##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    33-0121984
(I.R.S. Employer Identification No.)20202 Windrow Drive, Lake Forest, CA
(Address of Principal Executive Offices)
    
    92630
(Zip Code)
 
 þ o
 o o
  Large Accelerated Filer o
Accelerated Filer þNon-Accelerated Filer o
(Do not check if a smaller reporting company)Smaller Reporting Company o o þ




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##### 



I-FLOW CORPORATION
 FORM 10-Q
 FOR THE QUARTER ENDED SEPTEMBER 30, 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
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27Part II: Other InformationItem 1.
    
    Legal Proceedings
    
    
    28Item 1A.
    
    Risk Factors
    
    
    31Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 6.
    
    Exhibits
    
    
    36Signatures
    
    
    37EX-31.1EX-31.2EX-32.1




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 I-FLOW CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except par value amounts)
 September 30,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    49,119
    
    
    $
    39,276Short-term investments
    
    
    
    
    
    
    3,384Short-term investments  HAPC common stock
    
    
    5,217
    
    
    
    5,703Accounts receivable, less allowance for
doubtful accounts of $2,126 and $2,063 at
September 30, 2009 and December 31, 2008,
respectively
    
    
    20,987
    
    
    
    21,930Inventories
    
    
    26,394
    
    
    
    15,819Prepaid expenses and other current assets
    
    
    3,624
    
    
    
    3,356Note receivable, HAPC  current
    
    
    3,270
    
    
    
    3,270Deferred taxes
    
    
    783
    
    
    
    961Total current assets
    
    
    109,394
    
    
    
    93,699Property, net
    
    
    4,676
    
    
    
    4,127Goodwill
    
    
    12,233
    
    
    
    12,233Other intangible assets, net
    
    
    4,348
    
    
    
    4,201Other long-term assets
    
    
    232
    
    
    
    170Note receivable, HAPC  noncurrent
    
    
    19,233
    
    
    
    26,980Deferred taxes
    
    
    4,178
    
    
    
    7,277Total assets
    
    $
    154,294
    
    
    $
    148,687LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,507
    
    
    $
    4,882Accrued payroll and related expenses
    
    
    7,657
    
    
    
    6,138Accrued litigation costs (Note 10)
    
    
    11,956
    
    
    
    10,467Other current liabilities
    
    
    1,933
    
    
    
    2,140Total current liabilities
    
    
    30,053
    
    
    
    23,627Other liabilities (Note 10)
    
    
    5,935
    
    
    
    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; 24,459 and 24,534 shares issued
and outstanding at September 30, 2009 and
December 31, 2008, respectively
    
    
    137,746
    
    
    
    136,338Accumulated other comprehensive loss
    
    
    (736
    )
    
    
    (379
    )Accumulated deficit
    
    
    (18,704
    )
    
    
    (16,914
    )Net stockholders equity
    
    
    118,306
    
    
    
    119,045Total liabilities and stockholders equity
    
    $
    154,294
    
    
    $
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    36,747
    
    
    $
    32,242
    
    
    $
    104,756
    
    
    $
    95,973Cost of revenues
    
    
    9,767
    
    
    
    8,582
    
    
    
    28,483
    
    
    
    25,468Gross profit
    
    
    26,980
    
    
    
    23,660
    
    
    
    76,273
    
    
    
    70,505Operating expenses:Selling and marketing
    
    
    15,753
    
    
    
    16,965
    
    
    
    48,800
    
    
    
    54,716General and administrative
    
    
    7,024
    
    
    
    5,551
    
    
    
    19,394
    
    
    
    16,044Product development
    
    
    2,965
    
    
    
    1,285
    
    
    
    7,792
    
    
    
    3,443Certain litigation and insurance charges (Note 10)
    
    
    
    
    
    
    136
    
    
    
    1,500
    
    
    
    12,304Purchased in-process research and development
charges (Note 6)
    
    
    
    
    
    
    11,600
    
    
    
    
    
    
    
    11,600Total operating expenses
    
    
    25,742
    
    
    
