##### 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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from                 to
 Commission file number: 000-18338
 I-FLOW CORPORATION
  Delaware
    
    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 þ o
 o þ




---



##### 



I-FLOW CORPORATION
 FORM 10-Q
 FOR THE QUARTER ENDED JUNE 30, 2007
 Table of Contents
 PagePart I: Financial InformationItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations and Comprehensive Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20Part II: Other InformationItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 6. Exhibits
    
    
    24Signatures
    
    
    25EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




---



##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 I-FLOW CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (Amounts in thousands)
 June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,030
    
    
    $
    9,288Short-term investments
    
    
    12,935
    
    
    
    18,134Accounts receivable, less allowance for
doubtful accounts of $2,937 and $3,405
at June 30, 2007 and December 31, 2006,
respectively
    
    
    17,409
    
    
    
    18,935Inventories
    
    
    15,587
    
    
    
    13,611Prepaid expenses and other current assets
    
    
    1,845
    
    
    
    1,485Deferred taxes
    
    
    3,392
    
    
    
    3,260Current assets  held for sale
    
    
    8,388
    
    
    
    11,977Total current assets
    
    
    75,586
    
    
    
    76,690Property, net
    
    
    3,337
    
    
    
    2,843Other intangible assets, net
    
    
    2,627
    
    
    
    2,754Other long-term assets
    
    
    137
    
    
    
    137Deferred taxes
    
    
    15,703
    
    
    
    14,406Non-current assets  held for sale
    
    
    15,799
    
    
    
    15,316Total assets
    
    $
    113,189
    
    
    $
    112,146LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,386
    
    
    $
    4,249Accrued payroll and related expenses
    
    
    6,928
    
    
    
    7,171Income taxes payable
    
    
    
    
    
    
    18Other current liabilities
    
    
    1,095
    
    
    
    1,078Current liabilities  held for sale
    
    
    5,253
    
    
    
    7,626Total current liabilities
    
    
    17,662
    
    
    
    20,142Other liabilities (Note 7)
    
    
    1,226
    
    
    
    Commitments and contingencies (Note 8)Stockholders equity:Preferred stock  $0.001 par value;
5,000 shares authorized; no shares
issued and outstanding
    
    
    
    
    
    
    Common stock  $0.001 par value; 40,000
shares authorized; 24,352 and 23,901
shares issued and outstanding at June
30, 2007 and
December 31, 2006, respectively
    
    
    122,410
    
    
    
    119,092Accumulated other comprehensive loss
    
    
    (145
    )
    
    
    (163
    )Accumulated deficit
    
    
    (27,964
    )
    
    
    (26,925
    )Net stockholders equity
    
    
    94,301
    
    
    
    92,004Total liabilities and stockholders equity
    
    $
    113,189
    
    
    $
    112,146
  1




---



##### 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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net product sales
    
    $
    29,075
    
    
    $
    22,435
    
    
    $
    53,381
    
    
    $
    42,336Cost of revenues
    
    
    8,054
    
    
    
    6,016
    
    
    
    14,342
    
    
    
    11,338Gross profit
    
    
    21,021
    
    
    
    16,419
    
    
    
    39,039
    
    
    
    30,998Operating expenses:Selling and marketing
    
    
    18,273
    
    
    
    14,747
    
    
    
    35,414
    
    
    
    28,535General and administrative
    
    
    4,677
    
    
    
    2,826
    
    
    
    8,711
    
    
    
    5,888Product development
    
    
    682
    
    
    
    564
    
    
    
    1,304
    
    
    
    1,147Total operating expenses
    
    
    23,632
    
    
    
    18,137
    
    
    
    45,429
    
    
    
    35,570Operating loss
    
    
    (2,611
    )
    
    
    (1,718
    )
    
    
    (6,390
    )
    
    
    (4,572
    )Interest income
    
    
    245
    
    
    
    214
    
    
    
    524
    
    
    
    415Loss from continuing operations before income taxes
    
    
    (2,366
    )
    
    
    (1,504
    )
    
    
    (5,866
    )
    
    
    (4,157
    )Income tax benefit
    
    
    (796
    )
    
