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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




---

FORM 10-Q

(Mark One)

|      |  |                                                                                  
|----- |  | ---------------------------------------------------------------------------------
|[ X ] |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF1934.
|      |  |                                                                                  
|      |  | For the quarterly period ended June 30, 2003                                     

|    |  |                                                                                 
|--- |  | --------------------------------------------------------------------------------
|[ ] |  | 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: 0-18338

I-Flow Corporation




(Exact Name of Registrant as Specified in Its Charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0121984                          
|                                                               |  |                                     
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|20202 Windrow Drive, Lake Forest, CA                           |  | 92630                               
|                                                               |  |                                     
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

(949) 206-2700




(Registrants Telephone Number, Including Area Code)


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 12(b)-2 of the Exchange Act).
Yes [  ] No[ X ]

As of August 1, 2003 there were 15,924,033 shares of common stock outstanding.

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TABLE OF CONTENTS



|                             |                                                                                               |                                                                              |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- |  |  |  |  |  | 
|                             |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                                       
|                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
|                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                             
|                             |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                        
|                             | 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 1. Legal Proceedings                                                                    
|                             | Item 2. Changes in Securities and
Use of Proceeds                                            
|                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                  
|EXHIBIT 4.5                 
|EXHIBIT 4.6                 
|EXHIBIT 10.8                
|EXHIBIT 10.12               
|EXHIBIT 10.13               
|EXHIBIT 10.14               
|EXHIBIT 10.15               
|EXHIBIT 10.16               
|EXHIBIT 31.1                
|EXHIBIT 31.2                
|EXHIBIT 32.1                



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##### Table of Contents



I-FLOW CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2003

Table of Contents

|                              |                                                                                               |                                                                                                                                               |    |      |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                              |                                                                                               |                                                                                                                                               |    | Page
|                              |                                                                                               |                                                                                                                                               |    |     
|Part I: Financial Information |                                                                                               |                                                                                                                                               |    |     
|                              | Item 1. Financial Statements (Unaudited)                                                      |                                                                                                                                               |    |      |  
|                              |                                                                                               | Condensed Consolidated Balance Sheets as of June 30, 2003 and
December 31, 2002                                                               |    |      | 1 | 
|                              |                                                                                               | Condensed Consolidated Statements of Operations and Comprehensive Operations
for the three and six-month periods ended June 30, 2003 and 2002 |    |      | 2 | 
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the six-month periods
ended June 30, 2003 and 2002                                        |    |      | 3 | 
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                                                          |    |      | 4 | 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                                               |    | 10   |  
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                                               |    | 15   |  
|                              | Item 4. Controls and Procedures                                                               |                                                                                                                                               |    | 15   |  
|Part II: Other Information    |                                                                                               |                                                                                                                                               |    |     
|                              | Item 1. Legal Proceedings                                                                     |                                                                                                                                               |    | 16   |  
|                              | Item 2. Changes in Securities and Use of Proceeds                                             |                                                                                                                                               |    | 16   |  
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                                               |    | 16   |  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                                               |    | 17   |  
|Signatures                    |                                                                                               |                                                                                                                                               | 22 |     

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I-FLOW CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                       |                 |                                                                                                                                                                             |                           |   |             |            |              |   |             |            | 
|-------------------------------------- | --------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | - | ----------- | ---------- | ------------ | - | ----------- | ---------- | 
|                                       |                 |                                                                                                                                                                             |                           |   | June 30,    |            | December 31,
|                                       |                 |                                                                                                                                                                             |                           |   | 2003        |            | 2002        
|                                       |                 |                                                                                                                                                                             |                           |   |             |            |             
|ASSETS                                 |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|                                       | CURRENT ASSETS: |                                                                                                                                                                             |                           |   |             |            |              |   |            
|                                       |                 | Cash and cash equivalents                                                                                                                                                   |                           | $ | 1,517,000   |            |              | $ | 1,700,000   |           
|                                       |                 | Accounts receivable, net                                                                                                                                                    |                           |   | 11,657,000  |            |              |   | 10,483,000  |           
|                                       |                 | Inventories, net                                                                                                                                                            |                           |   | 7,881,000   |            |              |   | 7,046,000   |           
|                                       |                 | Prepaid expenses and other current assets                                                                                                                                   |                           |   | 916,000     |            |              |   | 477,000     |           
|                                       |                 | Deferred taxes                                                                                                                                                              |                           |   | 2,541,000   |            |              |   | 2,541,000   |           
|                                       |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|                                       |                 |                                                                                                                                                                             | Total current assets      |   |             | 24,512,000 |              |   |             | 22,247,000 | 
|                                       |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|                                       |                 | Property, net                                                                                                                                                               |                           |   | 6,552,000   |            |              |   | 5,626,000   |           
|                                       |                 | Goodwill                                                                                                                                                                    |                           |   | 2,639,000   |            |              |   | 2,639,000   |           
|                                       |                 | Other intangible assets, net                                                                                                                                                |                           |   | 1,088,000   |            |              |   | 1,134,000   |           
|                                       |                 | Other long-term assets                                                                                                                                                      |                           |   | 161,000     |            |              |   | 155,000     |           
|                                       |                 | Deferred taxes                                                                                                                                                              |                           |   | 1,560,000   |            |              |   | 1,560,000   |           
|                                       |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|TOTAL                                  |                 | $                                                                                                                                                                           | 36,512,000                |   |             | $          | 33,361,000   |  
|                                       |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY   |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|CURRENT LIABILITIES:                   |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|                                       |                 | Accounts payable                                                                                                                                                            |                           | $ | 3,535,000   |            |              | $ | 3,898,000   |           
|                                       |                 | Accrued payroll and related expenses                                                                                                                                        |                           |   | 2,083,000   |            |              |   | 1,349,000   |           
|                                       |                 | Income taxes payable                                                                                                                                                        |                           |   | 521,000     |            |              |   | 507,000     |           
|                                       |                 | Current portion of long-term debt                                                                                                                                           |                           |   | 286,000     |            |              |   | 77,000      |           
|                                       |                 | Line of credit                                                                                                                                                              |                           |   | 1,000,000   |            |              |   |            |           
|                                       |                 | Other liabilities                                                                                                                                                           |                           |   | 304,000     |            |              |   | 59,000      |           
|                                       |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|                                       |                 |                                                                                                                                                                             | Total current liabilities |   |             | 7,729,000  |              |   |             | 5,890,000  | 
|                                       |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|LONG-TERM DEBT, less current portion   |                 |                                                                                                                                                                             | 521,000                   |   |             |            | 1,000        |  
|COMMITMENTS AND CONTINGENCIES (Note 1) |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|STOCKHOLDERS EQUITY:                  |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|                                       |                 | Preferred stock - $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding                                                                           |                           |   |            |            |              |   |            |           
|                                       |                 | Common stock - $0.001 par value; 40,000,000 shares
authorized; 15,776,255 and 15,473,138 shares
issued and outstanding at June 30, 2003
and December 31, 2002, respectively |                           |   | 43,916,000  |            |              |   | 43,106,000  |           
|                                       |                 | Accumulated other comprehensive loss                                                                                                                                        |                           |   | (153,000    | )          |              |   | (95,000     | )         
|                                       |                 | Accumulated deficit                                                                                                                                                         |                           |   | (15,501,000 | )          |              |   | (15,541,000 | )         
|                                       |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|                                       |                 |                                                                                                                                                                             | Net stockholders equity  |   |             | 28,262,000 |              |   |             | 27,470,000 | 
|                                       |                 |                                                                                                                                                                             |                           |   |             |            |              |  
|TOTAL                                  |                 | $                                                                                                                                                                           | 36,512,000                |   |             | $          | 33,361,000   |  
|                                       |                 |                                                                                                                                                                             |                           |   |             |            |              |  

See accompanying notes to unaudited condensed consolidated financial statements.

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I-FLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(Unaudited)

