##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



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FORM 10-Q

(Mark One)



|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
|--- | ----------------------------------------------------------------------------------------

|                               |  |                   
|------------------------------ |  | ------------------
|For the quarterly period ended |  | September 30, 2002
|                               |  |                   



|[   ] | 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

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(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

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(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. [X]  Yes    [   ]  No

As of October 31, 2002 there were 15,452,638 shares outstanding of common stock.





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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 5. Other Information                                                                    
|                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                  
|INDEX TO EXHIBITS           
|Exhibit 99.1                



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##### Table of Contents



I-FLOW CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002

Table of Contents

|                              |                                                                                               |                                                                                                                                                     |    |      |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                              |                                                                                               |                                                                                                                                                     |    | Page
|                              |                                                                                               |                                                                                                                                                     |    |     
|Part I: Financial Information |                                                                                               |                                                                                                                                                     |    |     
|                              | Item 1. Financial Statements (Unaudited)                                                      |                                                                                                                                                     |    |      |  
|                              |                                                                                               | Condensed Consolidated Balance Sheets as of September 30, 2002 and
and December 31, 2001                                                            |    |      | 1 | 
|                              |                                                                                               | Condensed Consolidated Statements of Operations and Comprehensive Operations
for the three and nine-month periods ended September 30, 2002 and 2001 |    |      | 2 | 
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the nine-month periods
ended September 30, 2002 and 2001                                        |    |      | 3 | 
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                                    |    |      | 4 | 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                                                     |    | 9    |  
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                                                     |    | 16   |  
|                              | Item 4. Controls and Procedures                                                               |                                                                                                                                                     |    | 16   |  
|Part II: Other Information    |                                                                                               |                                                                                                                                                     |    |     
|                              | Item 1. Legal Proceedings                                                                     |                                                                                                                                                     |    | 17   |  
|                              | Item 5. Other Information                                                                     |                                                                                                                                                     |    | 17   |  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                                                     |    | 17   |  
|Signatures                    |                                                                                               |                                                                                                                                                     | 20 |     





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##### Table of Contents






I-FLOW CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                     |                 |                                                                                                                                                                                              |                           |   |               |            |              |   |             |            | 
|------------------------------------ | --------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | - | ------------- | ---------- | ------------ | - | ----------- | ---------- | 
|                                     |                 |                                                                                                                                                                                              |                           |   | September 30, |            | December 31,
|                                     |                 |                                                                                                                                                                                              |                           |   | 2002          |            | 2001        
|                                     |                 |                                                                                                                                                                                              |                           |   |               |            |             
|ASSETS                               |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|                                     | CURRENT ASSETS: |                                                                                                                                                                                              |                           |   |               |            |              |   |            
|                                     |                 | Cash and cash equivalents                                                                                                                                                                    |                           | $ | 2,106,000     |            |              | $ | 2,033,000   |           
|                                     |                 | Accounts receivable, net                                                                                                                                                                     |                           |   | 9,987,000     |            |              |   | 10,010,000  |           
|                                     |                 | Inventories, net                                                                                                                                                                             |                           |   | 6,932,000     |            |              |   | 6,984,000   |           
|                                     |                 | Prepaid expenses and other                                                                                                                                                                   |                           |   | 555,000       |            |              |   | 353,000     |           
|                                     |                 | Deferred taxes                                                                                                                                                                               |                           |   | 2,294,000     |            |              |   | 2,294,000   |           
|                                     |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|                                     |                 |                                                                                                                                                                                              | Total current assets      |   |               | 21,874,000 |              |   |             | 21,674,000 | 
|                                     |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|                                     |                 | Property, net                                                                                                                                                                                |                           |   | 5,333,000     |            |              |   | 4,805,000   |           
|                                     |                 | Goodwill, net                                                                                                                                                                                |                           |   | 2,639,000     |            |              |   | 6,115,000   |           
|                                     |                 | Other long-term assets                                                                                                                                                                       |                           |   | 1,228,000     |            |              |   | 1,068,000   |           
|                                     |                 | Deferred taxes                                                                                                                                                                               |                           |   | 2,042,000     |            |              |   | 2,042,000   |           
|                                     |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|TOTAL                                |                 | $                                                                                                                                                                                            | 33,116,000                |   |               | $          | 35,704,000   |  
|                                     |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|CURRENT LIABILITIES:                 |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|                                     |                 | Accounts payable                                                                                                                                                                             |                           | $ | 3,367,000     |            |              | $ | 3,115,000   |           
|                                     |                 | Accrued payroll and related expenses                                                                                                                                                         |                           |   | 1,644,000     |            |              |   | 1,875,000   |           
|                                     |                 | Income taxes payable                                                                                                                                                                         |                           |   | 760,000       |            |              |   | 576,000     |           
|                                     |                 | Current portion of long-term debt                                                                                                                                                            |                           |   | 110,000       |            |              |   | 221,000     |           
|                                     |                 | Other liabilities                                                                                                                                                                            |                           |   | 38,000        |            |              |   | 65,000      |           
|                                     |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|                                     |                 |                                                                                                                                                                                              | Total current liabilities |   |               | 5,919,000  |              |   |             | 5,852,000  | 
|                                     |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|LONG-TERM DEBT, less current portion |                 |                                                                                                                                                                                              | 9,000                     |   |               |            | 83,000       |  
|STOCKHOLDERS EQUITY:                |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|                                     |                 | Preferred stock  $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding at
September 30, 2002 (unaudited) and December 31, 2001,
respectively                      |                           |   |              |            |              |   |            |           
|                                     |                 | Common stock  $0.001 par value; 40,000,000 shares
authorized; 15,441,931 and 15,344,550 shares
issued and outstanding at September 30, 2002 (unaudited)
and December 31, 2001, respectively |                           |   | 42,898,000    |            |              |   | 42,274,000  |           
|                                     |                 | Accumulated other comprehensive income (loss)                                                                                                                                                |                           |   | (80,000       | )          |              |   | 1,000       |           
|                                     |                 | Accumulated deficit                                                                                                                                                                          |                           |   | (15,630,000   | )          |              |   | (12,506,000 | )         
|                                     |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|                                     |                 |                                                                                                                                                                                              | Net stockholders equity  |   |               | 27,188,000 |              |   |             | 29,769,000 | 
|                                     |                 |                                                                                                                                                                                              |                           |   |               |            |              |  
|TOTAL                                |                 | $                                                                                                                                                                                            | 33,116,000                |   |               | $          | 35,704,000   |  
|                                     |                 |                                                                                                                                                                                              |                           |   |               |            |              |  

See accompanying notes to unaudited condensed consolidated financial statements.

