##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 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 SEPTEMBER 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
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27Part II: Other InformationItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 6. Exhibits
    
    
    33Signatures
    
    
    34EX-31.1EX-31.2EX-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)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    35,356
    
    
    $
    78,571Short-term investments
    
    
    6,350
    
    
    
    14,379Short-term investments  InfuSystem
Holdings, Inc. (formerly known as HAPC)
common stock
    
    
    5,965
    
    
    
    10,533Accounts receivable, less allowance for
doubtful accounts of $1,943 and $1,962
at September 30, 2008 and December 31,
2007, respectively
    
    
    17,521
    
    
    
    22,443Inventories
    
    
    17,682
    
    
    
    13,128Prepaid expenses and other current assets
    
    
    4,956
    
    
    
    1,267Note receivable, InfuSystem Holdings,
Inc. (formerly known as HAPC)  current
    
    
    3,270
    
    
    
    2,044Deferred income taxes
    
    
    1,860
    
    
    
    1,499Total current assets
    
    
    92,960
    
    
    
    143,864Property, net
    
    
    4,185
    
    
    
    3,318Goodwill
    
    
    12,443
    
    
    
    Other intangible assets, net
    
    
    4,380
    
    
    
    2,586Other long-term assets
    
    
    195
    
    
    
    133Note receivable, InfuSystem Holdings, Inc.
(formerly known as HAPC)  noncurrent
    
    
    27,797
    
    
    
    30,250Deferred income taxes
    
    
    7,491
    
    
    
    8,504Total assets
    
    $
    149,451
    
    
    $
    188,655LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,662
    
    
    $
    4,570Accrued payroll and related expenses
    
    
    6,105
    
    
    
    7,724Income taxes payable
    
    
    
    
    
    
    12,450Accrued litigation costs (Note 10)
    
    
    8,374
    
    
    
    Other current liabilities
    
    
    1,773
    
    
    
    1,933Total current liabilities
    
    
    20,914
    
    
    
    26,677Other liabilities
    
    
    6,092
    
    
    
    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
September 30, 2008 and December 31,
2007, respectively
    
    
    135,154
    
    
    
    142,197Accumulated other comprehensive loss
    
    
    (206
    )
    
    
    (207
    )(Accumulated deficit)/retained earnings
    
    
    (12,503
    )
    
    
    13,586Total stockholders equity
    
    
    122,445
    
    
    
    155,576Total liabilities and stockholders equity
    
    $
    149,451
    
    
    $
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    32,242
    
    
    $
    28,231
    
    
    $
    95,973
    
    
    $
    81,612Cost of revenues
    
    
    8,582
    
    
    
    7,501
    
    
    
    25,468
    
    
    
    21,843Gross profit
    
    
    23,660
    
    
    
    20,730
    
    
    
    70,505
    
    
    
    59,769Operating expenses:Selling and marketing
    
    
    16,965
    
    
    
    17,208
    
    
    
    54,716
    
    
    
    52,622General and administrative
    
    
    5,551
    
    
    
    4,352
    
    
    
    16,044
    
    
    
    13,063Product development
    
    
    1,285
    
    
    
    559
    
    
    
    3,443
    
    
    
    1,863Certain litigation and insurance charges (Note 10)
    
    
    136
    
    
    
    
    
    
    
    12,304
    
    
    
    Purchased in-process research and development
charges (Note 6)
    
    
    11,600
    
    
    
    
    
    
    
    11,600
    
    
    
    Total operating expenses
    
    
    35,537
    
    
    
    22,119
    
    
    
    98,107
    
    
    
    67,548Operating loss
    
    
    (11,877
    )
    
    
    (1,389
    )
    
    
    (27,602
    )
    
    
    (7,779
    )Impairment loss on investment
    
    
    (4,569
    )
    
    
    
    
    
    
    (4,569
    )
    
    
    Interest and other income
    
    
    1,082
    
    
    
    266
    
    
    
    3,977
    
    
    
    790Loss from continuing operations before income taxes
    
    
    (15,364
    )
    
    
    (1,123
    )
    
    
    (28,194
    )
    
    
    (6,989
    )Income tax benefit
    
    
    1,237
    
    
    
    278
    
    
    
    2,105
    
    
    
    2,367Loss from continuing operations
    
    
    (14,127
    )
    
