same
period in the prior year. As a percentage of sales, general and administrative expenses
increased to 9.1% for the third quarter of 2003, from 8.9% for the third quarter of 2002.
Increases in administrative expenses were largely due to higher depreciation, legal and
other professional services, and bonus expense over the same period in the prior year.
Excluding the effects of currency changes, the increase in general and administrative
expenses for the third quarter of 2003 would have been $1.5 million, or 15%, compared with
the third quarter of 2002.

Research
and Development Expenses. Research and development expenses increased
approximately $1.6 million, or 19%, for the quarter ended September 30, 2003, compared
with the same period in the prior year. The increase was due to spending associated with
new product development primarily related to our medication safety strategy, including
increased spending on new products for the international market. This higher spending was
primarily in the form of increased salaries and benefits and outside consulting. Research
and development expenses increased to 7.4% of sales for the third quarter of 2003,
compared with 7.1% of sales for the third quarter of 2002.

Interest
Income from Sales-Type Capital Leases.Interest income from sales-type
capital leases decreased $.3 million, or 28%, for the quarter ended September 30, 2003,
compared with the same quarter in 2002, due to a decrease in the contract portfolio as
more customers have utilized third party financing.

Interest
Expense.Interest expense decreased $8.0 million, or 55%, for the quarter
ended September 30, 2003, compared with the same period in the prior year. Included in
interest expense in the third quarter of 2003 is $.7 million of debt-issue cost write-offs related to $30 million
in prepayments made under our new bank credit facility (the  Credit  Facility).
 The  decrease  in  interest  expense  resulted
from the  reduction  in the
principal amount of outstanding debt and lower interest rates on debt under the Credit Facility and the Notes compared with
the interest rates on the debt which was refinanced in the second quarter recapitalization described in
Note 2 to the unaudited Condensed Consolidated Financial Statements.

-20-

---

# Nine Months Ended
September 30, 2003 Compared with Nine Months Ended September 30, 2002

Sales.
          For the nine months ended September 30, 2003, sales were $379.4 million, an
          increase of $53.4 million, or 16%, over the same period in the prior year. If
          currency exchange rates for the nine months ended September 30, 2003 had
          prevailed during the same period 2002, sales would have been $341.8 million for
          the nine months ended September 30, 2002. Thus, excluding the effects of
          currency changes, the increase in sales for the nine months ended September 30,
          2003 was $37.6 million, or 11%, over the same period in 2002.

Higher
volumes of both drug infusion instruments and disposable administration sets were the
primary factors leading to the increase in North America sales of $33.2 million, or 15%,
over the prior year. The increase in infusion instruments was primarily due to sales of
the Medley Medication Safety System and our proprietary Guardrails Safety Software. We
believe that the increase in dedicated disposables was due to an increase in our installed
base of infusion devices. The growth in other disposables and service was due to an
increase of approximately $7.5 million in sales of SmartSite Needle-Free Systems along
with an increase in professional services. The increase in sales of drug infusion products
in North America was partially offset by lower volumes of patient monitoring instruments
and associated disposables compared with the prior year.

International
sales for the nine months ended September 30, 2003 increased $20.2 million, or 20%,
compared with the same period in the prior year. Excluding the effects of currency
changes, International sales for the nine months ended September 30, 2003 increased 5%
over the same period in 2002. This increase was due to higher volumes of, and revenues
from, large volume pumps, dedicated disposable administration sets, SmartSiteNeedle-Free Systems and services compared with the same period in the prior year.

Gross
Profit. Gross profit increased $38.8 million, or 24%, for the nine months
ended September 30, 2003, compared with the same period in the prior year. The gross
margin percentage increased to 53.3% for the first nine months of 2003, from 50.1% for the
first nine months of 2002. Excluding the effects of currency changes, gross profit for the
nine months ended September 30, 2003 would have increased $27.7 million from the same
period in 2002 and the gross margin percentage for the nine months ended September 30,
2002 would have been 51.0%. In both Business Units, the improved margin
percentage was due to increased volume of products manufactured and sold, an increased
percentage of revenues from sales of software products that carry a higher margin than
equipment and disposables, lower warranty costs, and generally lower product costs
resulting from improved manufacturing efficiencies.