1



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

|                                                                      |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |            |            |           |  
|--------------------------------------------------------------------- | -------------------------- | ------------------------ | ---------------------------------------- | --------- | ------------------ | ------- | ----------------- | --------- | --------- | ------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | --------- | -
|                                                                      |                            |                          |                                          |           | Three Months Ended |         | Nine Months Ended
|                                                                      |                            |                          |                                          |           | September 30,      |         | September 30,    
|                                                                      |                            |                          |                                          |           |                    |         |                  
|                                                                      |                            |                          |                                          |           | 2002               |         | 2001              |           | 2002      |         | 2001      
|                                                                      |                            |                          |                                          |           |                    |         |                   |           |           |         |           
|Net revenues                                                          |                            | $                        | 9,639,000                                |           |                    | $       | 7,991,000         |           |           | $       | 27,694,000 |            |            | $          | 24,462,000 |           
|Costs and expenses:                                                   |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           
|                                                                      | Cost of sales              |                          |                                          | 3,711,000 |                    |         |                   | 3,303,000 |           |         |            | 10,959,000 |            |            |            | 10,118,000 |           
|                                                                      | Selling and marketing      |                          |                                          | 3,103,000 |                    |         |                   | 1,199,000 |           |         |            | 8,409,000  |            |            |            | 3,860,000  |           
|                                                                      | General and administrative |                          |                                          | 2,106,000 |                    |         |                   | 2,236,000 |           |         |            | 6,116,000  |            |            |            | 6,817,000  |           
|                                                                      | Product development        |                          |                                          | 542,000   |                    |         |                   | 493,000   |           |         |            | 1,633,000  |            |            |            | 1,575,000  |           
|                                                                      |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           
|                                                                      |                            | Total costs and expenses |                                          |           | 9,462,000          |         |                   |           | 7,231,000 |         |            |            | 27,117,000 |            |            |            | 22,370,000 |          
|Operating income                                                      |                            |                          | 177,000                                  |           |                    |         | 760,000           |           |           |         | 577,000    |            |            |            | 2,092,000  |           
|Interest expense (income), net                                        |                            |                          |                                         |           |                    |         | (28,000           | )         |           |         | (5,000     | )          |            |            | 49,000     |           
|Income tax provision                                                  |                            |                          | 70,000                                   |           |                    |         | 377,000           |           |           |         | 233,000    |            |            |            | 917,000    |           
|                                                                      |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           
|Net income before effect of a change in
accounting principle          |                            |                          | 107,000                                  |           |                    |         | 411,000           |           |           |         | 349,000    |            |            |            | 1,126,000  |           
|Effect of a change in accounting principle:                           |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           
|                                                                      | Goodwill impairment        |                          |                                          |          |                    |         |                   |          |           |         |            | (3,474,000 | )          |            |            |           |           
|                                                                      |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           
|Net income (loss)                                                     |                            | $                        | 107,000                                  |           |                    | $       | 411,000           |           |           | $       | (3,125,000 | )          |            | $          | 1,126,000  |           
|                                                                      |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           
|Net income per share, before effect of
change in accounting principle |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           
|                                                                      |                            |                          | Basic                                    |           | $                  | 0.01    |                   |           | $         | 0.03    |            |            | $          | 0.02       |            |            | $          | 0.07      |  
|                                                                      |                            |                          | Diluted                                  |           | $                  | 0.01    |                   |           | $         | 0.03    |            |            | $          | 0.02       |            |            | $          | 0.07      |  
|Loss per share from goodwill impairment                               |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           
|                                                                      |                            |                          | Basic                                    |           | $                  |        |                   |           | $         |        |            |            | $          | (0.22      | )          |            | $          |          |  
|                                                                      |                            |                          | Diluted                                  |           | $                  |        |                   |           | $         |        |            |            | $          | (0.22      | )          |            | $          |          |  
|Net income (loss) per share                                           |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           
|                                                                      |                            |                          | Basic                                    |           | $                  | 0.01    |                   |           | $         | 0.03    |            |            | $          | (0.20      | )          |            | $          | 0.07      |  
|                                                                      |                            |                          | Diluted                                  |           | $                  | 0.01    |                   |           | $         | 0.03    |            |            | $          | (0.20      | )          |            | $          | 0.07      |  
|Comprehensive Operations:                                             |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           
|                                                                      |                            |                          | Net income (loss)                        |           | $                  | 107,000 |                   |           | $         | 411,000 |            |            | $          | (3,125,000 | )          |            | $          | 1,126,000 |  
|                                                                      |                            |                          | Foreign currency translation gain (loss) |           |                    | (18,000 | )                 |           |           | (26,000 | )          |            |            | (81,000    | )          |            |            | (62,000   | )
|                                                                      |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           
|                                                                      |                            |                          | Comprehensive income (loss)              |           | $                  | 89,000  |                   |           | $         | 385,000 |            |            | $          | (3,206,000 | )          |            | $          | 1,064,000 |  
|                                                                      |                            |                          |                                          |           |                    |         |                   |           |           |         |            |            |            |            |            |           

See accompanying notes to unaudited condensed consolidated financial statements.

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

|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |            |            |  
|---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------ | ---------- | ----------------- | -------- | ---- | ---------- | ---------- | ---------- | -
|                                                                                         |                                                                                          |                                                        |            | Nine Months Ended
|                                                                                         |                                                                                          |                                                        |            | September 30,    
|                                                                                         |                                                                                          |                                                        |            |                  
|                                                                                         |                                                                                          |                                                        |            | 2002              |          | 2001
|                                                                                         |                                                                                          |                                                        |            |                   |          |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |                                                                                          |                                                        |            |                   |          |      |            |           
|Net income (loss)                                                                        |                                                                                          | $                                                      | (3,125,000 | )                 |          | $    | 1,126,000  |           
|Adjustments to reconcile net income (loss)
to net cash provided by operating activities: |                                                                                          |                                                        |            |                   |          |      |            |           
|                                                                                         | Depreciation and amortization                                                            |                                                        |            | 1,515,000         |          |      |            | 2,010,000  |           
|                                                                                         | Goodwill impairment                                                                      |                                                        |            | 3,474,000         |          |      |            |           |           
|                                                                                         | Compensation expense related to stock option grants                                      |                                                        |            | 577,000           |          |      |            | 465,000    |           
|                                                                                         | Change in allowance for doubtful accounts                                                |                                                        |            | (407,000          | )        |      |            | 77,000     |           
|                                                                                         | Changes in operating assets and liabilities (net of acquisition assets and liabilities): |                                                        |            |                   |          |      |            |            |           
|                                                                                         |                                                                                          | Accounts receivable                                    |            |                   | 431,000  |      |            |            | 3,416,000  |  
|                                                                                         |                                                                                          | Inventories                                            |            |                   | 53,000   |      |            |            | (2,541,000 | )
|                                                                                         |                                                                                          | Prepaid expenses and other current assets              |            |                   | (121,000 | )    |            |            | (93,000    | )
|                                                                                         |                                                                                          | Accounts payable, accrued payroll and related expenses |            |                   | (30,000  | )    |            |            | 86,000     |  
|                                                                                         |                                                                                          | Income taxes payable                                   |            |                   | 184,000  |      |            |            | 612,000    |  
|                                                                                         |                                                                                          | Other liabilities                                      |            |                   | (21,000  | )    |            |            | (72,000    | )
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|Net cash provided by operating activities                                                |                                                                                          |                                                        | 2,530,000  |                   |          |      | 5,086,000  |           
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |                                                                                          |                                                        |            |                   |          |      |            |           
|                                                                                         | Property acquisitions                                                                    |                                                        |            | (1,865,000        | )        |      |            | (1,360,000 | )         
|                                                                                         | Cash paid for acquisition                                                                |                                                        |            |                  |          |      |            | (165,000   | )         
|                                                                                         | Change in other assets                                                                   |                                                        |            | (350,000          | )        |      |            | (347,000   | )         
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|Net cash used in investing activities                                                    |                                                                                          |                                                        | (2,215,000 | )                 |          |      | (1,872,000 | )         
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |                                                                                          |                                                        |            |                   |          |      |            |           
|                                                                                         | Net proceeds (repayments) from line of credit                                            |                                                        |            |                  |          |      |            | (500,000   | )         
|                                                                                         | Principal payments on notes payable                                                      |                                                        |            | (186,000          | )        |      |            | (1,906,000 | )         
|                                                                                         | Proceeds from exercise of stock options and warrants                                     |                                                        |            | 48,000            |          |      |            | 99,000     |           
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|Net cash used in financing activities                                                    |                                                                                          |                                                        | (138,000   | )                 |          |      | (2,307,000 | )         
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|Effect of exchange rates on cash                                                         |                                                                                          |                                                        | (104,000   | )                 |          |      | (66,000    | )         
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                |                                                                                          |                                                        | 73,000     |                   |          |      | 841,000    |           
|CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD                                         |                                                                                          |                                                        | 2,033,000  |                   |          |      | 1,184,000  |           
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                               |                                                                                          | $                                                      | 2,106,000  |                   |          | $    | 2,025,000  |           
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                      |                                                                                          |                                                        |            |                   |          |      |            |           
|Interest paid                                                                            |                                                                                          | $                                                      | 11,000     |                   |          | $    | 92,000     |           
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|Income tax payments                                                                      |                                                                                          | $                                                      | 49,000     |                   |          | $    | 321,000    |           
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|Liabilities issued and assumed in connection with acquisition:                           |                                                                                          |                                                        |            |                   |          |      |            |           
|                                                                                         | Fair value of assets acquired (including intangibles)                                    |                                                        | $          |                  |          |      | $          | 165,000    |           
|                                                                                         | Cash outflows for business acquisition                                                   |                                                        |            |                  |          |      |            | (165,000   | )         
|                                                                                         | Common stock issued                                                                      |                                                        |            |                  |          |      |            |           |           
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           
|Liabilities issued and assumed                                                           |                                                                                          | $                                                      |           |                   |          | $    |           |           
|                                                                                         |                                                                                          |                                                        |            |                   |          |      |            |           