|                                                                                   |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |            |            |            | 
|---------------------------------------------------------------------------------- | -------------------------- | ---------------------------------------- | ------------------------ | --------- | ------------------ | ---------- | ---------------- | --------- | ------- | --------- | ---------- | --------- | ------- | ---------- | ---------- | ---------- | ---------- | ---------- | 
|                                                                                   |                            |                                          |                          |           | Three Months Ended |            | Six Months Ended
|                                                                                   |                            |                                          |                          |           | June 30,           |            | June 30,        
|                                                                                   |                            |                                          |                          |           |                    |            |                 
|                                                                                   |                            |                                          |                          |           | 2003               |            | 2002             |           | 2003    |           | 2002      
|                                                                                   |                            |                                          |                          |           |                    |            |                  |           |         |           |           
|Net revenues                                                                       |                            | $                                        | 12,563,000               |           |                    | $          | 9,505,000        |           |         | $         | 23,727,000 |           |         | $          | 18,055,000 |           
|Costs and expenses:                                                                |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           
|                                                                                   | Cost of sales              |                                          |                          | 4,823,000 |                    |            |                  | 3,792,000 |         |           |            | 8,972,000 |         |            |            | 7,248,000  |           
|                                                                                   | Selling and marketing      |                                          |                          | 4,802,000 |                    |            |                  | 2,939,000 |         |           |            | 8,775,000 |         |            |            | 5,306,000  |           
|                                                                                   | General and administrative |                                          |                          | 2,374,000 |                    |            |                  | 2,036,000 |         |           |            | 4,893,000 |         |            |            | 4,010,000  |           
|                                                                                   | Product development        |                                          |                          | 520,000   |                    |            |                  | 565,000   |         |           |            | 1,022,000 |         |            |            | 1,091,000  |           
|                                                                                   |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           
|                                                                                   |                            |                                          | Total costs and expenses |           |                    | 12,519,000 |                  |           |         | 9,332,000 |            |           |         | 23,662,000 |            |            |            | 17,655,000 | 
|Operating income                                                                   |                            |                                          | 44,000                   |           |                    |            | 173,000          |           |         |           | 65,000     |           |         |            | 400,000    |           
|Interest expense (income), net                                                     |                            |                                          | 5,000                    |           |                    |            | (4,000           | )         |         |           | (3,000     | )         |         |            | (5,000     | )         
|Income tax provision                                                               |                            |                                          | 17,000                   |           |                    |            | 71,000           |           |         |           | 29,000     |           |         |            | 163,000    |           
|                                                                                   |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           
|Net income before cumulative effect of a change
in accounting principle            |                            |                                          | 22,000                   |           |                    |            | 106,000          |           |         |           | 39,000     |           |         |            | 242,000    |           
|Cumulative effect of a change in accounting principle:                             |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           
|                                                                                   | Goodwill impairment        |                                          |                          |          |                    |            |                  |          |         |           |            |          |         |            |            | (3,474,000 | )         
|                                                                                   |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           
|Net income (loss)                                                                  |                            | $                                        | 22,000                   |           |                    | $          | 106,000          |           |         | $         | 39,000     |           |         | $          | (3,232,000 | )         
|                                                                                   |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           
|Net income per share, before cumulative effect of
a change in accounting principle |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           
|                                                                                   |                            | Basic                                    |                          | $         |                   |            |                  | $         | 0.01    |           |            | $         |        |            |            | $          | 0.02       |           
|                                                                                   |                            | Diluted                                  |                          | $         |                   |            |                  | $         | 0.01    |           |            | $         |        |            |            | $          | 0.02       |           
|Loss per share from cumulative effect of a change
in accounting principle          |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           
|                                                                                   |                            | Basic                                    |                          | $         |                   |            |                  | $         |        |           |            | $         |        |            |            | $          | (0.23      | )         
|                                                                                   |                            | Diluted                                  |                          | $         |                   |            |                  | $         |        |           |            | $         |        |            |            | $          | (0.22      | )         
|Net income (loss) per share                                                        |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           
|                                                                                   |                            | Basic                                    |                          | $         |                   |            |                  | $         | 0.01    |           |            | $         |        |            |            | $          | (0.21      | )         
|                                                                                   |                            | Diluted                                  |                          | $         |                   |            |                  | $         | 0.01    |           |            | $         |        |            |            | $          | (0.20      | )         
|Comprehensive Operations:                                                          |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           
|                                                                                   |                            | Net income (loss)                        |                          | $         | 22,000             |            |                  | $         | 106,000 |           |            | $         | 39,000  |            |            | $          | (3,232,000 | )         
|                                                                                   |                            | Foreign currency translation gain (loss) |                          |           | 14,000             |            |                  |           | (72,000 | )         |            |           | (58,000 | )          |            |            | (62,000    | )         
|                                                                                   |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           
|                                                                                   |                            | Comprehensive income (loss)              |                          | $         | 36,000             |            |                  | $         | 34,000  |           |            | $         | (19,000 | )          |            | $          | (3,294,000 | )         
|                                                                                   |                            |                                          |                          |           |                    |            |                  |           |         |           |            |           |         |            |            |           

See accompanying notes to condensed consolidated financial statements

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I-FLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                                                                   |                                                       |                                                           |            |                  |          |      |            |            |          |  
|-------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | --------------------------------------------------------- | ---------- | ---------------- | -------- | ---- | ---------- | ---------- | -------- | -
|                                                                                                   |                                                       |                                                           |            | Six Months Ended
|                                                                                                   |                                                       |                                                           |            | June 30,        
|                                                                                                   |                                                       |                                                           |            |                 
|                                                                                                   |                                                       |                                                           |            | 2003             |          | 2002
|                                                                                                   |                                                       |                                                           |            |                  |          |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |                                                       |                                                           |            |                  |          |      |            |           
|Net income (loss)                                                                                  |                                                       | $                                                         | 39,000     |                  |          | $    | (3,232,000 | )         
|Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities: |                                                       |                                                           |            |                  |          |      |            |           
|                                                                                                   | Depreciation and amortization                         |                                                           |            | 1,109,000        |          |      |            | 977,000    |         
|                                                                                                   | Cumulative effect of a change in accounting principle |                                                           |            |                 |          |      |            | 3,474,000  |         
|                                                                                                   | Compensation expense related to stock option grants   |                                                           |            | 321,000          |          |      |            | 392,000    |         
|                                                                                                   | Change in allowance for doubtful accounts             |                                                           |            | (329,000         | )        |      |            | (237,000   | )       
|                                                                                                   | Change in inventory obsolescence reserve              |                                                           |            | 59,000           |          |      |            | 87,000     |         
|                                                                                                   | Changes in operating assets and liabilities           |                                                           |            |                  |          |      |            |            |         
|                                                                                                   |                                                       | Accounts receivable                                       |            |                  | (846,000 | )    |            |            | 293,000  |  
|                                                                                                   |                                                       | Inventories                                               |            |                  | (894,000 | )    |            |            | 373,000  |  
|                                                                                                   |                                                       | Prepaid expenses and other                                |            |                  | (383,000 | )    |            |            | (305,000 | )
|                                                                                                   |                                                       | Accounts payable and accrued payroll and related expenses |            |                  | 375,000  |      |            |            | (382,000 | )
|                                                                                                   |                                                       | Income taxes payable                                      |            |                  | 14,000   |      |            |            | 142,000  |  
|                                                                                                   |                                                       | Other liabilities                                         |            |                  | 245,000  |      |            |            | (44,000  | )
|                                                                                                   |                                                       |                                                           |            |                  |          |      |            |           
|Net cash (used in) provided by operating activities                                                |                                                       |                                                           | (290,000   | )                |          |      | 1,538,000  |           
|                                                                                                   |                                                       |                                                           |            |                  |          |      |            |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |                                                       |                                                           |            |                  |          |      |            |           
|                                                                                                   | Property acquisitions                                 |                                                           |            | (2,040,000       | )        |      |            | (1,303,000 | )       
|                                                                                                   | Change in other assets                                |                                                           |            | (10,000          | )        |      |            | (203,000   | )       
|                                                                                                   |                                                       |                                                           |            |                  |          |      |            |           
|Net cash used in investing activities                                                              |                                                       |                                                           | (2,050,000 | )                |          |      | (1,506,000 | )         
|                                                                                                   |                                                       |                                                           |            |                  |          |      |            |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |                                                       |                                                           |            |                  |          |      |            |           
|                                                                                                   | Borrowings on line of credit                          |                                                           |            | 1,000,000        |          |      |            |           |         
|                                                                                                   | Borrowings on notes payable                           |                                                           |            | 816,000          |          |      |            |            |         
|                                                                                                   | Principal payments on notes payable                   |                                                           |            | (87,000          | )        |      |            | (142,000   | )       
|                                                                                                   | Proceeds from exercise of stock options               |                                                           |            | 490,000          |          |      |            | 23,000     |         
|                                                                                                   |                                                       |                                                           |            |                  |          |      |            |           
|Net cash provided by (used in) financing activities                                                |                                                       |                                                           | 2,219,000  |                  |          |      | (119,000   | )         
|                                                                                                   |                                                       |                                                           |            |                  |          |      |            |           
|Effect of exchange rates on cash                                                                   |                                                       |                                                           | (62,000    | )                |          |      | (86,000    | )         
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                          |                                                       |                                                           | (183,000   | )                |          |      | (173,000   | )         
|CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD                                                   |                                                       |                                                           | 1,700,000  |                  |          |      | 2,033,000  |           
|                                                                                                   |                                                       |                                                           |            |                  |          |      |            |           
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                         |                                                       | $                                                         | 1,517,000  |                  |          | $    | 1,860,000  |           
|                                                                                                   |                                                       |                                                           |            |                  |          |      |            |           
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                                |                                                       |                                                           |            |                  |          |      |            |           
|Interest paid                                                                                      |                                                       | $                                                         | 9,000      |                  |          | $    | 2,000      |           
|                                                                                                   |                                                       |                                                           |            |                  |          |      |            |           
|Income tax payments                                                                                |                                                       | $                                                         | 20,000     |                  |          | $    | 22,000     |           
|                                                                                                   |                                                       |                                                           |            |                  |          |      |            |           

See accompanying notes to condensed consolidated financial statements.

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I-FLOW CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation The accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments, and a goodwill impairment charge related to a change in accounting
principle discussed in Note 4 below) that, in the opinion of management, are
necessary to present fairly the financial position of I-Flow Corporation and
its subsidiaries (the Company) at June 30, 2003 and the results of its
operations and its cash flows for the three and six-month periods ended June
30, 2003 and 2002. Certain information and footnote disclosures normally
included in financial statements have been condensed or omitted pursuant to
rules and regulations of the Securities and Exchange Commission although the
Company believes that the disclosures in the financial statements are adequate
to make the information presented not misleading.

The financial statements included herein should be read in conjunction with the
financial statements of the Company included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2002 filed with the Securities and
Exchange Commission on March 31, 2003.

New Accounting Pronouncements In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets(SFAS 142). SFAS 142
addresses the financial accounting and reporting requirements for acquired
goodwill and other intangible assets. The Company adopted the provisions of
SFAS 142 effective January 1, 2002. Under SFAS 142, the Company is no longer
required to amortize goodwill and other intangible assets with indefinite
lives. Instead, SFAS 142 requires that goodwill and intangible assets deemed
to have an indefinite useful life be reviewed for impairment upon adoption of
SFAS 142 and annually thereafter. See Note 4 to condensed consolidated
financial statements.