    
    (664
    )
    
    
    (2,089
    )
    
    
    (1,406
    )Loss from continuing operations
    
    
    (1,570
    )
    
    
    (840
    )
    
    
    (3,777
    )
    
    
    (2,751
    )Discontinued operations:Income from discontinued operations, net of tax
    
    
    2,169
    
    
    
    1,273
    
    
    
    3,455
    
    
    
    2,702Net income (loss)
    
    $
    599
    
    
    $
    433
    
    
    $
    (322
    )
    
    $
    (49
    )Per share of common stock, basic:Loss from continuing operations
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.16
    )
    
    $
    (0.12
    )Income from discontinued operations, net of tax
    
    
    0.09
    
    
    
    0.06
    
    
    
    0.15
    
    
    
    0.12Net income (loss)
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    (0.00
    )Per share of common stock, diluted:Loss from continuing operations
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.16
    )
    
    $
    (0.12
    )Income from discontinued operations, net of tax
    
    
    0.09
    
    
    
    0.06
    
    
    
    0.15
    
    
    
    0.12Net income (loss)
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    (0.00
    )Weighted-average shares:Basic
    
    
    23,694
    
    
    
    23,346
    
    
    
    23,622
    
    
    
    23,024Diluted
    
    
    23,694
    
    
    
    23,346
    
    
    
    23,622
    
    
    
    23,024Comprehensive Operations:Net income (loss)
    
    $
    599
    
    
    $
    433
    
    
    $
    (322
    )
    
    $
    (49
    )Foreign currency translation gain (loss)
    
    
    44
    
    
    
    (62
    )
    
    
    16
    
    
    
    (89
    )Unrealized gain on investment securities
    
    
    2
    
    
    
    35
    
    
    
    2
    
    
    
    60Comprehensive income (loss)
    
    $
    645
    
    
    $
    406
    
    
    $
    (304
    )
    
    $
    (78
    )
  2




---



##### Table of Contents



I-FLOW CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (Amounts in thousands)
 Six Months EndedJune 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (322
    )
    
    $
    (49
    )Adjustments to reconcile net loss to net cash used in operating activities:Income from discontinued operations, net of tax
    
    
    (3,455
    )
    
    
    (2,702
    )Deferred taxes
    
    
    (1,429
    )
    
    
    Stock-based compensation
    
    
    2,995
    
    
    
    2,395Depreciation and amortization
    
    
    777
    
    
    
    711Provision for doubtful accounts receivable
    
    
    535
    
    
    
    319Loss (gain) on property disposal
    
    
    (2
    )
    
    
    10Write-off of inventory obsolescence
    
    
    329
    
    
    
    88Changes in operating assets and liabilities:Accounts receivable
    
    
    991
    
    
    
    (2,904
    )Inventories
    
    
    (2,305
    )
    
    
    (1,582
    )Prepaid expenses and other current assets
    
    
    (246
    )
    
    
    (635
    )Accounts payable, accrued payroll and related expenses
    
    
    (302
    )
    
    
    283Income taxes payable
    
    
    (132
    )
    
    
    (208
    )Other liabilities
    
    
    1,093
    
    
    
    (426
    )Net cash used in operating activities from continuing operations
    
    
    (1,473
    )
    
    
    (4,700
    )Net cash provided by operating activities from discontinued operations
    
    
    3,578
    
    
    
    2,922Net cash provided by (used in) operating activities
    
    
    2,105
    
    
    
    (1,778
    )CASH FLOWS FROM INVESTING ACTIVITIES:Property acquisitions
    
    
    (782
    )
    
    
    (593
    )Purchases of investments
    
    
    (4,551
    )
    
    
    (700
    )Maturities of investments
    
    
    9,752
    
    
    
    5,245Patent acquisitions
    
    
    (164
    )
    
    
    (238
    )Net cash provided by investing activities from continuing operations
    
    
    4,255
    
    
    
    3,714Net cash used in investing activities from discontinued operations
    
    
    (1,353
    )
    
    
    (1,085
    )Net cash provided by investing activities
    
    
    2,902
    
    
    
    2,629CASH FLOWS FROM FINANCING ACTIVITIES:Purchase and retirement of common stock
    
