##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                    to
 Commission file number: 000-18338
 I-FLOW CORPORATION
  Delaware
    
    33-0121984(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)20202 Windrow Drive, Lake Forest, CA
    
    92630(Address of Principal Executive Offices)
    
    (Zip Code)
 
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ




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##### 



I-FLOW CORPORATION
 FORM 10-Q
 FOR THE QUARTER ENDED JUNE 30, 2008
  
 Table of Contents
 PagePart I: Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
    
    1Condensed Consolidated Statements of Operations and Comprehensive Operations
    
    2Condensed Consolidated Statements of Cash Flows
    
    3Notes to Condensed Consolidated Financial Statements
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    25Item 4.
    
    Controls and Procedures
    
    25Part II: Other InformationItem 1.
    
    Legal Proceedings
    
    26Item 1A.
    
    Risk Factors
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    29Item 5.
    
    Other Information
    
    29Item 6.
    
    Exhibits
    
    29Signatures
    
    30EXHIBIT 10.7EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 I-FLOW CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS  (Unaudited)  (Amounts in thousands)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    33,111
    
    
    $
    78,571Short-term investments
    
    
    6,995
    
    
    
    14,379Short-term investments  InfuSystem
Holdings, Inc. (formerly known as HAPC)
common stock
    
    
    7,665
    
    
    
    10,533Accounts receivable, less allowance for
doubtful accounts of $1,963 and $1,962
at June 30, 2008 and December 31, 2007,
respectively
    
    
    20,784
    
    
    
    22,443Inventories
    
    
    15,752
    
    
    
    13,128Prepaid expenses and other current assets
    
    
    3,457
    
    
    
    1,267Note receivable, InfuSystem Holdings,
Inc. (formerly known as HAPC)  current
    
    
    2,862
    
    
    
    2,044Deferred income taxes
    
    
    1,599
    
    
    
    1,499Total current assets
    
    
    92,225
    
    
    
    143,864Property, net
    
    
    4,055
    
    
    
    3,318Goodwill
    
    
    23,344
    
    
    
    Other intangible assets, net
    
    
    4,383
    
    
    
    2,586Other long-term assets
    
    
    195
    
    
    
    133Note receivable, InfuSystem Holdings, Inc.
(formerly known as HAPC)  noncurrent
    
    
    28,615
    
    
    
    30,250Deferred income taxes
    
    
    8,647
    
    
    
    8,504Total assets
    
    $
    161,464
    
    
    $
    188,655LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,713
    
    
    $
    4,570Accrued payroll and related expenses
    
    
    7,140
    
    
    
    7,724Income taxes payable
    
    
    
    
    
    
    12,450Accrued litigation costs (Note 10)
    
    
    8,687
    
    
    
    Other current liabilities
    
    
    1,464
    
    
    
    1,933Total current liabilities
    
    
    22,004
    
    
    
    26,677Other liabilities (Note 10)
    
    
    6,201
    
    
    
    6,402Commitments and contingencies (Note 10)
    
    
    
    
    
    
    Stockholders equity:Preferred stock  $0.001 par value;
5,000 shares authorized; no shares
issued and outstanding
    
    
    
    
    
    
    Common stock and additional paid-in
capital  $0.001 par value; 40,000
shares authorized; 24,601 and 24,974
shares issued and outstanding at June
30, 2008 and December 31, 2007,
respectively
    
    
    134,601
    
    
    
    142,197Accumulated other comprehensive loss
    
    
    (2,966
    )
    
    
    (207
    )Retained earnings
    
    
    1,624
    
    
    
    13,586Net stockholders equity
    
    
    133,259
    
    
    
    155,576Total liabilities and stockholders equity
    
    $
    161,464
    
    
    $
    188,655
  1




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##### Table of Contents



I-FLOW CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
OPERATIONS  (Unaudited)  (Amounts in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    35,316
    
    
    $
    29,075
    
    
    $
    63,731
    
    
    $
    53,381Cost of revenues
    
    
    9,699
    
    
    
    8,054
    
    
    
    16,886
    
    
    
    14,342Gross profit
    
    
    25,617
    
    
    
    21,021
    
    
    
    46,845
    
    
    
    39,039Operating expenses:Selling and marketing
    
    
    19,353
    
    
    
    18,273
    
    
    
    37,751
    
    
    
    35,414General and administrative
    
    
    5,585
    
    
    
    4,677
    
    
    
    10,493
    
    
    
    8,711Product development
    
    
    1,237
    
    
    