In August 2001, the FASB issued SFAS No. 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets(SFAS 143). SFAS 143
establishes accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS 143 is effective for fiscal
years beginning after June 15, 2002, with early adoption permitted. The
Company adopted the provisions of SFAS 143 on January 1, 2003 and such adoption
did not have a material impact on its consolidated results of operations and
financial position.

In October 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets(SFAS 144). SFAS 144 establishes a single
accounting model for the impairment or disposal of long-lived assets and new
standards for reporting discontinued operations. SFAS 144 superseded SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Ofand APB Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.The
provisions of SFAS 144 are effective in fiscal years beginning after December
15, 2001 and, in general, are to be applied prospectively. The Company adopted
the provisions of SFAS 144 on January 1, 2002 and such adoption did not have a
material impact on its consolidated results of operations and financial
position.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities(SFAS 146), which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the

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liability is incurred. Under EITF Issue 94-3,
a liability for an exit cost as defined in EITF Issue 94-3 was recognized at
the date of an entitys commitment to an exit plan. SFAS 146 also establishes
that the liability should initially be measured and recorded at fair value.
SFAS 146 is effective for exit and disposal activities initiated after December
31, 2002. The Company adopted the provisions of SFAS 146 on January 1, 2003,
and such adoption did not have a material impact on its consolidated results of
operations and financial position.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others.FIN 45 elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 while the provisions of the disclosure
requirements are effective for financial statements of interim or annual
reports ending after December 15, 2002. The Company adopted the disclosure
provisions of FIN 45 during the fourth quarter of fiscal 2002 and such adoption
did not have a material impact on the consolidated financial statements. The
Company adopted the recognition provisions of FIN 45 effective January 1, 2003
and such adoption did not have a material impact on the consolidated results of
operations and financial position.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure(SFAS 148). SFAS 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation(SFAS 123), to provide
alternative methods for voluntary transition to SFAS 123s fair value method of
accounting for stock-based employee compensation. SFAS 148 also requires
disclosure of the effects of an entitys accounting policy with respect to
stock-based employee compensation on reported net income (loss) and earnings
(loss) per share in annual and interim financial statements. The Company has
adopted the provisions of SFAS 148 effective January 1, 2003, and has included
the additional required disclosures below under the heading Accounting for
Stock Based Compensation. This adoption did not have a material impact on the
consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either does not have equity investors with voting
rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company
adopted the provisions of FIN 46 effective February 1, 2003, and such adoption
did not have a material impact on its consolidated results of operations and
financial position because the Company currently has no variable interest
entities.

In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. SFAS 150 requires that those
instruments be classified as liabilities in statements of financial position.
The Statement is effective for financial instruments entered into or modified
after May 31, 2003, otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. On June 15, 2003, the Company
adopted SFAS 150 which had no material impact on the Companys financial
condition and results of operations.

Accounting for Stock Based Compensation The Company accounts for employee
stock options using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employeesand
FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans. Stock options issued to consultants and
vendors are accounted for at fair value.

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The Company has adopted the disclosure-only provisions of SFAS 123, Accounting
for Stock-Based Compensation. Accordingly, no compensation cost has been
recognized for stock option grants to employees and non-employee directors with
exercise prices equal to the fair market value of the underlying shares at the
grant date. Had compensation cost for the Companys option plans been
determined based on the fair value of the options at the grant date consistent
with the provisions of SFAS 123, the Companys net income (loss) and net income
(loss) per share would have been the pro forma amounts indicated below:

|                                                                                                                    |  |                             |      |                           |  |      |       |      |  |   |       |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---- | ------------------------- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                                                                    |  | Three Months Ended June 30, |      | Six Months Ended June 30,
|(Amounts in thousands, except per share                                                                             |  |                             |      |                          
|amounts)                                                                                                            |  | 2003                        |      | 2002                      |  | 2003 |       | 2002
|                                                                                                                    |  |                             |      |                           |  |      |       |     
|Net income (loss)  as reported                                                                                     |  | $                           | 22   |                           |  | $    | 106   |      |  | $ | 39    |   |  | $ | (3,232 | )
|Stock-based employee compensation included in
net income (loss), net of tax                                         |  | $                           | 56   |                           |  | $    | 103   |      |  | $ | 111   |   |  | $ | 206    |  
|Total stock based employee compensation
expense determined under fair value based
method for all awards, net of tax |  | $                           | (154 | )                         |  | $    | (293  | )    |  | $ | (336  | ) |  | $ | (573   | )
|                                                                                                                    |  |                             |      |                           |  |      |       |      |  |   |       |   |  |   |        |  
|Net (loss)  pro forma                                                                                              |  | $                           | (76  | )                         |  | $    | (84   | )    |  | $ | (186  | ) |  | $ | (3,599 | )
|                                                                                                                    |  |                             |      |                           |  |      |       |      |  |   |       |   |  |   |        |  
|Basic earnings (loss) per share  as reported                                                                       |  | $                           |     |                           |  | $    | 0.01  |      |  | $ |      |   |  | $ | (0.21  | )
|Basic earnings (loss) per share  pro forma                                                                         |  | $                           |     |                           |  | $    | (0.01 | )    |  | $ | (0.01 | ) |  | $ | (0.23  | )
|Diluted
earnings (loss) per share  as reported                                                                     |  | $                           |     |                           |  | $    | 0.01  |      |  | $ |      |   |  | $ | (0.20  | )
|Diluted earnings (loss) per share  pro forma                                                                       |  | $                           |     |                           |  | $    | (0.01 | )    |  | $ | (0.01 | ) |  | $ | (0.22  | )
|                                                                                                                    |  |                             |      |                           |  |      |       |      |  |   |       |   |  |   |        |  

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the six months ended June 30, 2003 and
fiscal year 2002: no dividend yield; expected volatility 94%; risk-free
interest rate of 3.04%; and expected lives of five years.

2. Inventories

Inventories consisted of the following:

|                |  |          |           |              |  |   |           | 
|--------------- |  | -------- | --------- | ------------ |  | - | --------- | 
|                |  | June 30, |           | December 31,
|                |  | 2003     |           | 2002        
|                |  |          |           |             
|Raw Materials   |  | $        | 4,916,000 |              |  | $ | 4,404,000 | 
|Work in Process |  |          | 760,000   |              |  |   | 411,000   | 
|Finished Goods  |  |          | 2,205,000 |              |  |   | 2,231,000 | 
|                |  |          |           |              |  |   |           | 
|Total           |  | $        | 7,881,000 |              |  | $ | 7,046,000 | 
|                |  |          |           |              |  |   |           | 

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3. Earnings (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average number
of common shares outstanding during the periods presented, excluding unvested
restricted stock which the Company has a right to repurchase in the event of
early termination of employment.

Diluted net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the periods
utilizing the treasury stock method for stock options and unvested restricted
stock.

The following is a reconciliation between the number of shares used in the
basic and diluted net income (loss) per share calculations:

|                                                             |                                                      |                                             |    |                    |       |                  |     |        |     |   |    |        |     |    |       |        |     | 
|------------------------------------------------------------ | ---------------------------------------------------- | ------------------------------------------- | -- | ------------------ | ----- | ---------------- | --- | ------ | --- | - | -- | ------ | --- | -- | ----- | ------ | --- | 
|                                                             |                                                      |                                             |    | Three Months Ended |       | Six Months Ended
|                                                             |                                                      |                                             |    | June 30,           |       | June 30,        
|                                                             |                                                      |                                             |    |                    |       |                 
|(Amounts in thousands)                                       |                                                      | 2003                                        |    | 2002               |       | 2003             |     | 2002  
|                                                             |                                                      |                                             |    |                    |       |                  |     |       
|Net income before effect of a change in accounting
principle |                                                      | $                                           | 22 |                    |       | $                | 106 |        |     | $ | 39 |        |     | $  | 242   |       
|                                                             |                                                      |                                             |    |                    |       |                  |     |        |     |   |    |        |     |    |       |       
|Net income (loss)                                            |                                                      | $                                           | 22 |                    |       | $                | 106 |        |     | $ | 39 |        |     | ($ | 3,232 | )     
|                                                             |                                                      |                                             |    |                    |       |                  |     |        |     |   |    |        |     |    |       |       
|Basic net income (loss) per share                            |                                                      |                                             |    |                    |       |                  |     |        |     |   |    |        |     |    |       |       
|                                                             | Weighted average number of common shares outstanding |                                             |    | 15,516             |       |                  |     | 15,363 |     |   |    | 15,513 |     |    |       | 15,358 |    
|                                                             | Effect of dilutive securities:                       |                                             |    |                    |       |                  |     |        |     |   |    |        |     |    |       |        |    
|                                                             |                                                      | Stock options and unvested restricted stock |    |                    | 1,136 |                  |     |        | 670 |   |    |        | 853 |    |       |        | 754 | 
|                                                             |                                                      |                                             |    |                    |       |                  |     |        |     |   |    |        |     |    |       |       
|Diluted net income (loss) per share                          |                                                      |                                             |    |                    |       |                  |     |        |     |   |    |        |     |    |       |       
|                                                             | Weighted average number of common shares outstanding |                                             |    | 16,652             |       |                  |     | 16,033 |     |   |    | 16,366 |     |    |       | 16,112 |    
|                                                             |                                                      |                                             |    |                    |       |                  |     |        |     |   |    |        |     |    |       |       

Potential common shares of 32,000 and 772,000 have been excluded from diluted
weighted average common shares for the three and six-month periods ended June
30, 2003 and, respectively, as the effect would be anti-dilutive.