    
    (1,500
    )
    
    
    Proceeds from exercise of stock options
    
    
    1,676
    
    
    
    996Net cash provided by financing activities from continuing operations
    
    
    176
    
    
    
    996Net cash provided by financing activities from discontinued operations
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    176
    
    
    
    996Effect of exchange rates on cash
    
    
    16
    
    
    
    (89
    )Net increase in cash and cash equivalents
    
    
    5,199
    
    
    
    1,758Net decrease in cash and cash equivalents from discontinued operations
    
    
    1,543
    
    
    
    1,943Cash and cash equivalents at beginning of period
    
    
    9,288
    
    
    
    11,413Cash and cash equivalents at end of period
    
    $
    16,030
    
    
    $
    15,114SUPPLEMENTAL CASH FLOW INFORMATION:Income tax payments
    
    $
    318
    
    
    $
    332Cash distributions/contributions between Parent and subsidiary
    
    $
    3,768
    
    
    $
    3,780SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:Property acquisitions
    
    $
    226
    
    
    $
    10
  3




---



##### Table of Contents



I-FLOW CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. Basis of Presentation and Summary of Significant Accounting Policies
 Basis of Presentation
 Accounting for Impairment or Disposal of Long-Lived Assets
  Use of Estimates 
 New Accounting Pronouncements Accounting for Uncertainty in Income Taxes
 Fair Value Measurements ,
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 4




---



##### Table of Contents



Accounting for Stock-Based Compensation Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Share-Based Payment
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Amounts in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Income (loss) from continuing operations:Selling and marketing
    
    $
    616
    
    
    $
    852
    
    
    $
    1,232
    
    
    $
    1,178General and administrative
    
    
    1,216
    
    
    
    813
    
    
    
    1,763
    
    
    
    1,268Subtotal
    
    
    1,832
    
    
    
    1,665
    
    
    
    2,995
    
    
    
    2,446Income (loss) from discontinued operations:Selling and marketing
    
    
    30
    
    
    
    27
    
    
    
    79
    
    
    
    36General and administrative
    
    
    34
    
    
    
    41
    
    
    
    68
    
    
    
    62Subtotal
    
    
    64
    
    
    
    68
    
    
    
    147
    
    
    
    98Total
    
    $
    1,896
    
    
    $
    1,733
    
    
    $
    3,142
    
    
    $
    2,544
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Expected life (in years)
    
    5.0
    
    5.0
    
    5.0
    
    5.0Risk-free interest rate
    
    5.03%
    
    5.07%
    
    4.48% - 5.03%
    
    4.72% - 5.07%Volatility
    
    53%
    
    56%
    
    53% - 54%
    
    56% - 57%Dividend yield
    
    0.00%
    
    0.00%
    
    0.00%
    
    0.00%
  5




---



##### Table of Contents



Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards
  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, 2006
    
    
    3,294
    
    
    $
    10.66Options granted
    
    
    126
    
    
    
    15.33Options exercised
    
    
    (202
    )
    
    
    8.36Options forfeited or expired
    
    
    (103
    )
    
    
    15.16Options outstanding at June 30, 2007
    
    
    3,115
    
    
    
    10.85
    
    
    
    2.21
    
    
    $
    20,083Options vested and exercisable at June 30, 2007
    
    
    2,796
    
    
    $
    10.60
    
    
    
    2.03
    
    
    $
    18,923
  6




---



##### Table of Contents



Restricted Stock and Restricted Stock Units
 i.e.
 Restricted Stock
    
    Restricted Stock UnitsWeighted-Average
    
    
    
    
    
    Weighted-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, 2006
    
    
    522
    
    
    $
    13.89
    
    
    
    548
    
    
    $
    13.95Shares issued
    
    
    141
    
    
    
    16.43
    
    
    
    402
    
    
    
    16.04Shares vested or released
    
    
    (102
    )
    
    
    14.04
    
    
    
    (203
    )
    
    
    14.18Shares forfeited
    
    
    
    
    
    
    
    
    
    
    (68
    )
    
    
    14.39Nonvested shares outstanding at June 30, 2007
    
    
    561
    
    
    $
    14.50
    
    
    
