##### 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       June 30, 2002
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------



|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For 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 August 12, 2002 there were 15,425,886 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.                          
|PART II  OTHER INFORMATION
|                            | Item 1. Legal Proceedings                                                                    
|                            | Item 2. Changes in Securities and Use of Proceeds                                            
|                            | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                            | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                 
|INDEX TO EXHIBITS          
|EXHIBIT 10.11              
|EXHIBIT 99.1               



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##### Table of Contents



I-FLOW CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2002

Table of Contents

|                                        |  |                                                                                                        |  |                                                                                                                                                                               |  |     
|--------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                        |  |                                                                                                        |  |                                                                                                                                                                               |  | Page
|                                        |  |                                                                                                        |  |                                                                                                                                                                               |  |     
|Part I:
          Financial Information |  |                                                                                                       
|                                       
|                                        |  | Item 1.Financial Statements                                                                            |  |                                                                                                                                                                              
|                                       
|                                        |  |                                                                                                        |  | Condensed
          Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and
          December 31, 2001                                                               |  | 1   
|                                       
|                                        |  |                                                                                                        |  | Condensed
          Consolidated Statements of Operations and Comprehensive Operations for
          the three and six-month periods ended June 30, 2002 and 2001 (Unaudited) |  | 2   
|                                       
|                                        |  |                                                                                                        |  | Condensed
          Consolidated Statements of Cash Flows for the six-month periods ended
          June 30, 2002 and 2001 (Unaudited)                                        |  | 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                            |  | 15                                                                                                                                                                           
|                                       
|Part II:
          Other Information    |  |                                                                                                       
|                                       
|                                        |  | Item 1.Legal Proceedings                                                                               |  | 15                                                                                                                                                                           
|                                       
|                                        |  | Item 2.Changes in Securities and Use of Proceeds                                                       |  | 15                                                                                                                                                                           
|                                       
|                                        |  | Item 4.Submission of Matters to a Vote of Security Holders                                             |  | 16                                                                                                                                                                           
|                                       
|                                        |  | 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


|                                     |                 |                                                                                                                                                                                         |            |                           |             |             |            |              |             |   |            | 
|------------------------------------ | --------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- | ------------------------- | ----------- | ----------- | ---------- | ------------ | ----------- | - | ---------- | 
|                                     |                 |                                                                                                                                                                                         |            |                           |             | June 30,    |            | December 31,
|                                     |                 |                                                                                                                                                                                         |            |                           |             | 2002        |            | 2001        
|                                     |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|                                     |                 |                                                                                                                                                                                         |            |                           |             | (Unaudited) |            | (Audited)   
|ASSETS                               |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|                                     | CURRENT ASSETS: |                                                                                                                                                                                         |            |                           |             |             |            |              |            
|                                     |                 | Cash and cash equivalents                                                                                                                                                               |            | $                         | 1,860,000   |             |            | $            | 2,033,000   |  
|                                     |                 | Accounts receivable, net                                                                                                                                                                |            |                           | 9,955,000   |             |            |              | 10,010,000  |  
|                                     |                 | Inventories, net                                                                                                                                                                        |            |                           | 6,524,000   |             |            |              | 6,984,000   |  
|                                     |                 | Prepaid expenses and other                                                                                                                                                              |            |                           | 745,000     |             |            |              | 353,000     |  
|                                     |                 | Deferred taxes                                                                                                                                                                          |            |                           | 2,294,000   |             |            |              | 2,294,000   |  
|                                     |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|                                     |                 |                                                                                                                                                                                         |            | Total current assets      |             |             | 21,378,000 |              |             |   | 21,674,000 | 
|                                     |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|                                     |                 | Property, net                                                                                                                                                                           |            |                           | 5,243,000   |             |            |              | 4,805,000   |  
|                                     |                 | Goodwill, net                                                                                                                                                                           |            |                           | 2,639,000   |             |            |              | 6,115,000   |  
|                                     |                 | Other long-term assets                                                                                                                                                                  |            |                           | 1,148,000   |             |            |              | 1,068,000   |  
|                                     |                 | Deferred taxes                                                                                                                                                                          |            |                           | 2,042,000   |             |            |              | 2,042,000   |  
|                                     |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|TOTAL                                |                 | $                                                                                                                                                                                       | 32,450,000 |                           |             | $           | 35,704,000 |             
|                                     |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|LIABILITIES AND STOCKHOLDERS EQUITY |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|CURRENT LIABILITIES:                 |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|                                     |                 | Accounts payable                                                                                                                                                                        |            | $                         | 3,249,000   |             |            | $            | 3,115,000   |  
|                                     |                 | Accrued payroll and related expenses                                                                                                                                                    |            |                           | 1,401,000   |             |            |              | 1,875,000   |  
|                                     |                 | Income taxes payable                                                                                                                                                                    |            |                           | 718,000     |             |            |              | 576,000     |  
|                                     |                 | Current portion of long-term debt                                                                                                                                                       |            |                           | 145,000     |             |            |              | 221,000     |  
|                                     |                 | Other liabilities                                                                                                                                                                       |            |                           | 30,000      |             |            |              | 65,000      |  
|                                     |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|                                     |                 |                                                                                                                                                                                         |            | Total current liabilities |             |             | 5,543,000  |              |             |   | 5,852,000  | 
|                                     |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|LONG-TERM DEBT, less current portion |                 |                                                                                                                                                                                         | 17,000     |                           |             |             | 83,000     |             
|STOCKHOLDERS EQUITY:                |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|                                     |                 | Preferred stock  $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding at
June 30, 2002 (unaudited) and December 31, 2001, respectively                      |            |                           |            |             |            |              |            |  
|                                     |                 | Common stock  $0.001 par value; 40,000,000 shares
authorized; 15,425,886 and 15,344,550 shares
issued and outstanding at June 30, 2002 (unaudited)
and December 31, 2001, respectively |            |                           | 42,689,000  |             |            |              | 42,274,000  |  
|                                     |                 | Accumulated other comprehensive income (loss)                                                                                                                                           |            |                           | (62,000     | )           |            |              | 1,000       |  
|                                     |                 | Accumulated deficit                                                                                                                                                                     |            |                           | (15,737,000 | )           |            |              | (12,506,000 | )
|                                     |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|                                     |                 |                                                                                                                                                                                         |            | Net stockholders equity  |             |             | 26,890,000 |              |             |   | 29,769,000 | 
|                                     |                 |                                                                                                                                                                                         |            |                           |             |             |            |             
|TOTAL                                |                 | $                                                                                                                                                                                       | 32,450,000 |                           |             | $           | 35,704,000 |             
|                                     |                 |                                                                                                                                                                                         |            |                           |             |             |            |             