    
    (845
    )
    
    
    (26,089
    )
    
    
    (4,622
    )Discontinued operations:Income from discontinued operations, net of tax
    
    
    
    
    
    
    2,004
    
    
    
    
    
    
    
    5,459Net income (loss)
    
    $
    (14,127
    )
    
    $
    1,159
    
    
    $
    (26,089
    )
    
    $
    837Per share of common stock, basic and diluted:Loss from continuing operations
    
    $
    (0.59
    )
    
    $
    (0.03
    )
    
    $
    (1.07
    )
    
    $
    (0.19
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    0.08
    
    
    
    
    
    
    
    0.23Net income (loss)
    
    $
    (0.59
    )
    
    $
    0.05
    
    
    $
    (1.07
    )
    
    $
    0.04Weighted-average shares, basic and diluted
    
    
    24,062
    
    
    
    24,010
    
    
    
    24,341
    
    
    
    23,753Comprehensive Operations:Net income (loss)
    
    $
    (14,127
    )
    
    $
    1,159
    
    
    $
    (26,089
    )
    
    $
    837Foreign currency translation gain (loss)
    
    
    (106
    )
    
    
    (22
    )
    
    
    3
    
    
    
    (6
    )Unrealized gain (loss) on investment securities
    
    
    (2
    )
    
    
    3
    
    
    
    (2
    )
    
    
    5Unrealized gain on investment securities 
InfuSystem Holdings, Inc. (formerly known as
HAPC) common stock
    
    
    2,868
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income (loss)
    
    $
    (11,367
    )
    
    $
    1,140
    
    
    $
    (26,088
    )
    
    $
    836
  2




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##### Table of Contents



I-FLOW CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (Amounts in thousands)
 Nine Months EndedSeptember 302008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss)
income
    
    $
    (26,089
    )
    
    $
    837Adjustments to reconcile net loss to net cash used in operating activities:Income from discontinued operations, net of tax
    
    
    
    
    
    
    (5,459
    )Purchased in-process research and development charges
    
    
    11,600
    
    
    
    Stock-based compensation
    
    
    5,142
    
    
    
    4,803Impairment loss on investment
    
    
    4,569
    
    
    
    Depreciation and amortization
    
    
    1,614
    
    
    
    1,183Excess tax benefit from exercise of stock options and vested restricted stock and restricted stock units
    
    
    (562
    )
    
    
    Write-off of inventory
    
    
    401
    
    
    
    390Amortization of deferred financing fees from note receivable, InfuSystem Holdings, Inc. (formerly known as HAPC)
    
    
    (533
    )
    
    
    Provision for doubtful accounts receivable
    
    
    272
    
    
    
    755Gain on disposal of property
    
    
    (4
    )
    
    
    (1
    )Deferred income taxes
    
    
    230
    
    
    
    (428
    )Changes in operating assets and liabilities, net of AcryMed acquisition:Accounts receivable
    
    
    5,587
    
    
    
    418Inventories
    
    
    (4,335
    )
    
    
    (2,846
    )Prepaid expenses and other assets
    
    
    (821
    )
    
    
    (151
    )Accounts payable, accrued payroll and related expenses
    
    
    (2,552
    )
    
    
    (839
    )Income taxes payable
    
    
    (15,245
    )
    
    
    (80
    )Accrued litigation costs
    
    
    8,374
    
    
    
    Other liabilities
    
    
    (14
    )
    
    
    1,143Net cash used in operating activities from continuing operations
    
    
    (12,366
    )
    
    
    (275
    )Net cash provided by operating activities from discontinued operations
    
    
    
    
    
    
    4,838Net cash (used in) provided by operating activities
    
    
    (12,366
    )
    
    
    4,563CASH FLOWS FROM INVESTING ACTIVITIES:Property acquisitions
    
    
    (1,264
    )
    
    
    (1,149
    )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)
    
    
    1,227
    
    
    
    Purchases of investments
    
    
    (13,275
    )
    
    
    (6,325
    )Maturities of investments
    
    
    21,301
    
    
    
    16,635Patent acquisitions
    
    
    (474
    )
    
    
    (291
    )Net cash (used in) provided by investing activities from continuing operations
    
    
    (19,137
    )
    
    
    8,870Net cash used in investing activities from discontinued operations
    
    
    