    682
    
    
    
    2,158
    
    
    
    1,304Certain litigation and insurance charges (Note 10)
    
    
    12,168
    
    
    
    
    
    
    
    12,168
    
    
    
    Total operating expenses
    
    
    38,343
    
    
    
    23,632
    
    
    
    62,570
    
    
    
    45,429Operating loss
    
    
    (12,726
    )
    
    
    (2,611
    )
    
    
    (15,725
    )
    
    
    (6,390
    )Interest and other income
    
    
    1,188
    
    
    
    245
    
    
    
    2,895
    
    
    
    524Loss from continuing operations before income taxes
    
    
    (11,538
    )
    
    
    (2,366
    )
    
    
    (12,830
    )
    
    
    (5,866
    )Income tax benefit
    
    
    113
    
    
    
    796
    
    
    
    868
    
    
    
    2,089Loss from continuing operations
    
    
    (11,425
    )
    
    
    (1,570
    )
    
    
    (11,962
    )
    
    
    (3,777
    )Discontinued operations:Income from discontinued operations, net of tax
    
    
    
    
    
    
    2,169
    
    
    
    
    
    
    
    3,455Net income (loss)
    
    $
    (11,425
    )
    
    $
    599
    
    
    $
    (11,962
    )
    
    $
    (322
    )Per share of common stock, basic and diluted:Loss from continuing operations
    
    $
    (0.47
    )
    
    $
    (0.06
    )
    
    $
    (0.49
    )
    
    $
    (0.16
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    0.09
    
    
    
    
    
    
    
    0.15Net income (loss)
    
    $
    (0.47
    )
    
    $
    0.03
    
    
    $
    (0.49
    )
    
    $
    (0.01
    )Weighted-average shares, basic and diluted
    
    
    24,459
    
    
    
    23,694
    
    
    
    24,528
    
    
    
    23,622Comprehensive Operations:Net income (loss)
    
    $
    (11,425
    )
    
    $
    599
    
    
    $
    (11,962
    )
    
    $
    (322
    )Foreign currency translation gain (loss)
    
    
    (7
    )
    
    
    44
    
    
    
    108
    
    
    
    16Unrealized gain on investment securities
    
    
    4
    
    
    
    2
    
    
    
    1
    
    
    
    2Unrealized gain (loss) on investment securities -
InfuSystem Holdings, Inc. (formerly known as
HAPC) common stock
    
    
    1,409
    
    
    
    
    
    
    
    (2,868
    )
    
    
    Comprehensive income (loss)
    
    $
    (10,019
    )
    
    $
    645
    
    
    $
    (14,721
    )
    
    $
    (304
    )
  2




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##### Table of Contents



I-FLOW CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)  (Amounts in thousands)
 Six Months EndedJune 302008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (11,962
    )
    
    $
    (322
    )Adjustments to reconcile net loss to net cash used in operating activities:Income from discontinued operations, net of tax
    
    
    
    
    
    
    (3,455
    )Stock-based compensation
    
    
    3,328
    
    
    
    2,995Depreciation and amortization
    
    
    1,095
    
    
    
    777Excess tax benefit from exercise of stock options and vested restricted
stock and restricted stock units
    
    
    (562
    )
    
    
    Write-off of inventory
    
    
    373
    
    
    
    329Amortization of deferred financing fees from note receivable, InfuSystem
Holdings, Inc. (formerly known as HAPC)
    
    
    (355
    )
    
    
    Provision for doubtful accounts receivable
    
    
    184
    
    
    
    535Gain on disposal of property
    
    
    (4
    )
    
    
    (2
    )Deferred income taxes
    
    
    
    
    
    
    (1,429
    )Changes in operating assets and liabilities, net of AcryMed acquisition:Accounts receivable
    
    
    2,411
    
    
    
    991Inventories
    
    
    (2,377
    )
    
    
    (2,305
    )Prepaid expenses and other assets
    
    
    (777
    )
    
    
    (246
    )Accounts payable, accrued payroll and related expenses
    
    
    (1,571
    )
    
    
    (302
    )Income taxes payable
    
    
    (13,524
    )
    
    
    (132
    )Accrued litigation costs
    
    
    8,687
    
    
    
    Other liabilities
    
    
    (407
    )
    
    
    1,093Net cash used in operating activities from continuing operations
    
    
    (15,461
    )
    
    
    (1,473
    )Net cash provided by operating activities from discontinued operations
    
    
    
    
    