Selling
and Marketing Expenses. Selling and marketing expenses increased $10.0
million, or 15%, for the nine months ended September 30, 2003, compared with the same
period in 2002, primarily due to increased selling costs associated with higher sales
volume in 2003 compared with the prior year and to higher sales and marketing costs
related to increased personnel, bonus expense, consulting and related activities
supporting the continued deployment of our medication safety strategy. As a percentage of
sales, selling and marketing expenses decreased to 19.8% for the nine months ended
September 30, 2003, from 19.9% for the same period in 2002. Excluding the effects of
currency changes, the increase in selling and marketing expenses for the nine months ended
September 30, 2003 would have been $6.8 million, or 10%, compared with the same period in
2002.

General
and Administrative Expenses. General and administrative expenses increased
$4.9 million, or 16%, for the nine months ended September 30, 2003, compared with the same
period in the prior year. As a percentage of sales, general and administrative expenses
remained constant at 9.3%. Excluding the effects of currency changes, the increase in
general and administrative expenses for the nine months ended September 30, 2003 would
have been $4.2 million, or 13%, compared with the same period in 2002. Increases in
administrative expenses were largely due to higher depreciation, legal and other
professional services, and bonus expense over the same period in the prior year.

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

-21-

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

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

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

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

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

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

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

-22-

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

The
following table sets forth a reconciliation of our reported net loss and net loss per
common share for the nine months ended September 30, 2003 to our net income and net income
per share on a pro forma basis as if the recapitalization had occurred on January 1, 2003,
which pro forma amounts are non-GAAP financial measures. The pro forma data exclude the
effect of the pre-tax charges of $67.7 million we recorded in the first half of 2003.

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

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

|                                                        | Nine Months Ended
September 30, 2003 | 
|------------------------------------------------------- | ------------------------------------ | 
|
|
|Net loss, as reported                                   |                                      | 
|                                                        |                                     
|Adjustments to exclude recapitalization expenses:       |                                      | 
|Recapitalization expenses                               |                                      | 
|Income tax benefit                                      |                                      | 
|                                                        |                                      | 
|Net income, excluding recapitalization expenses         |                                      | 
|                                                        |                                      | 
|Pro forma adjustments:                                  |                                      | 
|Interest expense                                        |                                      | 
|Other, net                                              |                                      | 
|Provision for taxes                                     |                                      | 
|                                                        |                                      | 
|Net income, pro forma                                   |                                      | 
|                                                        |                                      | 
|Net loss per common share, diluted, as reported         |                                      | 
|                                                        |                                      | 
|Net income per common share, diluted, excluding         |                                      | 
|Recapitalization expenses                               |                                      | 
|                                                        |                                      | 
|Net income per common share, diluted, pro forma         |                                      | 
|                                                        |                                      | 
|Weighted average common shares outstanding, as reported |                                      | 
|Dilutive common stock equivalents                       |                                      | 
|                                                        |                                      | 
|Weighted average common shares                          |                                      | 
|outstanding,
diluted, assuming net income for period    |                                      | 
|Pro forma adjustment:                                   |                                      | 
|Weighted average effect of sale of common stock         |                                      | 
|                                                        |                                      | 
|Weighted average common shares                          |                                      | 
|outstanding diluted, pro forma                          |                                      | 
|                                                        |                                      | 
|                                                        |                                      | 

-23-

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# Liquidity and Capital
Resources

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

We
were required at September 30, 2003 to maintain $4.7 million in collateralized deposit
accounts with commercial banks as security against open foreign exchange contracts,
primarily forward contracts.