    
    
    
    (2,433
    )Net cash (used in) provided by investing activities
    
    
    (19,137
    )
    
    
    6,437CASH FLOWS FROM FINANCING ACTIVITIES:Purchase and retirement of common stock
    
    
    (12,621
    )
    
    
    (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
    
    
    353
    
    
    
    5,045Net cash (used in) provided by financing activities
    
    
    (11,706
    )
    
    
    3,545Effect of exchange rates on cash
    
    
    (6
    )
    
    
    (6
    )Net (decrease) increase in cash and cash equivalents
    
    
    (43,215
    )
    
    
    14,539Net decrease in cash and cash equivalents from discontinued operations
    
    
    
    
    
    
    954Cash and cash equivalents at beginning of period
    
    
    78,571
    
    
    
    9,288Cash and cash equivalents at end of period
    
    $
    35,356
    
    
    $
    24,781SUPPLEMENTAL CASH FLOW INFORMATION:Income tax payments
    
    $
    13,427
    
    
    $
    266Interest received
    
    
    3,762
    
    
    
    905SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:Property acquisitions in accounts payable
    
    $
    88
    
    
    $
    288
  3




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##### Table of Contents



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 
 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
  4




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##### Table of Contents



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 September 30,
    
    
    Nine Months Ended September 30,(Amounts in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Loss from continuing operations:Selling and marketing
    
    $
    246
    
    
    $
    610
    
    
    $
    738
    
    
    $
    1,842General and administrative
    
    
    1,568
    
    
    
    1,198
    
    
    
    4,404
    
    
    
    2,961Subtotal
    
    
    1,814
    
    
    
    1,808
    
    
    
    5,142
    
    
    
    4,803Income from discontinued operations:Selling and marketing
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    200General and administrative
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    105Subtotal
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    305Total
    
    $
    1,814
    
    
    $
    1,967
    
    
    $
    5,142
    
    
    $
    5,108
  Three Months Ended
    
    Nine Months EndedSeptember 30, 2007
    
    September 30, 2007Expected life (in years)
    
    
    5.0
    
    
    
    5.0Risk-free interest rate
    
    
    4.20
    %
    
    
    4.20% - 5.03
    %Volatility
    
    
    52
    %
    
    
    52% - 54
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
  5




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##### Table of Contents



Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards
  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
    
    
    (170
    )
    
    
    3.94Options forfeited or expired
    
    
    (97
    )
    
    
    15.20Options outstanding at September 30, 2008
    
    
    2,246
    
    
    
    11.32
    
    
    
    1.15
    
    
    $
    5,767Options vested and exercisable at September 30, 2008
    
    
    2,106
    
    
    
    11.09
    
    
    
    1.04
    
    
    $
    5,767
   Restricted Stock and Restricted Stock Units
 i.e.
 6




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##### Table of Contents



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
    
    
    
    401
    
    
    
    13.32Shares vested or released
    
    
    (235
    )
    
    
    14.76
    
    
    
    (189
    )
    
    
    14.04Shares forfeited
    
    
    
    
    
    
    
    
    
    
    (93
    )
    
    
    15.49Nonvested shares outstanding at September 30, 2008
    
    
    517
    
    
    $
    14.35
    
    
    
    716
    
    
    $
    14.36
  2. Inventories
  September 30,
    
    
    December 31,(Amounts in thousands)
    
    2008
    
    
    2007Raw materials
    
    $
    7,067
    
    
    $
    6,534Work in process
    
    
    4,225
    
    
    
    2,056Finished goods
    
    
    6,390
    
    
    
    4,538Total
    
    $
    17,682
    
    
    $
    13,128
 3. Earnings (Loss) Per Share
 Earnings Per Share
   7




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Amounts in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Loss from continuing operations, net of tax
    
    $
    (14,127
    )
    
    $
    (845
    )
    
    $
    (26,089
    )
    
    $
    (4,622
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    2,004
    
    
    
    
    
    
    
    5,459Net income (loss)
    
    $
    (14,127
    )
    
    $
    1,159
    
    
    $
    (26,089
    )
    
    $
    837Denominators:Denominator for basic earnings per share:Weighted-average number of common shares outstanding
    
    
    24,062
    
    
    
    24,010
    
    
    
    24,341
    
    
    
