##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission file number: 000-18338
 I-FLOW CORPORATION
  Delaware
    
    33-0121984(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)
 20202 Windrow Drive, Lake Forest, CA
    
    92630(Address of Principal Executive Offices)
    
    (Zip Code)
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



I-FLOW CORPORATION
 FORM 10-Q
 FOR THE QUARTER ENDED JUNE 30, 2009
 Table of Contents
 PagePart I: Financial InformationItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations and Comprehensive Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25Part II: Other InformationItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    28Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 4 Submission of Matters to a Vote of Security Holders
    
    
    31Item 6. Exhibits
    
    
    32Signatures
    
    
    33EX-31.2EX-31.2EX-32.1




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 I-FLOW CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except par value amounts)
 June 30,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    50,254
    
    
    $
    39,276Short-term investments
    
    
    
    
    
    
    3,384Short-term investments  HAPC common stock
    
    
    7,256
    
    
    
    5,703Accounts receivable, less allowance for
doubtful accounts of $2,487 and $2,063 at
June 30, 2009 and December 31, 2008,
respectively
    
    
    22,150
    
    
    
    21,930Inventories
    
    
    18,890
    
    
    
    15,819Prepaid expenses and other current assets
    
    
    4,920
    
    
    
    3,356Note receivable, HAPC  current
    
    
    3,270
    
    
    
    3,270Deferred taxes
    
    
    783
    
    
    
    961Total current assets
    
    
    107,523
    
    
    
    93,699Property, net
    
    
    4,121
    
    
    
    4,127Goodwill
    
    
    12,233
    
    
    
    12,233Other intangible assets, net
    
    
    4,293
    
    
    
    4,201Other long-term assets
    
    
    233
    
    
    
    170Note receivable, HAPC  noncurrent
    
    
    20,051
    
    
    
    26,980Deferred taxes
    
    
    3,464
    
    
    
    7,277Total assets
    
    $
    151,918
    
    
    $
    148,687LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,249
    
    
    $
    4,882Accrued payroll and related expenses
    
    
    6,002
    
    
    
    6,138Accrued litigation costs (Note 10)
    
    
    11,966
    
    
    
    10,467Other current liabilities
    
    
    1,696
    
    
    
    2,140Total current liabilities
    
    
    27,913
    
    
    
    23,627Other liabilities (Note 10)
    
    
    5,933
    
    
    
    6,015Commitments and contingencies (Note 10)
    
    
    
    
    
    
    Stockholders equity:Preferred stock  $0.001 par value; 5,000
shares authorized; no shares issued and
outstanding
    
    
    
    
    
    
    Common stock and additional paid-in capital
 $0.001 par value; 40,000 shares
authorized; 24,449 and 24,534 shares issued
and outstanding at June 30, 2009 and
December 31, 2008, respectively
    
    
    136,585
    
    
    
    136,338Accumulated other comprehensive income (loss)
    
    
    861
    
    
    
    (379
    )Accumulated deficit
    
    
    (19,374
    )
    
    
    (16,914
    )Net stockholders equity
    
    
    118,072
    
    
    
    119,045Total liabilities and stockholders equity
    
    $
    151,918
    
    
    $
    148,687
  1




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##### Table of Contents



I-FLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    37,074
    
    
    $
    35,316
    
    
    $
    68,009
    
    
    $
    63,731Cost of revenues
    
    
    11,225
    
    
    
    9,699
    
    
    
    18,716
    
    
    
    16,886Gross profit
    
    
    25,849
    
    
    
    25,617
    
    
    
    49,293
    
    
    
    46,845Operating expenses:Selling and marketing
    
    
    16,177
    
    
    
    19,353
    
    
    
    33,047
    
    
    
    37,751General and administrative
    
    
    5,933
    
    
    
    5,585
    
    
    
    12,370
    
    
    
    10,493Product development
    
    
    2,664
    
    
    
    1,237
    
    
    
    4,827
    
    
    
    2,158Certain litigation and insurance charges (Note 10)
    
    
    
    
    
    
    12,168
    
    
    
    1,500
    
    
    
    12,168Total operating expenses
    
    
    24,774
    
    
    
    38,343
    
    
    
    51,744
    
    
    
    62,570Operating income (loss)
    