    
    3,578Net cash (used in) provided by operating activities
    
    
    (15,461
    )
    
    
    2,105CASH FLOWS FROM INVESTING ACTIVITIES:Property acquisitions
    
    
    (691
    )
    
    
    (782
    )Proceeds from sale of property
    
    
    11
    
    
    
    Acquisition of AcryMed, net of cash acquired
    
    
    (26,663
    )
    
    
    Repayments on note receivable, InfuSystem Holdings, Inc. (formerly known
as HAPC)
    
    
    818
    
    
    
    Purchases of investments
    
    
    (6,944
    )
    
    
    (4,551
    )Maturities of investments
    
    
    14,329
    
    
    
    9,752Patent acquisitions
    
    
    (262
    )
    
    
    (164
    )Net cash (used in) provided by investing activities from continuing operations
    
    
    (19,402
    )
    
    
    4,255Net cash used in investing activities from discontinued operations
    
    
    
    
    
    
    (1,353
    )Net cash (used in) provided by investing activities
    
    
    (19,402
    )
    
    
    2,902CASH FLOWS FROM FINANCING ACTIVITIES:Purchase and retirement of common stock
    
    
    (11,582
    )
    
    
    (1,500
    )Excess tax benefit from exercise of stock options and vested restricted
stock and restricted stock units
    
    
    562
    
    
    
    Proceeds from exercise of stock options
    
    
    315
    
    
    
    1,676Net cash (used in) provided by financing activities
    
    
    (10,705
    )
    
    
    176Effect of exchange rates on cash
    
    
    108
    
    
    
    16Net (decrease) increase in cash and cash equivalents
    
    
    (45,460
    )
    
    
    5,199Net decrease in cash and cash equivalents from discontinued operations
    
    
    
    
    
    
    1,543Cash and cash equivalents at beginning of period
    
    
    78,571
    
    
    
    9,288Cash and cash equivalents at end of period
    
    $
    33,111
    
    
    $
    16,030
 (Table
continued on next page)
  3




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Six Months EndedJune 302008
    
    
    2007SUPPLEMENTAL CASH FLOW INFORMATION:Income tax payments
    
    $
    13,162
    
    
    $
    318Interest received
    
    
    2,830
    
    
    
    529SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:Property acquisitions
    
    $
    169
    
    
    $
    226
  4




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I-FLOW CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. Basis of Presentation and Summary of Significant Accounting Policies
 Basis of Presentation
  Use of Estimates 
 Segment Reporting
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Amounts in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Acute Care
    
    $
    27,894
    
    
    $
    23,015
    
    
    $
    51,084
    
    
    $
    42,147IV Infusion Therapy
    
    
    7,422
    
    
    
    6,060
    
    
    
    12,647
    
    
    
    11,234Total
    
    $
    35,316
    
    
    $
    29,075
    
    
    $
    63,731
    
    
    $
    53,381
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Amounts in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    $
    31,047
    
    
    $
    25,641
    
    
    $
    55,898
    
    
    $
    47,412Europe
    
    
    3,467
    
    
    
    2,757
    
    
    
    6,081
    
    
    
    4,666Asia/Pacific Rim
    
    
    258
    
    
    
    425
    
    
    
    738
    
    
    
    777Other
    
    
    544
    
    
    
    252
    
    
    
    1,014
    
    
    
    526Total
    
    $
    35,316
    
    
    $
    29,075
    
    
    $
    63,731
    
    
    $
    53,381
  5




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##### Table of Contents



New Accounting Pronouncements Fair Value
Measurements ,
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Business Combinations Business Combinations
  Accounting for Stock-Based Compensation  Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Share-Based Payment
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Amounts in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Loss from continuing operations:Selling and marketing
    
    $
    392
    
    
    $
    616
    
    
    $
    492
    
    
    $
    1,232General and administrative
    
    
    1,518
    
    
    
    1,216
    
    
    
    2,836
    
    
    
    1,763Subtotal
    
    
    1,910
    
    
    
    1,832
    
    
    
    3,328
    
    
    
    2,995Income from discontinued operations:Selling and marketing
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    79General and administrative
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    68Subtotal
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    147Total
    
    $
    1,910
    
    
    $
    1,896
    
    
    $
    3,328
    
    
    $
    3,142
 6




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30, 2007
    
    June 30, 2007Expected life (in years)
    
    
    5.0
    
    
    
    5.0Risk-free interest rate
    
    
    5.03
    %
    
    
    4.48% - 5.03
    %Volatility
    
    
    53%
    
    
    