Potential common shares of 1,938,000 and 1,689,000 have been excluded from
diluted weighted average common shares for the three and six-month periods
ended June 30, 2002, respectively, as the effect would be anti-dilutive.

4. Goodwill and Other Intangible Assets

SFAS 142 addresses the financial accounting and reporting requirements for
acquired goodwill and other intangible assets. The Company adopted the
provisions of SFAS 142 in January 2002. Under SFAS 142, the Company is no
longer required to amortize goodwill and other intangible assets with
indefinite lives. Instead, SFAS 142 requires that goodwill and intangible
assets deemed to have an indefinite useful life be reviewed for impairment upon
adoption of SFAS 142 and annually thereafter.

Under SFAS 142, goodwill impairment is deemed to exist if the net book value of
a reporting unit exceeds its estimated fair value. The Companys reporting
units are consistent with the operating segments underlying the reporting
segments identified in Note 5. - Business Segments.

In accordance with SFAS 142, the Company completed a test for impairment in
June 2002 and concluded that consolidated goodwill in the amount of $3,474,000
was impaired. The Company recorded a non-cash charge of $3,474,000 to reduce
the carrying value of its goodwill retroactively to the January 1, 2002
adoption date. Such charge is not included in operating income and is
reflected as a cumulative effect of a change in accounting principle, effective
January 1, 2002, in the accompanying Condensed Consolidated Statements of
Operations and Comprehensive Operations.

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The total impairment amount of $3,474,000 is attributable to the Companys
manufacturing and marketing business segment, and represents the previously
unamortized goodwill resulting from the Companys purchase of substantially all
of the assets of Block Medical, Inc. on July 22, 1996, and the Companys
acquisition of all of the outstanding stock of Spinal Specialties, Inc. on
January 14, 2000. In calculating the impairment charge, the fair value of the
impaired reporting unit was estimated using a market multiple methodology. The
impairment of the goodwill associated with the manufacturing and marketing
segment resulted from the low profitability of the business segment.

The changes in carrying amount of goodwill by segment for fiscal year 2002 and
the six months ended June 30, 2003 are as follows:

|                                |  |                   |            |         |  |       |           |  |  |   |            |  
|------------------------------- |  | ----------------- | ---------- | ------- |  | ----- | --------- |  |  | - | ---------- | -
|                                |  | Manufacturing and |            |         |  |       |           |  |  |  
|                                |  | Marketing         |            | Rentals |  | Total
|                                |  |                   |            |         |  |      
|Balance as of January 1, 2002   |  | $                 | 3,474,000  |         |  | $     | 2,639,000 |  |  | $ | 6,113,000  |  
|Impairment loss                 |  |                   | (3,474,000 | )       |  |       |          |  |  |   | (3,474,000 | )
|                                |  |                   |            |         |  |       |           |  |  |   |            |  
|Balance as of December 31, 2002 |  |                   |           |         |  |       | 2,639,000 |  |  | $ | 2,639,000  |  
|Goodwill acquired               |  |                   |           |         |  |       |          |  |  |   |           |  
|Impairment loss                 |  |                   |           |         |  |       |          |  |  |   |           |  
|                                |  |                   |            |         |  |       |           |  |  |   |            |  
|Balance as of June 30, 2003     |  | $                 |           |         |  | $     | 2,639,000 |  |  | $ | 2,639,000  |  
|                                |  |                   |            |         |  |       |           |  |  |   |            |  

As of June 30, 2003, the remaining goodwill of $2,639,000 is attributable to
the Companys rentals business segment and the Company has determined that
there was no impairment of this goodwill as of June 30, 2003.

Amortizable intangible assets in the accompanying consolidated balance sheets
are as follows:

|                 |  |                     |            |              |  |     |         |  |  |   |           | 
|---------------- |  | ------------------- | ---------- | ------------ |  | --- | ------- |  |  | - | --------- | 
|                 |  | As of June 30, 2003
|                 |  |                    
|                 |  | Carrying            |            | Accumulated  |  |     |         | 
|                 |  | Amount              |            | Amortization |  | Net
|                 |  |                     |            |              |  |    
|Patents          |  | $                   | 1,884,000  |              |  | $   | 811,000 |  |  | $ | 1,073,000 | 
|Licensing Rights |  | $                   | 150,000    |              |  | $   | 135,000 |  |  | $ | 15,000    | 
|                 |  |                     |            |              |  |     |         |  |  |   |           | 
|Total            |  |                     | $2,034,000 |              |  | $   | 946,000 |  |  | $ | 1,088,000 | 
|                 |  |                     |            |              |  |     |         |  |  |   |           | 

|                 |  |                         |            |              |  |     |         |  |  |   |           | 
|---------------- |  | ----------------------- | ---------- | ------------ |  | --- | ------- |  |  | - | --------- | 
|                 |  | As of December 31, 2002
|                 |  |                        
|                 |  | Carrying                |            | Accumulated  |  |     |         | 
|                 |  | Amount                  |            | Amortization |  | Net
|                 |  |                         |            |              |  |    
|Patents          |  | $                       | 1,817,000  |              |  | $   | 713,000 |  |  | $ | 1,104,000 | 
|Licensing Rights |  | $                       | 150,000    |              |  | $   | 120,000 |  |  | $ | 30,000    | 
|                 |  |                         |            |              |  |     |         |  |  |   |           | 
|Total            |  |                         | $1,967,000 |              |  | $   | 833,000 |  |  | $ | 1,134,000 | 
|                 |  |                         |            |              |  |     |         |  |  |   |           | 

The Company amortizes patents and licensing rights over a period of seven and
five years, respectively. Amortization expense for the three and six months
ended June 30, 2003 was $73,000 and $145,000, respectively, compared to $62,000
and $121,000 for the same periods in the prior year. Amortization expense of
intangible assets is expected to be approximately $300,000 in each of the next
five fiscal years.

5. Business Segments

The Company operates in two business segments: manufacturing and marketing of
medical infusion products, and rentals of medical infusion pumps.

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Business segment information is as follows for the three and six-month periods
ended June 30, 2003 and 2002:

|                                 |  |                   |        |         |  |              |        |  |  |   |        | 
|-------------------------------- |  | ----------------- | ------ | ------- |  | ------------ | ------ |  |  | - | ------ | 
|                                 |  | Manufacturing and |        |         |  |              |        |  |  |  
|(Amounts in thousands)           |  | Marketing         |        | Rentals |  | Consolidated
|                                 |  |                   |        |         |  |             
|Three months ended June 30, 2003 |  |                   |        |         |  |              |        |  |  |   |        | 
|Revenues                         |  | $                 | 9,249  |         |  | $            | 3,314  |  |  | $ | 12,563 | 
|Operating income (loss)          |  |                   | (780   | )       |  |              | 824    |  |  |   | 44     | 
|Assets                           |  |                   | 25,333 |         |  |              | 11,179 |  |  |   | 36,512 | 
|Six months ended June 30, 2003   |  |                   |        |         |  |              |        |  |  |   |        | 
|Revenues                         |  |                   | 17,383 |         |  |              | 6,344  |  |  |   | 23,727 | 
|Operating income (loss)          |  |                   | (1,422 | )       |  |              | 1,487  |  |  |   | 65     | 
|Assets                           |  |                   | 25,333 |         |  |              | 11,179 |  |  |   | 36,512 | 
|Three months ended June 30, 2002 |  |                   |        |         |  |              |        |  |  |   |        | 
|Revenues                         |  | $                 | 6,903  |         |  | $            | 2,602  |  |  | $ | 9,505  | 
|Operating income (loss)          |  |                   | (504   | )       |  |              | 677    |  |  |   | 173    | 
|Assets                           |  |                   | 20,443 |         |  |              | 12,007 |  |  |   | 32,450 | 
|Six months ended June 30, 2002   |  |                   |        |         |  |              |        |  |  |   |        | 
|Revenues                         |  |                   | 12,962 |         |  |              | 5,093  |  |  |   | 18,055 | 
|Operating income (loss)          |  |                   | (882   | )       |  |              | 1,282  |  |  |   | 400    | 
|Assets                           |  |                   | 20,443 |         |  |              | 12,007 |  |  |   | 32,450 | 
|Three months ended June 30, 2003 |  |                   |        |         |  |              |        |  |  |   |        | 

6. Guarantees and Indemnifications

The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture and acquisition
agreements, under which the Company may provide customary indemnifications to
either (a) purchasers of the Companys businesses or assets; or (b) entities
from which the Company is acquiring assets or businesses; (ii) certain real
estate leases, under which the Company may be required to indemnify property
owners for environmental and other liabilities, and other claims arising from
the Companys use of the applicable premises; (iii) certain agreements with the
Companys officers, directors and employees, under which the Company may be
required to indemnify such persons for liabilities arising out of their
relationship with the Company; and (iv) Company license, consulting,
distribution and purchase agreements with its customers and other parties,
under which the Company may be required to indemnify such parties for
intellectual property infringement claims, product liability claims, and other
claims arising from the Companys provision of products or services to such
parties.

The terms of such obligations vary. Generally, a maximum obligation arising
out of these types of agreements is not explicitly stated and, therefore, the
overall maximum amount of these obligations cannot be reasonably estimated.
Historically, the Company has not been obligated to make significant payments
for these obligations and, thus, no liabilities have been recorded for these
obligations. The fair value of indemnities, commitments and guarantees that
the Company issued during the three and six-month periods ended June 30, 2003
was not significant to the Companys financial position, results of operations,
or cash flows.