    
    1,075
    
    
    
    (12,726
    )
    
    
    (2,451
    )
    
    
    (15,725
    )Interest and other income
    
    
    696
    
    
    
    1,188
    
    
    
    1,529
    
    
    
    2,895Income (loss) before income taxes
    
    
    1,771
    
    
    
    (11,538
    )
    
    
    (922
    )
    
    
    (12,830
    )Income tax provision (benefit)
    
    
    883
    
    
    
    (113
    )
    
    
    1,538
    
    
    
    (868
    )Net income (loss)
    
    $
    888
    
    
    $
    (11,425
    )
    
    $
    (2,460
    )
    
    $
    (11,962
    )Net income (loss) per share of common stock:Basic
    
    $
    0.04
    
    
    $
    (0.46
    )
    
    $
    (0.10
    )
    
    $
    (0.48
    )Diluted
    
    $
    0.04
    
    
    $
    (0.46
    )
    
    $
    (0.10
    )
    
    $
    (0.48
    )Weighted-average shares:Basic
    
    
    24,446
    
    
    
    24,976
    
    
    
    24,496
    
    
    
    24,999Diluted
    
    
    24,849
    
    
    
    24,976
    
    
    
    24,496
    
    
    
    24,999Comprehensive Operations:Net income (loss)
    
    $
    888
    
    
    $
    (11,425
    )
    
    $
    (2,460
    )
    
    $
    (11,962
    )Foreign currency translation gain (loss)
    
    
    173
    
    
    
    (7
    )
    
    
    231
    
    
    
    108Unrealized gain (loss) on investment securities
    
    
    1,009
    
    
    
    1,413
    
    
    
    1,009
    
    
    
    (2,867
    )Comprehensive income (loss)
    
    $
    2,070
    
    
    $
    (10,019
    )
    
    $
    (1,220
    )
    
    $
    (14,721
    )
  2




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I-FLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
 Six Months EndedJune 30,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (2,460
    )
    
    $
    (11,962
    )Adjustments to reconcile net loss to net cash used in operating activities:Deferred taxes
    
    
    3,447
    
    
    
    Stock-based compensation
    
    
    2,545
    
    
    
    3,328Depreciation and amortization
    
    
    1,221
    
    
    
    1,095Excess tax benefit from exercise of stock options and vested restricted
stock and restricted stock units
    
    
    
    
    
    
    (562
    )Amortization of deferred financing fees from note receivable, HAPC
    
    
    (355
    )
    
    
    (355
    )Provision for doubtful accounts receivable
    
    
    341
    
    
    
    184Write-off of inventories
    
    
    413
    
    
    
    373Gain on disposal of property
    
    
    
    
    
    
    (4
    )Changes in operating assets and liabilities, net of AcryMed acquisition:Accounts receivable
    
    
    (561
    )
    
    
    2,411Inventories
    
    
    (3,484
    )
    
    
    (2,377
    )Prepaid expenses and other assets
    
    
    (637
    )
    
    
    (777
    )Accounts payable, accrued payroll and related expenses
    
    
    2,646
    
    
    
    (1,571
    )Income taxes payable
    
    
    (2,152
    )
    
    
    (13,524
    )Accrued litigation costs
    
    
    1,499
    
    
    
    8,687Other liabilities
    
    
    235
    
    
    
    (407
    )Net cash provided by (used in) operating activities
    
    
    2,698
    
    
    
    (15,461
    )CASH FLOWS FROM INVESTING ACTIVITIES:Property acquisitions
    
    
    (587
    )
    
    
    (691
    )Proceeds from sale of property
    
    
    
    
    
    
    11Acquisition of AcryMed, net of cash acquired
    
    
    
    
    
    
    (26,663
    )Repayments on note receivable, HAPC
    
    
    6,929
    
    
    
    818Purchases of investments
    
    
    
    
    
    
    (6,944
    )Maturities of investments
    
    
    3,384
    
    
    
    14,329Patent and other intangible asset acquisitions
    
    
    (565
    )
    
    
    (262
    )Net cash provided by (used in) investing activities
    
    
    9,161
    
    
    
    (19,402
    )CASH FLOWS FROM FINANCING ACTIVITIES:Purchase and retirement of common stock
    
    
    (1,134
    )
    