    35,537
    
    
    
    77,486
    
    
    
    98,107Operating income (loss)
    
    
    1,238
    
    
    
    (11,877
    )
    
    
    (1,213
    )
    
    
    (27,602
    )Impairment loss on investment
    
    
    
    
    
    
    (4,569
    )
    
    
    
    
    
    
    (4,569
    )Interest and other income
    
    
    671
    
    
    
    1,082
    
    
    
    2,200
    
    
    
    3,977Income (loss) before income taxes
    
    
    1,909
    
    
    
    (15,364
    )
    
    
    987
    
    
    
    (28,194
    )Income tax provision (benefit)
    
    
    1,239
    
    
    
    (1,237
    )
    
    
    2,777
    
    
    
    (2,105
    )Net income (loss)
    
    $
    670
    
    
    $
    (14,127
    )
    
    $
    (1,790
    )
    
    $
    (26,089
    )Net income (loss) per share of common stock:Basic
    
    $
    0.03
    
    
    $
    (0.57
    )
    
    $
    (0.07
    )
    
    $
    (1.05
    )Diluted
    
    $
    0.03
    
    
    $
    (0.57
    )
    
    $
    (0.07
    )
    
    $
    (1.05
    )Weighted-average shares:Basic
    
    
    24,454
    
    
    
    24,580
    
    
    
    24,482
    
    
    
    24,827Diluted
    
    
    25,001
    
    
    
    24,580
    
    
    
    24,482
    
    
    
    24,827Comprehensive Operations:Net income (loss)
    
    $
    670
    
    
    $
    (14,127
    )
    
    $
    (1,790
    )
    
    $
    (26,089
    )Foreign currency translation gain (loss)
    
    
    (272
    )
    
    
    (106
    )
    
    
    (41
    )
    
    
    3Unrealized gain (loss) on investment securities
    
    
    (1,325
    )
    
    
    2,866
    
    
    
    (316
    )
    
    
    (2
    )Comprehensive loss
    
    $
    (927
    )
    
    $
    (11,367
    )
    
    $
    (2,147
    )
    
    $
    (26,088
    )
  2




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I-FLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
 Nine Months EndedSeptember 30,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,790
    )
    
    $
    (26,089
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Purchased in-process research and development charges
    
    
    
    
    
    
    11,600Impairment loss on investment
    
    
    
    
    
    
    4,569Deferred taxes
    
    
    3,447
    
    
    
    230Stock-based compensation
    
    
    3,722
    
    
    
    5,142Depreciation and amortization
    
    
    1,854
    
    
    
    1,614Excess 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
    
    
    (533
    )
    
    
    (533
    )Provision for doubtful accounts receivable
    
    
    478
    
    
    
    272Write-off of inventories
    
    
    244
    
    
    
    401Gain on disposal of property
    
    
    
    
    
    
    (4
    )Changes in operating assets and liabilities, net of AcryMed acquisition:Accounts receivable
    
    
    465
    
    
    
    5,587Inventories
    
    
    (10,819
    )
    
    
    (4,335
    )Prepaid expenses and other assets
    
    
    (299
    )
    
    
    (821
    )Accounts payable, accrued payroll and related expenses
    
    
    4,903
    
    
    
    (2,552
    )Income taxes payable
    
    
    (1,196
    )
    
    
    (15,245
    )Accrued litigation costs
    
    
    1,489
    
    
    
    8,374Other liabilities
    
    
    397
    
    
    
    (14
    )Net cash provided by (used in) operating activities
    
    
    2,362
    
    
    
    (12,366
    )CASH FLOWS FROM INVESTING ACTIVITIES:Property acquisitions
    
    
    (1,606
    )
    
    
    (1,264
    )Proceeds from sale of property
    
    
    
    
    
    
    11Acquisition of AcryMed, net of cash acquired
    
    
    
    
    
    
    (26,663
    )Repayments on note receivable, HAPC
    
    
    7,747
    
    
    
    1,227Purchases of investments
    
    
    