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|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|Item 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements

Statements by the Company in this report and in other reports and statements
released by the Company are and will be forward-looking in nature and express
the Companys opinions about trends and factors that may impact future
operating results. Statements that use words such as believes,
anticipates, or expects or use similar expressions are intended to identify
forward-looking statements. Forward-looking statements are subject to risks
and uncertainties, which could cause actual results to differ materially from
those expected, and readers are cautioned not to place undue reliance on these
forward-looking statements. The Company undertakes no obligation to republish
revised forward-looking statements to reflect the occurrence of unanticipated
or subsequent events. Readers are also urged to carefully review and consider
the various disclosures made by the Company in this report which seek to advise
interested parties of the risks and other factors that affect the Companys
business. Interested parties should also review the Companys reports on Forms
10-K, 10-Q and 8-K and other reports that are periodically filed with the
Securities and Exchange Commission. The risks affecting the Companys business
include, without limitation, reliance on the success of the home health care
industry, the Companys success in pursuing its direct sales strategy, the
reimbursement system currently in place and future changes to that system,
competition in the industry, economic and political conditions in foreign
countries, currency exchange rates, inadequacy of booked reserves,
technological changes, and product availability. All forward-looking
statements, whether made in this report or elsewhere, should be considered in
context with the various disclosures made by the Company about its business.

Critical Accounting Policies

I-Flow prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America.
Accordingly, the Company is required to make estimates, judgments and
assumptions that the Company believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the periods presented. The critical
accounting policies which the Company believes are the most important to aid in
fully understanding and evaluating its reported financial results include the
following:

Revenue Recognition and Accounts Receivable

The Company recognizes revenue from product sales at the time of shipment and
passage of title. The Company offers the right of return for defective
products, and continuously monitors and tracks product returns. Also, the
Company records a provision for the estimated amount of future returns based
upon historical experience and any notification received of pending returns.
Although product returns have historically been insignificant, the Company
cannot guarantee that it will continue to experience the same return rates as
in the past. Any significant increase in product returns could have a material
adverse impact on the Companys operating results for the period or periods in
which the returns occur.

The Company recognizes rental revenues from medical pumps over the term of the
related agreement, generally on a month-to-month basis. Pump rentals are
billed at the Companys established rates, which often differ from
contractually allowable rates provided by third party payors such as Medicare,
Medicaid and commercial insurance carriers. The Company records net rental
revenues at the estimated realizable amounts from patients and third party
payors. The Company may experience significant extended payment terms with
certain of these third party payors, however, it continuously monitors
reimbursement rates from third party payors and timing of payments. Any change
in reimbursement or collection rates could have a material impact on the
Companys operating results for the period or periods in which the change is
identified.

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Bad Debts

The Company performs various analyses to evaluate accounts receivable balances.
It records an allowance for bad debts based upon the estimated collectibility
of the accounts such that the recorded amounts reflect estimated net realizable
value. The Company applies specified percentages to the accounts receivable
agings related to product sales to estimate the amount that will ultimately be
uncollectible and therefore should be reserved. The percentages are increased
as the accounts age. The collectibility of accounts receivable related to
rental revenues from medical pumps is estimated based upon current and
historical collection and reimbursement rates for that business segment. If
the actual uncollected amounts significantly exceed the estimated allowance,
the Companys operating results would be significantly and adversely affected.

Inventories

The Company values inventory at the lower of the actual cost to purchase or
manufacture the inventory and the current estimated market value of the
inventory. The Company regularly reviews inventory quantities on hand and
records a provision for excess and obsolete inventory on specifically
identified items based primarily upon the estimated forecast of product demand
and production requirements for the next two years. A significant increase in
the demand for the Companys products could result in a short-term increase in
the cost of inventory purchases while a significant decrease in demand could
result in an increase in the amount of excess inventory quantities on hand.
Additionally, the Companys estimates of future product demand may prove to be
inaccurate such that the Company may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if
inventory is determined to be overvalued, the Company would be required to
recognize such costs in cost of goods sold at the time of such determination.
Likewise, if inventory is determined to be undervalued, the Company may have
over-reported cost of goods sold in previous periods and would be required to
recognize such additional operating income at the time of sale. Therefore,
although the Company seeks to ensure the accuracy of its forecasts of future
product demand, any significant unanticipated changes in demand or
technological developments could have a significant impact on the value of its
inventory and reported operating results.

Deferred Taxes

The Company recognizes deferred tax assets and liabilities based upon the
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance based upon
historical taxable income, projected future taxable income and the expected
timing of the reversals of existing temporary differences. If the Company
continues to operate at a profit in the future and generate sufficient future
taxable income, it could be required to reverse the current valuation allowance
against the deferred tax assets which would result in a substantial decrease in
the Companys effective tax rate. Likewise, if the Company is unable to
operate at a profit and unable to generate sufficient future taxable income, it
could be required to establish an additional valuation allowance against all or
a significant portion of its deferred tax assets resulting in a substantial
increase in its effective tax rate and a material adverse impact on operating
results.

Intangible Assets

The Companys business combinations have at various times resulted in the
acquisition of goodwill and other intangible assets, which may affect the
amount of future period amortization expense and impairment expense that the
Company may incur. The determination of the value of such intangible assets
requires management to make estimates and assumptions that affect its
consolidated financial statements. The Company reviews the recoverability of
the carrying value of goodwill on an annual basis or more frequently if an
event occurs or circumstances change to indicate that an impairment of goodwill
has possibly occurred. The Company compares market value to book value of each
reporting unit to determine whether or not any potential impairment of goodwill
exists. The Company cannot guarantee that there will be no additional
impairment in the future. See Note 4 to Condensed Consolidated Financial
Statements.

The Company also reviews the recoverability of the carrying value of identified
intangibles and other long-lived assets on an annual basis or whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of these assets is determined based upon
the forecasted undiscounted

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future net cash flows from the operations to which
the assets relate, utilizing our best estimates, appropriate assumptions and
projections at the time. These projected future cash flows may significantly
vary over time as a result of increased competition, changes in technology,
fluctuations in demand, consolidation of customers and
reductions in average selling prices. If the carrying value is determined not
to be recoverable from future operating cash flows, the asset would be deemed
impaired and an impairment loss would be recognized to the extent the carrying
value exceeded the estimated fair market value of the asset.

Results of Operations

Net revenues during the three and six-month periods ended June 30, 2003 were
$12,563,000 and $23,727,000 compared to $9,505,000 and $18,055,000 for the same
periods in the prior year, representing increases of 32% and 31%, respectively.
The net increases in revenues of $3,058,000 and $5,672,000 for the three and
six-month periods ended June 30, 2003 compared to the comparable periods in the
prior year were primarily due to increases in regional anesthesia product
revenues of $1,849,000 or 58% and $3,505,000 or 63%, respectively. The
regional anesthesia revenue increase resulted from increased market penetration
by the Companys ON-Q® Post Operative Pain Relief System and by the Companys
Spinal Specialties subsidiary. Revenues in both other market segments also
increased over the prior year. For the three and six months ended June 30,
2003, Oncology infusion services increased $712,000 and $1,251,000 and I.V.
infusion therapy increased $497,000 and $916,000, respectively, when compared
to the comparable periods in the prior year. The increase in Oncology infusion
services revenues is related to the increased clinical usage of new
chemotherapy drugs and protocols requiring the use of continuous intravenous
pump services.

The Company incurred cost of sales of $4,823,000 and $8,972,000 during the
three and six-month periods ended June 30, 2003 compared to $3,792,000 and
$7,248,000, respectively, for the comparable periods in the prior year. This
represents an increase of 27% and 24%, respectively. This increase is
primarily due to higher sales volume. However, during the three and six-month
periods ended June 30, 2003, cost of sales as a percentage of net revenues
decreased from the prior year by approximately two percentage points, primarily
due to increased sales of higher-margin products including the Companys
ON-Q® Post Operative Pain Relief System during the three and six months ended
June 30, 2003.

Selling and marketing expenses for the three and six-month periods ended June
30, 2003 increased over the comparable periods in the prior year by $1,863,000
or 63% and $3,469,000 or 65%, respectively. As a percentage of net revenues,
selling and marketing expenses increased by seven percentage points for the
three month period ended June 30, 2003 and by eight percentage points for the
six month period ended June 30, 2003 compared to the comparable periods in the
prior year. These increases were primarily due to additional salaries,
commissions, travel expenses and recruiting costs related to the expansion of
the Companys direct sales force. The increase also consisted of increased
marketing expenses related to the Companys ON-Q® Post-Operative Pain Relief
System.

General and administrative expenses for the three and six-month periods ended
June 30, 2003 increased by $338,000 or 17% and $883,000 or 22% compared to the
comparable periods in the prior year. These increases were primarily due to
increased outside professional services and accrued compensation costs. As a
percentage of net revenues, general and administrative expenses decreased by
approximately two percentage points and one percentage point, respectively, for
the three and six-month periods ended June 30, 2003 when compared to the
comparable periods in the prior year.

Product development expenses for the three and six-month periods ended June 30,
2003 decreased compared to the comparable periods in the prior year by $45,000
or 8% and $69,000 or 6%, respectively. This decrease was primarily due to
reduced consulting expenses and other outside services due to the completion of
specific projects. The Company will continue to incur product development
expenses as it continues its efforts to introduce new and improved technology
and cost-efficient products into the market. Product development expense as a
percentage of net revenues for the three and six-month periods ended June 30,
2003 decreased by approximately two percentage points compared to the
comparable periods in the prior year.