    53% - 54
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00%
  Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards
  7




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##### Table of Contents



Stock Options
  Weighted-AverageWeighted-
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateNumber
    
    
    Exercise Price
    
    
    Term
    
    
    Intrinsic(Amounts in thousands, except per share and year amounts)
    
    of Shares
    
    
    per Share
    
    
    (in years)
    
    
    ValueOptions outstanding at December 31, 2007
    
    
    2,513
    
    
    $
    10.97Options granted
    
    
    
    
    
    
    Options exercised
    
    
    (161
    )
    
    
    3.72Options forfeited or expired
    
    
    (88
    )
    
    
    15.17Options outstanding at June 30, 2008
    
    
    2,264
    
    
    
    11.32
    
    
    
    1.43
    
    
    $
    6,383Options vested and exercisable at June 30, 2008
    
    
    2,105
    
    
    $
    11.05
    
    
    
    1.29
    
    
    $
    6,383
   Restricted Stock and Restricted Stock Units
 i.e.
 Restricted Stock
    
    
    Restricted Stock UnitsWeighted-
    
    
    
    
    
    
    Weighted-Average Grant
    
    
    
    
    
    
    Average GrantNumber of
    
    
    Date Fair Value
    
    
    Number of
    
    
    Date Fair Value(Amounts in thousands, except per share amounts)
    
    Shares
    
    
    per Share
    
    
    Shares
    
    
    per ShareNonvested shares outstanding at December 31, 2007
    
    
    561
    
    
    $
    14.50
    
    
    
    597
    
    
    $
    15.57Shares issued
    
    
    191
    
    
    
    14.41
    
    
    
    350
    
    
    
    13.82Shares vested or released
    
    
    (235
    )
    
    
    14.76
    
    
    
    (184
    )
    
    
    14.15Shares forfeited
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    15.51Nonvested shares outstanding at June 30, 2008
    
    
    517
    
    
    $
    14.35
    
    
    
    684
    
    
    $
    14.73
 8




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##### Table of Contents



2. Inventories
  June 30,
    
    
    December 31,(Amounts in thousands)
    
    2008
    
    
    2007Raw materials
    
    $
    6,840
    
    
    $
    6,534Work in process
    
    
    3,676
    
    
    
    2,056Finished goods
    
    
    5,236
    
    
    
    4,538Total
    
    $
    15,752
    
    
    $
    13,128
 3. Earnings (Loss) Per Share
 Earnings Per Share
   9




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Amounts in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Loss from continuing operations, net of tax
    
    $
    (11,425
    )
    
    $
    (1,570
    )
    
    $
    (11,962
    )
    
    $
    (3,777
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    2,169
    
    
    
    
    
    
    
    3,455Net income (loss)
    
    $
    (11,425
    )
    
    $
    599
    
    
    $
    (11,962
    )
    
    $
    (322
    )Denominators:Denominator for basic earnings per share:Weighted-average number of common shares outstanding
    
    
    24,459
    
    
    
    23,694
    
    
    
    24,528
    
    
    
    23,622Effect of dilutive securities:Stock options, nonvested restricted stock and
nonvested restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted net income per share:Weighted-average number of common and common
equivalent shares outstanding
    
    
    24,459
    
    
    
    23,694
    
    
    
    24,528
    
    
    
    23,622Earnings per share, basic and diluted:Loss from continuing operations, net of tax
    
    $
    (0.47
    )
    
    $
    (0.06
    )
    
    $
    (0.49
    )
    
    $
    (0.16
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    0.09
    
    
    
    
    
    
    
    0.15Net income (loss)
    
    $
    (0.47
    )
    
    $
    0.03
    
    
    $
    (0.49
    )
    
    $
    (0.01
    )
   4. Goodwill and Other Intangible Assets
 Goodwill
and Other Intangible Assets
  As of June 30, 2008Carrying
    
    
    Accumulated(Amounts in thousands)
    
    Amount
    
    
    Amortization
    
    
    NetPatents
    
    $
    3,515
    
    
    $
    (1,619
    )
    
    $
    1,896Licensing rights
    
    
    1,102
    
    
    
    (428
    )
    
    
    674Noncompetition agreements
    
    
    2,000
    
    
    
    (187
    )
    
    
    1,813Total
    
    $
    6,617
    
    
    $
    (2,234
    )
    
    $
    4,383
 As of December 31, 2007Carrying
    
    
    Accumulated(Amounts in thousands)
    