See accompanying notes to unaudited condensed consolidated financial statements.

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##### Table of Contents






I-FLOW CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. |  | 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)
that, in the opinion of management, are necessary to present fairly the
financial position of I-Flow Corporation and its subsidiaries (the
Company) at September 30, 2002 and the results of its operations and
its cash flows for the three and nine-month periods ended September 30,
2002 and 2001. 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, 2001 filed
with the Securities and Exchange Commission on April 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Certain amounts previously reported have been reclassified to conform
with the presentation at September 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Inventories consisted of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                |  |               |           |              |  |   |           | 
|--------------- |  | ------------- | --------- | ------------ |  | - | --------- | 
|                |  | September 30, |           | December 31,
|                |  | 2002          |           | 2001        
|                |  |               |           |             
|Raw Materials   |  | $             | 4,361,000 |              |  | $ | 4,553,000 | 
|Work in Process |  |               | 826,000   |              |  |   | 199,000   | 
|Finished Goods  |  |               | 1,745,000 |              |  |   | 2,232,000 | 
|                |  |               |           |              |  |   |           | 
|Total           |  | $             | 6,932,000 |              |  | $ | 6,984,000 | 
|                |  |               |           |              |  |   |           | 



|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.                               

4



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##### Table of Contents





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

|                                                             |                                                      |                                             |     |               |     |               |     |        |     |   |        |        |     |   |       |        |     | 
|------------------------------------------------------------ | ---------------------------------------------------- | ------------------------------------------- | --- | ------------- | --- | ------------- | --- | ------ | --- | - | ------ | ------ | --- | - | ----- | ------ | --- | 
|                                                             |                                                      |                                             |     | Three Months  |     | Nine Months  
|                                                             |                                                      |                                             |     | Ended         |     | Ended        
|                                                             |                                                      |                                             |     | September 30, |     | September 30,
|                                                             |                                                      |                                             |     |               |     |              
|(Amounts in thousands)                                       |                                                      | 2002                                        |     | 2001          |     | 2002          |     | 2001  
|                                                             |                                                      |                                             |     |               |     |               |     |       
|Net income before effect of a change in accounting
principle |                                                      | $                                           | 107 |               |     | $             | 411 |        |     | $ | 349    |        |     | $ | 1,126 |       
|                                                             |                                                      |                                             |     |               |     |               |     |        |     |   |        |        |     |   |       |       
|Net income (loss)                                            |                                                      | $                                           | 107 |               |     | $             | 411 |        |     | $ | (3,125 | )      |     | $ | 1,126 |       
|                                                             |                                                      |                                             |     |               |     |               |     |        |     |   |        |        |     |   |       |       
|Basic net income per share                                   |                                                      |                                             |     |               |     |               |     |        |     |   |        |        |     |   |       |       
|                                                             | Weighted average number of common shares outstanding |                                             |     | 15,367        |     |               |     | 15,293 |     |   |        | 15,361 |     |   |       | 15,200 |    
|                                                             | Effect of dilutive securities:                       |                                             |     |               |     |               |     |        |     |   |        |        |     |   |       |        |    
|                                                             |                                                      | Stock options and unvested restricted stock |     |               | 334 |               |     |        | 663 |   |        |        | 588 |   |       |        | 498 | 
|                                                             |                                                      |                                             |     |               |     |               |     |        |     |   |        |        |     |   |       |       
|Diluted net income per share                                 |                                                      |                                             |     |               |     |               |     |        |     |   |        |        |     |   |       |       
|                                                             | Weighted average number of common shares outstanding |                                             |     | 15,701        |     |               |     | 15,956 |     |   |        | 15,949 |     |   |       | 15,698 |    
|                                                             |                                                      |                                             |     |               |     |               |     |        |     |   |        |        |     |   |       |       



|   |  | Potential common shares of 4,571,000 and 4,317,000 have been excluded
from diluted weighted average common shares for the three and nine-month
periods ended September 30, 2002, respectively, as the effect would be
anti-dilutive.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Potential common shares of 3,574,000 and 3,739,000 have been excluded
from diluted weighted average common shares for the three and nine-month
periods ended September 30, 2001, respectively, as the effect would be
anti-dilutive.
|  
|4. |  | Business Segments                                                                                                                                                                                                                   
|  
|   |  | The Company operates in two business segments: manufacturing and
marketing of medical infusion products, and rentals of medical infusion
pumps.                                                                                     
|  
|   |  | Business segment information is as follows for the three and nine-month
periods ended September 30, 2002 and 2001:                                                                                                                  

|                                      |  |               |        |         |  |              |        |  |  |   |        | 
|------------------------------------- |  | ------------- | ------ | ------- |  | ------------ | ------ |  |  | - | ------ | 
|                                      |  | Manufacturing |        |         |  |              |        |  |  |  
|(Amounts in thousands)                |  | and Marketing |        | Rentals |  | Consolidated
|                                      |  |               |        |         |  |             
|Three months ended September 30,
2002 |  |               |        |         |  |              |        |  |  |   |        | 
|Revenues                              |  | $             | 7,122  |         |  | $            | 2,517  |  |  | $ | 9,639  | 
|Operating income (loss)               |  |               | (465   | )       |  |              | 642    |  |  |   | 177    | 
|Assets                                |  |               | 21,715 |         |  |              | 11,401 |  |  |   | 33,116 | 
|Nine months ended September 30,
2002  |  |               |        |         |  |              |        |  |  |   |        | 
|Revenues                              |  |               | 20,084 |         |  |              | 7,610  |  |  |   | 27,694 | 
|Operating income (loss)               |  |               | (1,347 | )       |  |              | 1,924  |  |  |   | 577    | 
|Assets                                |  |               | 21,715 |         |  |              | 11,401 |  |  |   | 33,116 | 
|Three months ended September 30,
2001 |  |               |        |         |  |              |        |  |  |   |        | 
|Revenues                              |  |               | 5,518  |         |  |              | 2,473  |  |  |   | 7,991  | 
|Operating income                      |  |               | 323    |         |  |              | 437    |  |  |   | 760    | 
|Assets                                |  |               | 23,871 |         |  |              | 11,183 |  |  |   | 35,054 | 
|Nine months ended September 30,
2001  |  |               |        |         |  |              |        |  |  |   |        | 
|Revenues                              |  |               | 16,839 |         |  |              | 7,623  |  |  |   | 24,462 | 
|Operating income                      |  |               | 584    |         |  |              | 1,508  |  |  |   | 2,092  | 
|Assets                                |  |               | 23,871 |         |  |              | 11,183 |  |  |   | 35,054 | 