During the three and six-month periods ended June 30, 2003, the Company
recorded income tax expense of $17,000 and $29,000, respectively, compared to
income tax expense of $71,000 and $163,000 for the comparable periods in

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the
prior year. The Companys effective tax rates for the three and six months
ended June 30, 2003 were 43.6% and 42.6% compared to 40.1% and 40.2%,
respectively, for the comparable periods in the prior year.

In accordance with SFAS 142, the Company completed a test for goodwill
impairment in June 2002 and concluded that consolidated goodwill in the amount
of $3,474,000 was impaired as of January 1, 2002. The Company recorded
a non-cash charge of approximately $3,474,000 to reduce the carrying value of
its goodwill which was recorded as a cumulative effect of a change in
accounting principle in 2002. See Note 4  Goodwill and Other Intangible
Assets.

Liquidity and Capital Resources

During the six-month period ended June 30, 2003, cash of $290,000 was used in
operating activities consisting of net income of $39,000 plus non-cash expenses
of $1,160,000, less net changes in operating assets and liabilities of
$1,489,000.

The Company used cash in investing activities during the six-month period ended
June 30, 2003 aggregating $2,050,000, compared to $1,506,000 for the same
period in the prior year. The expenditures in the six months ended June 30,
2003 consisted of $2,040,000 used to acquire capital equipment including
electronic infusion pumps for the Companys rental business segment, computer
equipment, purchased software, leasehold improvements, furniture, fixtures,
tooling and equipment for use in the Companys operations, and a net outflow
related to other assets, primarily patents, of $10,000.

During the six-month period ended June 30, 2003, cash of $2,219,000 was
provided by financing activities consisting of $1,000,000 in proceeds from the
Companys bank line of credit, $816,000 in proceeds from notes payable, and
$490,000 in proceeds from the exercise of stock options, partially offset by
$87,000 of net principal payments on notes payable.

As of June 30, 2003, the Company had cash and cash equivalents of $1,517,000,
net accounts receivable of $11,657,000, and net working capital of $16,783,000.
Management believes the Companys funds, together with possible borrowings on
its existing lines of credit and other bank loans, are sufficient to provide
for its short and long-term needs for operations as currently projected. The
Company may decide to sell additional equity securities or increase its
borrowings in order to fund or increase its expenditures for selling and
marketing, to fund increased product development, or for other purposes.

The Company has a working capital line of credit with a bank expiring in
December 2003. Under the line of credit, the Company may borrow up to the
lesser of $4,000,000 or 80% of eligible accounts receivable and 25% of eligible
inventory, as defined, at the banks prime rate plus 0.50% (4.75% at June 30,
2003). As of June 30, 2003, there were funds available for borrowing of
$3,000,000 and the amount outstanding under the line was $1,000,000. The
Company also has a term loan facility with the bank for a maximum amount of
$2,000,000, at the banks prime rate plus 1.00%, expiring in December 2003.
There was no amount outstanding under the term loan as of June 30, 2003.

The Companys InfuSystem subsidiary has a revolving line of credit with a bank
under which it may borrow up to $3,500,000 or 80% of eligible accounts
receivable, as defined, at the banks prime rate less 0.25% (4.00% at June 30,
2003). There were no outstanding borrowings under the line of credit as of
June 30, 2003 and there were funds available for borrowing of $3,167,000. The
credit line expires June 30, 2004. In addition, InfuSystem has a loan facility
under which it may borrow up to $2,500,000 for the purchase of equipment. As
of June 30, 2003, $800,000 was outstanding under the term loan.

The lines of credit and the notes are collateralized by substantially all of
the Companys assets and require the Company to comply with certain covenants
principally relating to working capital and liquidity. As of June 30, 2003,
the Company was in compliance with all such covenants.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets(SFAS 142). SFAS 142 addresses the

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financial
accounting and reporting requirements for acquired goodwill and other
intangible assets. The Company adopted the provisions of SFAS 142 effective
January 1, 2002. Under SFAS 142, the Company is no longer required to amortize
goodwill and other intangible assets with indefinite lives. Instead, SFAS 142
requires that goodwill and intangible assets deemed to have an indefinite
useful life be reviewed for impairment upon adoption of SFAS 142 and annually
thereafter. See Note 4 to Condensed Consolidated Financial Statements.

In August 2001, the FASB issued SFAS No. 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets(SFAS 143). SFAS 143
establishes accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS 143 is effective for fiscal
years beginning after June 15, 2002, with early adoption permitted. The
Company adopted the provisions of SFAS 143 on January 1, 2003 and such adoption
did not have a material impact on its consolidated results of operations and
financial position.

In October 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets(SFAS 144). SFAS 144 establishes a single
accounting model for the impairment or disposal of long-lived assets and new
standards for reporting discontinued operations. SFAS 144 superseded SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Ofand APB Opinion No. 30, Reporting the Results of
Operations -  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.The
provisions of SFAS 144 are effective in fiscal years beginning after December
15, 2001 and, in general, are to be applied prospectively. The Company adopted
the provisions of SFAS 144 on January 1, 2002 and such adoption did not have a
material impact on its consolidated results of operations and financial
position.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities(SFAS 146), which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3,
a liability for an exit cost as defined in EITF Issue 94-3 was recognized at
the date of an entitys commitment to an exit plan. SFAS 146 also establishes
that the liability should initially be measured and recorded at fair value.
SFAS 146 is effective for exit and disposal activities initiated after December
31, 2002. The Company adopted the provisions of SFAS 146 on January 1, 2003,
and such adoption did not have a material impact on its consolidated results of
operations and financial position.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others.FIN 45 elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 while the provisions of the disclosure
requirements are effective for financial statements of interim or annual
reports ending after December 15, 2002. The Company adopted the disclosure
provisions of FIN 45 during the fourth quarter of fiscal 2002 and such adoption
did not have a material impact on the consolidated financial statements. The
Company adopted the recognition provisions of FIN 45 effective January 1, 2003
and such adoption did not have a material impact on the consolidated results of
operations and financial position.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure(SFAS 148). SFAS 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation(SFAS 123), to provide
alternative methods for voluntary transition to SFAS 123s fair value method of
accounting for stock-based employee compensation. SFAS 148 also requires
disclosure of the effects of an entitys accounting policy with respect to
stock-based employee compensation on reported net income (loss) and earnings
(loss) per share in annual and interim financial statements. The Company has
adopted the provisions of SFAS 148 effective January 1, 2003, and has included
the additional required disclosures under the heading Accounting for Stock
Based

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Compensationin the footnotes to the Companys financial statements.
This adoption did not have a material impact on the consolidated financial
statements.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either does not have equity investors with voting
rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain
variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company adopted the provisions
of FIN 46 effective February 1, 2003, and such adoption did not have a material
impact on its consolidated results of operations and financial position because
the Company currently has no variable interest entities.

In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. SFAS 150 requires that those
instruments be classified as liabilities in statements of financial position.
The Statement is effective for financial instruments entered into or modified
after May 31, 2003, otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. On June 15, 2003, the Company
adopted SFAS 150 which had no material impact on the Companys financial
condition and results of operations.




Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Foreign Currency

The Company has a subsidiary operating in Mexico. As a result, the Company is
exposed to potential transaction gains and losses resulting from fluctuations
in foreign currency exchange rates. The Company has not and currently does not
hedge or enter into derivative contracts in an effort to address foreign
exchange risk.




Item 4. CONTROLS AND PROCEDURES.

As of the end of the period covered by this quarterly report on Form 10-Q, the
Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Companys periodic SEC filings.
There have been no significant changes in the Companys internal control over
financial reporting during the period covered by this quarterly report on Form
10-Q that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.

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PART II  - OTHER INFORMATION






|Item 1. | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       
|        | In February 2002, the Company initiated a patent infringement action
against a manufacturer of catheter products. The Company believes this
manufacturer was providing to a large orthopedic company a catheter that
was claimed to be functionally equivalent to the Companys Soaker
Catheter.                                                                                                                                     
|       
|        | The lawsuit was settled in April 2003 pursuant to the terms of a
Confidential Settlement Agreement. The Company granted a license to the
manufacturer as a part of that settlement. In addition, the manufacturer
agreed to not refer to, advertise or promote the catheter, or any of its
catheter products, as providing uniform distribution of fluid throughout
the fenestrated area of the catheter or generically as a soaker.






|Item 2. | Changes in Securities and
Use of Proceeds
|------- | -----------------------------------------

In December 2001, the Board of Directors of the
Company approved a restricted stock plan (the 2001 Restricted Stock
Plan)
pursuant to which employees of the Company may be offered the opportunity to
acquire common stock of the Company.  On February 27, 2003, the Board of
Directors of the Company approved an amendment to the 2001 Restricted
Stock Plan to authorize an additional 250,000 shares for issuance under
the 2001 Restricted Stock Plan, however, subsequent to the Boards approval,
the Board of Directors decided to terminate any future issuances under the
2001 Restricted Stock Plan. As of July 31, 2003, a total of 70,000 shares
of restricted common stock were issued and outstanding under the 2001
Restricted Stock Plan. On May 29, 2003, the Board of Directors of the
Company approved a new restricted stock plan (the 2003 Restricted Stock
Plan) pursuant to which employees of the Company may be offered the
opportunity to acquire common stock of the Company. The Board of Directors
authorized a total of 250,000 shares for issuance under the 2003 Restricted
Stock Plan. In July 2003, the Company issued 90,000 shares of restricted
stock under the 2003 Restricted Stock Plan. Generally, the restrictions
on the shares issued under both the 2001 and 2003 Restricted Stock Plans
lapse over a period of three years, subject to possible acceleration based
upon the achievement of individual performance goals.