As
part of the recapitalization discussed in Note 2 to the Condensed Consolidated Financial
Statements, we established our new Credit Facility, which provides for a six-year $245
million term loan and a five-year $30 million revolving credit facility. We also sold $175
million aggregate principal amount of Notes and 9.1 million shares of common stock. We
received proceeds from the sale of the Notes of $170.6 million, net of the underwriting
discount and proceeds from the sale of our common stock of $106.9 million, net of the
underwriting discount and other expenses of $6.9 million. We used the net proceeds from
the Notes and common stock offerings, borrowings under the term loan portion of the Credit
Facility and a portion of our existing cash on hand to repurchase (pursuant to tender
offers and consent solicitations which we commenced in May 2003) substantially all of our
outstanding indebtedness. On July 2, 2003, the underwriters of the common stock offering
exercised their over-allotment option to purchase an additional 1.35 million shares at
$12.50 per share, which consisted of 0.9 million shares purchased from us and 0.45 million
shares purchased from our executive officers. We received proceeds from the sale of the
0.9 million shares, of $10.7 million, net of the underwriting discount of $0.6 million.
The recapitalization, along with earlier repurchases of debt during 2003, reduced our
outstanding indebtedness at June 30, 2003 by $107 million from the amount outstanding at
December 31, 2002, reduced our projected annual interest expense by approximately $33
million, when compared with our full year 2002 interest expense, and simplified and added
greater flexibility to our capital structure through the introduction of pre-payable bank
debt.

As
a result of our receipt of the proceeds from the sale of 0.9 million additional shares of common
stock on July 2, 2003 in connection with the exercise by the common stock underwriters of
their over-allotment option, on July 10, 2003, we made a $10 million prepayment of
principal under the term loan portion of the Credit Facility. Utilizing cash flow from
operations, we made two additional principal prepayments of $10 million each during the
third quarter of 2003, as well as the first scheduled principal payment of $0.6 million on
September 30, 2003, and a subsequent principal prepayment of $10 million in October 2003.

At
September 30, 2003, giving effect the principal payments made in the quarter of $30.6
million, we had $389.4 million of outstanding indebtedness composed of a $214.4 million
term loan under the Credit Facility and $175.0 million of the Notes. We have not borrowed
any portion of the revolving credit facility. The term loan bears interest at an annual
rate equal to current LIBOR or a fluctuating base rate, plus 2.75%. We can elect to use
either a one-, two-, three-, or six-month LIBOR rate. We have made elections resulting in
a weighted average interest rate at September 30, 2003 of 3.87% per annum (presently 1.12%
plus the margin of 2.75%). Payments of 0.25% of the original principal balance on the term
loan plus accrued interest are due each quarter, with any unpaid principal balance due at
maturity. We are required to pay a quarterly commitment fee at the rate of 0.5% per annum
on the unused portion of the revolving credit facility.

-24-

---

Pursuant
to the terms of the Credit Facility, we are required to effectively fix the variable
interest rate exposure on at least 50% of our total outstanding debt. We have met this
requirement by fixing our LIBOR rate for the remainder of 2003 and entering into two
separate interest rate swap agreements in July 2003 and September 2003 whereby $202.0
million of the term loan is effectively converted to a weighted average fixed rate of
5.36% beginning January 2, 2004. The July 2003 swap agreement has a notional amount of
$30.0 million and expires on December 30, 2005. The September 2003 swap agreement has an
original notional amount of $172.0 million that decreases on a quarterly basis to a final
notional amount of $54.0 million and expires on December 29, 2006. Our management will
continue to evaluate our short term and long term strategies related to the interest rate
risk associated with our variable rate debt. See Item 3  Quantitative and
Qualitative Disclosures about Market Risk.

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

The
Credit Facility contains various operating, financial and reporting covenants. The Notes
contain certain restrictive and reporting covenants. As of September 30, 2003, we were in
compliance with all such covenants.