5



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|5. |  | New Accounting Pronouncements; Goodwill Impairment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations(SFAS 141) and SFAS No. 142, Goodwill and Other Intangible
Assets(SFAS 142). FASB also issued SFAS No. 143, Accounting for
Obligations Associated with the Retirement of Long-Lived Assets(SFAS
143), SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets(SFAS 144), and SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities(SFAS 146) in August 2001,
October 2001 and July 2002, respectively.                                                                                                                                                              
|  
|   |  | SFAS 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method. SFAS 141 superseded APB
Opinion No. 16, Business Combinations, and Statement of Financial
Accounting Standards No. 38, Accounting for Preacquisition Contingencies
of Purchased Enterprises.The Companys adoption of the provisions of
SFAS 141 has not had a material impact on the Companys consolidated
results of operations and financial position.                                                                                                                                                                                                                                                                                         
|  
|   |  | 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. The
Company will perform its annual impairment review during the first
quarter of each year, commencing in the first quarter of 2003 or more
frequently when an event occurs or circumstances change to indicate that
an impairment of goodwill has likely occurred.
|  
|   |  | 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 generally consistent with the operating
segments underlying the segments identified in Note 4. Business Segments.
This methodology differs from the Companys previous policy, as
permitted under accounting standards existing at that time, of using
undiscounted cash flows on an enterprise-wide basis to determine if
goodwill is recoverable.                                                                                                                                                                                                                                                      
|  
|   |  | 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
approximately $3,474,000 to reduce the carrying value of its goodwill.
Such charge is non-operational in nature and is reflected as a cumulative
effect of an accounting change, effective January 1, 2002, in the
accompanying Condensed Consolidated Statements of Operations and
Comprehensive Operations.                                                                                                                                                                                                                                              
|  
|   |  | 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
comprising the operating segment 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.                                      
|  
|   |  | As of September 30, 2002, the goodwill of $2,639,000 deemed unimpaired is
attributable to the Companys rentals business segment. A reconciliation
of net income is shown below for all periods presented to conform to the
requirements of SFAS 142.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

6



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##### Table of Contents



|                             |              |                            |                       |   |                    |   |                   |         |      |         |            |   |       |   |           |          |      |         | 
|---------------------------- | ------------ | -------------------------- | --------------------- | - | ------------------ | - | ----------------- | ------- | ---- | ------- | ---------- | - | ----- | - | --------- | -------- | ---- | ------- | 
|                             |              |                            |                       |   | Three Months Ended |   | Nine Months Ended
|                             |              |                            |                       |   | September 30,      |   | September 30,    
|                             |              |                            |                       |   |                    |   |                  
|                             |              |                            |                       |   | 2002               |   | 2001              |         | 2002 |         | 2001      
|                             |              |                            |                       |   |                    |   |                   |         |      |         |           
|Reported net income (loss)   |              | $                          | 107,000               |   |                    | $ | 411,000           |         |      | $       | (3,125,000 | ) |       | $ | 1,126,000 |         
|Add back:                    |              |                            |                       |   |                    |   |                   |         |      |         |            |   |       |   |           |         
|                             |              |                            | Goodwill amortization |   |                    |  |                   |         |      | 187,000 |            |   |       |  |           |          |      | 680,000 | 
|Less: Tax effect of goodwill |              |                            |                       |   |                    |   |                   |         |      |         |            |   |       |   |           |         
|                             | Amortization |                            |                       |  |                    |   |                   | (41,000 | )    |         |            |  |       |   |           | (151,000 | )   
|                             |              |                            |                       |   |                    |   |                   |         |      |         |            |   |       |   |           |         
|Adjusted net income (loss)   |              |                            | 107,000               |   |                    |   | 557,000           |         |      |         | (3,125,000 | ) |       |   | 1,655,000 |         
|                             |              |                            |                       |   |                    |   |                   |         |      |         |            |   |       |   |           |         
|Basic earnings per share     |              |                            |                       |   |                    |   |                   |         |      |         |            |   |       |   |           |         
|                             |              | Reported net income (loss) |                       |   | 0.01               |   |                   |         | 0.03 |         |            |   | (0.20 | ) |           |          | 0.07 |        
|                             |              | Goodwill adjustments       |                       |   |                   |   |                   |         | 0.01 |         |            |   |      |   |           |          | 0.04 |        
|                             |              |                            |                       |   |                    |   |                   |         |      |         |            |   |       |   |           |         
|                             |              | Adjusted net income (loss) |                       | $ | 0.01               |   |                   | $       | 0.04 |         |            | $ | (0.20 | ) |           | $        | 0.11 |        
|                             |              |                            |                       |   |                    |   |                   |         |      |         |            |   |       |   |           |         
|Diluted earnings per share   |              |                            |                       |   |                    |   |                   |         |      |         |            |   |       |   |           |         
|                             |              | Reported net income (loss) |                       |   | 0.01               |   |                   |         | 0.03 |         |            |   | (0.20 | ) |           |          | 0.07 |        
|                             |              | Goodwill adjustments       |                       |   |                   |   |                   |         |     |         |            |   |      |   |           |          | 0.04 |        
|                             |              |                            |                       |   |                    |   |                   |         |      |         |            |   |       |   |           |         
|                             |              | Adjusted net income (loss) |                       | $ | 0.01               |   |                   | $       | 0.03 |         |            | $ | (0.20 | ) |           | $        | 0.11 |        
|                             |              |                            |                       |   |                    |   |                   |         |      |         |            |   |       |   |           |         



| |  | Had the impairment loss been recorded upon initial adoption of SFAS No.
142 during the first quarter of 2002, the net income and per share data
for the three months ended March 31, 2002 would have been restated as
follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                       |         |   |                    |       |  
|------------------------------------------------------ | ------- | - | ------------------ | ----- | -
|                                                       |         |   | Three Months Ended
|                                                       |         |   | March 31, 2002    
|                                                       |         |   |                   
|Net income, as reported                                |         | $ | 136,000            |      
|Cumulative effect of change in net income, as restated |         |   | (3,474,000         | )    
|                                                       |         |   |                    |      
|Net loss, as restated                                  |         |   | (3,338,000         | )    
|                                                       |         |   |                    |      
|Basic and diluted earnings per share, as reported      |         | $ | 0.01               |      
|                                                       |         |   |                    |      
|Cumulative effect of change in net income, as restated |         |   |                    |      
|                                                       | Basic   |   | $                  | (0.23 | )
|                                                       | Diluted |   | $                  | (0.22 | )
|                                                       |         |   |                    |      
|Earnings per share, as restated                        |         |   |                    |      
|                                                       | Basic   |   | $                  | (0.22 | )
|                                                       | Diluted |   | $                  | (0.21 | )
|                                                       |         |   |                    |      