On May 8, 2003, in connection with entering
into the Amended and Restated Loan and Security Agreement with Silicon
Valley Bank, the Company issued a warrant to Silicon Valley Bank to purchase
15,625 shares of the Companys common stock at an exercise price of $3.84
per share. The warrant is immediately exercisable and expires on May 8, 2010.
In addition, the Company has granted certain registration rights to Silicon
Valley Bank in connection with the issuance of the warrant.






|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

| |     |  |                                                                                                                                                           
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) |  | The 2003 Annual Meeting of Stockholders of the Company was
held on May 29, 2003.                                                                          
| |     |  |                                                                                                                                                           
| | (b) |  | Both of the two Class I directors nominated for election by
the Companys board of directors, as described in the Companys
proxy statement, were elected.
| |     |  |                                                                                                                                                           
| | (c) |  | Matters voted upon at the meeting and the votes cast with
respect to each such matter were as follows:                                                    



| |  | Proposals and Vote Tabulations
| |  | ------------------------------

|                                                                                                                                      |  |            |            |         |  |         |        |           |  |  |        |  |  |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | ---------- | ------- |  | ------- | ------ | --------- |  |  | ------ |  |  | -
|                                                                                                                                      |  | Votes Cast
|                                                                                                                                      |  |           
|                                                                                                                                      |  |            |            |         |  |         |        | Broker   
|Proposal by the Board of Directors                                                                                                    |  | For        |            | Against |  | Abstain |        | Non-Votes
|                                                                                                                                      |  |            |            |         |  |         |        |          
|To ratify the appointment of
Deloitte & Touche LLP as the
Companys independent auditor for
the fiscal year ending December
31, 2003. |  |            | 14,291,457 |         |  |         | 57,819 |           |  |  | 61,084 |  |  | 

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| |  | Election of Directors                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Each of the directors listed below was elected and will continue to serve
on the Companys board of directors until the 2006 annual
meeting of stockholders and until their successors are duly elected
and qualified.

|                       |  |                |            |                |  |  |         | 
|---------------------- |  | -------------- | ---------- | -------------- |  |  | ------- | 
|Director               |  | Votes Received |            | Votes Withheld
|                       |  |                |            |               
|James J. Dal Porto     |  |                | 13,823,231 |                |  |  | 587,129 | 
|                       |  |                |            |                |  |  |         | 
|Jack H. Halperin, Esq. |  |                | 13,917,331 |                |  |  | 493,029 | 




Item 6.        Exhibits and Reports on Form 8-K



| | (a)                                                                                                     |  | Exhibits
| | ------------------------------------------------------------------------------------------------------- |  | --------
|
| | Set forth below is a list of the exhibits included or incorporated by
reference as part of this report:

|            |  |                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                              
|            |  |                                                                                                                                                      
|2.1         |  | Merger Agreement by and between I-Flow Corporation, a
Delaware corporation, and I-Flow Corporation, a California
corporation, dated July 27, 2001 (1)

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|            |  |                                                                                                                                                                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                        
|3.1         |  | Certificate of Incorporation of I-Flow Corporation, a
Delaware corporation (1)                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                        
|3.2         |  | Bylaws of I-Flow Corporation, a Delaware Corporation (1)                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                        
|3.3         |  | Certificate of Designation Regarding Series A Junior
Participating Cumulative Preferred Stock (14)                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                        
|4.1         |  | Specimen Common Stock Certificate (2)                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                        
|4.2         |  | Warrant Agreement between the Company and American Stock
Transfer & Trust Company, as Warrant Agent, dated February
13, 1990 (3)                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                        
|4.3         |  | Form of Warrant dated July 22, 1996, issued in conjunction
with the acquisition of Block Medical, Inc. (15)                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                        
|4.4         |  | Rights Agreement, dated as of March 8, 2002, by and between
I-Flow Corporation and American Stock Transfer & Trust
Company, as Rights Agent, which includes, as Exhibit A,
the Form of Rights Certificate, the Form of Assignment and
Form of Election to Purchase (14)
|            |  |                                                                                                                                                                                                                                                                        
|4.5         |  | Warrant to Purchase Stock dated May 8, 2003 between I-Flow
Corporation and Silicon Valley Bank                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                        
|4.6         |  | Registration Rights Agreement dated May 8, 2003 between
I-Flow Corporation and Silicon Valley Bank                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                        
|10.1        |  | 1987-1988 Incentive Stock Option Plan and Non-Statutory
Stock Option Plan Restated as of March 23, 1992 (5) *                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                        
|10.2        |  | 1992 Non-Employee Director Stock Option Plan (6) *                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                        
|10.3        |  | License and Transfer Agreement with SoloPak
Pharmaceuticals Inc., dated March 6, 1996 (7)                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                        
|10.4        |  | 1996 Stock Incentive Plan (8) *                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                        
|10.5        |  | Agreement for Purchase and Sale of Assets dated as of July
3, 1996 by and among I-Flow Corporation, Block Medical,
Inc. and Hillenbrand Industries, Inc. (4)                                                                                                           
|            |  |                                                                                                                                                                                                                                                                        
|10.6        |  | Lease Agreement between Industrial Developments International, Inc. as Landlord and I-Flow
Corporation as Tenant dated April 14, 1997 (9)                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                        
|10.7        |  | Agreement and Plan of Merger by and among I-Flow Corporation, I-Flow Subsidiary, Inc., Venture
Medical, Inc., and InfuSystems II, Inc. and the Shareholders of Venture Medical, Inc. and
InfuSystems II, Inc. (10)                                                     
|            |  |                                                                                                                                                                                                                                                                        
|10.8        |  | Amended and Restated Loan and Security Agreement between Silicon Valley Bank and I-Flow Corporation
dated May 8, 2003.                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                        
|10.9        |  | Agreement and Plan of Merger by and among I-Flow Corporation, Spinal Acquisition Corp., Spinal
Specialties, Inc. and the Shareholders of Spinal Specialties, Inc. dated January 13, 2000 (11)                                                                          

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##### Table of Contents



|            |  |                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                                 
|            |  |                                                                                                                                                         
|10.10       |  | I-Flow Corporation 2001 Equity Incentive Plan (2) *                                                                                                     
|            |  |                                                                                                                                                         
|10.11       |  | 2001 Restricted Stock Plan of I-Flow Corporation (16) *                                                                                                 
|            |  |                                                                                                                                                         
|10.12       |  | 2003 Restricted Stock Plan of I-Flow Corporation *                                                                                                      
|            |  |                                                                                                                                                         
|10.13       |  | Loan Agreement dated March 31, 2000 by and among InfuSystem, Inc., I-Flow Corporation, and Old Kent
Bank.                                               
|            |  |                                                                                                                                                         
|10.14       |  | First Amendment to Loan Agreement dated April 1, 2002 by and among InfuSystem, Inc., I-Flow
Corporation, and Fifth Third Bank (formerly Old Kent Bank). 
|            |  |                                                                                                                                                         
|10.15       |  | Second Amendment to Loan Agreement dated April 1, 2003 by and among InfuSystem, Inc., I-Flow
Corporation, and Fifth Third Bank (formerly Old Kent Bank).
|            |  |                                                                                                                                                         
|10.16       |  | Second Amended and Restated Promissory Note dated April 1, 2003 between InfuSystem, Inc. and Fifth
Third Bank (formerly Old Kent Bank).                 
|            |  |                                                                                                                                                         
|10.17       |  | Employment Agreement with Donald M. Earhart dated May 16, 1990 (12) *                                                                                   
|            |  |                                                                                                                                                         
|10.18       |  | Amendment #1 to Employment Agreement with Donald M. Earhart dated June 21, 2001 (2)*                                                                    
|            |  |                                                                                                                                                         
|10.19       |  | Promissory Note with Donald M. Earhart dated June 15, 2001 (2) *                                                                                        
|            |  |                                                                                                                                                         
|10.20       |  | Amended and Restated Employment Agreement with James J. Dal Porto dated June 21, 2001 (2) *                                                             
|            |  |                                                                                                                                                         
|10.21       |  | Employment Agreement with James R. Talevich dated June 30, 2000 (13) *                                                                                  
|            |  |                                                                                                                                                         
|10.22       |  | Agreement Re: Change in Control with Donald M. Earhart dated June 21, 2001 (2) *                                                                        
|            |  |                                                                                                                                                         
|10.23       |  | Agreement Re: Change in Control with James J. Dal Porto dated June 21, 2001 (2) *                                                                       
|            |  |                                                                                                                                                         
|10.24       |  | Agreement Re: Change in Control with James R. Talevich dated June 21, 2001 (2) *                                                                        
|            |  |                                                                                                                                                         
|31.1        |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                      
|            |  |                                                                                                                                                         
|31.2        |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                      
|            |  |                                                                                                                                                         
|32.1        |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002                                  

-19-



---



##### Table of Contents





---

|* |  | Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(1)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 3, 2001.           
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.                                        
|    
|(3)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Registration Statement (#33-32263-LA) declared effective
February 1, 1990.                                
|    
|(4)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 7, 1996.           
|    
|(5)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Post Effective Amendment to its Registration Statement
(#33-41207-LA) declared effective November 6, 1992.
|    
|(6)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for its fiscal year ended December
31, 1991.                                   
|    
|(7)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for its fiscal year ended December
31, 1995.                                   
|    
|(8)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Registration Statement on Form S-8 (#333-16547) declared
effective November 20, 1996.                     
|    
|(9)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 25, 1997.           
|    
|(10) |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 19, 1998.        
|    
|(11) |  | Incorporated by reference to exhibit with this title filed with the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.                                       
|    
|(12) |  | Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for its fiscal year ended September
30, 1990.                                  
|    
|(13) |  | Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for its fiscal year ended December
31, 2000.                                   
|    
|(14) |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K, filed with the Securities and
Exchange Commission on March 13, 2002.          
|    
|(15) |  | Incorporated by reference to exhibit with this title filed with the
Companys Registration Statement on Form S-3, filed February 10, 1997.                                              
|    
|(16) |  | Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for its fiscal year ended December
31, 2002.                                   

