##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from          to
 Commission file number: 000-18338
 I-FLOW CORPORATION
  Delaware
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    33-0121984
(I.R.S. Employer Identification No.)
 20202 Windrow Drive, Lake Forest, CA
(Address of Principal Executive Offices)
    
    92630
(Zip Code)
 
 þ o
  o þ o
 o þ




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##### 



I-FLOW CORPORATION
 FORM 10-Q
 FOR THE QUARTER ENDED SEPTEMBER 30, 2007
 Table of Contents
 PagePart I:
    
    Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations and Comprehensive Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    23Part II:
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    23Item 1A.
    
    Risk Factors
    
    
    23Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 6.
    
    Exhibits
    
    
    26Signatures
    
    
    27EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 I-FLOW CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
 September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,781
    
    
    $
    9,288Short-term investments
    
    
    7,829
    
    
    
    18,134Accounts receivable, less allowance for
doubtful accounts of $2,763 and $3,405
at September 30, 2007 and December 31,
2006, respectively
    
    
    17,762
    
    
    
    18,935Inventories
    
    
    16,067
    
    
    
    13,611Prepaid expenses and other current assets
    
    
    1,698
    
    
    
    1,485Deferred
taxes, net
    
    
    3,389
    
    
    
    3,260Current assets  held for sale
    
    
    9,509
    
    
    
    11,977Total current assets
    
    
    81,035
    
    
    
    76,690Property, net
    
    
    3,298
    
    
    
    2,843Other intangible assets, net
    
    
    2,604
    
    
    
    2,754Other long-term assets
    
    
    137
    
    
    
    137Deferred
taxes, net
    
    
    14,705
    
    
    
    14,406Non-current assets  held for sale
    
    
    17,012
    
    
    
    15,316Total assets
    
    $
    118,791
    
    
    $
    112,146LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,281
    
    
    $
    4,249Accrued payroll and related expenses
    
    
    6,346
    
    
    
    7,171Income taxes payable
    
    
    
    
    
    
    18Other current liabilities
    
    
    1,145
    
    
    
    1,078Current liabilities  held for sale
    
    
    5,015
    
    
    
    7,626Total current liabilities
    
    
    16,787
    
    
    
    20,142Other liabilities (Note 7)
    
    
    1,226
    
    
    
    Commitments and contingencies (Note 8)Stockholders equity:Preferred stock  $0.001 par value;
5,000 shares authorized; no shares
issued and outstanding
    
    
    
    
    
    
    Common stock  $0.001 par value; 40,000
shares authorized; 24,721 and 23,901
shares issued and outstanding at
September 30, 2007 and
December 31, 2006, respectively
    
    
    127,745
    
    
    
    119,092Accumulated other comprehensive loss
    
    
    (164
    )
    
    
    (163
    )Accumulated deficit
    
    
    (26,803
    )
    
    
    (26,925
    )Net stockholders equity
    
    
    100,778
    
    
    
    92,004Total liabilities and stockholders equity
    
    $
    118,791
    
    
    $
    112,146
  1




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##### Table of Contents



I-FLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net product sales
    
    $
    28,231
    
    
    $
    23,813
    
    
    $
    81,612
    
    
    $
    66,149Cost of revenues
    
    
    7,501
    
    
    
    6,936
    
    
    
    21,843
    
    
    
    18,274Gross profit
    
    
    20,730
    
    
    
    16,877
    
    
    
    59,769
    
    
    
    47,875Operating expenses:Selling and marketing
    
    
    17,208
    
    
    
    13,761
    
    
    
    52,622
    
    
    
    42,296General and administrative
    
    
    4,352
    
    
    
    3,928
    
    
    
    13,063
    
    
    
    9,816Product development
    
    
    559
    
    
    
    617
    
    
    
    1,863
    
    
    
    1,764Total operating expenses
    
    
    22,119
    
    
    
    18,306
    
    
    
    67,548
    
    
    
    53,876Operating loss
    
    
    (1,389
    )
    
    
    (1,429
    )
    
    
    (7,779
    )
    
    
    (6,001
    )Interest income
    
    
    266
    
    
    
    252
    
    
    
    790
    
    
    
    667Loss from continuing operations before income taxes
    
    
    (1,123
    )
    
    
    (1,177
    )
    
    
    (6,989
    )
    
    
    (5,334
    )Income tax benefit
    
    
    (278
    )
    
    
    (15,591
    )
    