    
    
    
    (13,275
    )Maturities of investments
    
    
    3,384
    
    
    
    21,301Patent and other intangible asset acquisitions
    
    
    (861
    )
    
    
    (474
    )Net cash provided by (used in) investing activities
    
    
    8,664
    
    
    
    (19,137
    )CASH FLOWS FROM FINANCING ACTIVITIES:Purchase and retirement of common stock
    
    
    (1,150
    )
    
    
    (12,621
    )Excess tax benefit from exercise of stock options and vested restricted
stock and restricted stock units
    
    
    
    
    
    
    562Proceeds from exercise of stock options
    
    
    
    
    
    
    353Net cash used in financing activities
    
    
    (1,150
    )
    
    
    (11,706
    )Effect of exchange rates on cash
    
    
    (33
    )
    
    
    (6
    )Net increase (decrease) in cash and cash equivalents
    
    
    9,843
    
    
    
    (43,215
    )Cash and cash equivalents at beginning of period
    
    
    39,276
    
    
    
    78,571Cash and cash equivalents at end of period
    
    $
    49,119
    
    
    $
    35,356SUPPLEMENTAL CASH FLOW INFORMATION:Income tax payments
    
    $
    441
    
    
    $
    13,427Interest received
    
    
    1,667
    
    
    
    3,762SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:Property acquisitions included in accounts payable
    
    $
    81
    
    
    $
    88
  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 Amendments to FASB Interpretation No. 46(R)
  2. Inventories
  September 30,
    
    
    December 31,(Amounts in thousands)
    
    2009
    
    
    2008Raw materials
    
    $
    14,556
    
    
    $
    7,501Work in process
    
    
    7,362
    
    
    
    2,612Finished goods
    
    
    4,476
    
    
    
    5,706Total
    
    $
    26,394
    
    
    $
    15,819
 4




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3. Earnings (Loss) Per Share
 Earnings per Share
     Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Amounts in thousands, except per share amounts)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Numerator:Net income (loss)
    
    $
    670
    
    
    $
    (14,127
    )
    
    $
    (1,790
    )
    
    $
    (26,089
    )Denominators:Denominator for basic earnings per share:Weighted-average number of common shares outstanding
    
    
    24,454
    
    
    
    24,580
    
    
    
    24,482
    
    
    
    24,827Effect of dilutive securities:Stock options, nonvested restricted stock and
nonvested restricted stock units
    
    
    547
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted net income per share:Weighted-average number of common and common
equivalent shares outstanding
    
    
    25,001
    
    
    
    24,580
    
    
    
    24,482
    
    
    
    24,827Net income (loss) per share of common stock:Basic
    
    $
    0.03
    
    
    $
    (0.57
    )
    
    $
    (0.07
    )
    
    $
    (1.05
    )Diluted
    
    $
    0.03
    
    
    $
    (0.57
    )
    
    $
    (0.07
    )
    
    $
    (1.05
    )
  5




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4. Goodwill and Other Intangible Assets
     As of September 30, 2009Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net(Amounts in thousands)Purchased technology and patents
    
    $
    4,964
    
    
    $
    (1,978
    )
    
    $
    2,986Licensing rights and agreements
    
    
    1,402
    
    
    
    (644
    )
    
    
    758Customer relationships
    
    
    700
    
    
    
    (209
    )
    
    
    491Other
    
    
    150
    
    
    
    (37
    )
    
    
    113Total
    
    $
    7,216
    
    
    $
    (2,868
    )
    
    $
    4,348
 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
  6




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5. Stockholders Equity
   7




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6. Stock-Based Compensation
 Share-Based Payment
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Amounts in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Selling and marketing
    
    $
    178
    
    
    $
    246
    
    
    $
    456
    
    
    $
    738General and administrative
    
    
    999
    
    
    
    1,568
    
    
    
    3,266
    
    
    
    4,404Total
    
    $
    1,177
    
    
    $
    1,814
    
    
    $
    3,722
    
    
    $
    5,142
    Stock Options
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise Price
    