    Amount
    
    
    Amortization
    
    
    NetPatents
    
    $
    3,335
    
    
    $
    (1,471
    )
    
    $
    1,864Licensing rights
    
    
    1,102
    
    
    
    (380
    )
    
    
    722Total
    
    $
    4,437
    
    
    $
    (1,851
    )
    
    $
    2,586
 10




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##### Table of Contents



5. Stockholders Equity
   6. Acquisition
  11




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(Amounts in thousands)Cash
    
    $
    66Accounts receivable, net
    
    
    937Inventory
    
    
    620Other current assets
    
    
    165Property, net
    
    
    506Intangible assets
    
    
    2,000Goodwill
    
    
    23,344Other long-term assets
    
    
    143Total assets acquired
    
    
    27,781Accounts payable
    
    
    689Accrued payroll and related expenses
    
    
    272Other current liabilities
    
    
    76Other long-term liabilities
    
    
    15Total liabilities assumed
    
    
    1,052Net assets acquired
    
    $
    26,729
  7. Discontinued Operations
 ®
   12




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##### Table of Contents



Accounting for Impairment or Disposal of Long-Lived Assets
 Three Months
    
    Six MonthsEnded
    
    Ended(Amounts in thousands)
    
    June 30, 2007
    
    June 30, 2007Operating revenues
    
    $
    7,832
    
    
    $
    15,706Operating income (1)
    
    
    3,644
    
    
    
    5,396Income taxes
    
    
    (1,475
    )
    
    
    (1,941
    )Income from discontinued operations (1) (2)
    
    
    2,169
    
    
    
    3,455
 
 (1)
    
    Includes $176,000 and $433,000 of divestiture expenses recorded during the three and six
months ended June 30, 2007, respectively.(2)
    
    Includes the effect of the favorable ruling by the Michigan Tax Tribunal relating to
InfuSystems use tax liability. The Company reversed in discontinued operations during the
second quarter of 2007, the accrued tax liability, accrued interest expense and cumulative
increases to gross fixed assets and total expenses in the amounts of $1,466,000, $267,000,
$1,347,000 and $924,000 (consisting of $657,000 of cost of sales and $267,000 of interest
expense), respectively. 8. Fair Values of Financial Instruments
      13




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##### Table of Contents



Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableBalance at
    
    
    Assets
    
    
    Inputs
    
    
    Inputs(Amounts in thousands)
    
    June 30, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Reported as:Cash equivalents (1)
    
    $
    29,448
    
    
    $
    29,448
    
    
    $
    
    
    
    $
    Short-term investments (2)
    
    
    6,995
    
    
    
    
    
    
    
    6,995
    
    
    
    Short-term investments 
InfuSystem Holdings, Inc.
(formerly known as HAPC)
common stock (3)
    
    
    7,665
    
    
    
    
    
    
    
    
    
    
    
    7,665Total
    
    $
    44,108
    
    
    $
    29,448
    
    
    $
    6,995
    
    
    $
    7,665
 
 (1)
    
    Level 1 securities include money market securities that are valued based on quoted market
prices in active markets.(2)
    
    Level 2 securities include available-for-sale investments in commercial paper and corporate
bonds that are valued based on quoted prices in markets that are not active or for which all
significant inputs are observable, either directly or indirectly.(3)
    
    Level 3 securities include available-for-sale investment in InfuSystem Holdings, Inc.
(formerly known as HAPC) common stock purchased in October 2007 in connection with the sale of
InfuSystem to HAPC. The value is based on quoted market price for the exchange-traded equity
security adjusted to reflect the restriction on the sale of the security due to the Companys
potential affiliate status with HAPC for purposes of federal securities laws resulting from
its position as a substantial stockholder and creditor on a secured promissory note.  Short-term(Amounts in thousands)
    
    InvestmentsBalance as of January 1, 2008
    
    $
    10,533Total gains (losses):Included in net loss
    
    
    Included in other comprehensive income
    
    
    (2,868
    )Purchases, issuances and settlements
    
    
    Transfers in and/or out of Level 3
    
    
    Balance as of June 30, 2008
    
    $
    7,665Change in unrealized losses still held at the reporting date
related to short-term investments  InfuSystem Holdings, Inc.
(formerly known as HAPC) common stock
    
    $
    2,868
 9. Income Taxes
   14




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10. Commitments and Contingencies
   Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
 e.g. ® ®
 Accounting for Contingencies
 15




