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

        (Mark One)

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

                     For the quarterly period ended March 31, 2004 or

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

                     For the transition period from ___________ to ___________

Commission File Number:                                                      1-10207
                                                         ______________________________________________


ALARIS MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Delaware 13-3492624
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

10221 Wateridge Circle, San Diego, CA 92121  
(Address of principal executive offices)                (Zip Code)

  
(858) 458-7000
(Registrant's telephone number, including area code)


(Former name, former address, and former fiscal year, if changed since last report)


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

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

As of April 12, 2004, the registrant had 72,249,796 shares of common stock outstanding.

Page 1 of 28


ALARIS MEDICAL SYSTEMS, INC.

INDEX

PART I. FINANCIAL INFORMATION    
   
Item 1 - Financial Statements:  
   
               Consolidated Statement of Operations for the three  
              months ended March 31, 2004 and 2003 (unaudited)   3  
   
               Consolidated Balance Sheet at March 31, 2004 (unaudited) and  
               December 31, 2003   4  
   
                Consolidated Statement of Cash Flows for the three months ended  
              March 31, 2004 and 2003 (unaudited)   5  
   
                Consolidated Statement of Changes in Stockholders' Equity and  
               Comprehensive Income for the period from December 31, 2003 to March  
               31, 2004 (unaudited)   6  
   
               Notes to the Condensed Consolidated Financial Statements (unaudited)   7  
   
Item 2 - Management's Discussion and Analysis of Financial Condition and  
               Results of Operations   15  
   
Item 3 - Quantitative and Qualitative Disclosures About Market Risk   25  
   
Item 4 - Controls and Procedures   26  
   
PART II. OTHER INFORMATION  
   
Item 6 - Exhibits and Reports on Form 8-K   27  






        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.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(Dollar and share amounts in thousands, except per share data)

Three Months Ended March 31,
2004
2003
 
Sales     $ 134,206   $ 121,174  
Cost of sales       58,193     58,000  
    Gross profit       76,013     63,174  
Selling and marketing expenses       27,878     24,242  
General and administrative expenses       12,854     11,142  
Research and development expenses       11,018     8,798  
    Total operating expenses       51,750     44,182  
Interest income from sales-type capital leases       611     873  
    Income from operations       24,874     19,865  
Other income (expenses):    
    Interest income       127     222  
    Interest expense       (6,123 )   (14,556 )
    Recapitalization expenses (Note 2)       -     (1,545 )
    Other, net       (728 )   189  
        Total other expense       (6,724 )   (15,690 )
Income before income taxes       18,150     4,175  
Provision for income taxes       6,534     1,628  
Net income     $ 11,616   $ 2,547  
    Net income per common share, basic     $ .16   $ .04  
    Net income per common share, diluted     $ .15   $ .04  
Weighted average common shares outstanding, basic       71,800     59,772  
Weighted average common shares outstanding, diluted       75,966     63,776  

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

– 3 –


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

ASSETS

March 31,
2004
December 31,
2003
(Unaudited)
Current assets:            
    Cash and cash equivalents     $ 31,700   $ 45,914  
    Receivables, net       80,940     92,403  
    Inventories       58,091     52,149  
    Deferred tax assets, net, current       27,910     31,420  
    Prepaid expenses and other current assets       7,315     6,866  
      Total current assets       205,956     228,752  
 
Net investment in sales-type capital leases, less current portion       7,580     9,219  
Property, plant and equipment, net       76,910     69,897  
Other non-current assets       35,950     37,256  
Goodwill       143,984     143,984  
Intangible assets, net       87,331     87,877  
      $ 557,711   $ 576,985  

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:            
    Current portion of long-term debt     $ 2,450   $ 2,450  
    Accounts payable       26,953     22,760  
    Accrued expenses and other current liabilities       56,959     76,446  
      Total current liabilities       86,362     101,656  
 
Long-term debt       335,713     356,325  
Other non-current liabilities       27,644     27,221  
      Total non-current liabilities       363,357     383,546  
 
Contingencies and litigation (Note 9)    
 
Stockholders' equity:                
    Non-redeemable preferred stock, authorized 9,000 shares,    
      issued and outstanding: none       -     -  
    Common stock, authorized 85,000 shares at $.01 par value;                
      issued and outstanding: 72,201 and 71,320 shares at                
      March 31, 2004 and December 31, 2003, respectively       722     713  
    Capital in excess of par value       278,147     274,109  
    Accumulated deficit       (173,264 )   (184,880 )
    Accumulated other comprehensive income       2,387     1,841  
      Total stockholders' equity       107,992     91,783  
      $ 557,711   $ 576,985  

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

– 4 –


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

Three Months Ended March 31,
2004
2003
Cash flows from operating activities:            
   Net income     $ 11,616   $ 2,547  
    Adjustments to reconcile net income to net cash                
       provided by operating activities:                
      Depreciation and amortization       7,181     6,299  
      Net loss on disposal of property, plant and equipment       76     246  
      Debt discount and issue costs amortization and write-offs       863     668  
      Accretion of bond interest       -     4,599  
      Recapitalization expenses (Note 2)       -     1,545  
      (Increase) decrease in assets:                
        Receivables, net       11,680     18,439  
        Inventories       (5,946 )   (2,198 )
        Prepaid expenses and other current assets       5,381     2,332  
        Net investment in sales-type capital leases, non-current portion       1,639     947  
        Other non-current assets       (73 )   224  
      Increase (decrease) in liabilities:                
        Accounts payable       4,314     2,430  
        Accrued expenses and other current liabilities       (19,374 )   669  
        Other non-current liabilities       423     (210 )
Net cash provided by operating activities       17,780     38,537  
Cash flows from investing activities:    
   Capital expenditures       (12,736 )   (7,012 )
   Patents, trademarks and other       (233 )   (113 )
   Proceeds from disposal of property, plant and equipment       5     -  
Net cash used in investing activities       (12,964 )   (7,125 )
Cash flows from financing activities:                
   Repurchase of debt and related costs       -     (25,000 )
   Principal payments on long-term debt       (20,613 )   -  
   Proceeds from exercise of stock options       1,743     1,615  
Net cash used in financing activities       (18,870 )   (23,385 )
Effect of exchange rate changes on cash       (160 )   191  
Net (decrease) increase in cash       (14,214 )   8,218  
Cash and cash equivalents at beginning of period       45,914     69,739  
Cash and cash equivalents at end of period     $ 31,700   $ 77,957  

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

– 5 –


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

Common Stock
Shares   Amount 		Capital in
Excess of
Par Value 		Accumulated
Deficit 		Accumulated
Other
Comprehensive
Income 		Total
Stockholders’
Equity 		Compre-
hensive
Income
                   
Balance at December 31, 2003       71,320   $ 713   $ 274,109   $ (184,880 ) $ 1,841 $ 91,783    
                   
Comprehensive income:    
   Net income for the period                   11,616       11,616 $ 11,616
   Equity adjustment from foreign    
     currency translation                       666     666     666  
   Effects of cash flow hedges included                          
     in other comprehensive income                          
     (net of tax expense of $111)                       (120 )   (120 )   (120 )
Comprehensive income                             $ 12,162
Exercise of stock options       881     9     1,734             1,743      
 
Tax benefit from exercise of