7



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##### Table of Contents





| |  | Amortizable intangible assets included in other long-term assets in the
accompanying condensed consolidated balance sheets are as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------

|                 |  |                          |           |              |  |     |         |  |  |   |           | 
|---------------- |  | ------------------------ | --------- | ------------ |  | --- | ------- |  |  | - | --------- | 
|                 |  | As of September 30, 2002
|                 |  |                         
|                 |  | Carrying                 |           | Accumulated  |  |     |         | 
|                 |  | Amount                   |           | Amortization |  | Net
|                 |  |                          |           |              |  |    
|Patents          |  | $                        | 1,680,000 |              |  | $   | 667,000 |  |  | $ | 1,013,000 | 
|Licensing Rights |  |                          | 150,000   |              |  |     | 112,000 |  |  |   | 38,000    | 
|                 |  |                          |           |              |  |     |         |  |  |   |           | 
|Total            |  | $                        | 1,830,000 |              |  | $   | 779,000 |  |  | $ | 1,051,000 | 
|                 |  |                          |           |              |  |     |         |  |  |   |           | 

|                 |  |                         |           |              |  |     |         |  |  |   |         | 
|---------------- |  | ----------------------- | --------- | ------------ |  | --- | ------- |  |  | - | ------- | 
|                 |  | As of December 31, 2001
|                 |  |                        
|                 |  | Carrying                |           | Accumulated  |  |     |         | 
|                 |  | Amount                  |           | Amortization |  | Net
|                 |  |                         |           |              |  |    
|Patents          |  | $                       | 1,457,000 |              |  | $   | 615,000 |  |  | $ | 842,000 | 
|Licensing Rights |  |                         | 150,000   |              |  |     | 90,000  |  |  |   | 60,000  | 
|                 |  |                         |           |              |  |     |         |  |  |   |         | 
|Total            |  | $                       | 1,607,000 |              |  | $   | 705,000 |  |  | $ | 902,000 | 
|                 |  |                         |           |              |  |     |         |  |  |   |         | 



| |  | Amortization expense for the three and nine-month periods ended September
30, 2002 was $63,000 and $184,000, respectively, compared to $58,000 and
$154,000 for the same periods in the prior year. Amortization expense of
intangible assets is expected to be approximately $230,000 in each of the
next five fiscal years. During the three and nine-month periods ended
September 30, 2002, the Company acquired patents with an aggregate cost
of $126,000 and $223,000, respectively. The Company amortizes patents
over a period of 7 years.                                                                                                                                                                                                                                                                                                                    
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 is currently evaluating the
provisions of SFAS 143 but expects that the provisions of SFAS 143 will
not have a material impact on its consolidated results of operations and
financial position upon adoption.                                                                                                                                                                                                                                                     
|
| |  | 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 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of,and 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 adoption of SFAS 144 did not have a material impact
on the Companys consolidated results of operations and financial
position.                                                                                
|
| |  | SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities. SFAS 146 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 Issue 94-3, a
liability for an exit cost, as defined in EITF 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. The Company will adopt the provisions of SFAS 146 for exit
or disposal activities that are initiated after December 31, 2002.

8



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##### Table of Contents






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



| |  | Certain disclosures made by the Company in this report and in other
reports and statements released by the Company are and will be
forward-looking in nature, such as comments that express the Companys
opinions about trends and factors that may impact future operating
results. Disclosures 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
certain risks and uncertainties, which could cause actual results to
differ significantly 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 events. Readers are also
urged to carefully review and consider the various disclosures made by
the Company in this report that seek to advise interested parties of the
risks and other factors that affect the Companys business, as well as in
the Companys reports on Forms 10-K, 10-Q and 8-K that are periodically
filed with the Securities and Exchange Commission. The risks affecting
the Companys business include 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, 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.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Significant Accounting Policies



| |  | The Company prepares its consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America. As such, 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 significant accounting policies that the Company
believes are the most critical to aid in fully understanding and
evaluating our reported financial results are:                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The Company recognizes revenue from product sales at the time of shipment
and passage of title. The Company also offers the right of return for
defective products, and continuously monitors and tracks such product
returns. Also, the Company records a provision for the estimated amount
of future returns based on historical experience and notification of
pending returns. While 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 generally
differ substantially 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
experiences significant delays between the time of billing and the time
of payment from many of these third party payors; however, it
continuously monitors reimbursement rates from third party payors and
timing of payments. Because of the delays in collection, the portion of
the Companys accounts receivable attributable to pump rentals is
disproportionately larger than that segments relative revenue. Any
significant 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 occurs.

9



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| |  | Accounts Receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history, expected purchases, and
the customers current credit worthiness, as determined by the Companys
review. Receivables from customers are generally unsecured. The Company
continuously monitors its customer account balances and actively pursues
collections on past due balances. The Company maintains an allowance for
doubtful accounts which is comprised of a general reserve based on
historical collections performance plus a specific reserve for certain
known customer collections issues. If actual bad debts are greater than
the reserves calculated based on historical trends and known customer
issues, the Company may be required to book additional bad debt expense
which could have a material adverse impact on the Companys operating
results for the period or periods in which such additional expense
occurs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | In addition, for the Companys rentals business segment, the Company
maintains a contractual allowance representing the estimated portion of
gross billings that will be ultimately uncollectible due to the
substantial difference between the Companys established pump rental
rates and the contractually allowable rates provided by third party
payors such as Medicare, Medicaid and commercial insurance carriers. If
actual collections are less than previously estimated, this may indicate
that net revenues and accounts receivable have been overstated, and the
Company may be required to record an adjustment to revenue and the
contractual allowance which could have a material adverse impact on the
Companys operating results for the period or periods in which such
adjustment occurs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Company values inventory at the lower of the actual cost to purchase
or manufacture the inventory or 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 based primarily
on 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, in which case 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 on 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 on 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 generates 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. Conversely, 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 its operating results.                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |  | Goodwill and Other Intangibles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company performs a review for impairment of the carrying value of
goodwill on an annual basis and more frequently when an event occurs or
circumstances change that would more likely than not reduce the fair
value of goodwill below its carrying amount. In determining the fair
value of the entire Company, the Company considers the market price of
the Companys common stock and various other factors. If the fair value
of a reporting unit of the Company is less than the net book value of the
reporting unit, the Company may potentially be required to record an
impairment loss for goodwill that could have a material adverse impact on
the Companys operating results for the period in which such impairment
loss was recorded.