See accompanying notes to condensed consolidated financial statements.

1



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##### Table of Contents



I-FLOW CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(Unaudited)


|                                                                        |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |           |            |         | 
|----------------------------------------------------------------------- | -------------------------- | ------------------------ | ---------------------------------------- | --------- | ------------------ | ------- | ---------------- | --------- | --------- | ------- | ---------- | ---------- | ---------- | ---------- | ---------- | --------- | ---------- | ------- | 
|                                                                        |                            |                          |                                          |           | Three Months Ended |         | Six Months Ended
|                                                                        |                            |                          |                                          |           | June 30,           |         | June 30,        
|                                                                        |                            |                          |                                          |           |                    |         |                 
|                                                                        |                            |                          |                                          |           | 2002               |         | 2001             |           | 2002      |         | 2001      
|                                                                        |                            |                          |                                          |           |                    |         |                  |           |           |         |           
|Net revenues                                                            |                            | $                        | 9,505,000                                |           |                    | $       | 8,479,000        |           |           | $       | 18,055,000 |            |            | $          | 16,471,000 |          
|Costs and expenses:                                                     |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |          
|                                                                        | Cost of sales              |                          |                                          | 3,792,000 |                    |         |                  | 3,469,000 |           |         |            | 7,248,000  |            |            |            | 6,815,000 |           
|                                                                        | Selling and marketing      |                          |                                          | 2,939,000 |                    |         |                  | 1,370,000 |           |         |            | 5,306,000  |            |            |            | 2,661,000 |           
|                                                                        | General and administrative |                          |                                          | 2,036,000 |                    |         |                  | 2,376,000 |           |         |            | 4,010,000  |            |            |            | 4,581,000 |           
|                                                                        | Product development        |                          |                                          | 565,000   |                    |         |                  | 524,000   |           |         |            | 1,091,000  |            |            |            | 1,082,000 |           
|                                                                        |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |          
|                                                                        |                            | Total costs and expenses |                                          |           | 9,332,000          |         |                  |           | 7,739,000 |         |            |            | 17,655,000 |            |            |           | 15,139,000 |        
|Operating income                                                        |                            |                          | 173,000                                  |           |                    |         | 740,000          |           |           |         | 400,000    |            |            |            | 1,332,000  |          
|Interest expense (income), net                                          |                            |                          | (4,000                                   | )         |                    |         | 30,000           |           |           |         | (5,000     | )          |            |            | 77,000     |          
|Income tax provision                                                    |                            |                          | 71,000                                   |           |                    |         | 311,000          |           |           |         | 163,000    |            |            |            | 540,000    |          
|                                                                        |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |          
|Net
income before effect of a change in accounting principle            |                            |                          | 106,000                                  |           |                    |         | 399,000          |           |           |         | 242,000    |            |            |            | 715,000    |          
|Effect of a change in accounting principle:                             |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |          
|                                                                        | Goodwill impairment        |                          |                                          |          |                    |         |                  |          |           |         |            | (3,474,000 | )          |            |            |          |           
|                                                                        |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |          
|Net income (loss)                                                       |                            | $                        | 106,000                                  |           |                    | $       | 399,000          |           |           | $       | (3,232,000 | )          |            | $          | 715,000    |          
|                                                                        |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |          
|Net income per share, before effect of
a change in accounting principle |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |          
|                                                                        |                            |                          | Basic                                    |           | $                  | 0.01    |                  |           | $         | 0.03    |            |            | $          | 0.02       |            |           | $          | 0.05    | 
|                                                                        |                            |                          | Diluted                                  |           | $                  | 0.01    |                  |           | $         | 0.03    |            |            | $          | 0.02       |            |           | $          | 0.05    | 
|Loss per share from goodwill impairment                                
|                                                                        |                            |                          | Basic                                    |           | $                  |        |                  |           | $         |        |            |            | $          | (0.23      | )          |           | $          |        | 
|                                                                        |                            |                          | Diluted                                  |           | $                  |        |                  |           | $         |        |            |            | $          | (0.22      | )          |           | $          |        | 
|Net income (loss) per share                                             |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |          
|                                                                        |                            |                          | Basic                                    |           | $                  | 0.01    |                  |           | $         | 0.03    |            |            | $          | (0.21      | )          |           | $          | 0.05    | 
|                                                                        |                            |                          | Diluted                                  |           | $                  | 0.01    |                  |           | $         | 0.03    |            |            | $          | (0.20      | )          |           | $          | 0.05    | 
|Comprehensive Operations:                                               |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |          
|                                                                        |                            |                          | Net income (loss)                        |           | $                  | 106,000 |                  |           | $         | 399,000 |            |            | $          | (3,232,000 | )          |           | $          | 715,000 | 
|                                                                        |                            |                          | Foreign currency translation gain (loss) |           |                    | (72,000 | )                |           |           | 43,000  |            |            |            | (62,000    | )          |           |            | 36,000  | 
|                                                                        |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |          
|                                                                        |                            |                          | Comprehensive income (loss)              |           | $                  | 34,000  |                  |           | $         | 442,000 |            |            | $          | (3,294,000 | )          |           | $          | 751,000 | 
|                                                                        |                            |                          |                                          |           |                    |         |                  |           |           |         |            |            |            |            |            |          