    679
    
    
    $
    15.08
 7




---



##### Table of Contents



2. Inventories
  June 30,
    
    
    December 31,(Amounts in thousands)
    
    2007
    
    
    2006Raw materials
    
    $
    8,326
    
    
    $
    7,784Work in process
    
    
    2,750
    
    
    
    2,024Finished goods
    
    
    4,511
    
    
    
    3,803Total
    
    $
    15,587
    
    
    $
    13,611
 3. Earnings (Loss) Per Share
 Earnings Per Share
   8




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Amounts in thousands, except per share amounts)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Loss from continuing operations
    
    $
    (1,570
    )
    
    $
    (840
    )
    
    $
    (3,777
    )
    
    $
    (2,751
    )Income from discontinued operations, net of tax
    
    
    2,169
    
    
    
    1,273
    
    
    
    3,455
    
    
    
    2,702Net income (loss)
    
    $
    599
    
    
    $
    433
    
    
    $
    (322
    )
    
    $
    (49
    )Denominators:Denominator for basic earnings per share:Weighted-average number of common shares outstanding
    
    
    23,694
    
    
    
    23,346
    
    
    
    23,622
    
    
    
    23,024Effect of dilutive securities:Stock options, nonvested restricted stock and
nonvested restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted net income per share:Weighted-average number of common and common
equivalent shares outstanding
    
    
    23,694
    
    
    
    23,346
    
    
    
    23,622
    
    
    
    23,024Basic earnings per share:Loss from continuing operations
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.16
    )
    
    $
    (0.12
    )Income from discontinued operations
    
    
    0.09
    
    
    
    0.06
    
    
    
    0.15
    
    
    
    0.12Net income (loss)
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    (0.00
    )Diluted earnings per share:Loss from continuing operations
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.16
    )
    
    $
    (0.12
    )Income from discontinued operations
    
    
    0.09
    
    
    
    0.06
    
    
    
    0.15
    
    
    
    0.12Net income (loss)
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    (0.00
    )
   4. Goodwill and Other Intangible Assets
 Goodwill
and Other Intangible Assets
 9




---



##### Table of Contents



As of June 30, 2007Carrying
    
    
    Accumulated(Amounts in thousands)
    
    Amount
    
    
    Amortization
    
    
    NetPatents
    
    $
    3,301
    
    
    $
    (1,444
    )
    
    $
    1,857Licensing Rights
    
    
    1,101
    
    
    
    (331
    )
    
    
    770Total
    
    $
    4,402
    
    
    $
    (1,775
    )
    
    $
    2,627
 As of December 31, 2006Carrying
    
    
    Accumulated(Amounts in thousands)
    
    Amount
    
    
    Amortization
    
    
    NetPatents
    
    $
    3,286
    
    
    $
    (1,348
    )
    
    $
    1,938Licensing Rights
    
    
    1,101
    
    
    
    (285
    )
    
    
    816Total
    
    $
    4,387
    
    
    $
    (1,633
    )
    
    $
    2,754
   5. Stockholders Equity
  6. Discontinued Operations
  10




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Amounts in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Operating revenues
    
    $
    7,832
    
    
    $
    7,966
    
    
    $
    15,706
    
    
    $
    15,683Operating income (1)
    
    
    3,644
    
    
    
    2,067
    
    
    
    5,396
    
    
    
    4,385Income taxes
    
    
    (1,475
    )
    
    
    (794
    )
    
    
    (1,941
    )
    
    
    (1,683
    )Income from discontinued operations (1) (2)
    
    
    2,169
    
    
    
    1,273
    
    
    
    3,455
    
    
    
    2,702
 
 (1)
    
    Includes $176,000 and $433,000 of divestiture expenses recorded during the three and six
months ended June 30, 2007, respectively.(2)
    
    Includes the effect of the favorable ruling by the Michigan Tax Tribunal relating to
InfuSystems use tax liability. The Company reversed in discontinued operations during the
second quarter of 2007, the accrued tax liability, accrued interest expense and cumulative
increases to gross fixed assets and total expenses in the amounts of $1,466,000, $267,000,
$1,347,000 and $924,000 (consisting of $657,000 of cost of sales and $267,000 of interest
expense), respectively. See Note 8 on Commitments and Contingencies.  June 30,
    