Results of Operations



| |  | Net revenues during the three and nine-month periods ended September 30,
2002 were $9,639,000 and $27,694,000 compared to $7,991,000 and
$24,462,000 for the same periods in the prior year, representing
increases of 21% and 13%, respectively. The net increases in revenues
of $1,648,000 and $3,232,000 for the three and nine-month periods ended
September 30, 2002 compared to the same periods in the prior year were
primarily due to increases in regional anesthesia product revenues of
$1,160,000 and $2,714,000, respectively. The revenue increase over the
prior year included substantially higher average selling prices for the
Companys ON-Q® Post-Operative Pain Relief System as a result of the
change in distribution method from a third party distributor to a direct
sales force selling to hospitals and other end users.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company incurred cost of sales of $3,711,000 and $10,959,000 during
the three and nine-month periods ended September 30, 2002 compared to
$3,303,000 and $10,118,000 for the same periods in the prior year. This
represents an increase of 12% and 8%, respectively. However, during the
three and nine-month periods ended September 30, 2002, cost of sales as a
percentage of net revenues decreased from the comparable prior year
periods by approximately 3% and 2%, respectively, primarily due to the
increased average selling prices on the Companys ON-Q Post-Operative
Pain Relief System as a result of the change in distribution method from
a third party distributor to a direct sales force.                                                                                                                                   
|
| |  | Selling and marketing expenses for the three and nine-month periods ended
September 30, 2002 increased over the same periods in the prior year by
$1,904,000 or 159% and $4,549,000 or 118%, respectively. These increases
were primarily due to the additional costs associated with the Companys
new direct sales force and related marketing expenses and infrastructure
necessary to support the ON-Q Post-Operative Pain Relief System. The
Company assumed exclusive distribution rights for the ON-Q product from
Ethicon-Endo Surgery, Inc., effective January 1, 2002.                                                                                                                                                                                                                                                                       
|
| |  | General and administrative expenses for the three-month period ended
September 30, 2002 decreased by $130,000, or 6% compared to the same
period in the prior year, while such expenses for the nine-month period
ended September 30, 2002 decreased by $701,000, or 10%. As a percentage
of net revenues, general and administrative expenses decreased by 6% for
both the three and nine-month periods ended September 30, 2002. The
decreases for the three and nine-month periods ended September 30, 2002
were primarily due to decreases in goodwill amortization of $187,000 and
$680,000, respectively, and reduced compensation expense.                                                                                                                                                                                                      
|
| |  | Product development expenses for the three and nine-month periods ended
September 30, 2002 increased over the same periods in the prior year by
$49,000 or 10% and $58,000 or 4%, respectively. These increases were
primarily due to increased consulting expenses and other outside
services. 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.                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | During the three and nine-month periods ended September 30, 2002, the
Company recorded income tax expense of $70,000 and $233,000,
respectively, compared to income tax expense of $377,000 and $917,000 for
the same periods in the prior year. The Companys effective tax rate
decreased to 39.5% during the quarter ended September 30, 2002 from 47.8%
in the quarter ended September 30, 2001, which included a $23,000
year-to-date adjustment of the estimated provision for federal income
taxes. For the                                                                                                                                                                                                                                                                                                                                     

11



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| |  | nine months ended September 30, 2002, the effective tax rate was 40.0%
compared to 44.9% for the nine months ended September 30, 2001.
| |  | --------------------------------------------------------------------------------------------------------------------------------------

Liquidity and Capital Resources



| |  | During the nine-month period ended September 30, 2002, cash of $2,530,000
was provided by operating activities consisting of a net loss of
$3,125,000 plus non-cash expenses of $5,159,000 and net changes in
operating assets and liabilities of $496,000.                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company used cash in investing activities during the nine-month
period ended September 30, 2002 aggregating $2,215,000, compared to
$1,872,000 for the same period in the prior year. The expenditures in
the nine months ended September 30, 2002 consisted of $1,865,000 used to
acquire computer equipment, purchased software, leasehold improvements,
furniture, fixtures, tooling and equipment for use in the Companys
operations along with a net outflow related to other assets, primarily
patents, of $350,000. The Company currently expects expenditures for
fixed assets to be relatively consistent for the remainder of the year.
|
| |  | During the nine-month period ended September 30, 2002, cash of $138,000
was used in financing activities consisting of $186,000 of payments on
notes payable, partially offset by $48,000 in proceeds from the exercise
of stock options.                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | As of September 30, 2002, the Company had cash and cash equivalents of
$2,106,000 and net accounts receivable of $9,987,000. Management
believes the Companys funds are sufficient to provide for its projected
needs for operation during the next 12 months. However, the Company may
decide to sell additional equity or increase its borrowings in order to
fund increased product development or for other purposes.                                                                                                                                                                                                                            

New Accounting Pronouncements



| |  | In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations(SFAS 141) and SFAS No. 142, Goodwill and Other Intangible
Assets(SFAS 142). FASB also issued SFAS No. 143, Accounting for
Obligations Associated with the Retirement of Long-Lived Assets(SFAS
143), SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets(SFAS 144), and SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities(SFAS 146) in August 2001,
October 2001 and July 2002, respectively.                                                                                                                                                              
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | SFAS 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method. SFAS 141 superseded APB
Opinion No. 16, Business Combinations, and Statement of Financial
Accounting Standards No. 38, Accounting for Preacquisition Contingencies
of Purchased Enterprises.The Companys adoption of the provisions of
SFAS 141 has not had a material impact on the Companys consolidated
results of operations and financial position.                                                                                                                                                                                                                                                                                         
|
| |  | 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. The
Company will perform its annual impairment review during the first
quarter of each year, commencing in the first quarter of 2003 or more
frequently when an event occurs or circumstances change to indicate that
an impairment of goodwill has likely occurred.
|
| |  | 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 generally consistent with the operating
segments underlying the segments identified in Note 4. Business Segments.
This methodology differs from the Companys previous policy, as
permitted under accounting standards existing at that time, of using
undiscounted cash flows on an enterprise-wide basis to determine if
goodwill is recoverable.                                                                                                                                                                                                                                                      

12



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##### Table of Contents





| |  | 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
approximately $3,474,000 to reduce the carrying value of its goodwill.
Such charge is non-operational in nature and is reflected as a cumulative
effect of an accounting change, effective January 1, 2002, in the
accompanying Condensed Consolidated Statements of Operations and
Comprehensive Operations.                                                                                                                                                                                                        
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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
comprising the operating segment 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.
|
| |  | As of September 30, 2002, the goodwill of $2,639,000 deemed unimpaired is
attributable to the Companys rentals business segment. A reconciliation
of net income is shown below for all periods presented to conform to the
requirements of SFAS 142.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                          |                            |                       |         |                    |   |                   |         |      |         |      |            |       |   |   |           |      |         | 
|----------------------------------------- | -------------------------- | --------------------- | ------- | ------------------ | - | ----------------- | ------- | ---- | ------- | ---- | ---------- | ----- | - | - | --------- | ---- | ------- | 
|                                          |                            |                       |         | Three Months Ended |   | Nine Months Ended
|                                          |                            |                       |         | September 30,      |   | September 30,    
|                                          |                            |                       |         |                    |   |                  
|                                          |                            |                       |         | 2002               |   | 2001              |         | 2002 |         | 2001
|                                          |                            |                       |         |                    |   |                   |         |      |         |     
|Reported net income (loss)                |                            | $                     | 107,000 |                    |   | $                 | 411,000 |      |         | $    | (3,125,000 | )     |   | $ | 1,126,000 |     
|Add back:                                 |                            |                       |         |                    |   |                   |         |      |         |      |            |       |   |   |           |     
|                                          |                            | Goodwill amortization |         |                    |  |                   |         |      | 187,000 |      |            |       |  |   |           |      | 680,000 | 
|Less: Tax effect of goodwill
Amortization |                            |                       |        |                    |   |                   | (41,000 | )    |         |      |           |       |   |   | (151,000  | )   
|                                          |                            |                       |         |                    |   |                   |         |      |         |      |            |       |   |   |           |     
|Adjusted net income (loss)                |                            |                       | 107,000 |                    |   |                   | 557,000 |      |         |      | (3,125,000 | )     |   |   | 1,655,000 |     
|                                          |                            |                       |         |                    |   |                   |         |      |         |      |            |       |   |   |           |     
|Basic earnings per share                  |                            |                       |         |                    |   |                   |         |      |         |      |            |       |   |   |           |     
|                                          | Reported net income (loss) |                       |         | 0.01               |   |                   |         | 0.03 |         |      |            | (0.20 | ) |   |           | 0.07 |        
|                                          | Goodwill adjustments       |                       |         |                   |   |                   |         | 0.01 |         |      |            |      |   |   |           | 0.04 |        
|                                          |                            |                       |         |                    |   |                   |         |      |         |      |            |       |   |   |           |     
|                                          | Adjusted net income (loss) |                       | $       | 0.01               |   |                   | $       | 0.04 |         |      | $          | (0.20 | ) |   | $         | 0.11 |        
|                                          |                            |                       |         |                    |   |                   |         |      |         |      |            |       |   |   |           |     
|Diluted earnings per share                |                            |                       |         |                    |   |                   |         |      |         |      |            |       |   |   |           |     
|                                          | Reported net income (loss) |                       |         | 0.01               |   |                   |         | 0.03 |         |      |            | (0.20 | ) |   |           | 0.07 |        
|                                          | Goodwill adjustments       |                       |         |                   |   |                   |         |     |         |      |            |      |   |   |           | 0.04 |        
|                                          |                            |                       |         |                    |   |                   |         |      |         |      |            |       |   |   |           |     
|                                          | Adjusted net income (loss) |                       | $       | 0.01               |   |                   | $       | 0.03 |         |      | $          | (0.20 | ) |   | $         | 0.11 |        
|                                          |                            |                       |         |                    |   |                   |         |      |         |      |            |       |   |   |           |     