See accompanying notes to condensed consolidated financial statements

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##### Table of Contents



I-FLOW CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |            |           |  
|---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------------- | ---------- | ---------------- | -------- | ---- | ---------- | ---------- | --------- | -
|                                                                                         |                                                                                      |                                                           |            | Six Months Ended
|                                                                                         |                                                                                      |                                                           |            | June 30,        
|                                                                                         |                                                                                      |                                                           |            |                 
|                                                                                         |                                                                                      |                                                           |            | 2002             |          | 2001
|                                                                                         |                                                                                      |                                                           |            |                  |          |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |                                                                                      |                                                           |            |                  |          |      |            |           
|Net income (loss)                                                                        |                                                                                      | $                                                         | (3,232,000 | )                |          | $    | 715,000    |           
|Adjustments to reconcile net income (loss)
to net cash provided by operating activities: |                                                                                      |                                                           |            |                  |          |      |            |           
|                                                                                         | Depreciation and amortization                                                        |                                                           |            | 977,000          |          |      |            | 1,359,000  |          
|                                                                                         | Goodwill impairment                                                                  |                                                           |            | 3,474,000        |          |      |            |           |          
|                                                                                         | Compensation expense related to stock option grants                                  |                                                           |            | 392,000          |          |      |            | 310,000    |          
|                                                                                         | Change in allowance for doubtful accounts                                            |                                                           |            | (237,000         | )        |      |            | 148,000    |          
|                                                                                         | Change in inventory obsolescence reserve                                             |                                                           |            | 87,000           |          |      |            | (9,000     | )        
|                                                                                         | Changes in operating assets and liabilities, net of effect of business acquisitions: |                                                           |            |                  |          |      |            |            |          
|                                                                                         |                                                                                      | Accounts receivable                                       |            |                  | 293,000  |      |            |            | 2,986,000 |  
|                                                                                         |                                                                                      | Inventories                                               |            |                  | 373,000  |      |            |            | (969,000  | )
|                                                                                         |                                                                                      | Prepaid expenses and other                                |            |                  | (305,000 | )    |            |            | (158,000  | )
|                                                                                         |                                                                                      | Accounts payable and accrued payroll and related expenses |            |                  | (382,000 | )    |            |            | (430,000  | )
|                                                                                         |                                                                                      | Income taxes payable                                      |            |                  | 142,000  |      |            |            | 284,000   |  
|                                                                                         |                                                                                      | Other liabilities                                         |            |                  | (44,000  | )    |            |            | (48,000   | )
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           
|Net cash provided by operating activities                                                |                                                                                      |                                                           | 1,538,000  |                  |          |      | 4,188,000  |           
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |                                                                                      |                                                           |            |                  |          |      |            |           
|                                                                                         | Property acquisitions                                                                |                                                           |            | (1,303,000       | )        |      |            | (842,000   | )        
|                                                                                         | Cash paid for acquisition                                                            |                                                           |            |                 |          |      |            | (165,000   | )        
|                                                                                         | Change in other assets                                                               |                                                           |            | (203,000         | )        |      |            | (295,000   | )        
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           
|Net cash used in investing activities                                                    |                                                                                      |                                                           | (1,506,000 | )                |          |      | (1,302,000 | )         
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |                                                                                      |                                                           |            |                  |          |      |            |           
|                                                                                         | Repayments on line of credit                                                         |                                                           |            |                 |          |      |            | (500,000   | )        
|                                                                                         | Principal payments on notes payable                                                  |                                                           |            | (142,000         | )        |      |            | (1,836,000 | )        
|                                                                                         | Proceeds from exercise of stock options and warrants                                 |                                                           |            | 23,000           |          |      |            | 20,000     |          
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           
|Net cash used in financing activities                                                    |                                                                                      |                                                           | (119,000   | )                |          |      | (2,316,000 | )         
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           
|Effect of exchange rates on cash                                                         |                                                                                      |                                                           | (86,000    | )                |          |      | (33,000    | )         
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |                                                                                      |                                                           | (173,000   | )                |          |      | 537,000    |           
|CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD                                         |                                                                                      |                                                           | 2,033,000  |                  |          |      | 1,184,000  |           
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                               |                                                                                      | $                                                         | 1,860,000  |                  |          | $    | 1,721,000  |           
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                      |                                                                                      |                                                           |            |                  |          |      |            |           
|Interest paid                                                                            |                                                                                      | $                                                         | 2,000      |                  |          | $    | 90,000     |           
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           
|Income tax payments                                                                      |                                                                                      | $                                                         | 22,000     |                  |          | $    | 81,000     |           
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           
|Liabilities issued and assumed in connection with acquisition:                           |                                                                                      |                                                           |            |                  |          |      |            |           
|                                                                                         | Fair value of assets acquired (including intangibles)                                |                                                           | $          |                 |          |      | $          | 165,000    |          
|                                                                                         | Cash paid for business acquisition                                                   |                                                           |            |                 |          |      |            | (165,000   | )        
|                                                                                         | Common stock issued                                                                  |                                                           |            |                 |          |      |            |           |          
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           
|Liabilities assumed                                                                      |                                                                                      | $                                                         |           |                  |          | $    |           |           
|                                                                                         |                                                                                      |                                                           |            |                  |          |      |            |           