After
giving effect to the $30.6 million of principal payments of the term loan under the Credit
Facility, we are required during the next twelve months (through September 30, 2004) to
make quarterly interest payments on the term loan and settlements on the two swaps totaling $11.9 million (assuming current
interest rates) and principal amortization payments totaling $2.5 million. In addition,
semi-annual interest payments on the Notes in the amounts of $6.4 million and $6.3 million
are due on January 1, 2004 and July 1, 2004, respectively.

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

In
response to customer requests to finance their payments related to equipment purchases
over time, we refer customers to an unrelated third party financing company. In recent
years, $16 million to $30 million annually, and $30 million through September 30, 2003, 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.

In
September 2003, we received approval from the Internal Revenue Service (IRS),
of our application of December 31, 2002, for a more favorable income tax treatment for
sales to third party distributors. We have previously reflected the benefit for this tax
accounting change as a reduction in our estimated current income tax liability for 2002
and 2003. This change resulted in an $8 million cash tax savings in 2002 with an
anticipated refund for income taxes previously paid in 2002 of an additional $4 million.
Based on our continued expected growth in sales to third party distributors, we anticipate
that additional cash tax savings will be realized in future years. This change affects
only cash flow and does not impact the amount of the income tax expense included in the
Condensed Consolidated Statement of Operations.

-25-

---

Net
cash provided by operating activities for the nine months ended September 30, 2003, was
$92.0 million compared with $33.7 million provided by operating activities for the same
period in 2002. Net cash used in investing activities for the nine months ended September
30, 2003 and 2002, was $30.4 million and $12.6 million, respectively. Cash used in
investing activities includes $21.9 million and $11.7 million in capital
expenditures for the nine months ended September 30, 2003 and 2002, respectively. Current
year capital spending includes $8.3 million for our new enterprise-wide information
system. We anticipate making capital expenditures of approximately $10.0 million during
the remainder of 2003. Spending from investing activities also includes $7.3 million for
the purchase of an unrestricted patent license for certain needle-free technology. Net
cash used in financing activities for the nine months ended September 30, 2003 was $93.4
million. This was primarily composed of repurchases of debt of $25.0 million in the first
quarter, $566.8 million in the second quarter, and principal prepayments under the Credit
Facility of $30.6 in the third quarter, offset by cash received in connection with the
recapitalization, including net debt proceeds of $407.8 million and net proceeds from the
sale of common stock of $117.5 million. Net cash used in financing activities for the nine
months ended September 30, 2002 was $14.3 million, and was primarily composed of principal
payments on long-term debt in 2002. During the nine months ended September 30, 2003,
federal, state and foreign taxes paid (net of refunds) were $3.2 million.

Due to the charges we recorded  during the second  quarter of 2003 in connection  with the  recapitalization  and resulting
payment of accreted  interest on the Senior Discount Notes, we anticipate  generating  substantial tax net operating losses
(NOL) for 2003. We expect that such losses will effectively  eliminate  Federal income taxes payable for 2003 and 2004 as
well as allow us to  carryback  and recover  income  taxes paid in previous  years.  The tax  effected  value of our estimated NOL is
included in current deferred tax assets, net on the Consolidated Balance Sheet as of September 30, 2003.

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

|                                   | Contractual Obligations & Commitments
(dollars in millions) |                     |                   |                   |                    
|---------------------------------- | ----------------------------------------------------------- | ------------------- | ----------------- | ----------------- | -------------------
|
|
|
|2003 (A)                           | $       
       0.6                                         | $
              2.2 | $
            1.9 | $
            0.6 | $
              5.3
|2004                               | 2.5                                                         | 25.3                | 7.8               | 3.6               | 39.2               
|2005                               | 2.5                                                         | 22.9                | 7.5               | 4.0               | 36.9               
|2006                               | 2.5                                                         | 22.2                | 3.3               | 4.0               | 32.0               
|2007                               | 2.5                                                         | 20.9                | 2.5               | 4.0               | 29.9               
|Thereafter                         | 378.8                                                       | 64.7                | 12.7              | 1.0               | 457.2              
|                                   |                                                             |                     |                   |                   |                    
|                                   |                                                             |                     |                   |                   |                    
|Total Contractual Cash Obligations | $            389.4                                          | $            158.2  | $            35.7 | $            17.2 | $            600.5 
|                                   |                                                             |                     |                   |                   |                    
|                                   |                                                             |                     |                   |                   |                    