    
    (11,582
    )Excess tax benefit from exercise of stock options and vested restricted
stock and restricted stock units
    
    
    
    
    
    
    562Proceeds from exercise of stock options
    
    
    
    
    
    
    315Net cash used in financing activities
    
    
    (1,134
    )
    
    
    (10,705
    )Effect of exchange rates on cash
    
    
    253
    
    
    
    108Net increase (decrease) in cash and cash equivalents
    
    
    10,978
    
    
    
    (45,460
    )Cash and cash equivalents at beginning of period
    
    
    39,276
    
    
    
    78,571Cash and cash equivalents at end of period
    
    $
    50,254
    
    
    $
    33,111SUPPLEMENTAL CASH FLOW INFORMATION:Income tax payments
    
    $
    184
    
    
    $
    13,162Interest received
    
    
    1,174
    
    
    
    2,830SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:Property acquisitions included in accounts payable
    
    $
    150
    
    
    $
    169
  3




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I-FLOW CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. Basis of Presentation and Summary of Significant Accounting Policies
 Basis of Presentation
  Use of Estimates 
 New Accounting Pronouncements Determination of the Useful Life of
Intangible Assets Goodwill and Other Intangible Assets
  FSP FAS No. 115-2 (FSP FAS 115-2) and FAS 124-2-FSP FAS 115-2 and
FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, amends current
other-than-temporary impairment guidance for debt securities to make the guidance more
operational and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. This FSP does not
amend existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities.
 FSP FAS No. 157-4 (FSP FAS 157-4) -FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, provides additional guidance for estimating
fair value in accordance with SFAS No. 157, Fair Value Measurements(SFAS 157),when the
volume and level of activity for the asset or liability
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have decreased significantly. FSP FAS 157-4 also provides guidance on identifying
circumstances that indicate a transaction is not orderly. FSP FAS 157-4 must be applied
prospectively and retrospective application is not permitted.
 FSP FAS No. 107-1 (FSP FAS 107-1) and Accounting Principles Board (APB) 28-1 (APB
28-1) - FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments, requires disclosures about fair value of financial instruments in interim
reporting periods of publicly traded companies that were previously only required to be
disclosed in annual financial statements.
 Subsequent Events
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles
  2. Inventories
  June 30,
    
    
    December 31,(Amounts in thousands)
    
    2009
    
    
    2008Raw materials
    
    $
    9,045
    
    
    $
    7,501Work in process
    
    
    5,568
    
    
    
    2,612Finished goods
    
    
    4,277
    
    
    
    5,706Total
    
    $
    18,890
    
    
    $
    15,819
 3. Earnings (Loss) Per Share
 Earnings per Share
 Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
 5




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Amounts in thousands, except per share amounts)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Numerator:Net income (loss)
    
    $
    888
    
    
    $
    (11,425
    )
    
    $
    (2,460
    )
    
    $
    (11,962
    )Denominators:Denominator for basic earnings per share:Weighted-average number of common shares outstanding
    
    
    24,446
    
    
    
    24,976
    
    
    
    24,496
    
    
    
    24,999Effect of dilutive securities:Stock options, nonvested restricted stock and
nonvested restricted stock units
    
    
    403
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted net income per share:Weighted-average number of common and common
equivalent shares outstanding
    
    
    24,849
    
    
    
    24,976
    
    
    
    24,496
    
    
    
    24,999Net income (loss) per share of common stock:Basic
    
    $
    0.04
    
    
    $
    (0.46
    )
    
    $
    (0.10
    )
    
    $
    (0.48
    )Diluted
    
    $
    0.04
    
    
    $
    (0.46
    )
    
    $
    (0.10
    )
    
    $
    (0.48
    )
   6




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4. Goodwill and Other Intangible Assets
     As of June 30, 2009Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net(Amounts in thousands)Purchased technology and patents
    
    $
    4,792
    
    
    $
    (1,935
    )
    
    $
    2,857Licensing rights and agreements
    
    
    1,402
    
    
    
    (605
    )
    
    
    797Customer relationships
    
    
    700
    
    
    
    (180
    )
    
    
    520Other
    
    
    150
    
    
    
    (31
    )
    
    
    119Total
    
    $
    7,044
    
    
    $
    (2,751
    )
    