    
    (2,367
    )
    
    
    (16,998
    )Income (loss) from continuing operations
    
    
    (845
    )
    
    
    14,414
    
    
    
    (4,622
    )
    
    
    11,664Discontinued operations:Income (loss) from discontinued operations,
net of tax
    
    
    2,004
    
    
    
    (826
    )
    
    
    5,459
    
    
    
    1,875Net income
    
    $
    1,159
    
    
    $
    13,588
    
    
    $
    837
    
    
    $
    13,539Per share of common stock, basic:Income (loss) from continuing operations
    
    $
    (0.03
    )
    
    $
    0.62
    
    
    $
    (0.19
    )
    
    $
    0.50Income (loss) from discontinued operations, net
of tax
    
    
    0.08
    
    
    
    (0.04
    )
    
    
    0.23
    
    
    
    0.08Net income
    
    $
    0.05
    
    
    $
    0.58
    
    
    $
    0.04
    
    
    $
    0.58Per share of common stock, diluted:Income (loss) from continuing operations
    
    $
    (0.03
    )
    
    $
    0.59
    
    
    $
    (0.19
    )
    
    $
    0.48Income (loss) from discontinued operations, net
of tax
    
    
    0.08
    
    
    
    (0.04
    )
    
    
    0.23
    
    
    
    0.08Net income
    
    $
    0.05
    
    
    $
    0.55
    
    
    $
    0.04
    
    
    $
    0.56Weighted-average shares:Basic
    
    
    24,010
    
    
    
    23,429
    
    
    
    23,753
    
    
    
    23,159Diluted
    
    
    24,010
    
    
    
    24,544
    
    
    
    23,753
    
    
    
    24,325Comprehensive Operations:Net income
    
    $
    1,159
    
    
    $
    13,588
    
    
    $
    837
    
    
    $
    13,539Foreign currency translation gain (loss)
    
    
    (22
    )
    
    
    46
    
    
    
    (6
    )
    
    
    (44
    )Unrealized gain on investment securities
    
    
    3
    
    
    
    39
    
    
    
    5
    
    
    
    100Comprehensive income
    
    $
    1,140
    
    
    $
    13,673
    
    
    $
    836
    
    
    $
    13,595
  2




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I-FLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
 Nine Months EndedSeptember 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    837
    
    
    $
    13,539Adjustments to reconcile net loss to net cash used in operating activities:Income from discontinued operations, net of tax
    
    
    (5,459
    )
    
    
    (1,875
    )Stock-based compensation
    
    
    4,803
    
    
    
    3,674Deferred taxes
    
    
    (428
    )
    
    
    (17,122
    )Depreciation and amortization
    
    
    1,183
    
    
    
    1,066Provision for doubtful accounts receivable
    
    
    755
    
    
    
    224Write-off of inventory
    
    
    390
    
    
    
    121Loss (gain) on property disposal
    
    
    (1
    )
    
    
    34Changes in operating assets and liabilities:Accounts receivable
    
    
    418
    
    
    
    (3,624
    )Inventories
    
    
    (2,846
    )
    
    
    (3,038
    )Prepaid expenses and other current assets
    
    
    (151
    )
    
    
    (280
    )Accounts payable, accrued payroll and related expenses
    
    
    (839
    )
    
    
    2,634Income taxes payable
    
    
    (80
    )
    
    
    (292
    )Other liabilities
    
    
    1,143
    
    
    
    (322
    )Net cash used in operating activities from continuing operations
    
    
    (275
    )
    
    
    (5,261
    )Net cash provided by operating activities from discontinued operations
    
    
    4,838
    
    
    
    5,705Net cash provided by operating activities
    
    
    4,563
    
    
    
    444CASH FLOWS FROM INVESTING ACTIVITIES:Property acquisitions
    
    
    (1,149
    )
    
    
    (775
    )Purchases of investments
    
    
    (6,325
    )
    
    
    (13,050
    )Maturities of investments
    
    
    16,635
    
    
    
    11,347Patent acquisitions
    
    
    (291
    )
    
    
    (390
    )Net cash provided by (used in) investing activities from continuing operations
    
    
    8,870
    
    
    
    (2,868
    )Net cash used in investing activities from discontinued operations
    
    
    (2,433
    )
    
    
    (1,701
    )Net cash provided by (used in) investing activities
    
    
    6,437
    
    
    
    (4,569
    )CASH FLOWS FROM FINANCING ACTIVITIES:Purchase and retirement of common stock
    
