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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 Form 10-K/A
 (Amendment No. 1)
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 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: 0-18338
 I-FLOW CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    33-0121984(IRS Employer
Identification No.)20202 Windrow Drive,
    
    92630Lake Forest, CA
    
    (Zip Code)(Address of Principal Executive Offices)
 Registrants telephone number, including area code:
(949) 206-2700
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $0.001 par value 
Rights to Purchase Preferred Stock
    
    The NASDAQ Global Market
 Securities registered pursuant to Section 12(g) of the Act:
None
 o þ
 o þ
 þ o
 þ
  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
  DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures about Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accounting Fees and ServicesPART IVItem 15. Exhibits, Financial Statement SchedulesSIGNATURESINDEX TO EXHIBITSEX-21.1EX-23.1EX-31.1EX-31.2EX-32.1    Table of Contents  EXPLANATORY NOTE
   Purpose of the Restatement
 Statement of Cash Flows




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PART I
 
 Item 1.  Business.
 The Company
  ®
  www.iflo.com.
 Recent Developments
  tm ®
  1




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Acquisitions and Divestitures
   The Companys Products
   Net Revenues by Market Segment
    
    2007
    
    2006
    
    2005Regional Anesthesia
    
    
    77
    %
    
    
    73
    %
    
    
    69
    %IV Infusion Therapy
    
    
    23
    %
    
    
    27
    %
    
    
    31
    %
 Regional Anesthesia
 Pain Relief Kits
 ® ® ® ®
 Journal of American College of Surgeons
 2




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##### Table of Contents



www.AskYourSurgeon.com
 IV Infusion Therapy
 Elastomerics
 ® tm
 Non-ElectricIV Bag Delivery Systems
 ®
 Sales and Distribution
  
   3




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Sales to Unaffiliated Customers:
    
    2007
    
    
    2006
    
    
    2005(Amounts in thousands)United States
    
    $
    100,790
    
    
    $
    78,136
    
    
    $
    59,214Europe
    
    $
    12,371
    
    
    $
    12,840
    
    
    $
    10,497Asia/Pacific Rim
    
    
    2,085
    
    
    
    1,362
    
    
    
    1,328Other
    
    
    1,228
    
    
    
    1,244
    
    
    
    1,080All Foreign Countries in the Aggregate
    
    $
    15,684
    
    
    $
    15,446
    
    
    $
    12,905
 Competition
  4




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##### Table of Contents



CompanysNumber of Known
    
    EstimatedMarket
    
    CompetitiveU.S. Market Description
    
    Participants(1)
    
    PositionRegional AnesthesiaAcute Pain Kits (wound site pain management)
    
    
    13
    
    
    
    1IV Infusion TherapyElastomerics
    
    
    4
    
    
    
    1
 
 (1)
    
    Includes the Company Manufacturing and Operations
  Backlog
  Product Development
  Patents and Trademarks
    5




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Government Regulation
       6




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Employees
  Available Information
 www.iflo.com
 
 Item 1A.  Risk Factors.
 RISK FACTORS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE
 We have experienced net losses in prior periods. Future losses are possible.
  7




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We have invested substantial resources into the sales and marketing of the ON-Q PainBuster. If this
product does not achieve significant clinical acceptance or if our direct sales strategy is not
successful, our financial condition and operating results will be adversely affected.
  We have recently acquired AcryMed in an effort to expand our strategic focus to include general
surgical site care management. If we are unsuccessful in integrating AcryMeds operations with our
own, or if we fail to successfully develop and commercialize AcryMeds technologies, our results of
operations may be adversely affected.
  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.
  e.g.
 8




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Our customers frequently receive reimbursement from private insurers and governmental agencies. Any
change in the overall reimbursement system may adversely impact our business.
    Our products are highly regulated by a number of governmental agencies. Any changes to the existing
rules and regulations of these agencies may adversely impact our ability to manufacture and market
our products.
     9




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Our compliance with laws frequently involves our subjective judgment. If we are wrong in any of our
interpretations of the laws, we could be subjected to substantial penalties for noncompliance.
  Our industry is intensely competitive and changes rapidly. If we are unable to maintain a
technological lead over our competitors, our business operations will suffer.
  We rely on independent suppliers for parts and materials necessary to assemble our products. Any
delay or disruption in the supply of parts may prevent us from manufacturing our products and
negatively impact our operations.
  We manufacture the majority of our products in Mexico. Any difficulties or disruptions in the
operation of our plant may adversely impact our operations.
  We are dependent on our proprietary technology and the patents, copyrights and trademarks that
protect our products. If competitors are able to independently develop products of equivalent or
superior capabilities, the results of our operations could be adversely impacted.
  10




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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.
  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.
  Additional financings may be dilutive to stockholders, involve the issuance of securities that are
more senior to our stock or impose operational restrictions.
  11




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The preparation of our financial statements in accordance with accounting principles generally
accepted in the United States requires us to make estimates, judgments and assumptions that may
ultimately prove to be incorrect.
  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
 Failure to achieve and maintain effective internal control over financial reporting in accordance
with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and
our stock price.
  12




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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;
    
    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 or holders of awards under our equity
incentive plans could negatively affect the market price of our stock and make it more difficult
for us to sell stock in the future.
  
    
    24,412,463 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;
 
    
    165,009 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 3,107,924 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.
  13




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Anti-takeover devices may prevent a sale, or changes in the management, of I-Flow.
   We do not pay dividends and this may negatively affect the price of our stock.
  In the future, our common stock may be removed from listing on the Nasdaq Global Market and may not
qualify for listing on any stock exchange, in which case it may be difficult to find a market in
our stock.
  
 Item 1B.  Unresolved Staff Comments.
  
 Item 2.  Properties.
    14




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Item 3.  Legal Proceedings.
  
 Item 4.  Submission of Matters to a Vote of Security Holders.
  15




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EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionDonald M. Earhart
    
    
    63
    
    
    President, Chief Executive Officer and Chairman of the BoardJames J. Dal Porto
    
    
    54
    
    
    Executive Vice President, Chief Operating Officer, Director
and SecretaryJames R. Talevich
    
    
    57
    
    
    Chief Financial Officer and Treasurer
 Donald M. Earhart
 James J. Dal Porto
 James R. Talevich
 16




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 Common Stock Information
  High
    
    Low20061st Quarter
    
    $
    16.64
    
    
    $
    12.862nd Quarter
    
    $
    14.10
    
    
    $
    10.823rd Quarter
    
    $
    12.80
    
    
    $
    10.104th Quarter
    
    $
    15.71
    
    
    $
    12.7720071st Quarter
    
    $
    16.92
    
    
    $
    13.602nd Quarter
    
    $
    17.47
    
    
    $
    14.033rd Quarter
    
    $
    20.86
    
    
    $
    16.524th Quarter
    
    $
    19.77
    
    
    $
    14.75
   Information About Our Equity Compensation Plans
  Weighted-
    
    Number of SecuritiesAverage Exercise
    
    Remaining Available forNumber of Securities
    
    Price of
    
    Future Issuance Underto be Issued Upon
    
    Outstanding
    
    Equity CompensationExercise of
    
    Options,
    
    Plans (ExcludingOutstanding Options,
    
    Warrants and
    
    Securities Reflected inPlan Category
    
    Warrants and Rights (A)
    