See accompanying notes to 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 June 30, 2002 and the results of its operations and its
cash flows for the three and six-month periods ended June 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 June 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Inventories consisted of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                |  |          |           |              |  |   |           | 
|--------------- |  | -------- | --------- | ------------ |  | - | --------- | 
|                |  | June 30, |           | December 31,
|                |  | 2002     |           | 2001        
|                |  |          |           |             
|Raw Materials   |  | $        | 4,202,000 |              |  | $ | 4,553,000 | 
|Work in Process |  |          | 719,000   |              |  |   | 199,000   | 
|Finished Goods  |  |          | 1,603,000 |              |  |   | 2,232,000 | 
|                |  |          |           |              |  |   |           | 
|Total           |  | $        | 6,524,000 |              |  | $ | 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 Ended |     | Six Months Ended
|                                                             |                                                      |                                             |     | June 30,           |     | June 30,        
|                                                             |                                                      |                                             |     |                    |     |                 
|(Amounts in thousands)                                       |                                                      | 2002                                        |     | 2001               |     | 2002             |     | 2001  
|                                                             |                                                      |                                             |     |                    |     |                  |     |       
|Net
income before effect of a change in accounting principle |                                                      | $                                           | 106 |                    |     | $                | 399 |        |     | $ | 242    |        |     | $ | 715 |       
|                                                             |                                                      |                                             |     |                    |     |                  |     |        |     |   |        |        |     |   |     |       
|Net income (loss)                                            |                                                      | $                                           | 106 |                    |     | $                | 399 |        |     | $ | (3,232 | )      |     | $ | 715 |       
|                                                             |                                                      |                                             |     |                    |     |                  |     |        |     |   |        |        |     |   |     |       
|Basic net income per share                                   |                                                      |                                             |     |                    |     |                  |     |        |     |   |        |        |     |   |     |       
|                                                             | Weighted average number of common shares
outstanding |                                             |     | 15,363             |     |                  |     | 15,249 |     |   |        | 15,358 |     |   |     | 15,154 |    
|                                                             | Effect of dilutive securities:                       |                                             |     |                    |     |                  |     |        |     |   |        |        |     |   |     |        |    
|                                                             |                                                      | Stock options and unvested restricted stock |     |                    | 670 |                  |     |        | 393 |   |        |        | 754 |   |     |        | 430 | 
|                                                             |                                                      |                                             |     |                    |     |                  |     |        |     |   |        |        |     |   |     |       
|Diluted net income per share                                 |                                                      |                                             |     |                    |     |                  |     |        |     |   |        |        |     |   |     |       
|                                                             | Weighted average number of common shares
outstanding |                                             |     | 16,033             |     |                  |     | 15,642 |     |   |        | 16,112 |     |   |     | 15,584 |    
|                                                             |                                                      |                                             |     |                    |     |                  |     |        |     |   |        |        |     |   |     |       