    
    Contractual Term
    
    
    Intrinsic(Amounts in thousands, except per share and year amounts)
    
    Number of Shares
    
    
    per Share
    
    
    (in years)
    
    
    ValueOptions outstanding at December 31, 2008
    
    
    2,001
    
    
    $
    11.79Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited or expired
    
    
    (699
    )
    
    
    13.57Options outstanding at September 30, 2009
    
    
    1,302
    
    
    
    10.83
    
    
    
    0.66
    
    
    $
    5,366Options vested and exercisable at September 30, 2009
    
    
    1,243
    
    
    $
    10.63
    
    
    
    0.60
    
    
    $
    5,366
  8




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Restricted Stock and Restricted Stock Units
 i.e.
 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
    
    
    
    233
    
    
    
    4.76Shares vested
    
    
    (354
    )
    
    
    14.48
    
    
    
    (163
    )
    
    
    14.32Shares forfeited
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    14.41Nonvested shares outstanding at September 30, 2009
    
    
    248
    
    
    $
    10.80
    
    
    
    714
    
    
    $
    11.01
  7. Income Taxes
   9




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Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
  8. Note Receivable  HAPC
   9. Fair Values of Financial Instruments
 Fair Value
Measurements
     10




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Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantBalance at
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable Inputs(Amounts in thousands)
    
    September 30, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Reported as:Cash equivalents (1)
    
    $
    36,773
    
    
    $
    36,773
    
    
    $
    
    
    
    $
    Short-term investments  HAPC common stock (2)
    
    
    5,217
    
    
    
    
    
    
    
    
    
    
    
    5,217Total
    
    $
    41,990
    
    
    $
    36,773
    
    
    $
    
    
    
    $
    5,217
 
 (1)
    
    Level 1 securities include money market securities that are valued based on quoted market
prices in active markets.(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
    
    
    (486
    )Purchases, issuances and settlements
    
    
    Transfers in and/or out of Level 3
    
    
    Balance as of September 30, 2009
    
    $
    5,217Amount 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
  11




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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
  12




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e.g. ®
   Kilpatrick v.
Breg, Inc Daubert v. Merrell Dow Pharmaceuticals,
   13




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Accounting for Contingencies
    14




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##### Table of Contents



Litigation as to the Offer and Merger
 David Lash and Dale Hartig v. Donald
Earhart, et al. Stuart Kessler v. James J. Dal Porto, et al.
 Other Litigation and Regulatory Matters
 ®
 15




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11. Operating Segments and Revenue Data
 Disclosures about Segments of an Enterprise and Related
Information
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Amounts in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Infusion Pumps:Regional Anesthesia
    
    $
    27,532
    
    
    $
    24,817
    
    
    $
    78,466
    
    
    $
    73,537IV Infusion Therapy
    
    
    8,368
    
    
    
    5,945
    
    
    
    23,837
    
    
    
    18,592Subtotal
    
    
    35,900
    
    
    
    30,762
    
    
    
    102,303
    
    
    
    92,129Antimicrobial Materials
    
    
    847
    
    
    
    1,480
    
    
    
    2,453
    
    
    
    3,844Total
    
    $
    36,747
    
    
    $
    32,242
    
    
    $
    104,756
    
    
    $
    95,973
  Infusion
    
    
    AntimicrobialPumps
    
    
    Materials
    
    
    Consolidated(Amounts in thousands)Three Months Ended September 30, 2009Revenues (1)
    
    $
    35,900
    
    
    $
    847
    
    
    $
    36,747Operating income (loss) (1)(2)
    
    
    1,748
    
    
    
    (510
    )
    
    
    1,238Assets
    
    
    138,857
    
    
    
    15,437
    
    
    
    154,294Depreciation and amortization
    
    
    523
    
    
    
    110
    
    
    
    633Property additions
    
    
    774
    
    
    
    176
    
    
    