    Rights
    
    Column (A))Equity compensation
plans approved by
security holders
    
    
    3,102,924
    (1)
    
    $
    8.85
    
    
    
    2,519,517
    (2)Equity compensation
plans not approved
by security holders
    
    
    5,000
    (3)
    
    $
    15.20
    
    
    
    
    (4)
 
 (1)
    
    Includes 595,000 shares of restricted stock units with no exercise
price and outstanding options, totaling 2,507,924 shares, to purchase
shares of the Companys common stock under: (a) the 1992 Non-Employee
Director Stock Option Plan; (b) the 1996 Stock Incentive Plan; and
(c) the I-Flow Corporation 2001 Equity Incentive Plan.(2)
    
    All shares of common stock that remain available for future issuance
are under the I-Flow Corporation 2001 Equity Incentive Plan.(3)
    
    Includes options to purchase 5,000 shares of the Companys common
stock issued to Thomas Winters, M.D. to acquire the non-exclusive
rights to utilize intellectual property owned by Dr. Winters,
including registered United States patents. Dr. Winters was not, at
the time, an employee, director or consultant to the Company.(4)
    
    No shares available for future issuance. The Companys 2001 Restricted
Stock Plan and 2003 Restricted Stock Plan have both been terminated. 17




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Material Features of Non-Stockholder Approved Plans
 Winters Options
  Stock Performance Graph
  
 12/31/02
    
    
    12/31/03
    
    
    12/31/04
    
    
    12/31/05
    
    
    12/31/06
    
    
    12/31/07I-Flow Corporation
    
    
    $
    100.00
    
    
    
    $
    892.31
    
    
    
    $
    1,168.59
    
    
    
    $
    937.18
    
    
    
    $
    958.33
    
    
    
    $
    1,011.54Industry Index
    
    
    
    100.00
    
    
    
    
    147.95
    
    
    
    
    173.33
    
    
    
    
    190.30
    
    
    
    
    200.58
    
    
    
    
    255.03Nasdaq Market Index
    
    
    
    100.00
    
    
    
    
    150.84
    
    
    
    
    164.13
    
    
    
    
    167.86
    
    
    
    
    185.16
    
    
    
    
    204.70
 18




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Item 6.  Selected Financial Data.
  Years Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Amounts in thousands, except per share amounts)Consolidated Statements of Operations and
Comprehensive Operations Data:(1)(2)Net product sales
    
    $
    116,474
    
    
    $
    93,582
    
    
    $
    72,119
    
    
    $
    51,796
    
    
    $
    34,021Cost of revenues
    
    
    32,025
    
    
    
    26,267
    
    
    
    19,662
    
    
    
    15,703
    
    
    
    13,285Gross profit
    
    
    84,449
    
    
    
    67,315
    
    
    
    52,457
    
    
    
    36,093
    
    
    
    20,736Operating expenses:Selling and marketing
    
    
    71,928
    
    
    
    57,731
    
    
    
    49,899
    
    
    
    41,199
    
    
    
    17,450General and administrative
    
    
    17,664
    
    
    
    15,012
    
    
    
    16,269
    
    
    
    10,637
    
    
    
    6,153Product development
    
    
    2,657
    
    
    
    2,436
    
    
    
    2,549
    
    
    
    2,779
    
    
    
    2,361Total operating expenses
    
    
    92,249
    
    
    
    75,179
    
    
    
    68,717
    
    
    
    54,615
    
    
    
    25,964Operating loss
    
    
    (7,800
    )
    
    
    (7,864
    )
    
    
    (16,260
    )
    
    
    (18,522
    )
    
    
    (5,228
    )Impairment loss on investment
    
    
    (6,118
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest and other income, net
    
    
    2,425
    
    
    
    933
    
    
    
    937
    
    
    
    525
    
    
    
    (31
    )Loss from continuing operations before income taxes
    
    
    (11,493
    )
    
    
    (6,931
    )
    
    
    (15,323
    )
    
    
    (17,997
    )
    
    
    (5,259
    )Income tax provision (benefit)
    
    
    (2,500
    )
    
    
    (17,561
    )
    
    
    (2,334
    )
    
    
    2,050
    
    
    
    (2,015
    )Income (loss) from continuing operations, net of
tax
    
    
    (8,993
    )
    
    
    10,630
    
    
    
    (12,989
    )
    
    
    (20,047
    )
    
    
    (3,244
    )Discontinued operations:Income from discontinued operations, net of tax
    
    
    4,825
    
    
    
    3,044
    
    
    
    4,584
    
    
    
    2,937
    
    
    
    1,418Gain on sale of discontinued operations, net of tax
    
    
    45,396
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,283Net income (loss)
    
    $
    41,228
    
    
    $
    13,674
    
    
    $
    (8,405
    )
    
    $
    (17,110
    )
    
    $
    457Per share of common stock, basic:Income (loss) from continuing operations, net of
tax
    
    $
    (0.37
    )
    
    $
    0.47
    
    
    $
    (0.58
    )
    
    $
    (0.97
    )
    
    $
    (0.20
    )Income from discontinued operations, net of tax
    
    
    0.20
    
    
    
    0.13
    
    
    
    0.20
    
    
    
    0.14
    
    
    
    0.09Gain on sale of discontinued operations, net of tax
    
    
    1.90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.14Net income (loss)
    
    $
    1.73
    
    
    $
    0.60
    
    
    $
    (0.38
    )
    
    $
    (0.83
    )
    
    $
    0.03Per share of common stock, diluted:Income (loss) from continuing operations, net of
tax
    
    $
    (0.37
    )
    
    $
    0.44
    
    
    $
    (0.58
    )
    
    $
    (0.97
    )
    
    $
    (0.20
    )Income from discontinued operations, net of tax
    
    
    0.20
    
    
    
    0.13
    
    
    
    0.20
    
    
    
    0.14
    
    
    
    0.09Gain on sale of discontinued operations, net of tax
    
    
    1.90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.14Net income (loss)
    
    $
    1.73
    
    
    $
    0.57
    
    
    $
    (0.38
    )
    
    $
    (0.83
    )
    
    $
    0.03Weighted-average common shares outstanding:Basic
    
    
    23,889
    
    
    
    22,887
    
    
    
    22,397
    
    
    
    20,628
    
    
    
    16,384Diluted
    
    
    23,889
    
    
    
    24,071
    
    
    
    22,397
    
    
    
    20,628
    
    
    
    16,384Consolidated Balance Sheet Data:(1)(2)Working capital
    
    $
    117,187
    
    
    $
    56,548
    
    
    $
    49,733
    
    
    $
    57,948
    
    
    $
    31,467Total assets
    
    
    188,655
    
    
    
    112,146
    
    
    
    82,953
    
    
    
    84,430
    
    
    