---



|   |  | Potential common shares of 4,351,000 and 4,267,000
have been excluded from diluted weighted average common shares for the
three and six-month periods ended June 30, 2002, respectively, as the
effect would be anti-dilutive.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Potential common shares of
3,959,000 and 3,922,000 have been excluded from diluted weighted average common shares for the
three and six-month periods ended June 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-month periods
ended June 30, 2002 and 2001:                                                                                                                          

|                                 |  |                   |        |         |  |              |        |  |  |   |        | 
|-------------------------------- |  | ----------------- | ------ | ------- |  | ------------ | ------ |  |  | - | ------ | 
|                                 |  | Manufacturing and |        |         |  |              |        |  |  |  
|(Amounts in thousands)           |  | Marketing         |        | Rentals |  | Consolidated
|                                 |  |                   |        |         |  |             
|Three months ended June 30, 2002 |  |                   |        |         |  |              |        |  |  |   |        | 
|Revenues                         |  | $                 | 6,903  |         |  | $            | 2,602  |  |  | $ | 9,505  | 
|Operating income (loss)          |  |                   | (504   | )       |  |              | 677    |  |  |   | 173    | 
|Assets                           |  |                   | 20,443 |         |  |              | 12,007 |  |  |   | 32,450 | 
|Six months ended June 30, 2002   |  |                   |        |         |  |              |        |  |  |   |        | 
|Revenues                         |  |                   | 12,962 |         |  |              | 5,093  |  |  |   | 18,055 | 
|Operating
income (loss)          |  |                   | (882   | )       |  |              | 1,282  |  |  |   | 400    | 
|Assets                           |  |                   | 20,443 |         |  |              | 12,007 |  |  |   | 32,450 | 
|Three months ended June 30, 2001 |  |                   |        |         |  |              |        |  |  |   |        | 
|Revenues                         |  |                   | 5,860  |         |  |              | 2,619  |  |  |   | 8,479  | 
|Operating income                 |  |                   | 121    |         |  |              | 619    |  |  |   | 740    | 
|Assets                           |  |                   | 22,467 |         |  |              | 11,243 |  |  |   | 33,710 | 
|Six months ended June 30, 2001   |  |                   |        |         |  |              |        |  |  |   |        | 
|Revenues                         |  |                   | 11,321 |         |  |              | 5,150  |  |  |   | 16,471 | 
|Operating income                 |  |                   | 261    |         |  |              | 1,071  |  |  |   | 1,332  | 
|Assets                           |  |                   | 22,467 |         |  |              | 11,243 |  |  |   | 33,710 | 
|                                 |  |                   |        |         |  |              |        |  |  |   |        | 

5



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##### Table of Contents





|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.                                                                                          
|  
|   |  | 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 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 June 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 |   | Six Months Ended
|                                          |  |                            |                       |   | June 30,           |   | June 30,        
|                                          |  |                            |                       |   |                    |   |                 
|                                          |  |                            |                       |   | 2002               |   | 2001             |   | 2002 |         | 2001      
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |           
|Reported net income (loss)                |  | $                          | 106,000               |   |                    | $ | 399,000          |   |      | $       | (3,232,000 | ) |       | $ | 715,000   |  
|Add back:                                 |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|                                          |  |                            | Goodwill amortization |   |                    |  |                  |   |      | 246,000 |            |   |       |  |           |   |      | 493,000 | 
|Less: Tax effect of goodwill Amortization |  |                            |                      |   |                    |   | (54,000          | ) |      |         |           |   |       |   | (109,000  | )
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|Adjusted net income (loss)                |  |                            | 106,000               |   |                    |   | 591,000          |   |      |         | (3,232,000 | ) |       |   | 1,099,000 |  
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|Basic earnings per share                  |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|                                          |  | Reported net income (loss) |                       |   | 0.01               |   |                  |   | 0.03 |         |            |   | (0.21 | ) |           |   | 0.05 |        
|                                          |  | Goodwill adjustments       |                       |   |                   |   |                  |   | 0.01 |         |            |   |      |   |           |   | 0.02 |        
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|                                          |  | Adjusted net income (loss) |                       | $ | 0.01               |   |                  | $ | 0.04 |         |            | $ | (0.21 | ) |           | $ | 0.07 |        
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|Diluted earnings per share                |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|                                          |  | Reported net income (loss) |                       |   | 0.01               |   |                  |   | 0.03 |         |            |   | (0.20 | ) |           |   | 0.05 |        
|                                          |  | Goodwill adjustments       |                       |   |                   |   |                  |   | 0.01 |         |            |   |      |   |           |   | 0.02 |        
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|                                          |  | Adjusted net income (loss) |                       | $ | 0.01               |   |                  | $ | 0.04 |         |            | $ | (0.20 | ) |           | $ | 0.07 |        
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  



| |  | 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 | )