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16




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
  Overview
  ®
  17




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Results of Operations
 Revenue
   ® ® ®
  Cost of Revenues
   Selling and Marketing Expenses
  18




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General and Administrative Expenses
     19




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Product Development Expenses
  Certain Litigation and Insurance Charges
   Interest Income, Net
  20




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Income Taxes
  Liquidity and Capital Resources
       21




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Maximum Number(or ApproximateDollar Value) ofTotal Number of
    
    Shares That May YetAverage
    
    Shares Purchased Under
    
    Be Purchased UnderTotal Number of
    
    Price Paid
    
    the Stock Repurchase
    
    the Stock Repurchase2008
    
    Shares Purchased (1)
    
    per Share (1)
    
    Program (2)
    
    Program (2)January 1  January 31
    
    
    55,414
    
    
    $
    14.30
    
    
    
    
    
    
    
    February 1
 February 29
    
    
    125,418
    
    
    
    14.02
    
    
    
    
    
    
    
    1,000,000March 1  March 31
    
    
    449
    
    
    
    13.87
    
    
    
    93,000
    
    
    
    907,000April 1  April 30
    
    
    
    
    
    
    
    
    
    
    7,500
    
    
    
    899,500May 1  May 31
    
    
    
    
    
    
    
    
    
    
    484,153
    
    
    
    415,347June 1  June 30
    
    
    
    
    
    
    
    
    
    
    143,351
    
    
    
    271,996Total
    
    
    181,281
    
    
    $
    14.11
    
    
    
    728,004
    
    
    
    271,996
 
 (1)
    
    The total number of shares purchased represents shares delivered to or withheld by the
Company in connection with employee payroll tax withholding upon vesting of restricted stock
and restricted stock units and the satisfaction of payment of the exercise price and employee
tax withholding for the exercise of certain outstanding stock options.(2)
    
    The stock repurchase program authorized the repurchase of up to 1,000,000 shares of the
Companys common stock. The program will be in existence for 12 months, unless the program is
terminated sooner by the board of directors. No shares were repurchased under the stock
repurchase program during the six months ended June 30, 2007.  New Accounting Pronouncements
  22




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Critical Accounting Policies
  Revenue Recognition
    Accounts Receivable
  Inventories
  23




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Short-Term Investments
 Accounting for Certain Investments in Debt and Equity Securities ,
 Deferred Taxes
  Accounting for Uncertainty in Income Taxes
 Contingencies
  24




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Stock-Based Compensation
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   Foreign Currency
  
 Item 4. CONTROLS AND PROCEDURES
   25




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PART II  OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
 e.g.
 Accounting for
Contingencies
  
 Item 1A. RISK FACTORS
  26




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RISK FACTORS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE
 If one or more of our products
proves to be defective or is misused by a health care practitioner, we may be subject to
claims of liability that could adversely affect our financial condition and the
results of our operations.
  e.g.
  We have experienced net losses in prior periods. Future losses are possible.
  We may need to raise additional capital in the future to fund our operations. We may be unable to
raise funds when needed or on acceptable terms.
  A significant portion of our sales is to customers in foreign countries. We may lose revenues,
market share, and profits due to exchange rate fluctuations and other factors related to our
foreign business.
   We currently rely on two distributors for a significant percentage of our sales. If our
relationship with these distributors were to deteriorate, our sales may materially decline.
  Our financial results could be adversely impacted by recording impairment losses or incurring
capital losses on stock sales in connection with our ownership of HAPC common stock.
  27




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##### Table of Contents



RISK FACTORS RELATED SPECIFICALLY TO OUR COMMON STOCK
 The average trading volume for our common stock is relatively low when compared to most larger
companies. As a result, there may be less liquidity and more volatility associated with our common
stock, even if our business is doing well.
   
    
    announcements of technological innovations, new products, or clinical studies by us or
others;
    
    government regulation;
    
    changes in the coverage or reimbursement rates of private insurers and governmental
agencies;
    
    developments in patent or other proprietary rights;
    
    future sales of substantial amounts of our common stock by existing stockholders or by
us; and
    
    comments by securities analysts and general market conditions.
  Future sales of our common stock by existing stockholders could negatively affect the market price
of our stock and make it more difficult for us to sell stock in the future.
  