    51,896Long-term obligations
    
    
    6,402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total stockholders equity
    
    $
    155,576
    
    
    $
    92,004
    
    
    $
    70,049
    
    
    $
    73,219
    
    
    $
    44,773
 19




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(1)
    
    In October 2007, the Company completed its sale of InfuSystem to HAPC.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived
Assets(SFAS 144), the Company has reclassified the results from
InfuSystem as discontinued operations, reclassifying previously
reported results to reflect all prior periods on a comparable basis.
See Note 4 of Notes to Consolidated Financial Statements.In November 2003, the Company sold Spinal Specialties, Inc., a wholly
owned subsidiary. The operations of Spinal Specialties have been
excluded from continuing operations in the year ended December 31,
2003.(2)
    
    In 2006, the Company recorded a release of the valuation allowance for
deferred tax assets with an incremental tax benefit of approximately
$16.8 million. The income tax benefit was consistent with the guidance
in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, which addresses financial accounting for deferred tax
assets. The Company regularly reviews its deferred tax assets for
recoverability and establishes a valuation allowance when it is more
likely than not, based on available evidence, that projected future
taxable income will be insufficient to recover the deferred tax
assets. Due to the then-pending sale of InfuSystem to HAPC, management
believed it was more likely than not that the Company would realize
the benefits of the existing net deferred tax asset at December 31,
2006. In the event the Company is unable to operate at a profit and
unable to generate sufficient future taxable income, it would be
required to increase the valuation allowance against all of its
deferred tax assets.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 2007
    
    Mar. 31
    
    June 30
    
    Sept. 30
    
    Dec. 31(1)(Amounts in thousands, except per share amounts)Total revenues
    
    $
    24,306
    
    
    $
    29,075
    
    
    $
    28,231
    
    
    $
    34,862Gross profit
    
    
    18,018
    
    
    
    21,021
    
    
    
    20,730
    
    
    
    24,680Loss from continuing operations before income taxes
    
    
    (3,500
    )
    
    
    (2,366
    )
    
    
    (1,123
    )
    
    
    (4,504
    )Loss from continuing operations, net of tax
    
    
    (2,207
    )
    
    
    (1,570
    )
    
    
    (845
    )
    
    
    (4,371
    )Income (loss) from discontinued operations, net of tax
    
    
    1,286
    
    
    
    2,169
    
    
    
    2,004
    
    
    
    (634
    )Gain on sale of discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,396Net income (loss)
    
    
    (921
    )
    
    
    599
    
    
    
    1,159
    
    
    
    40,391Per share of common stock  basic and diluted:Loss from continuing operations, net of tax
    
    
    (0.09
    )
    
    
    (0.06
    )
    
    
    (0.03
    )
    
    
    (0.18
    )Net income (loss)
    
    
    (0.04
    )
    
    
    0.03
    
    
    
    0.05
    
    
    
    1.66Weighted-average common shares  basic and diluted
    
    
    23,550
    
    
    
    23,694
    
    
    
    24,010
    
    
    
    24,304
 2006
    
    Mar. 31
    
    June 30
    
    Sept. 30(2)
    
    Dec. 31Total revenues
    
    $
    19,901
    
    
    $
    22,435
    
    
    $
    23,813
    
    
    $
    27,433Gross profit
    
    
    14,579
    
    
    
    16,419
    
    
    
    16,877
    
    
    
    19,440Loss from continuing operations before income taxes
    
    
    (2,653
    )
    
    
    (1,504
    )
    
    
    (1,177
    )
    
    
    (1,597
    )Income (loss) from continuing operations, net of tax
    
    
    (1,911
    )
    
    
    (840
    )
    
    
    14,414
    
    
    
    (1,033
    )Income (loss) from discontinued operations, net of tax
    
    
    1,429
    
    
    
    1,273
    
    
    
    (826
    )
    
    
    1,168Net income (loss)
    
    
    (482
    )
    
    
    433
    
    
    
    13,588
    
    
    
    135Per share of common stock  basic:Income (loss) from continuing operations
    
    
    (0.08
    )
    
    
    (0.04
    )
    
    
    0.62
    
    
    
    (0.04
    )Net income (loss)
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.58
    
    
    
    0.01Per share of common stock  diluted:Income (loss) from continuing operations, net of tax
    
    
    (0.08
    )
    
    
    (0.04
    )
    
    
    0.59
    
    
    
    (0.04
    )Net income (loss)
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.55
    
    
    
    0.01Weighted-average common shares  basic
    
    
    22,701
    
    
    
    23,346
    
    
    
    23,429
    
    
    
    23,124Weighted-average common shares  diluted
    
    
    22,701
    
    
    
    23,346
    
    
    
    24,544
    
    
    
    23,124
 20




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##### Table of Contents



(1)
    
    In October 2007, the Company completed its sale of InfuSystem to HAPC.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived
Assets(SFAS 144), the Company has reclassified the results from
InfuSystem as discontinued operations, reclassifying previously
reported results to reflect all prior periods on a comparable basis.
See Note 4 of Notes to Consolidated Financial Statements.(2)
    
    In 2006, the Company recorded a release of the valuation allowance for
deferred tax assets with an incremental tax benefit of approximately
$16.8 million. The income tax benefit was consistent with the guidance
in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, which addresses financial accounting for deferred tax
assets. The Company regularly reviews its deferred tax assets for
recoverability and establishes a valuation allowance when it is more
likely than not, based on available evidence, that projected future
taxable income will be insufficient to recover the deferred tax
assets. Due to the then-pending sale of InfuSystem to HAPC, management
believed it was more likely than not that the Company would realize
the benefits of the existing net deferred tax asset at September 30,
2006 and December 31, 2006. In the event the Company is unable to
operate at a profit and unable to generate sufficient future taxable
income, it would be required to increase the valuation allowance
against all of its deferred tax assets. 
 Item 7.  Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements
  Overview
  21




---



##### Table of Contents



®
  Discontinued Operations of InfuSystem
 ®
    22




---



##### Table of Contents



Accounting for
Impairment or Disposal of Long-Lived Assets
 Year Ended December 31,2007(1)(2)
    
    
    2006(2)
    
    
    2005(Amounts in thousands)Operating revenues
    
    $
    25,001
    
    
    $
    31,716
    
    
    $
    28,525Operating income
    
    $
    7,764
    
    
    $
    7,007
    
    
    $
    7,445Income taxes
    
    
    2,939
    
    
    
    3,963
    
    
    
    2,861Income from discontinued operations
    
    $
    4,825
    
    
    $
    3,044
    
    
    $
    4,584
 
 (1)
    
    Includes financial results for InfuSystem for the period January 1,
2007 through October 25, 2007, which was the date the sale of
InfuSystem was consummated.(2)
    