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---



##### Table of Contents





| | (b) | Reports on Form 8-K                                                                                                                                                                    
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     | The Company filed the following Current Report on Form 8-K during
the second fiscal quarter of 2003:                                                                                   
|
| |     | On April 29, 2003, the Company filed a Current Report on Form 8-K that
included a press release issued on April 29, 2003 announcing the
Companys first quarter 2003 financial results.

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---



##### Table of Contents






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.

|                      |  |                                                                                                                         
|--------------------- |  | ------------------------------------------------------------------------------------------------------------------------
|Date: August 14, 2003 |  | /s/ Donald M. Earhart
Donald M. Earhart
President, Chairman and Chief Executive Officer
(As Principal Executive Officer)

|                      |  |                                                                                                 
|--------------------- |  | ------------------------------------------------------------------------------------------------
|Date: August 14, 2003 |  | /s/ James R. Talevich
James R. Talevich
Chief Financial Officer
(As Principal Financial Officer)

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##### Table of Contents



INDEX TO EXHIBITS

Set forth below is a list of the exhibits included or incorporated by
reference as part of this report:

|            |  |                                                                                                                                                                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                        
|2.1         |  | Merger Agreement by and between I-Flow Corporation, a
Delaware corporation, and I-Flow Corporation, a California
corporation, dated July 27, 2001 (1)                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                        
|3.1         |  | Certificate of Incorporation of I-Flow Corporation, a
Delaware corporation (1)                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                        
|3.2         |  | Bylaws of I-Flow Corporation, a Delaware Corporation (1)                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                        
|3.3         |  | Certificate of Designation Regarding Series A Junior
Participating Cumulative Preferred Stock (14)                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                        
|4.1         |  | Specimen Common Stock Certificate (2)                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                        
|4.2         |  | Warrant Agreement between the Company and American Stock
Transfer & Trust Company, as Warrant Agent, dated February
13, 1990 (3)                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                        
|4.3         |  | Form of Warrant dated July 22, 1996, issued in conjunction
with the acquisition of Block Medical, Inc. (15)                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                        
|4.4         |  | Rights Agreement, dated as of March 8, 2002, by and between
I-Flow Corporation and American Stock Transfer & Trust
Company, as Rights Agent, which includes, as Exhibit A,
the Form of Rights Certificate, the Form of Assignment and
Form of Election to Purchase (14)
|            |  |                                                                                                                                                                                                                                                                        
|4.5         |  | Warrant to Purchase Stock dated May 8, 2003 between I-Flow
Corporation and Silicon Valley Bank                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                        
|4.6         |  | Registration Rights Agreement dated May 8, 2003 between
I-Flow Corporation and Silicon Valley Bank                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                        
|10.1        |  | 1987-1988 Incentive Stock Option Plan and Non-Statutory
Stock Option Plan Restated as of March 23, 1992 (5) *                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                        
|10.2        |  | 1992 Non-Employee Director Stock Option Plan (6) *                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                        
|10.3        |  | License and Transfer Agreement with SoloPak
Pharmaceuticals Inc., dated March 6, 1996 (7)                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                        
|10.4        |  | 1996 Stock Incentive Plan (8) *                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                        
|10.5        |  | Agreement for Purchase and Sale of Assets dated as of July
3, 1996 by and among I-Flow Corporation, Block Medical,
Inc. and Hillenbrand Industries, Inc. (4)                                                                                                           
|            |  |                                                                                                                                                                                                                                                                        
|10.6        |  | Lease Agreement between Industrial Developments International, Inc. as
Landlord and I-Flow
Corporation as Tenant dated April 14, 1997 (9)                                                                                                                              

-23-



---



##### Table of Contents



|            |  |                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                   
|10.7        |  | Agreement and Plan of Merger by and among I-Flow Corporation, I-Flow Subsidiary, Inc., Venture
Medical, Inc., and InfuSystems II, Inc. and the Shareholders of Venture Medical, Inc. and
InfuSystems II, Inc. (10)
|            |  |                                                                                                                                                                                                                   
|10.8        |  | Amended and Restated Loan and Security Agreement between Silicon Valley Bank and I-Flow Corporation
dated May 8, 2003.                                                                                            
|            |  |                                                                                                                                                                                                                   
|10.9        |  | Agreement and Plan of Merger by and among I-Flow Corporation, Spinal Acquisition Corp., Spinal
Specialties, Inc. and the Shareholders of Spinal Specialties, Inc. dated January 13, 2000 (11)                     
|            |  |                                                                                                                                                                                                                   
|10.10       |  | I-Flow Corporation 2001 Equity Incentive Plan (2) *                                                                                                                                                               
|            |  |                                                                                                                                                                                                                   
|10.11       |  | 2001 Restricted Stock Plan of I-Flow Corporation (16) *                                                                                                                                                           
|            |  |                                                                                                                                                                                                                   
|10.12       |  | 2003 Restricted Stock Plan of I-Flow Corporation *                                                                                                                                                                
|            |  |                                                                                                                                                                                                                   
|10.13       |  | Loan Agreement dated March 31, 2000 by and among InfuSystem, Inc., I-Flow Corporation, and Old Kent
Bank.                                                                                                         
|            |  |                                                                                                                                                                                                                   
|10.14       |  | First Amendment to Loan Agreement dated April 1, 2002 by and among InfuSystem, Inc., I-Flow
Corporation, and Fifth Third Bank (formerly Old Kent Bank).                                                           
|            |  |                                                                                                                                                                                                                   
|10.15       |  | Second Amendment to Loan Agreement dated April 1, 2003 by and among InfuSystem, Inc., I-Flow
Corporation, and Fifth Third Bank (formerly Old Kent Bank).                                                          
|            |  |                                                                                                                                                                                                                   
|10.16       |  | Second Amended and Restated Promissory Note dated April 1, 2003 between InfuSystem, Inc. and Fifth
Third Bank (formerly Old Kent Bank).                                                                           
|            |  |                                                                                                                                                                                                                   
|10.17       |  | Employment Agreement with Donald M. Earhart dated May 16, 1990 (12) *                                                                                                                                             
|            |  |                                                                                                                                                                                                                   
|10.18       |  | Amendment #1 to Employment Agreement with Donald M. Earhart dated June 21, 2001 (2)*                                                                                                                              
|            |  |                                                                                                                                                                                                                   
|10.19       |  | Promissory Note with Donald M. Earhart dated June 15, 2001 (2) *                                                                                                                                                  
|            |  |                                                                                                                                                                                                                   
|10.20       |  | Amended and Restated Employment Agreement with James J. Dal Porto dated June 21, 2001 (2) *                                                                                                                       
|            |  |                                                                                                                                                                                                                   
|10.21       |  | Employment Agreement with James R. Talevich dated June 30, 2000 (13) *                                                                                                                                            
|            |  |                                                                                                                                                                                                                   
|10.22       |  | Agreement Re: Change in Control with Donald M. Earhart dated June 21, 2001 (2) *                                                                                                                                  
|            |  |                                                                                                                                                                                                                   
|10.23       |  | Agreement Re: Change in Control with James J. Dal Porto dated June 21, 2001 (2) *                                                                                                                                 
|            |  |                                                                                                                                                                                                                   
|10.24       |  | Agreement Re: Change in Control with James R. Talevich dated
June 21, 2001 (2) *                                                                                                                                  
|            |  |                                                                                                                                                                                                                   

-24-



---



##### Table of Contents



|            |  |                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                               
|            |  |                                                                                                                       
|            | 
|31.1        |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                    
|            |  |                                                                                                                       
|31.2        |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                    
|            |  |                                                                                                                       
|32.1        |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002



---

|* |  | Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(1)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 3, 2001.           
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.                                        
|    
|(3)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Registration Statement (#33-32263-LA) declared effective
February 1, 1990.                                
|    
|(4)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 7, 1996.           
|    
|(5)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Post Effective Amendment to its Registration Statement
(#33-41207-LA) declared effective November 6, 1992.
|    
|(6)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for its fiscal year ended December
31, 1991.                                   
|    
|(7)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for its fiscal year ended December
31, 1995.                                   
|    
|(8)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Registration Statement on Form S-8 (#333-16547) declared
effective November 20, 1996.                     
|    
|(9)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 25, 1997.           
|    
|(10) |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 19, 1998.        
|    
|(11) |  | Incorporated by reference to exhibit with this title filed with the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.                                       
|    
|(12) |  | Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for its fiscal year ended September
30, 1990.                                  
|    
|(13) |  | Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for its fiscal year ended December
31, 2000.                                   

-25-



---



##### Table of Contents





|(14) |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K, filed with the Securities and
Exchange Commission on March 13, 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(15) |  | Incorporated by reference to exhibit with this title filed with the
Companys Registration Statement on Form S-3, filed February 10, 1997.                                    
|    
|(16) |  | Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for its fiscal year ended December
31, 2002.                         

-26-