    
    December 31,(Amounts in thousands)
    
    2007
    
    
    2006Cash
    
    $
    413
    
    
    $
    1,956Accounts receivable, less allowance for
doubtful accounts of $3,570 and $1,668
at June 30, 2007 and December 31, 2006,
respectively
    
    
    7,577
    
    
    
    9,630Inventories
    
    
    345
    
    
    
    252Prepaid expenses and other current assets
    
    
    53
    
    
    
    139Total current assets
    
    $
    8,388
    
    
    $
    11,977Property, net (1)
    
    $
    13,625
    
    
    $
    13,142Goodwill
    
    
    2,174
    
    
    
    2,174Total noncurrent assets
    
    $
    15,799
    
    
    $
    15,316Accounts payable
    
    $
    890
    
    
    $
    1,884Accrued payroll and related expenses
    
    
    591
    
    
    
    1,056Accrued use taxes payable
    
    
    
    
    
    
    1,392Income taxes payable
    
    
    (163
    )
    
    
    23Deferred taxes (2)
    
    
    3,022
    
    
    
    3,267Other liabilities
    
    
    913
    
    
    
    4Total current liabilities
    
    $
    5,253
    
    
    $
    7,626
 
 (1)
    
    In accordance with SFAS 144, the Company ceased recognizing depreciation expense for all
fixed assets recorded in discontinued operations beginning in the fourth quarter of 2006.(2)
    
    The deferred tax liability consists primarily of depreciation and the basis adjustment in
accordance with Emerging Issues Task Force (EITF) Issue No. 93-17, Recognition of Deferred
Tax Assets for a Parent Companys Excess Tax Basis in the Stock of a Subsidiary that is
Accounted for as a Discontinued Operation(EITF 93-17). 11




---



##### Table of Contents



7. Income Taxes
 Accounting for Income Taxes
     8. Commitments and Contingencies
    12




---



##### Table of Contents



13




---



##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
  Overview
  ®
 14




---



##### Table of Contents



Discontinued Operations of InfuSystem
 Accounting for Impairment or Disposal of Long-Lived Assets
 Three Months Ended June 30,
    
    Six Months Ended June 30,(Amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Operating revenues
    
    $
    7,832
    
    
    $
    7,966
    
    
    $
    15,706
    
    
    $
    15,683Operating income (1)
    
    
    3,644
    
    
    
    2,067
    
    
    
    5,396
    
    
    
    4,385Income taxes
    
    
    (1,475
    )
    
    
    (794
    )
    
    
    (1,941
    )
    
    
    (1,683
    )Income from discontinued operations (1) (2)
    
    
    2,169
    
    
    
    1,273
    
    
    
    3,455
    
    
    
    2,702
 
 (1)
    
    Includes $176,000 and $433,000 of divestiture expenses recorded during the three and six
months ended June 30, 2007, respectively.(2)
    
    Includes the effect of the favorable ruling by the Michigan Tax Tribunal relating to
InfuSystems use tax liability. The Company reversed in discontinued operations during the
second quarter of 2007, the accrued tax liability, accrued interest expense and cumulative
increases to gross fixed assets and total expenses in the amounts of $1,466,000, $267,000,
$1,347,000 and $924,000 (consisting of $657,000 of cost of sales and $267,000 of interest
expense), respectively. See Note 8 on Commitments and Contingencies.  Results of Operations
 Revenue
   ® ® ®
 15




---



##### Table of Contents



Cost of Revenues
   Selling and Marketing Expenses
     General and Administrative Expenses
  16




---



##### Table of Contents



Product Development Expenses
  Interest Income, Net
  Income Taxes
  Liquidity and Capital Resources
   17




---



##### Table of Contents



18




---



##### Table of Contents



Dollar Value ofTotal Number of
    
    Shares That May YetAverage
    
    Shares Purchased Under
    
    Be Purchased UnderTotal Number of
    
    Price Paid
    
    the Stock Repurchase
    
    the Stock Repurchase2007
    
    Shares Purchased (1)
    