    InfuSystem recorded approximately $2,090,000 of divestiture expenses
during the year ended December 31, 2006. In October 2007, at the
closing of the sale of InfuSystem, the Company received reimbursement
of approximately $946,000 by HAPC of certain divestiture expenses
incurred in 2006 and 2007 by the Company directly resulting from the
sale transaction, including legal, audit and other professional fees.
Since the reimbursement of $946,000 included payments for services
incurred for 2006, divestiture expenses recorded during the year ended
December 31, 2007 resulted in a net credit of approximately $245,000. Consolidated Results of Operations for the Year Ended December 31, 2007 Compared to the Year Ended
December 31, 2006
 Revenues
   ® ® ® tm
  23




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##### Table of Contents



Cost of Revenues
  Selling and Marketing Expenses
    General and Administrative Expenses
   Product Development Expenses
  24




---



##### Table of Contents



Impairment Loss on Investments
 Accounting for Certain
Investments in Debt and Equity Securities
 Interest, Net
  Income Taxes
 Accounting for Income Taxes
   25




---



##### Table of Contents



Consolidated Results of Operations for the Year Ended December 31, 2006 Compared to the Year Ended
December 31, 2005
 Revenue
    Cost of Revenues
  Selling and Marketing Expenses
   Share-Based Payment
 26




---



##### Table of Contents



General and Administrative Expenses
    Product Development Expenses
  Interest, Net
  Income Taxes
 Accounting for Income Taxes
 27




---



##### Table of Contents



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
 Liquidity and Capital Resources
      28




---



##### Table of Contents



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




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##### Table of Contents



(1)
    
    The total number of shares purchased includes shares delivered to or
withheld by the Company in connection with employee payroll tax
withholding upon vesting of restricted stock and restricted stock
units.(2)
    
    In July 2004, the Companys board of directors authorized the
repurchase of up to 1,000,000 shares of the Companys common stock.
The stock repurchase program was extended in May 2005 and expired on
July 27, 2006. No shares were repurchased under the stock repurchase
program during the year ended December 31, 2007.  Contractual Obligations and Commercial Commitments
  Payment Due by PeriodLess than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More than1 Year
    
    
    Years
    
    
    Years
    
    
    5 Years
    
    
    Total(Amounts in thousands)Operating Lease Obligations for Facilities
    
    $
    970
    
    
    $
    1,278
    
    
    $
    
    
    
    $
    
    
    
    $
    2,248Purchase Commitments with Suppliers(1)
    
    
    7,511
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,511Total Contractual Obligations and Commercial Commitments
    
    $
    8,481
    
    
    $
    1,278
    
    
    $
    
    
    
    $
    
    
    
    $
    9,759
 
 (1)
    
    Includes contractual agreements and purchase orders for raw materials,
finished goods and services to be incurred in the ordinary course of
business, which are enforceable and legally binding. Accounting for Uncertainty in Income
Taxes Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
 New Accounting Pronouncements
  Fair Value Measurements ,
 30




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##### Table of Contents



The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Business Combinations Business Combinations
 Critical Accounting Policies
  Revenue Recognition
    31




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##### Table of Contents



Accounts Receivable
  Inventories
  Short-Term Investments
 Accounting for Certain Investments in Debt and Equity Securities ,
 Deferred Taxes
   32




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##### Table of Contents



Stock-Based Compensation
  
 Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.
 Interest Rate Risk
   Foreign Currency
  
 Item 8.  Financial Statements and Supplementary Data.
 Financial Statements
  33




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##### Table of Contents



Financial Statement Schedule
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 Balance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning of
    
    Costs
    
    
    
    
    
    End ofClassification
    
    Period
    
    and Expenses
    
    Deductions(1)
    
    Period(Amounts in thousands)Year Ended December 31, 2005:Allowance for doubtful accounts
    
    $
    2,900
    
    
    $
    1,926
    
    
    $
    (1,454
    )
    
    $
    3,372Reserve for obsolete inventories
    
    
    923
    
    
    
    232
    
    
    
    (76
    )
    
    
    1,079Year Ended December 31, 2006:Allowance for doubtful accounts
    
    
    3,372
    
    
    
    4,667
    
    
    
    (2,966
    )
    
    
    5,073Reserve for obsolete inventories
    
    
    1,079
    
    
    
    73
    
    
    
    (61
    )
    
    
    1,091Year Ended December 31, 2007:Allowance for doubtful accounts
    
    
    5,073
    
    
    
    5,700
    
    
    
    (8,811
    )(2)
    
    
    1,962Reserve for obsolete inventories
    
    
    1,091
    
    
    
    639
    
    
    
    (928
    )(2)
    
    
    802
  
 (1)
    
    Deductions in all years reported represent reductions to the reserve
accounts and the related asset accounts. Specifically, deductions from
the reserve for allowance for doubtful accounts represent the
write-off of uncollectible accounts receivable balances. Deductions
from the reserve for obsolete inventories represent the write-off and
disposal of specific inventory items.(2)
    
    Includes the write-off of reserve accounts of approximately $6,639,000
and $20,000 for the allowance for doubtful accounts and reserve for
obsolete inventories of discontinued operations, respectively, due to
the sale of InfuSystem in October 2007. Selected Quarterly Financial Data
  
 Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A.  Controls and Procedures
  (a) Disclosure Controls and Procedures
  34




---



##### Table of Contents



(b) Management Report on Internal Control Over Financial Reporting (as Restated)
  
    
    Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of the assets of the Company;
 
    
    Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
 
    
    Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect on
the financial statements.
      35




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##### Table of Contents



(c) Change in Internal Control Over Financial Reporting
  (d) Remediation
Efforts of the Material Weakness
 Statement of Cash Flows
 
 Item 9B.  Other Information
  36




---



##### Table of Contents



PART III
 
 Item 10.  Directors, Executive Officers and Corporate Governance.
  
 Item 11.  Executive Compensation.
  
 Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  
 Item 13.  Certain Relationships and Related Transactions and Director Independence.
  
 Item 14.  Principal Accounting Fees and Services.
  37




---



##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules.
  Page in ThisReport(1) Financial StatementsThe documents described in the Index to Consolidated Financial Statements
are included in this report
    
    
    39(2) Financial Statement Schedule included herein:Schedule II  Valuation and Qualifying Accounts
    
    
    34All other schedules are omitted, as the required information is inapplicable.(3) ExhibitsThe list of exhibits contained in the accompanying Index to Exhibits is
incorporated herein by reference.
 