    
    (1,500
    )
    
    
    Proceeds from exercise of stock options
    
    
    5,045
    
    
    
    1,035Net cash provided by financing activities from continuing operations
    
    
    3,545
    
    
    
    1,035Net cash provided by financing activities from discontinued operations
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    3,545
    
    
    
    1,035Effect of exchange rates on cash
    
    
    (6
    )
    
    
    (44
    )Net increase (decrease) in cash and cash equivalents
    
    
    14,539
    
    
    
    (3,134
    )Net decrease in cash and cash equivalents from discontinued operations
    
    
    954
    
    
    
    982Cash and cash equivalents at beginning of period
    
    
    9,288
    
    
    
    11,413Cash and cash equivalents at end of period
    
    $
    24,781
    
    
    $
    9,261SUPPLEMENTAL CASH FLOW INFORMATION:Income tax payments
    
    $
    266
    
    
    $
    383Net distributions from subsidiary to Parent
    
    $
    3,359
    
    
    $
    4,986SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:Property acquisitions
    
    $
    288
    
    
    $
    219
  3




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I-FLOW CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. Basis of Presentation and Summary of Significant Accounting Policies
 Basis of Presentation
 ®
 Accounting for
Impairment or Disposal of Long-Lived Assets
  Use of Estimates 
 New Accounting Pronouncements Accounting for Uncertainty in Income Taxes
 4




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Fair Value Measurements ,
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Accounting for Stock-Based Compensation  Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Amounts in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Income (loss) from continuing operations:Selling and marketing
    
    $
    610
    
    
    $
    554
    
    
    $
    1,842
    
    
    $
    1,732General and administrative
    
    
    1,198
    
    
    
    725
    
    
    
    2,961
    
    
    
    1,992Subtotal
    
    
    1,808
    
    
    
    1,279
    
    
    
    4,803
    
    
    
    3,724Income (loss) from discontinued operations:Selling and marketing
    
    
    122
    
    
    
    35
    
    
    
    200
    
    
    
    71General and administrative
    
    
    37
    
    
    
    40
    
    
    
    105
    
    
    
    102Subtotal
    
    
    159
    
    
    
    75
    
    
    
    305
    
    
    
    173Total
    
    $
    1,967
    
    
    $
    1,354
    
    
    $
    5,108
    
    
    $
    3,897
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Expected life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Risk-free interest rate
    
    
    4.20
    %
    
    
    4.67
    %
    
    
    4.20%  5.03
    %
    
    
    4.67%  5.07
    %Volatility
    
    
    52
    %
    
    
    56
    %
    
    
    52%  54
    %
    
    
    56%  57
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
  5




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##### Table of Contents



Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards
  Stock Options
  Weighted-AverageWeighted-
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateNumber of
    
    
    Exercise Price
    
    
    Term
    
    
    Intrinsic(Amounts in thousands, except per share and year amounts)
    
    Shares
    
    
    per Share
    
    
    (in years)
    
    
    ValueOptions outstanding at December 31, 2006
    
    
    3,294
    
    
    $
    10.66Options granted
    
    
    149
    
    
    
    15.67Options exercised
    
    
    (566
    )
    
    
    8.94Options forfeited or expired
    
    
    (137
    )
    
    
    15.12Options outstanding at September 30, 2007
    
    
    2,740
    
    
    
    11.08
    
    
    
    2.06
    
    
    $
    21,705Options vested and exercisable at September 30, 2007
    
    
    2,436
    
    
    $
    10.73
    
    
    
    1.85
    
    
    $
    20,280
 6




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##### Table of Contents



Restricted Stock and Restricted Stock Units
 i.e.
 7




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##### Table of Contents



Restricted Stock
    
    Restricted Stock UnitsWeighted-Average GrantWeighted-Average
    
    
    
    
    
    Date FairNumber of
    
    Grant Date Fair
    
    Number of
    
    Value(Amounts in thousands, except per share amounts)
    
    Shares
    
    Value per Share
    
    Shares
    
    Per ShareNonvested shares outstanding at December 31, 2006
    
    
    522
    
    
    $
    13.89
    
    
    
    548
    
    
    $
    13.95Shares issued
    
    
    141
    
    
    
    16.43
    
    
    
    437
    
    
    
    16.20Shares vested or released
    
    
    (102
    )
    
    
    14.04
    
    
    
    (209
    )
    