    $
    4,293
 As of December 31, 2008Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net(Amounts in thousands)Purchased technology and patents
    
    $
    4,404
    
    
    $
    (1,784
    )
    
    $
    2,620Licensing rights and agreements
    
    
    1,402
    
    
    
    (528
    )
    
    
    874Customer relationships
    
    
    700
    
    
    
    (123
    )
    
    
    577Other
    
    
    150
    
    
    
    (20
    )
    
    
    130Total
    
    $
    6,656
    
    
    $
    (2,455
    )
    
    $
    4,201
   7




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5. Stockholders Equity
   6. Stock-Based Compensation
 Share-Based Payment
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Amounts in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Selling and marketing
    
    $
    168
    
    
    $
    392
    
    
    $
    278
    
    
    $
    492General and administrative
    
    
    1,028
    
    
    
    1,518
    
    
    
    2,267
    
    
    
    2,836Total
    
    $
    1,196
    
    
    $
    1,910
    
    
    $
    2,545
    
    
    $
    3,328
 8




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Stock Options
  Weighted-AverageWeighted-
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateNumber
    
    
    Exercise Price
    
    
    Term
    
    
    Intrinsic(Amounts in thousands, except per share and year amounts)
    
    of Shares
    
    
    per Share
    
    
    (in years)
    
    
    ValueOptions outstanding at December 31, 2008
    
    
    2,001
    
    
    $
    11.79Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited or expired
    
    
    (670
    )
    
    
    13.61Options outstanding at June 30, 2009
    
    
    1,331
    
    
    
    10.87
    
    
    
    0.91
    
    
    $
    2,951Options vested and exercisable at June 30, 2009
    
    
    1,260
    
    
    $
    10.64
    
    
    
    0.84
    
    
    $
    2,951
   Restricted Stock and Restricted Stock Units
 i.e.
 9




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Restricted Stock
    
    Restricted Stock UnitsWeighted-
    
    
    
    
    
    Weighted-Average Grant
    
    
    
    
    
    Average GrantNumber of
    
    Date Fair Value
    
    Number of
    
    Date Fair Value(Amounts in thousands, except per share amounts)
    
    Shares
    
    per Share
    
    Shares
    
    per ShareNonvested shares outstanding at December 31, 2008
    
    
    517
    
    
    $
    14.35
    
    
    
    676
    
    
    $
    14.12Shares issued
    
    
    85
    
    
    
    4.58
    
    
    
    213
    
    
    
    4.60Shares vested
    
    
    (354
    )
    
    
    14.48
    
    
    
    (151
    )
    
    
    14.52Shares forfeited
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    14.30Nonvested shares outstanding at June 30, 2009
    
    
    248
    
    
    $
    10.80
    
    
    
    717
    
    
    $
    11.21
  7. Income Taxes
  Business Combinations
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109
  10




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8. Note Receivable  HAPC
   9. Fair Values of Financial Instruments
     Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active
 Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableBalance at
    
    
    Assets
    
    
    Inputs
    
    
    Inputs(Amounts in thousands)
    
    June 30, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Reported as:Cash equivalents (1)
    
    $
    36,774
    
    
    $
    36,774
    
    
    $
    
    
    
    $
    Short-term investments  HAPC common stock (2)
    
    
    7,256
    
    
    
    
    
    
    
    
    
    
    
    7,256Total
    
    $
    44,030
    
    
    $
    36,774
    
    
    $
    
    
    
    $
    7,256
 11




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##### Table of Contents



(1)
    
    Level 1 securities include money market securities that are valued based on quoted market
prices in active markets. The money market securities participate in the Department of
Treasurys Temporary Guarantee Program for Money Market Funds.(2)
    
    Level 3 securities include available-for-sale investment in HAPC common stock purchased in
October 2007 in connection with the sale of InfuSystem to HAPC. The value is based on quoted
market prices for the exchange-traded equity security, adjusted to reflect the restriction on
the sale of the security due to the Companys potential affiliate status with HAPC for
purposes of federal securities laws resulting from the Companys position as a substantial
stockholder and creditor on a secured promissory note.  Short-term(Amounts in thousands)
    
    InvestmentsBalance as of January 1, 2009
    
    $
    5,703Total gains (losses):Included in net income (loss)
    