 (b)
    
    See (a)(3) above.(c)
    
    There are no financial statements required by Regulation S-X (17 CFR
210) which are or will be excluded from the annual report to
shareholders by Rule 14a-3(b). 38




---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    
    F-3Consolidated Statements of Operations and Comprehensive Operations For the Years Ended December 31,
2007, 2006 and 2005
    
    
    F-4Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2007, 2006 and 2005
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2007 (Restated), 2006 and 2005
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Financial Statement Schedule Schedule II  Valuation and Qualifying Accounts
    
    
    34
 39




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      F-1




---



##### Table of Contents



Accounting for Uncertainty in
Income Taxes
     F-2




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##### Table of Contents



I-FLOW CORPORATION
 CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    December 31,2007
    
    
    2006(Amounts in thousands,except share and pershare amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    78,571
    
    
    $
    9,288Short-term investments
    
    
    14,379
    
    
    
    18,134Short-term investments  HAPC common stock
    
    
    10,533
    
    
    
    Accounts receivable, less allowance for
doubtful accounts of $1,962 and $3,405 at
December 31, 2007 and 2006, respectively
    
    
    22,443
    
    
    
    18,935Inventories
    
    
    13,128
    
    
    
    13,611Prepaid expenses and other current assets
    
    
    1,267
    
    
    
    1,485Note receivable, HAPC  current
    
    
    2,044
    
    
    
    Deferred taxes
    
    
    1,499
    
    
    
    3,260Current assets  held for sale
    
    
    
    
    
    
    11,977Total current assets
    
    
    143,864
    
    
    
    76,690Property, net
    
    
    3,318
    
    
    
    2,843Other intangible assets, net
    
    
    2,586
    
    
    
    2,754Other long-term assets
    
    
    133
    
    
    
    137Note receivable, HAPC  noncurrent
    
    
    30,250
    
    
    
    Deferred taxes
    
    
    8,504
    
    
    
    14,406Non-current assets  held for sale
    
    
    
    
    
    
    15,316Total assets
    
    $
    188,655
    
    
    $
    112,146LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,570
    
    
    $
    4,249Accrued payroll and related expenses
    
    
    7,724
    
    
    
    7,171Income taxes payable
    
    
    12,450
    
    
    
    18Other current liabilities
    
    
    1,933
    
    
    
    1,078Current liabilities  held for sale
    
    
    
    
    
    
    7,626Total current liabilities
    
    
    26,677
    
    
    
    20,142Other liabilities
    
    
    6,402
    
    
    
    Commitments and contingencies (Note 8)Stockholders equity:Preferred stock, $0.001 par value per
share; 5,000,000 shares authorized; no
shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value per share;
40,000,000 shares authorized, 24,973,537
and 23,900,869 shares issued and
outstanding at December 31, 2007 and
2006, respectively
    
    
    142,197
    
    
    
    119,092Accumulated other comprehensive loss
    
    
    (207
    )
    
    
    (163
    )Retained earnings (accumulated deficit)
    
    
    13,586
    
    
    
    (26,925
    )Total stockholders equity
    
    
    155,576
    
    
    
    92,004Total liabilities and stockholders equity
    
    $
    188,655
    
    
    $
    112,146
 See accompanying Notes to Consolidated Financial Statements.
 F-3




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##### Table of Contents



I-FLOW CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
 Year Ended December 31,2007
    
    
    2006
    
    
    2005(Amounts in thousands, except pershare amounts)Net product sales
    
    $
    116,474
    
    
    $
    93,582
    
    
    $
    72,119Cost of revenues
    
    
    32,025
    
    
    
    26,267
    
    
    
    19,662Gross profit
    
    
    84,449
    
    
    
    67,315
    
    
    
    52,457Operating expensesSelling and marketing
    
    
    71,928
    
    
    
    57,731
    
    
    
    49,899General and administrative
    
    
    17,664
    
    
    
    15,012
    
    
    
    16,269Product development
    
    
    2,657
    
    
    
    2,436
    
    
    
    2,549Total operating expenses
    
    
    92,249
    
    
    
    75,179
    
    
    
    68,717Operating loss
    
    
    (7,800
    )
    
    
    (7,864
    )
    
    
    (16,260
    )Impairment loss on investment
    
    
    (6,118
    )
    
    
    
    
    
    
    Interest, net
    
    
    2,425
    
    
    
    933
    
    
    
    937Loss from continuing operations before income taxes
    
    
    (11,493
    )
    
    
    (6,931
    )
    
    
    (15,323
    )Income tax benefit
    
    
    (2,500
    )
    
    
    (17,561
    )
    
    
    (2,334
    )Income (loss) from continuing operations, net of tax
    
    
    (8,993
    )
    
    
    10,630
    
    
    
    (12,989
    )Discontinued operations:Income from discontinued operations, net of tax
    
    
    4,825
    
    
    
    3,044
    
    
    
    4,584Gain on sale of discontinued operations, net of tax
    
    
    45,396
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    41,228
    
    
    $
    13,674
    
    
    $
    (8,405
    )Per share of common stock, basic:Income (loss) from continuing operations, net of tax
    
    $
    (0.37
    )
    
    $
    0.47
    
    
    $
    (0.58
    )Income from discontinued operations, net of tax
    
    
    0.20
    
    
    
    0.13
    
    
    
    0.20Gain on sale of discontinued operations, net of tax
    
    
    1.90
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    1.73
    
    
    $
    0.60
    
    
    $
    (0.38
    )Per share of common stock, diluted:Income (loss) from continuing operations, net of tax
    
    $
    (0.37
    )
    
    $
    0.44
    
    
    $
    (0.58
    )Income from discontinued operations, net of tax
    
    
    0.20
    
    
    
    0.13
    
    
    
    0.20Gain on sale of discontinued operations, net of tax
    
    
    1.90
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    1.73
    
    
    $
    0.57
    
    
    $
    (0.38
    )Weighted-average shares:Basic
    
    
    23,889
    
    
    
    22,887
    
    
    
    22,397Diluted
    
    
    23,889
    
    
    
    24,071
    
    
    
    22,397Comprehensive Operations:Net income (loss)
    
    $
    41,228
    
    
    $
    13,674
    
    
    $
    (8,405
    )Unrealized gain (loss) on securities
    
    
    7
    
    
    
    96
    
    
    
    (32
    )Foreign currency translation adjustments
    
    
    (51
    )
    
    
    (17
    )
    
    
    80Comprehensive income (loss)
    
    $
    41,184
    
    
    $
    13,753
    
    
    $
    (8,357
    )
 See accompanying Notes to Consolidated Financial Statements.
 F-4




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##### Table of Contents



I-FLOW CORPORATION
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 Accumulated
    
    
    RetainedOther
    
    
    EarningsCommon Stock
    
    
    Comprehensive
    
    
    (AccumulatedShares
    
    
    Amount
    
    
    Income (Loss)
    
    
    Deficit)
    
    
    Total(Amounts in thousands)Balance, January 1, 2005
    
    
    22,220
    
    
    $
    105,703
    
    
    $
    (290
    )
    
    $
    (32,194
    )
    
    $
    73,219Exercise of common stock options and
warrants and vested restricted stock
units
    
    
    533
    
    
    
    1,347
    
    
    
    
    
    
    
    
    
    
    
    1,347Stock-based compensation
    
    
    
    
    
    
    7,214
    
    
    
    
    
    
    
    
    
    
    
    7,214Issuance of stock from stock upward
repricing event
    
    
    162Purchase and retirement of treasury stock
    
    
    (286
    )
    
    
    (3,425
    )
    
    
    
    
    
    
    
    
    
    
    (3,425
    )Issuance of common stock options for
licensing rights
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    51Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    
    
    
    
    (32
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    80Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,405
    )
    
    
    (8,405
    )Balance, December 31, 2005
    
    
    22,629
    
    
    