    
    14.16Shares forfeited
    
    
    
    
    
    
    
    
    
    
    (92
    )
    
    
    14.60Nonvested shares outstanding at September 30, 2007
    
    
    561
    
    
    $
    14.50
    
    
    
    684
    
    
    $
    15.24
   2. Inventories
  September 30,
    
    
    December 31,(Amounts in thousands)
    
    2007
    
    
    2006Raw materials
    
    $
    7,231
    
    
    $
    7,784Work in process
    
    
    2,734
    
    
    
    2,024Finished goods
    
    
    6,102
    
    
    
    3,803Total
    
    $
    16,067
    
    
    $
    13,611
 3. Earnings (Loss) Per Share
 Earnings Per Share
   8




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Amounts in thousands, except per share amounts)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Income (loss) from continuing operations
    
    $
    (845
    )
    
    $
    14,414
    
    
    $
    (4,622
    )
    
    $
    11,664Income (loss) from discontinued operations, net of tax
    
    
    2,004
    
    
    
    (826
    )
    
    
    5,459
    
    
    
    1,875Net income
    
    $
    1,159
    
    
    $
    13,588
    
    
    $
    837
    
    
    $
    13,539Denominators:Denominator for basic earnings per share:Weighted-average number of common shares outstanding
    
    
    24,010
    
    
    
    23,429
    
    
    
    23,753
    
    
    
    23,159Effect of dilutive securities:Stock options, nonvested restricted stock and
nonvested restricted stock units
    
    
    
    
    
    
    1,115
    
    
    
    
    
    
    
    1,166Denominator for diluted net income per share:Weighted-average number of common and common
equivalent shares outstanding
    
    
    24,010
    
    
    
    24,544
    
    
    
    23,753
    
    
    
    24,325Basic earnings per share:Income (loss) from continuing operations
    
    $
    (0.03
    )
    
    $
    0.62
    
    
    $
    (0.19
    )
    
    $
    0.50Income (loss) from discontinued operations
    
    
    0.08
    
    
    
    (0.04
    )
    
    
    0.23
    
    
    
    0.08Net income
    
    $
    0.05
    
    
    $
    0.58
    
    
    $
    0.04
    
    
    $
    0.58Diluted earnings per share:Income (loss) from continuing operations
    
    $
    (0.03
    )
    
    $
    0.59
    
    
    $
    (0.19
    )
    
    $
    0.48Income (loss) from discontinued operations
    
    
    0.08
    
    
    
    (0.04
    )
    
    
    0.23
    
    
    
    0.08Net income
    
    $
    0.05
    
    
    $
    0.55
    
    
    $
    0.04
    
    
    $
    0.56
   4. Goodwill and Other Intangible Assets
 Goodwill
and Other Intangible Assets
 9




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##### Table of Contents



As of September 30, 2007Carrying
    
    
    Accumulated(Amounts in thousands)
    
    Amount
    
    
    Amortization
    
    
    NetPatents
    
    $
    3,341
    
    
    $
    (1,483
    )
    
    $
    1,858Licensing Rights
    
    
    1,102
    
    
    
    (356
    )
    
    
    746Total
    
    $
    4,443
    
    
    $
    (1,839
    )
    
    $
    2,604
 As of December 31, 2006Carrying
    
    
    Accumulated(Amounts in thousands)
    
    Amount
    
    
    Amortization
    
    
    NetPatents
    
    $
    3,286
    
    
    $
    (1,348
    )
    
    $
    1,938Licensing Rights
    
    
    1,101
    
    
    
    (285
    )
    
    
    816Total
    
    $
    4,387
    
    
    $
    (1,633
    )
    
    $
    2,754
   5. Stockholders Equity
  6. Discontinued Operations
  10




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##### Table of Contents



®
  Three Months Ended September 30,
    
    Nine Months Ended September 30,(Amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Operating revenues
    
    $
    7,822
    
    
    $
    7,825
    
    
    $
    23,528
    
    
    $
    23,508Operating income (1) (2) (3)
    
    
    2,938
    
    
    
    44
    
    
    
    8,334
    
    
    
    4,429Income taxes
    
    
    (934
    )
    
    
    (870
    )
    
    
    (2,875
    )
    
    
    (2,554
    )Income (loss) from discontinued operations (1) (2) (3)
    
    
    2,004
    
    
    
    (826
    )
    
    
    5,459
    
    
    
    1,875
 
 (1)
    