    Per Share
    
    Program (2)
    
    Program (2)January 1  January 31
    
    
    64,974
    
    
    $
    15.66
    
    
    
    
    
    
    $
    February 1  February 28
    
    
    29,780
    
    
    
    16.17
    
    
    
    
    
    
    
    March 1  March 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    April 1  April 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 1  May 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 1  June 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    94,754
    
    
    $
    15.83
    
    
    
    
    
    
    $
    
 
 (1)
    
    The total number of shares purchased includes shares delivered to or withheld by the Company
in connection with employee payroll tax withholding upon vesting of restricted stock and
restricted stock units.(2)
    
    The stock repurchase program authorized the repurchase of up to 1,000,000 shares of the
Companys common stock. The program expired on July 27, 2006. No shares were repurchased
under the stock repurchase program during the six months ended June 30, 2007.  New Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes
 Fair Value Measurements ,
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Critical Accounting Policies
  19




---



##### Table of Contents



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
  
 Item 1A. RISK FACTORS
  20




---



##### Table of Contents



RISK FACTORS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE
 The pending sale of InfuSystem to HAPC may not be consummated.
  
    
    our cash flow and financial condition could be adversely affected if the Company is
unable to complete the transaction;
    
    the current stock price of our common stock may reflect a market assumption that the
sale of InfuSystem will occur, and, thus, a failure to complete the transaction could
result in a negative perception by the stock market of us generally and a decline in the
market price of our common stock;
    
    changes in third-party reimbursement rates may adversely impact InfuSystems revenues.
InfuSystem depends primarily on third-party reimbursement for the collection of its
revenues. InfuSystem is paid directly by private insurers and governmental agencies, often
on a fixed fee basis, for infusion services provided to patients. InfuSystems oncology
revenues comprised 21% and 23% of our consolidated revenues for the three and six months
ended June 30, 2007, respectively. If the average fees allowable by private insurers or
governmental agencies were reduced, the negative impact on revenues of InfuSystem could
have a material adverse effect on our financial condition and results of operations;
    
    our business could be adversely affected if we are unable to retain key customers, our
employees at InfuSystem or attract replacements; and
    
    the value of our deferred tax assets could be impaired if the Company is unable to
complete the transaction.
 We have experienced net losses in prior periods and have an accumulated deficit. 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.
  21




---



##### Table of Contents



If one of our products proves to be defective or is misused by a health care practitioner, we may
be subject to claims of liability that could adversely affect our financial condition and the
results of our operations.
   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.
  RISK FACTORS RELATED SPECIFICALLY TO OUR COMMON STOCK
 The average trading volume for our common stock is relatively low when compared to most larger
companies. As a result, there may be less liquidity and more volatility associated with our common
stock, even if our business is doing well.
   
    
    announcements of technological innovations, new products, or clinical studies by us or others;
    
    government regulation;
    
    changes in the coverage or reimbursement rates of private insurers and governmental agencies;
    
    developments in patent or other proprietary rights;
    
    future sales of substantial amounts of our common stock by existing stockholders or by us; and
    
    comments by securities analysts and general market conditions.
 22




---



##### Table of Contents



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.
  
    
    23,791,082 shares of common stock that are freely tradable in the public markets;
 
    
    561,074 shares of restricted stock that are subject to outstanding awards under our 2001
Equity Incentive Plan;
 
    
    185,109 shares of common stock underlying outstanding warrants which have been registered for
resale under a Registration Statement on Form S-3 (Registration No. 333-109096); and
 
    
    an aggregate of 3,794,105 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
  23




---



##### Table of Contents



Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  (1)
    
    The stockholders approved the election of the two Class II directors to the board of
directors.
 Director Nominee
    
    Term
    
    For
    
    Withhold AuthorityJoel S. Kanter
    
    3 years
    
    
    18,677,836
    
    
    
    3,526,859Erik H. Loudon
    
    3 years
    
    
    18,612,911
    
    
    
    3,591,784
  (2)
    
    The stockholders re-approved the material terms of the performance goals of the 2001 Equity
Incentive Plan.
 For
    