    110,890
    
    
    
    (242
    )
    
    
    (40,599
    )
    
    
    70,049Exercise of common stock options and
warrants and vested restricted stock
units
    
    
    745
    
    
    
    2,691
    
    
    
    
    
    
    
    
    
    
    
    2,691Stock-based compensation
    
    
    
    
    
    
    5,511
    
    
    
    
    
    
    
    
    
    
    
    5,511Issuance of restricted stock awards
    
    
    522Issuance of stock from stock upward
repricing event
    
    
    5Unrealized gain on securities
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    96Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    (17
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,674
    
    
    
    13,674Balance, December 31, 2006
    
    
    23,901
    
    
    
    119,092
    
    
    
    (163
    )
    
    
    (26,925
    )
    
    
    92,004Cumulative effect of adjustments from
adoption of FIN 48 (Note 7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (717
    )
    
    
    (717
    )Balance, January 1, 2007
    
    
    23,901
    
    
    
    119,092
    
    
    
    (163
    )
    
    
    (27,642
    )
    
    
    91,287Exercise of common stock options and
warrants and vested restricted stock
units
    
    
    1,027
    
    
    
    7,096
    
    
    
    
    
    
    
    
    
    
    
    7,096Tax benefit from exercise of stock
options and vested restricted stock and
restricted stock units
    
    
    
    
    
    
    10,248
    
    
    
    
    
    
    
    
    
    
    
    10,248Stock-based compensation
    
    
    
    
    
    
    7,261
    
    
    
    
    
    
    
    
    
    
    
    7,261Tax shares withheld and retired in
connection with vested restricted stock
and restricted stock units
    
    
    (95
    )
    
    
    (1,500
    )
    
    
    
    
    
    
    
    
    
    
    (1,500
    )Issuance of restricted stock awards
    
    
    141Unrealized gain on securities
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    7Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    (51
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,228
    
    
    
    41,228Balance, December 31, 2007
    
    
    24,974
    
    
    $
    142,197
    
    
    $
    (207
    )
    
    $
    13,586
    
    
    $
    155,576
 See accompanying Notes to Consolidated Financial Statements.
 F-5




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##### Table of Contents



I-FLOW CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,(Restated -Note 12)2007
    
    
    2006
    
    
    2005(Amounts in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    41,228
    
    
    $
    13,674
    
    
    $
    (8,405
    )Income from discontinued operations, net of tax
    
    
    (4,825
    )
    
    
    (3,044
    )
    
    
    (4,584
    )Gain on sale of discontinued operations, net of tax
    
    
    (45,396
    )
    
    
    
    
    
    
    Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:Deferred taxes
    
    
    7,663
    
    
    
    (17,666
    )
    
    
    (1,106
    )Stock-based compensation
    
    
    6,515
    
    
    
    5,116
    
    
    
    6,129Impairment loss on investment
    
    
    6,118
    
    
    
    
    
    
    
    Excess tax benefit from exercise of stock options and vested restricted stock and
restricted stock units
    
    
    (8,565
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    1,604
    
    
    
    1,432
    
    
    
    1,416Provision for doubtful accounts receivable
    
    
    730
    
    
    
    442
    
    
    
    666Write-off of inventory obsolescence
    
    
    633
    
    
    
    72
    
    
    
    232Loss (gain) on disposal of property
    
    
    (2
    )
    
    
    40
    
    
    
    Changes in operating assets and liabilities, net of effect of discontinued operations:Accounts receivable
    
    
    (4,238
    )
    
    
    (5,954
    )
    
    
    (3,004
    )Inventories
    
    
    (150
    )
    
    
    (2,154
    )
    
    
    (3,622
    )Prepaid expenses and other
    
    
    187
    
    
    
    (279
    )
    
    
    (409
    )Accounts payable and accrued payroll and related expenses
    
    
    826
    
    
    
    3,289
    
    
    
    (72
    )Income taxes payable
    
    
    (13,003
    )
    
    
    (210
    )
    
    
    146Other liabilities
    
    
    4,084
    
    
    
    152
    
    
    
    218Net cash provided by (used in) operating activities from continuing operations
    
    
    (6,591
    )
    
    
    (5,090
    )
    
    
    (12,395
    )Net cash provided by operating activities of discontinued operations
    
    
    7,464
    
    
    
    8,872
    
    
    
    6,519Net cash provided by (used in) operating activities
    
    
    873
    
    
    
    3,782
    
    
    
    (5,876
    )Cash flows from investing activities:Repayments on note receivable, HAPC
    
    
    409
    
    
    
    
    
    
    
    Receipt of deferred financing fees from note receivable, HAPC
    
    
    2,586
    
    
    
    
    
    
    
    Capital expenditures
    
    
    (1,437
    )
    
    
    (1,193
    )
    
    
    (583
    )Purchase of HAPC common stock
    
    
    (16,652
    )
    
    
    
    
    
    
    Purchases of other investments
    
    
    (18,121
    )
    
    
    (19,600
    )
    
    
    (18,825
    )Maturities of investments
    
    
    21,884
    
    
    
    14,838
    
    
    
    37,620Sale of investments
    
    
    
    
    
    
    
    
    
    
    1,984Patents and licensing right acquisitions
    
    
    (389
    )
    
    
    (628
    )
    
    
    (1,631
    )Net cash provided by (used in) investing activities from continuing operations
    
    
    (11,720
    )
    
    
    (6,583
    )
    
    
    18,565Net cash provided by (used in) investing activities from discontinued operations
    
    
    64,225
    
    
    
    (2,506
    )
    
    
    (6,835
    )Net cash provided by (used in) investing activities
    
    
    52,505
    
    
    
    (9,089
    )
    
    
    11,730Cash flows from financing activities:Purchase and retirement of common and treasury stock
    
    
    (1,500
    )
    
    
    
    
    
    
    (3,425
    )Proceeds from exercise of stock options and warrants
    
    
    7,096
    
    
    
    2,691
    
    
    
    1,347Excess tax benefit from exercise of stock options and vested restricted stock and
restricted stock units
    
    
    8,565
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities from continuing operations
    
    
    14,161
    
    
    
    2,691
    
    
    
    (2,078
    )Net cash provided by financing activities from discontinued operations
    
    
    2,183
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    16,344
    
    
    
    2,691
    
    
    
    (2,078
    )Effect of exchange rates on cash
    
    
    (51
    )
    
    
    (17
    )
    
    
    80Net increase (decrease) in cash and cash equivalents
    
    
    69,671
    
    
    
    (2,633
    )
    
    
    3,856Net (increase) decrease in cash and cash equivalents from discontinued operations
    
    
    (388
    )
    
    
    508
    
    
    
    (1,604
    )Cash and cash equivalents at beginning of year
    
    
    9,288
    
    
    
    11,413
    
    
    
    9,161Cash and cash equivalents at end of year
    
    $
    78,571
    
    
    $
    9,288
    
    
    $
    11,413SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid
    
    $
    
    
    