    
    Included in other comprehensive income
    
    
    1,553Purchases, issuances and settlements
    
    
    Transfers in and/or out of Level 3
    
    
    Balance as of June 30, 2009
    
    $
    7,256Amount of total income (losses) for the period included
in earnings attributable to the change in unrealized
losses relating to assets still held at the reporting
date  Short-term investments  HAPC common stock
    
    $
    
 Accounting for
Certain Investments in Debt and Equity Securities The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments Other Than Temporary Impairment of Certain Investments in Debt and
Equity Securities
  12




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10. Commitments and Contingencies
   Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others
 Chondrolysis Litigation
 e.g.
  13




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Kilpatrick v.
Breg, Inc Daubert v. Merrell Dow Pharmaceuticals,
   Accounting for Contingencies Reasonable Estimation of the Amount of a Loss
  14




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Other Litigation and Regulatory Matters
 ®
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##### Table of Contents



11. Operating Segments and Revenue Data
 Disclosures about Segments of an Enterprise and Related Information
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Amounts in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Infusion Pumps:Regional Anesthesia
    
    $
    26,237
    
    
    $
    26,105
    
    
    $
    50,934
    
    
    $
    48,720IV Infusion Therapy
    
    
    10,028
    
    
    
    7,422
    
    
    
    15,469
    
    
    
    12,647Subtotal
    
    
    36,265
    
    
    
    33,527
    
    
    
    66,403
    
    
    
    61,367Antimicrobial Materials
    
    
    809
    
    
    
    1,789
    
    
    
    1,606
    
    
    
    2,364Total
    
    $
    37,074
    
    
    $
    35,316
    
    
    $
    68,009
    
    
    $
    63,731
  Infusion
    
    AntimicrobialPumps
    
    Materials
    
    Consolidated(Amounts in thousands)Three Months Ended June 30, 2009Revenues (1)
    
    $
    36,265
    
    
    $
    809
    
    
    $
    37,074Operating income (loss) (1)(2)
    
    
    1,635
    
    
    
    (560
    )
    
    
    1,075Assets
    
    
    136,396
    
    
    
    15,522
    
    
    
    151,918Depreciation and amortization
    
    
    509
    
    
    
    109
    
    
    
    618Property additions
    
    
    506
    
    
    
    8
    
    
    
    514
 16




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##### Table of Contents



Infusion
    
    AntimicrobialPumps
    
    Materials
    
    Consolidated(Amounts in thousands)Six Months Ended June 30, 2009Revenues (1)
    
    $
    66,403
    
    
    $
    1,606
    
    
    $
    68,009Operating loss (1)(2)
    
    
    (1,282
    )
    
    
    (1,169
    )
    
    
    (2,451
    )Assets
    
    
    136,396
    
    
    
    15,522
    
    
    
    151,918Depreciation and amortization
    
    
    1,006
    
    
    
    215
    
    
    
    1,221Property additions
    
    
    717
    
    
    
    20
    
    
    
    737Three Months Ended June 30, 2008Revenues (1)
    
    $
    33,527
    
    
    $
    1,789
    
    
    $
    35,316Operating loss (1)(2)
    
    
    (12,586
    )
    
    
    (140
    )
    
    
    (12,726
    )Assets
    
    
    133,328
    
    
    
    28,136
    
    
    
    161,464Depreciation and amortization
    
    
    448
    
    
    
    158
    
    
    
    606Property additions
    
    
    589
    
    
    
    41
    
    
    
    630Six Months Ended June 30, 2008Revenues (1)
    
    $
    61,367
    
    
    $
    2,364
    
    
    $
    63,731Operating loss (1)(2)
    
    
    (15,320
    )
    
    
    (405
    )
    
    
    (15,725
    )Assets
    
    
    133,328
    
    
    
    28,136
    
    
    
    161,464Depreciation and amortization
    
    
    858
    
    
    
    237
    
    
    
    1,095Property additions
    
    
    807
    
    
    
    53
    
    
    
    860
 
 (1)
    
    Intercompany sales and operating income between the Infusion Pumps and Antimicrobial
Materials operating segments have been eliminated in the consolidation and have been excluded
from the above numbers.(2)
    