    Includes $268,000 and $700,000 of divestiture expenses recorded during the three and nine
months ended September 30, 2007, respectively, and $1,661,000 and $1,828,000 of divestiture
expenses during the three and nine months ended September 30, 2006, respectively.(2)
    
    In accordance with SFAS 144, the Company ceased recognizing depreciation expense for all
fixed assets recorded in discontinued operations beginning in the fourth quarter of 2006.(3)
    
    Includes the effect of the favorable ruling by the Michigan Tax Tribunal relating to
InfuSystems use tax liability. The Company reversed in discontinued operations during the
second quarter of 2007, the accrued tax liability, accrued interest expense and cumulative
increases to gross fixed assets and total expenses in the amounts of $1,466,000, $267,000,
$1,347,000 and $924,000 (consisting of $657,000 of cost of sales and $267,000 of interest
expense), respectively. See Note 8 on Commitments and Contingencies. 11




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##### Table of Contents



September 30,
    
    
    December 31,(Amounts in thousands)
    
    2007
    
    
    2006Cash
    
    $
    1,001
    
    
    $
    1,956Accounts receivable, less allowance for
doubtful accounts of $3,827 and $1,668
at September 30, 2007 and December 31,
2006, respectively
    
    
    7,988
    
    
    
    9,630Inventories
    
    
    308
    
    
    
    252Prepaid expenses and other current assets
    
    
    212
    
    
    
    139Total current assets
    
    $
    9,509
    
    
    $
    11,977Property, net (1)
    
    $
    14,838
    
    
    $
    13,142Goodwill
    
    
    2,174
    
    
    
    2,174Total noncurrent assets
    
    $
    17,012
    
    
    $
    15,316Accounts payable
    
    $
    1,098
    
    
    $
    1,884Accrued payroll and related expenses
    
    
    517
    
    
    
    1,056Accrued use taxes payable
    
    
    
    
    
    
    1,392Income taxes payable
    
    
    (490
    )
    
    
    23Deferred taxes (2)
    
    
    2,905
    
    
    
    3,267Other liabilities
    
    
    985
    
    
    
    4Total current liabilities
    
    $
    5,015
    
    
    $
    7,626
 
 (1)
    
    In accordance with SFAS 144, the Company ceased recognizing depreciation expense for all
fixed assets recorded in discontinued operations beginning in the fourth quarter of 2006.(2)
    
    The deferred tax liability consists primarily of depreciation and the basis adjustment in
accordance with Emerging Issues Task Force (EITF) Issue No. 93-17, Recognition of Deferred
Tax Assets for a Parent Companys Excess Tax Basis in the Stock of a Subsidiary that is
Accounted for as a Discontinued Operation(EITF 93-17). 7. Income Taxes
 Accounting for Income Taxes
    12




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##### Table of Contents



8. Commitments and Contingencies
     9. Subsequent Events
   13




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14




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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
  Overview
  
    
    On September 18, 2007, the Company amended the definitive agreement resulting in a new
purchase price of $100 million (subject to working capital adjustments in the definitive
agreement) plus a contingent payment right to the Company of up to a maximum of $12 million
(the Earn-Out). The Earn-Out provides that HAPC will make an additional cash payment
(the Additional Payment) to the Company of up to $12 million based on the compound annual
growth rate (CAGR) of HAPCs net consolidated revenues over the three year period ending
December 31, 2010. If HAPCs net consolidated revenues for the fiscal year ending December
31, 2010 (FY 2010) are less than 2.744 times InfuSystems 2007 net revenues, excluding
InfuSystems revenues related to the Companys ON-Q® product line (the 40% CAGR
Target), no Additional Payment will be due. If HAPCs net consolidated revenues for FY
2010 equal or exceed 3.375 times InfuSystems 2007 net revenues, excluding InfuSystems
revenues related to the Companys ON-Q product line (the 50% CAGR Target), the Company
will receive the full $12 million Additional Payment. If HAPCs net consolidated revenues
for FY 2010 are between the 40% and 50% CAGR Targets, the Company will receive an
Additional Payment equal to $3 million plus a pro rata portion of the remaining $9 million.
 15




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##### Table of Contents




    
    On October 19, 2007, the Company purchased approximately 2.8 million shares of common
stock of HAPC at $5.97 per share through private transactions with third parties totaling
approximately $17 million. With the shares purchased, the Company owns approximately 15%
of the issued and outstanding HAPC common stock and disclosed its intentions to vote such shares in favor of the acquisition.
    