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

-26-

---

# Seasonality

Infusion
instrument sales are typically highest in the fourth quarter due to sales compensation
plans that reward the achievement of annual quotas and the seasonal characteristics of the
industry, including hospital purchasing patterns. We anticipate that this trend will
continue but are unable to predict the effect, if any, from increased competitive
pressures. Approximately 36% of our 2002 sales of drug infusion instruments occurred
during the fourth quarter of 2002.

# Backlog

The
amount of unfilled orders, believed to be firm, at September 30, 2003 and 2002, was $9.0
million and $12.9 million, respectively.

# Foreign Operations and
Currency Exchange Rates

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 third quarter of 2003. For the nine months ended September 30, 2003 and 2002,
approximately 33% and 32%, respectively, of our sales were denominated in currencies other
than the U.S. dollar. For the nine months ended September 30, 2003 and 2002, approximately
32% and 30%, respectively, of our operating expenses were denominated in currencies other
than the U.S. dollar. These foreign currencies are primarily those of Western Europe,
Canada, Mexico, Australia and South Africa. Additionally, substantially all of the
receivables and payables of our foreign subsidiaries are denominated in currencies other
than the U.S. dollar.

We
address certain financial exposures through a controlled program of risk management that
includes the use of derivative financial instruments. At September 30, 2003, we recorded a
liability in our Consolidated Balance Sheet of $.6 million for foreign currency forward
contracts and an asset of $.5 million for option contracts. As of December 31, 2002,
forward contracts valued at $.1 million were recorded as a current asset in the
Companys Consolidated Balance Sheet.

For
the nine months ended September 30, 2003 and 2002, we recognized net charges related to
the designated cash flow hedges of forecasted foreign currency exchange transactions in
the amounts of $1.6 million and $.5 million, respectively, in other expense, which
consisted primarily of losses incurred to settle currency option contracts and premium
costs for currency option contacts. Such costs were recorded in other, net in the
Condensed Consolidated Statement of Operations. At September 30, 2003, $1.1 million ($.7
million after tax) was included in accumulated other comprehensive loss. This represents
the remaining option premium costs net of the fair value of the open option contracts that
are designated as cash flow hedges. This loss is expected to be charged to earnings during
2003 as the hedged transactions occur.

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

-27-

---

# ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

# Foreign Exchange Risk
Management

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. We categorize these instruments as entered into for purposes other than
trading. We do not utilize derivative instruments for trading or speculative purposes.
These contracts are entered into to reduce the risk that our earnings and cash flows,
resulting from certain forecasted transactions, will be affected by changes in foreign
currency exchange rates. However, we may be impacted by changes in foreign exchange rates
related to the unhedged portion of the forecasted transactions. The success of the hedging
program depends, in part, on forecasts of our transactions in various currencies
(primarily the Euro). Hedges are placed for periods consistent with identified exposures,
but generally no longer than the end of the year for which we have substantially completed
our annual business plan. We may experience unanticipated foreign currency exchange gains
or losses to the extent that there are timing differences between forecasted and actual
activity during periods of currency volatility. However, since the critical terms of
contracts designated as cash flow hedges are the same as the underlying forecasted
transaction, changes in fair value of contracts should be highly effective in offsetting
the present value of changes in the expected cash flows from the forecasted transaction.
The ineffective portion of any changes in the fair value of option contracts designated as
hedges, if any, is recognized immediately in earnings. We did not recognize material gains
or losses resulting from either hedge ineffectiveness or changes in forecasted
transactions during the nine months ended September 30, 2003 or the year ended December
31, 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. The contracts have varying maturities with none
exceeding eighteen months. Costs associated with entering into contracts are not expected
to be material to our financial results. (See Item 2, Managements Discussion
and Analysis of Financial Condition and Results of OperationsForeign Operations and
Currency Exchange Rates.)