    950
 16




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##### Table of Contents



Infusion
    
    
    AntimicrobialPumps
    
    
    Materials
    
    
    Consolidated(Amounts in thousands)Nine Months Ended September 30, 2009Revenues (1)
    
    $
    102,303
    
    
    $
    2,453
    
    
    $
    104,756Operating income (loss) (1)(2)
    
    
    466
    
    
    
    (1,679
    )
    
    
    (1,213
    )Assets
    
    
    138,857
    
    
    
    15,437
    
    
    
    154,294Depreciation and amortization
    
    
    1,529
    
    
    
    325
    
    
    
    1,854Property additions
    
    
    1,491
    
    
    
    196
    
    
    
    1,687Three Months Ended September 30, 2008Revenues (1)
    
    $
    30,762
    
    
    $
    1,480
    
    
    $
    32,242Operating loss (1)(2)
    
    
    (116
    )
    
    
    (11,761
    )
    
    
    (11,877
    )Assets
    
    
    133,418
    
    
    
    16,033
    
    
    
    149,451Depreciation and amortization
    
    
    471
    
    
    
    48
    
    
    
    519Property additions
    
    
    393
    
    
    
    99
    
    
    
    492Nine Months Ended September 30, 2008Revenues (1)
    
    $
    92,129
    
    
    $
    3,844
    
    
    $
    95,973Operating loss (1)(2)
    
    
    (15,437
    )
    
    
    (12,165
    )
    
    
    (27,602
    )Assets
    
    
    133,418
    
    
    
    16,033
    
    
    
    149,451Depreciation and amortization
    
    
    1,329
    
    
    
    285
    
    
    
    1,614Property additions
    
    
    1,200
    
    
    
    152
    
    
    
    1,352
 
 (1)
    
    Intercompany sales and operating income between the Infusion Pumps and Antimicrobial
Materials operating segments have been eliminated in the consolidation and have been excluded
from the above numbers.(2)
    
    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. 12. Pending Merger with Kimberly-Clark
    17




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18




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
  Overview
   ®
 19




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Pending Merger with Kimberly-Clark
   Results of Operations
 Revenue
   20




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®
   21




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Cost of Revenues
  Selling and Marketing Expenses
     General and Administrative Expenses
   22




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Product Development Expenses
  Certain Litigation and Insurance Charges
   23




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Purchased In-Process Research and Development
  Interest and Other Income
  Income Taxes
  Liquidity and Capital Resources
  24




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25




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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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,963,685July 1  July 31
    
    
    1,574
    
    
    
    7.03
    
    
    
    
    
    
    
    
    
    
    
    2,963,685August 1  August 31
    
    
    286
    
    
    
    8.83
    
    
    
    
    
    
    
    
    
    
    
    2,963,685September 1  September 30
    
    
    238
    
    
    
    8.59
    
    
    
    
    
    
    
    
    
    
    
    2,963,685Total
    
    
    194,595
    
    
    $
    4.35
    
    
    
    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
  Critical Accounting Policies
  26




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##### Table of Contents



Contingencies
   
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   Foreign Currency
  
 Item 4. CONTROLS AND PROCEDURES
   27




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PART II  OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
 Chondrolysis Litigation
 e.g. ®
   Kilpatrick v.
Breg, Inc Daubert v. Merrell Dow Pharmaceuticals,
 28




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Accounting for Contingencies
   29




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Litigation as to the Offer and Merger
 David Lash and Dale Hartig v. Donald
Earhart, et al. Stuart Kessler v. James J. Dal Porto, et al.
 Other Litigation and Regulatory Matters
 ®
 30




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Item 1A. RISK FACTORS
  RISKS RELATING TO THE PROPOSED MERGER
 The pending Merger and/or the delay or failure to complete the Merger with Kimberly-Clark could
materially and adversely affect our results of operations and our stock price.
  31