    Certain expenses incurred by the Company at the corporate level have not been allocated to
the Antimicrobial Materials operating segment, such as employee stock administration, human
resources, finance, information technology, investor relations, corporate governance, SEC
compliance, general management, strategy development, taxes, audit fees, cash management,
legal fees, regulatory compliance and budgeting, as such amounts are not used by management in
evaluating segment profitability. 17




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




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Results of Operations
 Revenue
    ®
 19




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Cost of Revenues
  Selling and Marketing Expenses
   20




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General and Administrative Expenses
     Product Development Expenses
  21




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Certain Litigation and Insurance Charges
 Accounting for Contingencies Reasonable
Estimation of the Amount of a Loss ,
   Interest and Other Income
  22




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Income Taxes
  Liquidity and Capital Resources
       23




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Total Number of
    
    
    
    
    
    Maximum Number ofShares Purchased
    
    
    
    
    
    Shares That May YetTotal Number of
    
    
    
    
    
    Under the Stock
    
    
    
    
    
    Be Purchased UnderShares Repurchased
    
    Average
    
    Repurchase
    
    Average
    
    the Stockfor Tax
    
    Price Paid
    
    Program
    
    Price Paid
    
    Repurchase Program2009
    
    Withholding (1)
    
    per Share
    
    (2)
    
    per Share
    
    (2)January 1  January 31
    
    
    22,434
    
    
    $
    4.12
    
    
    
    
    
    
    $
    
    
    
    
    3,092,548February 1  February 28
    
    
    167,739
    
    
    
    4.36
    
    
    
    
    
    
    
    
    
    
    
    3,092,548March 1  March 31
    
    
    1,968
    
    
    
    2.96
    
    
    
    128,863
    
    
    
    2.35
    
    
    
    2,963,685April 1  April 30
    
    
    335
    
    
    
    4.33
    
    
    
    
    
    
    
    
    
    
    
    2,963,685May 1  May 31
    
    
    21
    
    
    
    5.44
    
    
    
    
    
    
    
    
    
    
    
    2,963,685June 1  June 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,963,685Total
    
    
    192,497
    
    
    $
    4.32
    
    
    
    128,863
    
    
    $
    2.35
    
    
    
    2,963,685
 
 (1)
    
    The total number of shares purchased represents shares delivered to or withheld by the
Company in connection with employee payroll tax withholding upon vesting of restricted stock
and restricted stock units.(2)
    
    The stock repurchase program authorized the repurchase of up to 4,000,000 shares of the
Companys common stock. The program will be in existence until February 28, 2010, unless the
program is terminated sooner by the board of directors.  New Accounting Pronouncements
  24




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Critical Accounting Policies
  Contingencies
 Accounting for Contingencies, Reasonable Estimation of the Amount of a Loss,
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   Foreign Currency
  
 Item 4. CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
 Chondrolysis Litigation
  25




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e.g.
   Kilpatrick v.
Breg, Inc Daubert v. Merrell Dow Pharmaceuticals,
   Accounting for Contingencies Reasonable Estimation of the Amount of a Loss
 26




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27




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Other Litigation and Regulatory Matters
 ®
   
 Item 1A. RISK FACTORS
  RISK FACTORS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE
 If one or more of our products proves to be defective or is misused by a health care practitioner,
we may be subject to claims of liability that could adversely affect our financial condition and
the results of our operations.
   28




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e.g.
   We have experienced net losses in prior periods. Future losses are possible.
  We may need to raise additional capital in the future to fund our operations. We may be unable to
raise funds when needed or on acceptable terms.
  29




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A significant portion of our sales is to customers in foreign countries. We may lose revenues,
market share, and profits due to exchange rate fluctuations and other factors related to our
foreign business.
   We currently rely on two distributors for a significant percentage of our sales. If our
relationship with these distributors were to deteriorate, our sales may materially decline.
  Our financial results could be adversely impacted by recording impairment losses or incurring
capital losses on stock sales in connection with our ownership of HAPC common stock.
 Accounting for Certain
Investments in Debt and Equity Securities
 RISK FACTORS RELATED SPECIFICALLY TO OUR COMMON STOCK
 The average trading volume for our common stock is relatively low when compared to most larger
companies. As a result, there may be less liquidity and more volatility associated with our common
stock, even if our business is doing well.
  30




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
    
    announcements of technological innovations, new products, or clinical studies by us or
others;
    
    government regulation;
    
    changes in the coverage or reimbursement rates of private insurers and governmental
agencies;
    
    developments in patent or other proprietary rights;
    
    developments in the chondrolysis lawsuits filed against us;
    
    future sales of substantial amounts of our common stock by existing stockholders or by
us; and
    
    comments by securities analysts and general market conditions.
  Future sales of our common stock by existing stockholders could negatively affect the market price
of our stock and make it more difficult for us to sell stock in the future.
  