# Interest Rate Risk

We
are exposed to market risk from changes in interest rates, which could impact our results
of operations and financial condition. The term loan under the Credit Facility bears
interest at a variable rate tied to LIBOR or other index at our option. Consistent with
our risk management policy to reduce the effect of interest rate volatility and stabilize
cash flows, and as required under the Credit Facility, we have fixed our LIBOR rate for
the remainder of 2003 and entered into two interest rate swap agreements in July 2003 and
August 2003 whereby $202 million of the term loan is effectively converted to a fixed rate
and is effective beginning January 2, 2004. Since entering into the swap agreements, the
fair value of the swaps has become negative. At September 30, 2003, the negative market
value of the swaps was $1.2 million ($.7 million after tax) and is included in accumulated
other comprehensive loss. Should we terminate the swaps in advance of their expiration,
the cost to us could be material. Absent such swaps, a one percentage point change in the
interest rate on our term loan (assuming no further principal prepayments) would result in
an approximate $2.14 million annual change in interest expense.

-28-

---

# ITEM 4. CONTROLS AND
PROCEDURES

Evaluation
of Disclosure Controls and Procedures

We
maintain disclosure controls and procedures (as defined in Rule 13a-14 under the Exchange
Act) that are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognizes
that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.

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

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, 2003.

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---

# PART II

# OTHER INFORMATION

# ITEM 6. EXHIBITS AND
REPORTS ON FORM 8-K

(a)
       Exhibits

|     |                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|     |                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                               
|3.2  | ALARIS  Medical  Systems,  Inc.  By-Laws (as amended  through
                                                             June 30, 2003).                                                                                                                                              | Incorporated by   reference   to 
                                                                Exhibit 2.3  to  the  Form  8-A12B
                                                                filed September 19, 2003.
|     |                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                               
|31.1 | Certification   by  David  L.   Schlotterbeck   Pursuant   to
                                                             Securities Exchange Act Rule 13a-15.                                                                                                                         | Filed herewith                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                               
|31.2 | Certification  by  William  C. Bopp  Pursuant  to  Securities
                                                             Exchange Act Rule 13a-15.                                                                                                                                    | Filed herewith                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                               
|32.1 | Certification  by  David  L.  Schlotterbeck  Pursuant  to  18
                                                              U.S.C.  Section 1350,  as Adopted  Pursuant to Section 906 of
                                                              the Sarbanes-Oxley Act of 2002. | Filed herewith                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                               
|32.2 | Certification  by  William  C.  Bopp  Pursuant  to 18  U.S.C.
                                                              Section  1350,  as Adopted  Pursuant  to  Section  906 of the
                                                              Sarbanes-Oxley Act of 2002.     | Filed herewith                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                               

(b)       
          Reports on Form 8-K

We filed the following Current
Reports on 8-K during the quarter ended September 30, 2003:

| | 1. | July 1, 2003, reporting under Item 5 a press release announcing the completion
               of our recapitalization and the merger of ALARIS Medical Systems,
               Inc. into ALARIS Medical, Inc.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | July 3, 2003, reporting under Item 5 a press release announcing that the
               underwriters of our recent public offering of common stock have
               exercised their over-allotment option in full to purchase an additional
               1,350,000 shares of common stock.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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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 28, 2003 |  | By: /s/ WILLIAM C. BOPP
William C. BoppSenior Vice President and Chief Financial Officer 
(Principal Financial Officer)
|------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------

| |  | By: /s/ ROBERT F. MATHEWS  
Robert F. MathewsVice President - Finance and Treasurer 
(Principal Accounting Officer)
| |  | ---------------------------------------------------------------------------------------------------------------------------------

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