    On October 22, 2007, because HAPC was unable to obtain the approval of its stockholders
of the acquisition by such date, a termination fee of $3.0 million pursuant to the
definitive agreement, as amended, became unconditionally due and owing to the Company,
regardless of whether or not the transaction was subsequently consummated.
    
    On October 24, 2007, the shareholders of HAPC approved the acquisition of InfuSystem.
The sale was completed on October 25, 2007 and the Company received the $100 million
purchase price at the closing in a combination of (i) cash equal to $67.3 million and (ii)
a secured promissory note with a principal amount equal to
$32.7 million. In addition to the $67.3 million in cash, the
Company at closing received the $3.0 million termination fee discussed above and fees
totaling approximately $2.6 million at closing in connection with the secured promissory
note, including a facility fee of $1.8 million, ticking fee of approximately $0.7 million
and an annual administrative fee of $75,000. The termination fee will be recognized as
part of the fain from the sale. Pursuant to the definitive agreement
and in connection with the Companys commitment to the secured
promissory note, ticking fees were due and payable to the Company
equal to a rate between 0.50% and 1.00% per annum of the maximum
amount of the secured promissory note, which was $75 million. The facility and ticking fees will be recorded as deferred
finance income and amortized over the life of the secured promissory note. The
administrative fee will be recorded as deferred finance income and amortized on a monthly
basis over the period of one year. The Company also received reimbursement of
approximately $0.9 million by HAPC of certain divestiture expenses incurred by the Company
directly resulting from the sale transaction, including legal, audit and other professional
fees, pursuant to the definitive agreement. Divestiture expenses were previously recorded
in discontinued operations. As a result, the Company will record the reimbursement of
divestiture expenses in discontinued operations in the fourth quarter of 2007.
 ®
 Discontinued Operations of InfuSystem
 Accounting for Impairment or Disposal
of Long-Lived Assets
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(Amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Operating revenues
    
    $
    7,822
    
    
    $
    7,825
    
    
    $
    23,528
    
    
    $
    23,508Operating income (1) (2) (3)
    
    
    2,938
    
    
    
    44
    
    
    
    8,334
    
    
    
    4,429Income taxes
    
    
    (897
    )
    
    
    (870
    )
    
    
    (2,838
    )
    
    
    (2,554
    )Income (loss) from discontinued operations (1) (2) (3)
    
    
    2,041
    
    
    
    (826
    )
    
    
    5,496
    
    
    
    1,875
 
 1)
    
    Includes $268,000 and $700,000 of divestiture expenses recorded during the three and nine
months ended September 30, 2007, respectively, and $1,661,000 and $1,828,000 of divestiture
expenses during the three and nine months ended September 30, 2006, respectively.2)
    
    In accordance with SFAS 144, the Company ceased recognizing depreciation expense for all
fixed assets recorded in discontinued operations beginning in the fourth quarter of 2006 16




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##### Table of Contents



3)
    
    Includes the effect of the favorable ruling by the Michigan Tax Tribunal relating to
InfuSystems use tax liability. The Company reversed in discontinued operations during the
second quarter of 2007, the accrued tax liability, accrued interest expense and cumulative
increases to gross fixed assets and total expenses in the amounts of $1,466,000, $267,000,
$1,347,000 and $924,000 (consisting of $657,000 of cost of sales and $267,000 of interest
expense), respectively. See Note 8 on Commitments and Contingencies.  Results of Operations
 Revenue
     17




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##### Table of Contents



Cost of Revenues
   Selling and Marketing Expenses
     General and Administrative Expenses
   18




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##### Table of Contents



Product Development Expenses
  Interest Income, Net
  Income Taxes
 Accounting
for Income Taxes
 Recognition of Deferred Tax Assets for a Parent Companys Excess
Tax Basis in the Stock of a Subsidiary that is
 19




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##### Table of Contents



Accounted for as a Discontinued Operation .
 Liquidity and Capital Resources
       20




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##### Table of Contents



Total Number of
    
    Dollar Value ofShares Purchased
    
    Shares That May YetUnder the Stock
    
    Be Purchased UnderTotal Number of
    
    Average Price Paid
    
    Repurchase Program
    
    the Stock Repurchase2007
    
    Shares Purchased (1)
    
    Per Share
    
    (2)
    
    Program (2)January 1  January 31
    
    
    64,974
    
    
    $
    15.66
    
    
    