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

|                 |  |                     |           |              |  |     |         |  |  |   |         | 
|---------------- |  | ------------------- | --------- | ------------ |  | --- | ------- |  |  | - | ------- | 
|                 |  | As of June 30, 2002
|                 |  |                    
|                 |  | Carrying            |           | Accumulated  |  |     |         | 
|                 |  | Amount              |           | Amortization |  | Net
|                 |  |                     |           |              |  |    
|Patents          |  | $                   | 1,554,000 |              |  | $   | 626,000 |  |  | $ | 928,000 | 
|Licensing Rights |  |                     | 150,000   |              |  |     | 105,000 |  |  |   | 45,000  | 
|                 |  |                     |           |              |  |     |         |  |  |   |         | 
|Total            |  | $                   | 1,704,000 |              |  | $   | 731,000 |  |  | $ | 973,000 | 
|                 |  |                     |           |              |  |     |         |  |  |   |         | 

|                 |  |                         |           |              |  |     |         |  |  |   |         | 
|---------------- |  | ----------------------- | --------- | ------------ |  | --- | ------- |  |  | - | ------- | 
|                 |  | 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 six-months ended June 30, 2002 was
$62,000 and $121,000, respectively, compared to $39,000 and $96,000 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 six month periods ended June 30,
2002, the Company acquired patents with an aggregate cost of $65,000 and
$97,000, 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                                                                                                                                                                                                    

7



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##### Table of Contents





| |  | 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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##### Table of Contents





| |  | 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 and the current estimated market value of
the inventory. The Company regularly reviews inventory quantities on
hand and records a provision for excess and obsolete inventory 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                  

10



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##### Table of Contents



Results of Operations



| |  | Net revenues during the three and six-month periods ended June 30, 2002
were $9,505,000 and $18,055,000 compared to $8,479,000 and $16,471,000
for the same periods in the prior year, representing increases of 12% and
10%, respectively. The net increases in revenues of $1,026,000 and
$1,584,000 for the three and six-month periods ended June 30, 2002
compared to the same periods in the prior year were primarily due to an
increase in regional anesthesia product revenues of $1,190,000 and
$1,547,000, 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 $3,792,000 and $7,248,000 during
the three and six-month periods ended June 30, 2002 compared to
$3,469,000 and $6,815,000 for the same periods in the prior year. This
represents an increase of 9% and 6%, respectively. However, during the
three and six-month periods ended June 30, 2002, cost of sales as a
percentage of net revenues decreased by approximately 1% mainly 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 six-month periods ended
June 30, 2002 increased over the same periods in the prior year by
$1,569,000 or 115% and $2,645,000 or 99%, respectively. These increases
were primarily due to the additional costs associated with the Companys
new direct sales force and related marketing expenses necessary to
support the ON-Q Post-Operative Pain Relief System. The Company acquired
exclusive distribution rights for the ON-Q product from Ethicon-Endo
Surgery, Inc. effective January 1, 2002.                                                                                                                                                                                                                                                                                       
|
| |  | General and administrative expenses for the three and six-month periods
ended June 30, 2002 decreased compared to the same periods in the prior
year by $340,000 or 14% and $571,000 or 12%, respectively. As a
percentage of net revenues, general and administrative expenses decreased
by 7% and 6% for the three and six-month periods ended June 30,
2002, respectively. The decreases for the three and six-month periods ended
June 30, 2002 were primarily due to decreases in goodwill amortization of
$246,000 and $493,000, respectively, and reduced compensation expense.                                                                                                                                                                                                                                                       
|
| |  | Product development expenses for the three and six-month periods ended
June 30, 2002 increased over the same periods in the prior year by
$41,000 or 8% and $9,000 or 1%, respectively. These increases were due
primarily to regulatory costs incurred for product testing 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 six-month periods ended June 30, 2002, the Company
recorded income tax expense of $71,000 and $163,000, respectively,
compared to income tax expense of $311,000 and $540,000 for the same
periods in the prior year. The Companys effective tax rate decreased
slightly to 40.1% during the quarter ended June 30, 2002 from 43.8% in
the prior year quarter. For the six months ended June 30, 2002, the
effective tax rate was 40.2% compared to 43.0% for the six months ended
June 30, 2001.                                                                                                                                                                                                                                                                                                                      

Liquidity and Capital Resources



| |  | During the six-month period ended June 30, 2002, cash of $1,538,000 was
provided by operating activities consisting of a net loss of $3,232,000
plus non-cash expenses of $4,693,000 and net changes in operating assets
and liabilities of $77,000.                                                                                                                                                                
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company used cash in investing activities during the six-month period
ended June 30, 2002 aggregating $1,506,000, compared to $1,303,000 for
the same period in the prior year. The expenditures in the six months
ended June 30, 2002 consisted of $1,303,000 used to acquire leasehold
improvements, furniture, fixtures and equipment for use in the Companys
operations along with a net outflow related to