    $
    47
    
    
    $
    Income tax payments
    
    $
    333
    
    
    $
    286
    
    
    $
    305Tax benefit from exercise of stock options
    
    $
    10,248
    
    
    $
    
    
    
    $
    SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:Property acquisitions
    
    $
    598
    
    
    $
    1,126
    
    
    $
    Issuance of note receivable, HAPC
    
    $
    32,703
    
    
    $
    
    
    
    $
    
 See accompanying Notes to Consolidated Financial Statements.
 F-6




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements
 1.  Nature of Operations and Summary of Significant Accounting Policies
 Nature of Operations
 Principles of Consolidation
 ®
    F-7




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
 Accounting for
Impairment or Disposal of Long-Lived Assets
 Cash and Cash Equivalents
 Short-term Investments Accounting for Certain Investments in Debt and Equity Securities ,
 Inventories
 2007
    
    
    2006(Amounts in thousands)Raw Materials
    
    $
    6,534
    
    
    $
    7,784Work in Process
    
    
    2,056
    
    
    
    2,024Finished Goods
    
    
    4,538
    
    
    
    3,803Total
    
    $
    13,128
    
    
    $
    13,611
 Long-Lived Assets Accounting for Impairment or Disposal of Long-Lived Assets
 Property
 2007
    
    
    2006(Amounts in thousands)Equipment
    
    $
    9,215
    
    
    $
    8,025Furniture and fixtures
    
    
    2,129
    
    
    
    1,853Accumulated depreciation and amortization
    
    
    (8,026
    )
    
    
    (7,035
    )Total
    
    $
    3,318
    
    
    $
    2,843
 F-8




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
 Goodwill Goodwill and
Other Intangible Assets
  Revenue Recognition
      Sales to Unaffiliated Customers:
    
    2007
    
    
    2006
    
    
    2005(Amounts in thousands)United States
    
    $
    100,790
    
    
    $
    78,136
    
    
    $
    59,214Europe
    
    
    12,371
    
    
    
    12,840
    
    
    
    10,497Asia/Pacific Rim
    
    
    2,085
    
    
    
    1,362
    
    
    
    1,328Other
    
    
    1,228
    
    
    
    1,244
    
    
    
    1,080Total
    
    $
    116,474
    
    
    $
    93,582
    
    
    $
    72,119
 F-9




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
 Accounts Receivable
 Product Warranties
 Income Taxes Accounting for Income Taxes Accounting for Uncertainty in Income Taxes
 Accounting for Stock-Based Compensation Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Share-Based Payment
  Year Ended December 31,2007
    
    
    2006
    
    
    2005(Amounts in thousands)Continuing operations:Selling and marketing
    
    $
    2,446
    
    
    $
    2,373
    
    
    $
    1,924General and administrative
    
    
    4,069
    
    
    
    2,794
    
    
    
    5,554Subtotal
    
    
    6,515
    
    
    
    5,167
    
    
    
    7,478Discontinued operations:Selling and marketing
    
    
    116
    
    
    
    254
    
    
    
    266General and administrative
    
    
    630
    
    
    
    141
    
    
    
    819Subtotal
    
    
    746
    
    
    
    395
    
    
    
    1,085Total
    
    $
    7,261
    
    
    $
    5,562
    
    
    $
    8,563
 Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans,
 F-10




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
   Year Ended December 31,2007
    
    2006
    
    2005Expected life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Risk-free interest rate
    
    
    3.49%  5.03%
    
    
    
    4.53%  5.07%
    
    
    
    3.70%  4.39%Volatility
    
    
    51%  54%
    
    
    
    55%  57%
    
    
    
    58%  89%Dividend yield
    
    
    0.00%
    
    
    
    0.00%
    
    
    
    0.00%
   Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards
 F-11




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
  Stock Options
  Weighted-AverageWeighted-
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateNumber
    
    
    Exercise Price
    
    
    Term
    
    
    Intrinsicof Shares
    
    
    per Share
    
    
    (In years)
    
    
    Value(Amounts in thousands, except per share and in year amounts)Options outstanding at December 31, 2004
    
    
    3,348
    
    
    $
    6.52Options granted
    
    
    1,057
    
    
    $
    16.87Options exercised
    
    
    (460
    )
    
    $
    2.85Options forfeited or expired
    
    
    (117
    )
    
    $
    11.60Options outstanding at December 31, 2005
    
    
    3,828
    
    
    $
    9.66Options granted
    
    
    242
    
    
    $
    13.56Options exercised
    
    
    (607
    )
    
    $
    4.33Options forfeited or expired
    
    
    (169
    )
    
    $
    14.78Options outstanding at December 31, 2006
    
    
    3,294
    
    
    $
    10.66Options granted
    
    
    160
    
    
    $
    15.82Options exercised
    
    
    (733
    )
    
    $
    9.49Options forfeited or expired
    
    
    (208
    )
    
    $
    15.34Options outstanding at December 31, 2007
    
    
    2,513
    
    
    $
    10.97
    
    
    
    1.81
    
    
    $
    14,374Options vested and exercisable at
December 31, 2007
    
    
    2,268
    
    
    $
    10.58
    
    
    
    1.64
    
    
    $
    13,945
   F-12




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
  Options Outstanding
    
    Options ExercisableWeighted-Average
    
    
    
    
    
    
    
    
    
    Weighted-Number
    
    Remaining
    
    Weighted-
    
    Number
    
    Averageof Shares
    
    Contractual
    
    Average
    
    of Shares
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life in Years
    
    Exercise Price
    
    Exercisable
    
    Price$  0.00 - $  1.28
    
    
    363,282
    
    
    
    2.34
    
    
    $
    1.20
    
    
    
    363,282
    
    
    $
    1.20$  1.29 - $  2.50
    
    
    129,750
    
    
    
    0.10
    
    
    $
    2.41
    
    
    
    128,857
    
    
    $
    2.42$  2.51 - $  3.37
    
    
    299,132
    
    
    
    2.00
    
    
    $
    3.37
    
    
    
    299,132
    
    
    $
    3.37$  3.38 - $13.54
    
    
    146,755
    
    
    
    1.49
    
    
    $
    10.90
    
    
    
    112,800
    
    
    $
    10.78$13.55
    
    
    628,329
    
    
    
    1.01
    
    
    $
    13.55
    
    
    
    628,329
    
    
    $
    13.55$13.56 - $15.33
    
    
    252,176
    
    
    
    2.81
    
    
    $
    14.29
    
    
    
    109,816
    
    
    $
    14.23$15.34 - $17.57
    
    
    98,000
    
    
    
    3.43
    
    
    $
    16.25
    
    
    
    45,000
    
    
    $
    16.44$17.58
    
    
    575,500
    
    
    
    1.94
    
    
    $
    17.58
    
    
    
    575,500
    
    
    $
    17.58$17.59 - $19.37
    
    
    19,000
    
    
    
    4.14
    
    
    $
    18.60
    
    
    
    4,000
    
    
    $
    18.32$19.38 - $19.81
    
    
    1,000
    
    
    
    1.91
    
    
    $
    19.81
    
    
    