    
    24,200,602 shares of common stock that are freely tradable in the public markets;
    
    248,052 shares of restricted stock that are subject to outstanding awards under our 2001
Equity Incentive Plan; and
    
    an aggregate of 2,048,024 shares of common stock that are subject to outstanding awards under
our various equity incentive plans, including shares of restricted stock units and stock
options.
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  31




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(1)
    
    The stockholders approved the election of the two Class I directors to the board of
directors.
 Director Nominee
    
    Term
    
    For
    
    Withhold AuthorityJames J. Dal Porto
    
    3 years
    
    14,877,164
    
    6,101,024Jack H. Halperin
    
    3 years
    
    13,761,901
    
    7,216,287
 In addition, Joel S. Kanter, Erik H. Loudon, John H. Abeles, Donald M. Earhart and Henry
Tsutomu Tai continued to serve on the Companys board of directors after the Annual Meeting.(2)
    
    The stockholders ratified the selection of Deloitte & Touche LLP as the Companys independent
registered public accounting firm for the fiscal year ending December 31, 2009.
 For
    
    Against
    
    Abstain
    
    Broker Non-Votes20,707,271
    
    266,069
    
    4,846
    
    
 
 Item 6. EXHIBITS
  32




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SIGNATURES
  I-FLOW CORPORATIONDate: August 10, 2009
    /s/ Donald M. EarhartDonald M. EarhartChairman, President and Chief Executive Officer
(On behalf of the registrant)Date: August 10, 2009
    /s/ James R. TalevichJames R. TalevichChief Financial Officer
(As principal financial officer) 33




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




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Exhibit No.
    
    Exhibit3.1
    
    Amended and Restated Certificate of Incorporation of I-Flow Corporation, a
Delaware Corporation (6)3.2
    
    Amended and Restated Bylaws of I-Flow Corporation (20)3.3
    
    Certificate of Designation Regarding Series A Junior Participating
Cumulative Preferred Stock (7)4.1
    
    Specimen Common Stock Certificate (8)4.2
    
    Warrant Agreement, dated February 13, 1990, between the Company and
American Stock Transfer & Trust Company, as warrant agent (9)4.3
    
    Rights Agreement, dated as of March 8, 2002, by and between I-Flow
Corporation and American Stock Transfer & Trust Company, as rights agent,
which includes, as Exhibit A, the Form of Rights Certificate, the Form of
Assignment and the Form of Election to Purchase (7)4.4
    
    Warrant to Purchase Stock, dated May 8, 2003, between I-Flow Corporation
and Silicon Valley Bank (10)4.5
    
    Registration Rights Agreement, dated May 8, 2003, between I-Flow
Corporation and Silicon Valley Bank (10)4.6
    
    Form of Warrant, dated September 4, 2003 (1)4.7
    
    Form of Registration Rights Agreement, dated September 4, 2003 (1)10.1
    
    Summary of the terms of the 2009 Executive Performance Incentive Plan (20)*31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Management contract or compensatory plan or arrangement required to be filed as an exhibit
pursuant to applicable rules of the Securities and Exchange Commission.(1)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended September 30, 2003.(2)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on August 3, 2001.(3)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended March 31, 2000.(4)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K/A filed on March 6, 1998.(5)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated July 22, 1996.(6)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated May 29, 2002.(7)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on March 13, 2002.(8)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002.




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(9)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10-K for the fiscal year ended September 30, 1990.(10)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003.(11)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 4, 2006.(12)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on May 1, 2007.(13)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 2, 2007.(14)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 31, 2007.(15)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on September 13, 2007.(16)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on September 19, 2007.(17)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 19, 2007.(18)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on December 17, 2007.(19)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on February 6, 2008.(20)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on April 3, 2009.