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
    
    the attention of our management and our employees may be diverted from day-to-day
operations as they focus on consummating the Merger;
 
    
    the Merger Agreement places a variety of restrictions and constraints on the conduct of our
business prior to the closing of the Merger or the termination of the Merger Agreement;
 
    
    our customers may seek to modify or terminate existing agreements, or prospective customers
may delay entering into new agreements or purchasing our products as a result of the
announcement of the Merger, which could cause our revenues to decline or any anticipated
increases in revenue to be lower than expected; and
 
    
    our ability to attract new employees and retain our existing employees may be harmed by
uncertainties associated with the Merger, and we may be required to incur substantial costs to
recruit replacements for lost personnel.
   
    
    our stockholders will not receive $12.65 in cash per share of our common stock which
Kimberly-Clark has agreed to pay pursuant to the Merger Agreement, and our stock price would
likely experience a significant decline;
 
    
    we have incurred and will incur significant transaction costs, including legal, accounting,
financial advisory and other costs relating to the Merger; and
 
    
    under some circumstances, we may have to pay a termination fee to Kimberly-Clark.
  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.
   32




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##### Table of Contents



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.
  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.
  33




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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.
  Recent regulatory developments could adversely affect HAPCs business and, as a result, its ability
to perform under the Note Receivable.
   34




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RISK FACTORS RELATED SPECIFICALLY TO OUR COMMON STOCK
 The average trading volume for our common stock is relatively low when compared to most larger
companies. As a result, there may be less liquidity and more volatility associated with our common
stock, even if our business is doing well.
   
    
    announcements of technological innovations, new products, or clinical studies by us or
others;
 
    
    government regulation;
 
    
    changes in the coverage or reimbursement rates of private insurers and governmental agencies;
 
    
    developments in patent or other proprietary rights;
 
    
    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.
  
    
    24,211,404 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 2,015,047 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.
  35




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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 6. EXHIBITS
  36




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SIGNATURES
  I-FLOW CORPORATIONDate: November 5, 2009
    /s/ Donald M. EarhartDonald M. EarhartChairman, President and Chief Executive Officer
(On behalf of the registrant)Date: November 5, 2009
    /s/ James R. TalevichJames R. TalevichChief Financial Officer
(As principal financial officer) 37




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INDEX TO EXHIBITS
 Exhibit No.
    
    Exhibit2.1
    
    
    Stock Purchase Agreement, dated October 28, 2003, 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) (9)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.
(10)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. (11)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. (12)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. (13)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.
(14)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. (15)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 (15)2.14
    
    
    Form of Share Purchase Agreement (15)2.15
    
    
    Second Form of Share Purchase Agreement (15)2.16
    
    
    Form of Irrevocable Proxy (15)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. (16)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 (17)




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Exhibit No.
    
    Exhibit2.19
    
    
    Agreement and Plan of Merger, dated as of October 8, 2009, by and among
Kimberly-Clark Corporation, Boxer Acquisition, Inc. and I-Flow Corporation
(20)3.1
    
    
    Amended and Restated Certificate of Incorporation of I-Flow Corporation, a
Delaware Corporation (6)3.2
    
    
    Amended and Restated Bylaws of I-Flow Corporation (18)3.3
    
    
    Certificate of Designation Regarding Series A Junior Participating
Cumulative Preferred Stock (7)4.1
    
    
    Specimen Common Stock Certificate (8)4.2
    
    
    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)4.3
    
    
    Amendment No. 1 to Rights Agreement, dated as of October 15, 2009, by and
between I-Flow Corporation and American Stock Transfer & Trust Company, LLC,
(as successor-in-interest to American Stock Transfer & Trust Company), as
Rights Agent (21)10.1
    
    
    Summary of the 2009 Executive Performance Incentive Plan (as amended on
August 11, 2009) (19)*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 Current Report
on Form 8-K filed on October 4, 2006.(10)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on May 1, 2007.(11)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 2, 2007.(12)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 31, 2007.(13)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on September 13, 2007.(14)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on September 19, 2007.(15)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 19, 2007.(16)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on December 17, 2007.(17)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on February 6, 2008.(18)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on April 3, 2009.(19)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on August 17, 2009.(20)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 9, 2009.(21)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 16, 2009.