    
    
    
    $
    February 1  February 28
    
    
    29,780
    
    
    
    16.17
    
    
    
    
    
    
    
    March 1  March 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    April 1  April 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 1  May 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 1  June 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    July 1  July 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    August 1  August 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 1  September 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    94,754
    
    
    $
    15.83
    
    
    
    
    
    
    $
    
 21




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##### Table of Contents



(1)
    
    The total number of shares purchased includes shares delivered to or withheld by the Company
in connection with employee payroll tax withholding upon vesting of restricted stock and
restricted stock units. All such shares were retired.(2)
    
    The stock repurchase program authorized the repurchase of up to 1,000,000 shares of the
Companys common stock. The program expired on July 27, 2006. No shares were repurchased
under the stock repurchase program during the nine months ended September 30, 2007.  New Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes
 Fair Value Measurements ,
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Critical Accounting Policies
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   22




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##### Table of Contents



Foreign Currency
  
 Item 4. CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  RISK FACTORS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE
 We have experienced net losses in prior periods and have an accumulated deficit. Future losses are possible.
  23




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##### Table of Contents



We may need to raise additional capital in the future to fund our operations. We may be unable to
raise funds when needed or on acceptable terms.
  If one of our products proves to be defective or is misused by a health care practitioner, we may
be subject to claims of liability that could adversely affect our financial condition and the
results of our operations.
  e.g.
 A significant portion of our sales is to customers in foreign countries. We may lose revenues,
market share, and profits due to exchange rate fluctuations and other factors related to our
foreign business.
  24




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##### Table of Contents



We currently rely on two distributors for a significant percentage of our sales. If our
relationship with these distributors were to deteriorate, our sales may materially decline.
  RISK FACTORS RELATED SPECIFICALLY TO OUR COMMON STOCK
 The average trading volume for our common stock is relatively low when compared to most larger
companies. As a result, there may be less liquidity and more volatility associated with our common
stock, even if our business is doing well.
   
    
    announcements of technological innovations, new products, or clinical studies by us or
others;
    
    government regulation;
    
    changes in the coverage or reimbursement rates of private insurers and governmental
agencies;
    
    developments in patent or other proprietary rights;
    
    future sales of substantial amounts of our common stock by existing stockholders or by
us; and
    
    comments by securities analysts and general market conditions.
  Future sales of our common stock by existing stockholders could negatively affect the market price
of our stock and make it more difficult for us to sell stock in the future.
  25




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##### Table of Contents




    
    24,160,349 shares of common stock that are freely tradable in the public markets;
    
    561,074 shares of restricted stock that are subject to outstanding awards under our 2001
Equity Incentive Plan;
    
    185,109 shares of common stock underlying outstanding warrants which have been registered for
resale under a Registration Statement on Form S-3 (Registration No. 333-109096); and
    
    an aggregate of 3,424,694 shares of common stock that are subject to outstanding awards under
our various equity incentive plans, including shares of restricted stock units and stock
options.
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 6. EXHIBITS
  26




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##### Table of Contents



SIGNATURES
  I-FLOW CORPORATIONDate: November 7, 2007
    /s/ Donald M. EarhartDonald M. EarhartChairman, President and Chief Executive Officer
(On behalf of the registrant) Date: November 7, 2007
    /s/ James R. TalevichJames R. TalevichChief Financial Officer
(As principal financial officer) 27




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Exhibit2.1
    
    
    Stock Purchase Agreement, dated October 28, 2004, by and between
Integra LifeSciences Corporation and I-Flow Corporation (1)2.2
    
    
    Merger Agreement, dated July 27, 2001, by and between I-Flow
Corporation, a Delaware corporation, and I-Flow Corporation, a
California corporation (2)2.3
    
    
    Agreement and Plan of Merger, dated January 13, 2000, by and
among I-Flow Corporation, Spinal Acquisition Corp., Spinal
Specialties, Inc. and the Shareholders of Spinal Specialties,
Inc. (3)2.4
    
    
    Agreement and Plan of Merger, dated February 9, 1998, by and
among I-Flow Corporation, I-Flow Subsidiary, Inc., Venture
Medical, Inc., InfuSystems II, Inc. and the Shareholders of
Venture Medical, Inc. and InfuSystems II, Inc. (4)2.5
    
    
    Agreement for Purchase and Sale of Assets, dated July 3, 1996, by
and among I-Flow Corporation, Block Medical, Inc. and Hillenbrand
Industries, Inc. (5)2.6
    