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| |  | other assets of $203,000. The Company currently expects expenditures for
fixed assets to be relatively consistent for the remainder of the year.                                                                                                                                                                                                                                                                     
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the six-month period ended June 30, 2002, cash of $119,000 was
used in financing activities consisting of $142,000 of payments on notes
payable, partially offset by $23,000 in proceeds from the exercise of
stock options.                                                                                                                                                                                  
|
| |  | As of June 30, 2002, the Company had cash and cash equivalents of
$1,860,000 and net accounts receivable of $9,955,000. 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.                                                                                          
|
| |  | 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 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 June 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |   |      |         | 
|----------------------------------------- |  | -------------------------- | --------------------- | - | ------------------ | - | ---------------- | - | ---- | ------- | ---------- | - | ----- | - | --------- | - | ---- | ------- | 
|                                          |  |                            |                       |   | Three Months Ended |   | Six Months Ended
|                                          |  |                            |                       |   | June 30,           |   | June 30,        
|                                          |  |                            |                       |   |                    |   |                 
|                                          |  |                            |                       |   | 2002               |   | 2001             |   | 2002 |         | 2001      
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |           
|Reported
net income (loss)                |  | $                          | 106,000               |   |                    | $ | 399,000          |   |      | $       | (3,232,000 | ) |       | $ | 715,000   |  
|Add back:                                 |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|                                          |  |                            | Goodwill amortization |   |                    |  |                  |   |      | 246,000 |            |   |       |  |           |   |      | 493,000 | 
|Less: Tax effect of goodwill Amortization |  |                            |                      |   |                    |   | (54,000          | ) |      |         |           |   |       |   | (109,000  | )
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|Adjusted net income (loss)                |  |                            | 106,000               |   |                    |   | 591,000          |   |      |         | (3,232,000 | ) |       |   | 1,099,000 |  
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|Basic earnings per share                  |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|                                          |  | Reported
net income (loss) |                       |   | 0.01               |   |                  |   | 0.03 |         |            |   | (0.21 | ) |           |   | 0.05 |        
|                                          |  | Goodwill amortization      |                       |   |                   |   |                  |   | 0.01 |         |            |   |      |   |           |   | 0.02 |        
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|                                          |  | Adjusted net income (loss) |                       | $ | 0.01               |   |                  | $ | 0.04 |         |            | $ | (0.21 | ) |           | $ | 0.07 |        
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|Diluted earnings per share                |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|                                          |  | Reported
net income (loss) |                       |   | 0.01               |   |                  |   | 0.03 |         |            |   | (0.20 | ) |           |   | 0.05 |        
|                                          |  | Goodwill amortization      |                       |   |                   |   |                  |   | 0.01 |         |            |   |      |   |           |   | 0.02 |        
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  
|                                          |  | Adjusted net income (loss) |                       | $ | 0.01               |   |                  | $ | 0.04 |         |            | $ | (0.20 | ) |           | $ | 0.07 |        
|                                          |  |                            |                       |   |                    |   |                  |   |      |         |            |   |       |   |           |  



| |  | 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 consolidating balance sheets are as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------

|                 |  |                     |           |              |  |     |         |  |  |   |         | 
|---------------- |  | ------------------- | --------- | ------------ |  | --- | ------- |  |  | - | ------- | 
|                 |  | As of June 30, 2002
|                 |  |                    
|                 |  | Carrying            |           | Accumulated  |  |     |         | 
|                 |  | Amount              |           | Amortization |  | Net
|                 |  |                     |           |              |  |    
|Patents          |  | $                   | 1,554,000 |              |  | $   | 626,000 |  |  | $ | 928,000 | 
|Licensing Rights |  |                     | 150,000   |              |  |     | 105,000 |  |  |   | 45,000  | 
|                 |  |                     |           |              |  |     |         |  |  |   |         | 
|Total            |  | $                   | 1,704,000 |              |  | $   | 731,000 |  |  | $ | 973,000 | 
|                 |  |                     |           |              |  |     |         |  |  |   |         | 

|                 |  |                         |           |              |  |     |         |  |  |   |         | 
|---------------- |  | ----------------------- | --------- | ------------ |  | --- | ------- |  |  | - | ------- | 
|                 |  | 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 six-months ended June 30, 2002 was
$62,000 and $121,000, respectively, compared to $39,000 and $96,000 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 six month periods ended June 30,
2002, the Company acquired patents with an aggregate cost of $65,000 and
$97,000, 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                                                                                              

13



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##### Table of Contents





| |  | 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.

14



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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
changes 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.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




PART II  OTHER INFORMATION




Item 1.Legal Proceedings



| |  | On April 23, 2002, the Company filed an action in the Superior Court of
Orange County, California 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 SoakerTM 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 2.Changes in Securities and Use of Proceeds



| |  | On May 23, 2002, at the annual meeting of stockholders, the stockholders
of the Company approved a proposal to amend and restate the Companys
Certificate of Incorporation to provide for the classification of the
board of directors into three classes with staggered terms of office. On
May 29, 2002, the Company filed an Amended and Restated Certificate of
Incorporation with the State of Delaware which created a classified board
of directors having three classes with staggered terms of office. The
identity, classification, and term of service for each director is
discussed below under the heading Reports on Form 8-K.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15



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##### Table of Contents






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



| | (a) |  | The 2002 Annual Meeting of Stockholders of the Company was
held on May 23, 2002                                                              
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | All of the directors nominated for election by the Companys
board of directors, as described in the Companys proxy statement,
were elected.
|
| | (c) |  | Matters voted upon at the meeting and the votes cast with
respect to each such matter were as follows:                                       