    
    24,083,247 shares of common stock that are freely tradable in the public markets;
    
    517,315 shares of restricted stock that are subject to outstanding awards under our 2001
Equity Incentive Plan;
    
    185,109 shares of common stock underlying outstanding warrants which have been registered for
resale under a Registration Statement on Form S-3 (Registration No. 333-109096); and
    
    an aggregate of 2,948,335 shares of common stock that are subject to outstanding awards under
our various equity incentive plans, including shares of restricted stock units and stock
options.
 28




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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  (1)
    
    The stockholders approved the election of the two Class II directors to the board of
directors.
 Director Nominee
    
    Term
    
    For
    
    Withhold AuthorityJohn H. Abeles
    
    3 years
    
    
    18,042,250
    
    
    
    3,290,514Donald M. Earhart
    
    3 years
    
    
    20,326,677
    
    
    
    1,006,087Henry Tsutomu Tai
    
    3 years
    
    
    20,198,084
    
    
    
    1,134,680
 In addition, James J. Dal Porto, Joel S. Kanter, Jack H. Halperin and Erik H. Loudon
continued to serve on the Companys board of directors after the Annual Meeting.(2)
    
    The stockholders ratified the selection of Deloitte & Touche LLP as the Companys independent
registered public accounting firm for the fiscal year ending December 31, 2008.
 For
    
    Against
    
    Abstain
    
    Broker Non-Votes18,833,740
    
    2,435,114
    
    63,907
    
    
 
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
  29




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SIGNATURES
  I-FLOW CORPORATIONDate: August 11, 2008

/s/ Donald M. EarhartDonald M. EarhartChairman, President and Chief Executive Officer
(On behalf of the registrant)Date: August 11, 2008

/s/ James R. TalevichJames R. TalevichChief Financial Officer
(As principal financial officer) 30




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INDEX TO EXHIBITS
 Exhibit No.
    
    Exhibit2.1
    
    
    Stock Purchase Agreement, dated October 28, 2004, by and between Integra
LifeSciences Corporation and I-Flow Corporation (1)2.2
    
    
    Merger Agreement, dated July 27, 2001, by and between I-Flow Corporation,
a Delaware corporation, and I-Flow Corporation, a California corporation
(2)2.3
    
    
    Agreement and Plan of Merger, dated January 13, 2000, by and among I-Flow
Corporation, Spinal Acquisition Corp., Spinal Specialties, Inc. and the
Shareholders of Spinal Specialties, Inc. (3)2.4
    
    
    Agreement and Plan of Merger, dated February 9, 1998, by and among I-Flow
Corporation, I-Flow Subsidiary, Inc., Venture Medical, Inc., InfuSystems
II, Inc. and the Shareholders of Venture Medical, Inc. and InfuSystems II,
Inc. (4)2.5
    
    
    Agreement for Purchase and Sale of Assets, dated July 3, 1996, by and
among I-Flow Corporation, Block Medical, Inc. and Hillenbrand Industries,
Inc. (5)2.6
    
    
    Stock Purchase Agreement, dated as of September 29, 2006, by and among
I-Flow Corporation, InfuSystem, Inc., HAPC, Inc. and Iceland Acquisition
Subsidiary, Inc. (including the Form of Services Agreement, attached
thereto as Exhibit A, the Form of License Agreement attached thereto as
Exhibit B and the Term Sheet attached thereto as Exhibit C) (11)2.7
    
    
    Amendment No. 1 dated as of April 30, 2007 to the Stock Purchase Agreement
dated as of September 29, 2006 by and among I-Flow Corporation,
InfuSystem, Inc., HAPC, Inc. and Iceland Acquisition Subsidiary, Inc. (12)2.8
    
    
    Amendment No. 2 dated as of June 29, 2007 to the Stock Purchase Agreement
dated as of September 29, 2006, as amended by an Amendment No. 1 dated as
of April 30, 2007, by and among I-Flow Corporation, InfuSystem, Inc.,
HAPC, Inc. and Iceland Acquisition Subsidiary, Inc. (13)2.9
    
    
    Amendment No. 3 dated as of July 31, 2007 to the Stock Purchase Agreement
dated as of September 29, 2006, as amended by Amendment No. 1 dated as of
April 30, 2007 and an Amendment No. 2 dated as of June 29, 2007, by and
among I-Flow Corporation, InfuSystem, Inc., HAPC, Inc. and Iceland
Acquisition Subsidiary, Inc. (14)2.10
    
    
    Memorandum of Intent dated as of September 12, 2007 by and among I-Flow
Corporation, InfuSystem, Inc., HAPC, Inc. and Iceland Acquisition
Subsidiary, Inc. (15)2.11
    