    
    Stock Purchase Agreement, dated as of September 29, 2006, by and
among I-Flow Corporation, InfuSystem, Inc., HAPC, Inc. and
Iceland Acquisition Subsidiary, Inc. (including the Form of
Services Agreement, attached thereto as Exhibit A, the Form of
License Agreement attached thereto as Exhibit B and the Term
Sheet attached thereto as Exhibit C) (11)2.7
    
    
    Amendment No. 1 dated as of April 30, 2007 to the Stock Purchase
Agreement dated as of September 29, 2006 by and among I-Flow
Corporation, InfuSystem, Inc., HAPC, Inc. and Iceland Acquisition
Subsidiary, Inc. (12)2.8
    
    
    Amendment No. 2 dated as of June 29, 2007 to the Stock Purchase
Agreement dated as of September 29, 2006, as amended by an
Amendment No. 1 dated as of April 30, 2007, by and among I-Flow
Corporation, InfuSystem, Inc., HAPC, Inc. and Iceland Acquisition
Subsidiary, Inc. (13)2.9
    
    
    Amendment No. 3 dated as of July 31, 2007 to the Stock Purchase
Agreement dated as of September 29, 2006, as amended by Amendment
No. 1 dated as of April 30, 2007 and an Amendment No. 2 dated as
of June 29, 2007, by and among I-Flow Corporation, InfuSystem,
Inc., HAPC, Inc. and Iceland Acquisition Subsidiary, Inc. (15)2.10
    
    
    Memorandum of Intent dated as of September 12, 2007 by and among
I-Flow Corporation, InfuSystem, Inc., HAPC, Inc. and Iceland
Acquisition Subsidiary, Inc. (16)2.11
    
    
    Amendment No. 4 dated as of September 18, 2007 to the Stock
Purchase Agreement dated as of September 29, 2006, as amended by
Amendment No. 1 dated as of April 30, 2007, an Amendment No. 2
dated as of June 29, 2007 and an Amendment No. 3 dated as of July
31, 2007, by and among I-Flow Corporation, InfuSystem, Inc.,
HAPC, Inc. and Iceland Acquisition Subsidiary, Inc. (17)2.12
    
    
    Further Agreement Regarding Project Iceland dated as of October
17, 2007, by and among I-Flow Corporation, InfuSystem, Inc.,
HAPC, Inc. and Iceland Acquisition Subsidiary, Inc. (18)2.13
    
    
    Acknowledgement and Agreement dated as of October 8, 2007, by and
among I-Flow Corporation, InfuSystem, Inc., HAPC, Inc., Iceland
Acquisition Subsidiary, Inc., Sean D. McDevitt and Philip B.
Harris (18)4.2
    
    
    Warrant Agreement, dated February 13, 1990, between the Company
and American Stock Transfer & Trust Company, as warrant agent (9)4.3
    
    
    Rights Agreement, dated as of March 8, 2002, by and between
I-Flow Corporation and American Stock Transfer & Trust Company,
as rights agent, which includes, as Exhibit A, the Form of Rights
Certificate, the Form of Assignment and the Form of Election to
Purchase (7)4.4
    
    
    Warrant to Purchase Stock, dated May 8, 2003, between I-Flow
Corporation and Silicon Valley Bank (10)4.5
    
    
    Registration Rights Agreement, dated May 8, 2003, between I-Flow
Corporation and Silicon Valley Bank (10)




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##### Table of Contents



Exhibit No.
    
    Exhibit4.6
    
    
    Form of Warrant, dated September 4, 2003 (1)4.7
    
    
    Form of Registration Rights Agreement, dated September 4, 2003 (1)10.1
    
    
    Amendment to Loan Agreement between Silicon Valley Bank and
I-Flow Corporation, dated as of July 16, 2007 (14)31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003.(2)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on August 3, 2001.(3)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000.(4)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K/A filed on March 6, 1998.(5)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated July 22, 1996.(6)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated May 29, 2002.(7)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on March 13, 2002.(8)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002.(9)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10-K for the fiscal year ended September 30, 1990.(10)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003.(11)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 4, 2006.(12)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on May 1, 2007.(13)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 2, 2007.




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##### Table of Contents



(14)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 19, 2007.(15)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 31, 2007.(16)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on September 13, 2007.(17)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on September 19, 2007.(18)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 19, 2007.