    23,753Effect 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
    
    
    24,062
    
    
    
    24,010
    
    
    
    24,341
    
    
    
    23,753Earnings per share, basic and diluted:Loss from continuing operations, net of tax
    
    $
    (0.59
    )
    
    $
    (0.03
    )
    
    $
    (1.07
    )
    
    $
    (0.19
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    0.08
    
    
    
    
    
    
    
    0.23Net income (loss)
    
    $
    (0.59
    )
    
    $
    0.05
    
    
    $
    (1.07
    )
    
    $
    0.04
   4. Goodwill and Other Intangible Assets
 Goodwill
and Other Intangible Assets
  8




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##### Table of Contents



As of September 30, 2008Carrying
    
    
    Accumulated(Amounts in thousands)
    
    Amount
    
    
    Amortization
    
    
    NetPurchased technology and patents
    
    $
    5,956
    
    
    $
    (3,237
    )
    
    $
    2,719Licensing rights and agreements
    
    
    1,402
    
    
    
    (489
    )
    
    
    913Customer relationships
    
    
    700
    
    
    
    (88
    )
    
    
    612Other
    
    
    150
    
    
    
    (14
    )
    
    
    136Total
    
    $
    8,208
    
    
    $
    (3,828
    )
    
    $
    4,380
 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
    5. Stockholders Equity
   9




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##### Table of Contents



6. Acquisition
   (Amounts in thousands)Cash
    
    $
    66Accounts receivable, net
    
    
    937Inventory
    
    
    620Other current assets
    
    
    165Property, net
    
    
    506Intangible assets
    
    
    1,950In-process research and development
    
    
    11,600Goodwill
    
    
    12,443Other long-term assets
    
    
    143Total assets acquired
    
    
    28,430Accounts payable
    
    
    689Accrued payroll and related expenses
    
    
    271Other current liabilities
    
    
    76Deferred tax liability, long-term
    
    
    665Total liabilities assumed
    
    
    1,701Net assets acquired
    
    $
    26,729
  Weighted Average(Amounts in thousands)
    
    Amount
    
    
    Useful Life (in yrs)Purchased technology and patents
    
    $
    800
    
    
    
    10.0(1)Customer relationships
    
    
    700
    
    
    
    10.0(2)Licensing agreements
    
    
    300
    
    
    
    5.0(1)Other
    
    
    150
    
    
    
    8.0(1)Net assets acquired
    
    $
    1,950
 
 (1)
    
    Amortization is based on a straight-line method.(2)
    
    Amortization is based on an accelerated method. 10




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##### Table of Contents



7. Discontinued Operations
 ®
    Accounting for Impairment or Disposal of Long-Lived Assets
 Three Months Ended
    
    Nine Months Ended(Amounts in thousands)
    
    September 30, 2007
    
    September 30, 2007Operating revenues
    
    $
    7,822
    
    
    $
    23,528Operating income (1)
    
    
    2,938
    
    
    
    8,334Income taxes
    
    
    (934
    )
    
    
    (2,875
    )Income from discontinued operations (1) (2)
    
    
    2,004
    
    
    
    5,459
 11




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##### Table of Contents



(1)
    
    Includes $268,000 and $700,000 of divestiture expenses recorded during the three and nine
months ended September 30, 2007, respectively.(2)
    
    Includes the effect of the favorable ruling by the Michigan Tax Tribunal relating to
InfuSystems use tax liability. In discontinued operations during the second quarter of 2007,
the Company reversed 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
      Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    SignificantBalance at
    
    
    for Identical
    
    
    Observable
    
    
    UnobservableSeptember 30,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs(Amounts in thousands)
    
    2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Reported as:Cash equivalents (1)
    
    $
    29,341
    
    
    $
    29,341
    
    
    $
    
    
    
    $
    Short-term investments (2)
    
    
    7,345
    
    
    
    
    
    
    
    7,345
    
    
    
    Short-term investments 
InfuSystem Holdings, Inc.
(formerly known as HAPC)
common stock (3)
    
    
    5,965
    
    
    
    
    
    
    
    
    
    
    
    5,965Total
    
    $
    42,651
    
    
    $
    29,341
    
    
    $
    7,345
    
    
    $
    5,965
 
 (1)
    