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| |  | Had the impairment loss been recorded upon initial adoption of SFAS No.
142 during the first quarter of 2002, the net income and per share data
for the three months ended March 31, 2002 would have been restated as
follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                       |         |   |                    |       |  
|------------------------------------------------------ | ------- | - | ------------------ | ----- | -
|                                                       |         |   | Three Months Ended
|                                                       |         |   | March 31, 2002    
|                                                       |         |   |                   
|Net income, as reported                                |         | $ | 136,000            |      
|Cumulative effect of change in net income, as restated |         |   | (3,474,000         | )    
|                                                       |         |   |                    |      
|Net loss, as restated                                  |         |   | (3,338,000         | )    
|                                                       |         |   |                    |      
|Basic and diluted earnings per share, as reported      |         | $ | 0.01               |      
|                                                       |         |   |                    |      
|Cumulative effect of change in net income, as restated |         |   |                    |      
|                                                       | Basic   |   | $                  | (0.23 | )
|                                                       | Diluted |   | $                  | (0.22 | )
|                                                       |         |   |                    |      
|Earnings (loss) per share, as restated                 |         |   |                    |      
|                                                       | Basic   |   | $                  | (0.22 | )
|                                                       | Diluted |   | $                  | (0.21 | )
|                                                       |         |   |                    |      



| |  | Amortizable intangible assets included in other long-term assets in the
accompanying condensed consolidated balance sheets are as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------

|                 |  |                          |           |              |  |     |         |  |  |   |           | 
|---------------- |  | ------------------------ | --------- | ------------ |  | --- | ------- |  |  | - | --------- | 
|                 |  | As of September 30, 2002
|                 |  |                         
|                 |  | Carrying                 |           | Accumulated  |  |     |         | 
|                 |  | Amount                   |           | Amortization |  | Net
|                 |  |                          |           |              |  |    
|Patents          |  | $                        | 1,680,000 |              |  | $   | 667,000 |  |  | $ | 1,013,000 | 
|Licensing Rights |  |                          | 150,000   |              |  |     | 112,000 |  |  |   | 38,000    | 
|                 |  |                          |           |              |  |     |         |  |  |   |           | 
|Total            |  | $                        | 1,830,000 |              |  | $   | 779,000 |  |  | $ | 1,051,000 | 
|                 |  |                          |           |              |  |     |         |  |  |   |           | 

|                 |  |                         |           |              |  |     |         |  |  |   |         | 
|---------------- |  | ----------------------- | --------- | ------------ |  | --- | ------- |  |  | - | ------- | 
|                 |  | As of December 31, 2001
|                 |  |                        
|                 |  | Carrying                |           | Accumulated  |  |     |         | 
|                 |  | Amount                  |           | Amortization |  | Net
|                 |  |                         |           |              |  |    
|Patents          |  | $                       | 1,457,000 |              |  | $   | 615,000 |  |  | $ | 842,000 | 
|Licensing Rights |  |                         | 150,000   |              |  |     | 90,000  |  |  |   | 60,000  | 
|                 |  |                         |           |              |  |     |         |  |  |   |         | 
|Total            |  | $                       | 1,607,000 |              |  | $   | 705,000 |  |  | $ | 902,000 | 
|                 |  |                         |           |              |  |     |         |  |  |   |         | 



| |  | Amortization expense for the three and nine-month periods ended September
30, 2002 was $63,000 and $184,000, respectively, compared to $58,000 and
$154,000 for the same periods in the prior year. Amortization expense of
intangible assets is expected to be approximately $230,000 in each of the
next five fiscal years. During the three and nine-month periods ended
September 30, 2002, the Company acquired patents with an aggregate cost
of $126,000 and $223,000, respectively. The Company amortizes patents
over a period of 7 years.                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 is currently evaluating the
provisions of SFAS 143 but expects that the provisions of SFAS 143 will
not have a material impact on its consolidated results of operations and
financial position upon adoption.

14



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##### Table of Contents





| |  | 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 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of,and 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 adoption of SFAS 144 did not have a material impact
on the Companys consolidated results of operations and financial
position.                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities. SFAS 146 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 Issue 94-3, a
liability for an exit cost, as defined in EITF 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. The Company will adopt the provisions of SFAS 146 for exit
or disposal activities that are initiated after December 31, 2002.

15



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##### Table of Contents






Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



| |  | Foreign Currency                                                                                                                                                                                                                                                                                                                
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has a subsidiary operating in Mexico. Accordingly, the
Company is exposed to transaction gains and losses that could result 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.



| |  | Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of
the Companys management, including the Companys 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-14. 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 controls or in other factors that could significantly
affect these internal controls subsequent to the date of our most recent
evaluation.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



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##### Table of Contents






PART II   OTHER INFORMATION




Item 1.Legal Proceedings



| |  | As previously reported in our Form 10-Q for the quarterly period ended
June 30, 2002, the Company filed an action in the Superior Court of
Orange County, California, on April 23, 2002, against dj Orthopedics,
Inc. and Donjoy, LLC (collectively, dj). The Companys complaint
alleged, among other matters, that dj materially breached the
Distribution Agreement, as amended, between the parties which relates to
djs distribution of the Companys PainBuster® infusion kits and Soaker
Catheters. In August 2002, the parties entered into a settlement
agreement that included mutual releases and results in the continuation
of the Distribution Agreement.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 5.Other Information



| |  | Our Audit Committee did not pre-approve any non-audit services by our
independent auditors during the period covered by this report.
| |  | ------------------------------------------------------------------------------------------------------------------------------------