    Against
    
    Abstain
    
    Broker Non-Votes11,486,124
    
    
    3,160,918
    
    
    
    41,924
    
    
    
    7,515,729
 (3)
    
    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, 2007.
 For
    
    Against
    
    Abstain
    
    Broker Non-Votes17,821,752
    
    
    2,637,177
    
    
    
    19,932
    
    
    
    1,725,834
 
 Item 6. EXHIBITS
  24




---



##### Table of Contents



SIGNATURES
  I-FLOW CORPORATIONDate: August 8, 2007
    
    /s/Donald M. Earhart

Donald M. EarhartChairman, President and Chief Executive Officer(On behalf of the registrant)Date: August 8, 2007
    
    /s/James R. Talevich

James R. TalevichChief Financial Officer (As principal financial officer)
 25




---



##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Exhibit2.1
    
    Stock Purchase Agreement, dated October 28, 2004, by and between
Integra LifeSciences Corporation and I-Flow Corporation (1)2.2
    
    Merger Agreement, dated July 27, 2001, by and between I-Flow
Corporation, a Delaware corporation, and I-Flow Corporation, a
California corporation (2)2.3
    
    Agreement and Plan of Merger, dated January 13, 2000, by and
among I-Flow Corporation, Spinal Acquisition Corp., Spinal
Specialties, Inc. and the Shareholders of Spinal Specialties,
Inc. (3)2.4
    
    Agreement and Plan of Merger, dated February 9, 1998, by and
among I-Flow Corporation, I-Flow Subsidiary, Inc., Venture
Medical, Inc., InfuSystems II, Inc. and the Shareholders of
Venture Medical, Inc. and InfuSystems II, Inc. (4)2.5
    
    Agreement for Purchase and Sale of Assets, dated July 3, 1996, by
and among I-Flow Corporation, Block Medical, Inc. and Hillenbrand
Industries, Inc. (5)2.6
    
    Stock Purchase Agreement, dated as of September 29, 2006, by and
among I-Flow Corporation, InfuSystem, Inc., HAPC, Inc. and
Iceland Acquisition Subsidiary, Inc. (including the Form of
Services Agreement, attached thereto as Exhibit A, the Form of
License Agreement attached thereto as Exhibit B and the Term
Sheet attached thereto as Exhibit C) (11)2.7
    
    Amendment No. 1 dated as of April 30, 2007 to the Stock Purchase
Agreement dated as of September 29, 2006 by and among I-Flow
Corporation, InfuSystem, Inc., HAPC, Inc. and Iceland Acquisition
Subsidiary, Inc. (12)2.8
    
    Amendment No. 2 dated as of June 29, 2007 to the Stock Purchase
Agreement dated as of September 29, 2006, as amended by an
Amendment No. 1 dated as of April 30, 2007, by and among I-Flow
Corporation, InfuSystem, Inc., HAPC, Inc. and Iceland Acquisition
Subsidiary, Inc. (13)2.9
    
    Amendment No. 3 dated as of July 31, 2007 to the Stock Purchase
Agreement dated as of September 29, 2006, as amended by Amendment
No. 1 dated as of April 30, 2007 and an Amendment No. 2 dated as
of June 29, 2007, by and among I-Flow Corporation, InfuSystem,
Inc., HAPC, Inc. and Iceland Acquisition Subsidiary, Inc. (15)3.2
    
    Bylaws of I-Flow Corporation, a Delaware Corporation (2)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
    
    Amendment to Loan Agreement between Silicon Valley Bank and
I-Flow Corporation, dated as of July 16, 2007 (14)31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




---



##### Table of Contents



(1)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended September 30, 2003.(2)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on August 3, 2001.(3)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended March 31, 2000.(4)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K/A filed on March 6, 1998.(5)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated July 22, 1996.(6)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated May 29, 2002.(7)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on March 13, 2002.(8)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended March 31, 2002.(9)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10-K for the fiscal year ended September 30, 1990.(10)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended June 30, 2003.(11)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 4, 2006.(12)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on May 1, 2007.(13)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 2, 2007.(14)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 19, 2007.(15)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 31, 2007.