    Level 1 securities include money market securities that are valued based on quoted market
prices in active markets. The money market securities participate in the Department of
Treasurys Temporary Guarantee Program for Money Market Funds.(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 HAPC common stock purchased in
October 2007 in connection with the sale of InfuSystem to HAPC. The value is based on quoted
market prices 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 the Companys position as a substantial stockholder
and creditor on a secured promissory note. 12




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##### Table of Contents



Short-term(Amounts in thousands)
    
    InvestmentsBalance as of January 1, 2008
    
    $
    10,533Total gains (losses):Included in net loss
    
    
    (4,569
    )Included in other comprehensive income
    
    
    Purchases, issuances and settlements
    
    
    Transfers in and/or out of Level 3
    
    
    Balance as of September 30, 2008
    
    $
    5,965Amount of total losses for the period included in
earnings attributable to the change in unrealized losses
relating to assets still held at the reporting date 
Short-term investments  InfuSystem Holdings, Inc.
(formerly known as HAPC) common stock
    
    $
    4,569
  Accounting for
Certain Investments in Debt and Equity Securities The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
  9. Income Taxes
  13




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10. Commitments and Contingencies
   Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
  14




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e.g. ® ®
  Accounting for Contingencies Reasonable Estimation of the Amount of a Loss
  15




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##### Table of Contents



®
  11. Operating Segments and Revenue Data
 Disclosures about Segments of an Enterprise and Related Information
 Three Months Ended
    
    
    Nine Months Ended(Amounts in thousands)
    
    September 30, 2008
    
    
    September 30, 2008Infusion PumpsRegional Anesthesia
    
    $
    24,817
    
    
    $
    73,537IV Infusion Therapy
    
    
    5,945
    
    
    
    18,592Subtotal
    
    
    30,762
    
    
    
    92,129Antimicrobial Materials
    
    
    1,480
    
    
    
    3,844Total
    
    $
    32,242
    
    
    $
    95,973
 16




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##### Table of Contents



Infusion
    
    Antimicrobial(Amounts in thousands)
    
    Pumps
    
    Materials
    
    ConsolidatedThree months ended September 30, 2008Revenues (1)
    
    $
    30,762
    
    
    $
    1,480
    
    
    $
    32,242Operating loss (1)(2)
    
    
    (116
    )
    
    
    (11,761
    )
    
    
    (11,877
    )Assets
    
    
    133,418
    
    
    
    16,033
    
    
    
    149,451Depreciation and amortization
    
    
    471
    
    
    
    48
    
    
    
    519Property additions
    
    
    393
    
    
    
    99
    
    
    
    492Nine months ended September 30, 2008Revenues (1)
    
    $
    92,129
    
    
    $
    3,844
    
    
    $
    95,973Operating loss (1)(2)
    
    
    (15,437
    )
    
    
    (12,165
    )
    
    
    (27,602
    )Assets
    
    
    133,418
    
    
    
    16,033
    
    
    
    149,451Depreciation and amortization
    
    
    1,329
    
    
    
    285
    
    
    
    1,614Property additions
    
    
    1,200
    
    
    
    152
    
    
    
    1,352
 
 (1)
    
    Intercompany sales and operating income between the Infusion
Pumps and Antimicrobial Materials operating segments have been
eliminated in the consolidation and have been excluded from the above
numbers.(2)
    
    Operating loss for the Antimicrobial Materials operating segment for the three and nine
months ended September 30, 2008 includes $11.6 million of in-process research and development
write-off that was recorded in the third quarter of 2008. See Note 6 on Acquisition for
additional information. Certain expenses incurred by the Company at the corporate level have
not been allocated to the Antimicrobial Materials operating segment, such as employee stock
administration, human resources, finance, information technology, investor relations,
corporate governance, SEC compliance, general management, strategy development, taxes, audit
fees, cash management, legal fees, regulatory compliance and budgeting.  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Amounts in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    $
    28,552
    
    
    $
    23,901
    
    
    $
    84,450
    
    
    $
    71,313Europe
    
    
    2,998
    
    
    
    3,389
    
    
    
    9,079
    
    
    
    8,055Asia/Pacific Rim
    
    
    256
    
    
    
    490
    
    
    
    994
    
    
    
    1,267Other
    
    
    436
    
    
    
    451
    
    
    
    1,450
    
    
    