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

|                                                                                                                                                                                                                                        |  |            |            |         |  |         |           |                  |  |  |         |  |  |  |           | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | ---------- | ------- |  | ------- | --------- | ---------------- |  |  | ------- |  |  |  | --------- | 
|                                                                                                                                                                                                                                        |  | Votes Cast
|                                                                                                                                                                                                                                        |  |           
|Proposal by the Board of Directors                                                                                                                                                                                                      |  | For        |            | Against |  | Abstain |           | Broker Non-Votes
|                                                                                                                                                                                                                                        |  |            |            |         |  |         |           |                 
|To approve and adopt an amended
and restated certificate of
incorporation to establish a
classified board of directors
having three classes with
staggered three-year terms.                                                            |  |            | 7,967,846  |         |  |         | 1,512,620 |                  |  |  | 77,641  |  |  |  | 5,031,799 | 
|To amend the I-Flow Corporation
2001 Equity Incentive Plan to
make non-employee directors
eligible to receive grants under
the plan.                                                                                                    |  |            | 11,838,190 |         |  |         | 2,636,113 |                  |  |  | 115,603 |  |  |  |          | 
|To amend the I-Flow Corporation
2001 Equity Incentive Plan to
increase the number of shares of
common stock available for grant
by 2,250,000 and to reserve an
additional 2,250,000 shares of
common stock for issuance under
the plan. |  |            | 6,541,840  |         |  |         | 2,924,907 |                  |  |  | 91,360  |  |  |  | 5,031,799 | 
|To ratify the appointment of
Deloitte & Touche LLP as the
Companys independent auditor for
the fiscal year ending December
31, 2002.                                                                                                   |  |            | 14,263,741 |         |  |         | 267,063   |                  |  |  | 59,102  |  |  |  |          | 



| |  | Election of Directors                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Each of the directors listed below was elected and will continue to serve
on the Companys board of directors. The term of service for each
director is discussed below under the heading Reports on Form
8-K.

|                               |  |                |            |                |  |  |         | 
|------------------------------ |  | -------------- | ---------- | -------------- |  |  | ------- | 
|Director                       |  | Votes Received |            | Votes Withheld
|                               |  |                |            |               
|John H. Abeles, M.D.           |  |                | 14,096,770 |                |  |  | 493,136 | 
|James J. Dal Porto             |  |                | 14,096,770 |                |  |  | 493,136 | 
|Donald M. Earhart              |  |                | 14,016,177 |                |  |  | 573,729 | 
|Jack H. Halperin, Esq          |  |                | 14,016,177 |                |  |  | 573,729 | 
|Joel S. Kanter                 |  |                | 14,016,177 |                |  |  | 573,729 | 
|Erik H. Loudon                 |  |                | 14,016,177 |                |  |  | 573,729 | 
|Henry Tsutomu Tai, Ph.D., M.D. |  |                | 14,096,770 |                |  |  | 493,136 | 

16



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##### Table of Contents






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)*                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                      
|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                                                                                                                                                                                               

17



---



##### Table of Contents



|            |  |                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                
|            |  |                                                                                                                                        
|            |  | Specialties,
        Inc. and the Shareholders of Spinal Specialties, Inc. dated January 13,
        2000(12)                          
|            |  |                                                                                                                                        
|10.11       |  | I-Flow Corporation 2001 Equity
        Incentive Plan*                                                                                 
|            |  |                                                                                                                                        
|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.                                                        

18



---



##### 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.                             



| | (b) |  | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On May 31, 2002, the Company filed a Current Report on Form 8-K to
report that it had, on May 29, 2002 filed an Amended and Restated
Certificate of Incorporation with the State of Delaware which
Certificate of Incorporation created a classified board of
directors having three classes with staggered terms of office. The
Class I directors, Jack H. Halperin and James J. Dal Porto, will
serve on the board of directors until the 2003 Annual Meeting of
Stockholders, the Class II directors, Joel S. Kanter and Erik H.
Loudon, will serve on the board of directors until the 2004 Annual
Meeting of Stockholders. The Class III directors, Dr. John H.
Abeles, Donald M. Earhart and Dr. Henry Tai, will serve on the
board of directors until the 2005 Annual Meeting of Stockholders.
The directors were elected, and the Amended and Restated
Certificate of Incorporation was approved, by the Companys
stockholders at the 2002 Annual Meeting of Stockholders held on May
23, 2002.

19



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|Date: | August 14, 2002 |  | /s/ Donald M. Earhart
Donald M. Earhart
President, Chairman and Chief Executive Officer
(As Duly Authorized Officer)
|----- | --------------- |  | --------------------------------------------------------------------------------------------------------------------



|Date: | August 14, 2002 |  | /s/ James R. Talevich
James R. Talevich
Chief Financial Officer
(As Principal Financial Officer)
|----- | --------------- |  | ------------------------------------------------------------------------------------------------

20



---



##### 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)                                                                                 

21



---



##### Table of Contents



|            |  |                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                
|            |  |                                                                                                                                        
|10.11       |  | I-Flow Corporation 2001 Equity
        Incentive Plan*                                                                                 
|            |  |                                                                                                                                        
|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.                                                        

22



---



##### 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.                             

23