    
    Amendment No. 4 dated as of September 18, 2007 to the Stock Purchase
Agreement dated as of September 29, 2006, as amended by Amendment No. 1
dated as of April 30, 2007, an Amendment No. 2 dated as of June 29, 2007
and an Amendment No. 3 dated as of July 31, 2007, by and among I-Flow
Corporation, InfuSystem, Inc., HAPC, Inc. and Iceland Acquisition
Subsidiary, Inc. (16)2.12
    
    
    Further Agreement Regarding Project Iceland dated as of October 17, 2007
by and among I-Flow Corporation, InfuSystem, Inc., HAPC, Inc. and Iceland
Acquisition Subsidiary, Inc. (17)2.13
    
    
    Acknowledgement and Agreement dated as of October 8, 2007 by and among
I-Flow Corporation, InfuSystem, Inc., HAPC, Inc., Iceland Acquisition
Subsidiary, Inc., Sean D. McDevitt and Philip B. Harris (17)2.14
    
    
    Form of Share Purchase Agreement (17)2.15
    
    
    Second Form of Share Purchase Agreement (17)2.16
    
    
    Form of Irrevocable Proxy (17)2.17
    
    
    Binding Letter of Intent dated as of December 13, 2007 by and among I-Flow
Corporation, AcryMed, Inc., Bruce L. Gibbins, Jack D. McMaken, John A.
Calhoun and James P. Fee, Jr. (18)2.18
    
    
    Agreement and Plan of Merger dated as of February 2, 2008 by and among
I-Flow Corporation, Alaska Acquisition Subsidiary, Inc., AcryMed
Incorporated, Bruce L. Gibbins, Jack D. McMaken, John A. Calhoun and James
P. Fee, Jr., in their capacities as stockholders, and John A. Calhoun, in
his capacity as the stockholder representative (19)




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Exhibit No.
    
    Exhibit3.1
    
    
    Amended and Restated Certificate of Incorporation of I-Flow Corporation, a
Delaware Corporation (6)3.2
    
    
    Bylaws of I-Flow Corporation, a Delaware Corporation (2)3.3
    
    
    Certificate of Designation Regarding Series A Junior Participating
Cumulative Preferred Stock (7)4.1
    
    
    Specimen Common Stock Certificate (8)4.2
    
    
    Warrant Agreement, dated February 13, 1990, between the Company and
American Stock Transfer & Trust Company, as warrant agent (9)4.3
    
    
    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 the Form of Election to Purchase (7)4.4
    
    
    Warrant to Purchase Stock, dated May 8, 2003, between I-Flow Corporation
and Silicon Valley Bank (10)4.5
    
    
    Registration Rights Agreement, dated May 8, 2003, between I-Flow
Corporation and Silicon Valley Bank (10)4.6
    
    
    Form of Warrant, dated September 4, 2003 (1)4.7
    
    
    Form of Registration Rights Agreement, dated September 4, 2003 (1)10.1
    
    
    Summary of the terms of the 2008 Executive Performance Incentive Plan (20)*10.2
    
    
    Amendment No. 3 to Employment Agreement with Donald M. Earhart, dated
February 21, 2008 (20)*10.3
    
    
    Amendment No. 2 to Employment Agreement with James R. Talevich, dated
February 21, 2008 (20)*10.4
    
    
    Amendment No. 2 to Agreement Re: Change in Control with Donald M. Earhart,
dated February 21, 2008 (20)*10.5
    
    
    Amendment No. 2 to Agreement Re: Change in Control with James J. Dal
Porto, dated February 21, 2008 (20)*10.6
    
    
    Amendment No. 2 to Agreement Re: Change in Control with James R. Talevich,
dated February 21, 2008 (20)*10.7
    
    

Amendment
to Loan Agreement, dated as of August 6, 2008, between I-Flow
Corporation and Silicon Valley Bank31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer and Chief Financial Officer
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 Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003.(2)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on August 3, 2001.(3)
    
    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.(4)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K/A filed on March 6, 1998.(5)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated July 22, 1996.




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##### Table of Contents



(6)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated May 29, 2002.(7)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on March 13, 2002.(8)
    
    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, 2002.(9)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10-K for the fiscal year ended September 30, 1990.(10)
    
    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, 2003.(11)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 4, 2006.(12)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on May 1, 2007.(13)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 2, 2007.(14)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 31, 2007.(15)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on September 13, 2007.(16)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on September 19, 2007.(17)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 19, 2007.(18)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on December 17, 2007.(19)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on February 6, 2008.(20)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on February 26, 2008.