    977Total
    
    $
    32,242
    
    
    $
    28,231
    
    
    $
    95,973
    
    
    $
    81,612
  17




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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
  Overview
  ®
  18




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Results of Operations
 Revenue
    ® ® ®
   19




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Cost of Revenues
   Selling and Marketing Expenses
     General and Administrative Expenses
  20




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Product Development Expenses
  Certain Litigation and Insurance Charges
  21




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Accounting for Contingencies Reasonable Estimation of the Amount of a Loss ,
 Purchased In-Process Research and Development
  Interest Income, Net
  Income Taxes
  Liquidity and Capital Resources
  22




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23




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Total Number of
    
    
    
    
    
    Total Number of
    
    
    
    
    
    Maximum Number ofShares Repurchased
    
    
    
    
    
    Shares Purchased
    
    
    
    
    
    Shares That May YetFor Tax Withholding/
    
    Average
    
    Under the Stock
    
    Average
    
    Be Purchased UnderExercise Price
    
    Price Paid
    
    Repurchase
    
    Price Paid
    
    the Stock Repurchase2008
    
    Purposes (1)
    
    per Share (1)
    
    Program (2)
    
    per Share (1)
    
    Program (2)January 1  January 31
    
    
    55,414
    
    
    $
    14.31
    
    
    
    
    
    
    $
    
    
    
    
    February 1  February 29
    
    
    125,418
    
    
    
    14.02
    
    
    
    
    
    
    
    
    
    
    
    2,000,000March 1  March 31
    
    
    449
    
    
    
    13.87
    
    
    
    93,000
    
    
    
    14.37
    
    
    
    1,907,000April 1  April 30
    
    
    
    
    
    
    
    
    
    
    7,500
    
    
    
    14.52
    
    
    
    1,899,500May 1  May 31
    
    
    
    
    
    
    
    
    
    
    484,153
    
    
    
    12.61
    
    
    
    1,415,347June 1  June 30
    
    
    
    
    
    
    
    
    
    
    143,351
    
    
    
    12.27
    
    
    
    1,271,996July 1  July 31
    
    
    134
    
    
    
    10.16
    
    
    
    
    
    
    
    
    
    
    
    1,271,996August 1  August 31
    
    
    444
    
    
    
    9.11
    
    
    
    45,785
    
    
    
    9.80
    
    
    
    1,226,211September 1  September 30
    
    
    179
    
    
    
    10.09
    
    
    
    58,606
    
    
    
    9.94
    
    
    
    1,167,605Total
    
    
    182,038
    
    
    $
    14.09
    
    
    
    832,395
    
    
    $
    12.42
    
    
    
    1,167,605
 
 (1)
    
    The total number of shares repurchased 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 2,000,000 shares of the
Companys common stock. The program will be in existence until August 8, 2009, unless the
program is terminated sooner by the board of directors. No shares were repurchased under the
stock repurchase program during the nine months ended September 30, 2007.  New Accounting Pronouncements
  Critical Accounting Policies
  24




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Revenue Recognition
    Accounts Receivable
  Inventories
  Short-Term Investments
  25




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Accounting for Certain Investments in Debt and Equity Securities , The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
  Deferred Taxes
  Accounting for Uncertainty in Income
Taxes
 Contingencies
  26




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##### Table of Contents



Stock-Based Compensation
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   Foreign Currency
  
 Item 4. CONTROLS AND PROCEDURES
  27




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Statement of Cash Flows
 
 PART II  OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
 e.g. ® ®
   28




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®
  
 Item 1A. RISK FACTORS
  29




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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.
  30




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##### Table of Contents



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.
  31




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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, including developments in our
patent lawsuit against Apex;
    
    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.
  
    
    23,991,839 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; and
 
    
    an aggregate of 2,961,969 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.
  32




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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 6. EXHIBITS
  33




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##### Table of Contents



SIGNATURES
  I-FLOW CORPORATIONDate: November 10, 2008

/s/ Donald M. EarhartDonald M. EarhartChairman, President and Chief Executive Officer
(On behalf of the registrant) Date: November 10, 2008

/s/ James R. TalevichJames R. TalevichChief Financial Officer
(As principal financial officer) 34




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##### Table of Contents



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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##### Table of Contents



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 Bank (21)31.1
    
    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 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.




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##### Table of Contents



(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.(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.(21)
    
    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, 2008.