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)                                                                                                                 
|3.1         |  | Amended and Restated Certificate of Incorporation of I-Flow Corporation, a Delaware corporation
(17)                                                                                                                                                                  
|3.2         |  | Bylaws of I-Flow Corporation, a Delaware Corporation (1)                                                                                                                                                                                                              
|3.3         |  | Certificate of Designation Regarding Series A Junior Participating Cumulative Preferred Stock (15)                                                                                                                                                                    
|4.1         |  | Specimen Common Stock Certificate (18)                                                                                                                                                                                                                                
|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. (16)                                                                                                                                                           
|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 Right Certificate, the Form of Assignment and Form of Election to
Purchase (15)
|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) *                                                                                                                                                                                                                                       

17



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##### Table of Contents



|            |  |                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                   
|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        |  | Loan and Security Agreement between Silicon Valley Bank and I-Flow Corporation dated September
28, 1995 (11)                                                                                                      
|10.9        |  | Amendment to Loan Agreement between Silicon Valley Bank and
I-Flow Corporation dated March 2, 1998 (11)                                                                                                           
|10.10       |  | 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 (12)                     
|10.11       |  | I-Flow Corporation 2001 Equity Incentive Plan (19) *                                                                                                                                                              
|10.20       |  | Employment Agreement with Donald M. Earhart dated May 16, 1990 (13) *                                                                                                                                             
|10.21       |  | Amendment #1 to Employment Agreement with Donald M. Earhart dated June 21, 2001 (2) *                                                                                                                             
|10.22       |  | Promissory Note with Donald M. Earhart dated June 15, 2001 (2)                                                                                                                                                    
|10.23       |  | Amended and Restated Employment Agreement with James J. Dal Porto dated June 21, 2001 (2) *                                                                                                                       
|10.24       |  | Employment Agreement with James R. Talevich dated June 30, 2000 (14) *                                                                                                                                            
|10.25       |  | Agreement Re: Change in Control with Donald M. Earhart dated June 21, 2001 (2) *                                                                                                                                  
|10.26       |  | Agreement Re: Change in Control with James J. Dal Porto dated June 21, 2001 (2) *                                                                                                                                 
|10.27       |  | Agreement Re: Change in Control with James R. Talevich dated June 21, 2001 (2) *                                                                                                                                  
|99.1        |  | 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 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 dated July 22, 1996.                                     

18



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##### Table of Contents



|(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 (#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 dated April 14, 1997.                                                          
|    
|    
|    
|    
|(10) |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K dated February 9, 1998.                                                        
|    
|    
|    
|    
|(11) |  | 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, 1997.                                   
|    
|    
|    
|    
|(12) |  | 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.                                       
|    
|    
|    
|    
|(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 September
30, 1990.                                  
|    
|    
|    
|    
|(14) |  | 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.                                   
|    
|    
|    
|    
|(15) |  | 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.          
|    
|    
|    
|    
|(16) |  | Incorporated by reference to exhibit with this title filed with the
Companys Registration Statement on Form S-3, filed February 10, 1997.                                              
|    
|    
|    
|    
|(17) |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on May 31, 2002.                                                         
|    
|    
|    
|    
|(18) |  | 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.                                       
|    
|    
|    
|    
|(19) |  | 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,
2002.                                        

(b) Reports on Form 8-K

No current reports on Form 8-K were filed during the quarter ended
September 30, 2002.

19



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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: |  | November 14, 2002 |  | /s/   Donald M. Earhart                                                                           
|      |  |                   |  |                                                                                                   
|      |  |                   |  | Donald M. Earhart
President, Chairman and Chief Executive Officer
(As Principal Executive Officer)
|      |  |                   |  |                                                                                                   
|Date: |  | November 14, 2002 |  | /s/   James R. Talevich                                                                           
|      |  |                   |  |                                                                                                   
|      |  |                   |  | James R. Talevich
Chief Financial Officer
(As Principal Financial Officer)                        

20



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##### Table of Contents



CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Donald M. Earhart, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of I-Flow
Corporation;                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors
(or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002



| | /s/   Donald M. EarhartDonald M. Earhart
President, Chairman and Chief Executive Officer
I-Flow Corporation
| | -----------------------------------------------------------------------------------------------------------

21



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##### Table of Contents



CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James R. Talevich, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of I-Flow
Corporation;                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors
(or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002



| | /s/   James R. TalevichJames R. Talevich
Chief Financial Officer
I-Flow Corporation
| | -----------------------------------------------------------------------------------

22



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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         |  | Amended and Restated Certificate of Incorporation of I-Flow
Corporation, a Delaware corporation (17)                                                                                                                                                                  
|3.2         |  | Bylaws of I-Flow Corporation, a Delaware Corporation (1)                                                                                                                                                                                                              
|3.3         |  | Certificate of Designation Regarding Series A Junior
Participating Cumulative Preferred Stock (15)                                                                                                                                                                    
|4.1         |  | Specimen Common Stock Certificate (18)                                                                                                                                                                                                                                
|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. (16)                                                                                                                                                           
|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 Right
Certificate, the Form of Assignment and Form of Election to
Purchase (15)
|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        |  | Loan and Security Agreement between Silicon Valley Bank and
I-Flow Corporation dated September 28, 1995 (11)                                                                                                                                                          
|10.9        |  | Amendment to Loan Agreement between Silicon Valley Bank and
I-Flow Corporation dated March 2, 1998 (11)                                                                                                                                                               
|10.10       |  | 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
(12)                                                                         

23



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##### Table of Contents



|            |  |                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                               
|            |  |                                                                                                                       
|10.11       |  | I-Flow Corporation 2001 Equity Incentive Plan (19) *                                                                  
|10.20       |  | Employment Agreement with Donald M. Earhart dated May 16, 1990
(13) *                                                 
|10.21       |  | Amendment #1 to Employment Agreement with Donald M. Earhart dated
June 21, 2001 (2) *                                 
|10.22       |  | Promissory Note with Donald M. Earhart dated June 15, 2001 (2)                                                        
|10.23       |  | Amended and Restated Employment Agreement with James J. Dal Porto
dated June 21, 2001 (2) *                           
|10.24       |  | Employment Agreement with James R. Talevich dated June 30, 2000
(14) *                                                
|10.25       |  | Agreement Re: Change in Control with Donald M. Earhart dated June
21, 2001 (2) *                                      
|10.26       |  | Agreement Re: Change in Control with James J. Dal Porto dated
June 21, 2001 (2) *                                     
|10.27       |  | Agreement Re: Change in Control with James R. Talevich dated June
21, 2001 (2) *                                      
|99.1        |  | 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 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 dated July 22, 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 (#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 dated April 14, 1997.                                                          
|    
|    
|    
|    
|(10) |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K dated February 9, 1998.                                                        

24



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##### Table of Contents



|(11) |  | 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, 1997.                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(12) |  | 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.                             
|    
|    
|    
|    
|(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 September
30, 1990.                        
|    
|    
|    
|    
|(14) |  | 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.                         
|    
|    
|    
|    
|(15) |  | 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.
|    
|    
|    
|    
|(16) |  | Incorporated by reference to exhibit with this title filed with the
Companys Registration Statement on Form S-3, filed February 10, 1997.                                    
|    
|    
|    
|    
|(17) |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on May 31, 2002.                                               
|    
|    
|    
|    
|(18) |  | 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.                             
|    
|    
|    
|    
|(19) |  | 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,
2002.                              

25