    1,000
    
    
    $
    19.81Total
    
    
    2,512,924
    
    
    
    1.81
    
    
    $
    10.97
    
    
    
    2,267,716
    
    
    $
    10.58
      F-13




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
  Year EndedDecember 31, 2005(Amounts in thousands,except per share amounts)Net loss  as reported
    
    $
    (8,405
    )Add: Stock-based employee and director compensation
included in net income (loss), net of tax
    
    
    8,549Deduct: Total stock-based employee and director
compensation expense determined under fair value based
method for all awards, net of tax
    
    
    (15,308
    )Net loss  pro forma
    
    $
    (15,164
    )Basic and diluted earnings (loss) per share  as reported
    
    $
    (0.38
    )Basic and diluted loss per share  pro forma
    
    $
    (0.68
    )
 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 ValueShares
    
    per Share
    
    Shares
    
    per Share(Amounts in thousands, except per share amounts)Nonvested shares outstanding at December 31, 2004
    
    
    
    
    
    $
    
    
    
    
    292
    
    
    $
    13.85Shares issued
    
    
    
    
    
    
    
    
    
    
    257
    
    
    
    15.58Shares vested or released
    
    
    
    
    
    
    
    
    
    
    (69
    )
    
    
    13.58Shares forfeited
    
    
    
    
    
    
    
    
    
    
    (154
    )
    
    
    14.96Nonvested shares outstanding at December 31, 2005
    
    
    
    
    
    
    
    
    
    
    326
    
    
    
    14.74Shares issued
    
    
    522
    
    
    
    13.89
    
    
    
    449
    
    
    
    13.69Shares vested or released
    
    
    
    
    
    
    
    
    
    
    (109
    )
    
    
    14.98Shares forfeited
    
    
    
    
    
    
    
    
    
    
    (118
    )
    
    
    14.20Nonvested shares outstanding at December 31, 2006
    
    
    522
    
    
    
    13.89
    
    
    
    548
    
    
    
    13.95Shares issued
    
    
    141
    
    
    
    16.43
    
    
    
    477
    
    
    
    16.35Shares vested or released
    
    
    (102
    )
    
    
    14.04
    
    
    
    (273
    )
    
    
    14.14Shares forfeited
    
    
    
    
    
    
    
    
    
    
    (157
    )
    
    
    14.80Nonvested shares outstanding at December 31, 2007
    
    
    561
    
    
    $
    14.50
    
    
    
    595
    
    
    $
    15.56
 F-14




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
  Earnings Per Share Earnings Per Share
    Year Ended December 31,2007
    
    
    2006
    
    
    2005(Amounts in thousands,except per share amounts)Numerator:Income (loss) from continuing operations, net of tax
    
    $
    (8,993
    )
    
    $
    10,630
    
    
    $
    (12,989
    )Income from discontinued operations, net of tax
    
    
    4,825
    
    
    
    3,044
    
    
    
    4,584Gain on sale of discontinued operations, net of tax
    
    
    45,396
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    41,228
    
    
    $
    13,674
    
    
    $
    (8,405
    )Denominators:Denominator for basic earnings per share:Weighted-average number of common shares outstanding
    
    
    23,889
    
    
    
    22,887
    
    
    
    22,397Effect of dilutive securities:Stock options, nonvested restricted stock and nonvested restricted stock units
    
    
    
    
    
    
    1,184
    
    
    
    Denominator for diluted net income per share:Weighted-average number of common and common equivalent shares outstanding
    
    
    23,889
    
    
    
    24,071
    
    
    
    22,397Basic earnings per share:Income (loss) from continuing operations
    
    $
    (0.37
    )
    
    $
    0.47
    
    
    $
    (0.58
    )Income from discontinued operations
    
    
    0.20
    
    
    
    0.13
    
    
    
    0.20Gain on sale of discontinued operations
    
    
    1.90
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    1.73
    
    
    $
    0.60
    
    
    $
    (0.38
    )Diluted earnings per share:Income (loss) from continuing operations
    
    $
    (0.37
    )
    
    $
    0.44
    
    
    $
    (0.58
    )Income from discontinued operations
    
    
    0.20
    
    
    
    0.13
    
    
    
    0.20Gain on sale of discontinued operations
    
    
    1.90
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    1.73
    
    
    $
    0.57
    
    
    $
    (0.38
    )
  F-15




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
 Comprehensive Income  Reporting Comprehensive Income
 Use of Estimates 
 Foreign Currency 
 New Accounting Pronouncements 
 Fair Value Measurements ,
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Business Combinations Business Combinations
 F-16




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
 2.  Goodwill and Other Intangible Assets
 Goodwill
and Other Intangible Assets
  As of December 31, 2007Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net(Amounts in thousands)Patents
    
    $
    3,335
    
    
    
    ($1,471
    )
    
    $
    1,864Licensing Rights
    
    
    1,102
    
    
    
    (380
    )
    
    
    722Total
    
    $
    4,437
    
    
    
    ($1,851
    )
    
    $
    2,586
 As of December 31, 2006Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net(Amounts in thousands)Patents
    
    $
    3,286
    
    
    
    ($1,348
    )
    
    $
    1,938Licensing Rights
    
    
    1,101
    
    
    
    (285
    )
    
    
    816Total
    
    $
    4,387
    
    
    
    ($1,633
    )
    
    $
    2,754
   F-17




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
 3.  Investments
  December 31, 2007GrossAmortized
    
    
    UnrealizedCost
    
    
    Gains (Losses)
    
    
    Fair Value(Amounts in thousands)Money market funds
    
    $
    31,777
    
    
    $
    
    
    
    $
    31,777Certificates of deposits
    
    
    2,400
    
    
    
    
    
    
    
    2,400Corporate debentures and bonds
    
    
    10,088
    
    
    
    3
    
    
    
    10,091Commercial paper
    
    
    42,192
    
    
    
    (1
    )
    
    
    42,191Common stock(1)
    
    
    10,533
    
    
    
    
    
    
    
    10,533Total
    
    $
    96,990
    
    
    $
    2
    
    
    $
    96,992
 
 (1)
    
    Represents investment in HAPC common stock. An other-than-temporary
impairment of approximately $6.1 million was recognized as of
December 31, 2007 to recognize the investment at the estimated fair
value. No other-than-temporary impairments were recorded as of
December 31, 2007. Amounts in thousandsReported as:Cash equivalents
    
    $
    72,080Short-term investments
    
    
    24,912Total
    
    $
    96,992
 December 31, 2006GrossAmortized
    
    
    UnrealizedCost
    
    
    Losses
    
    
    Fair Value(Amounts in thousands)Money market funds
    
    $
    2,478
    
    
    $
    
    
    
    $
    2,478U.S. agency discount notes
    
    
    2,100
    
    
    
    
    
    
    
    2,100U.S. agency  non-callable
    
    
    1,998
    
    
    
    
    
    
    
    1,998Corporate debentures and bonds
    
    
    11,955
    
    
    
    (5
    )
    
    
    11,950Commercial paper
    
    
    2,783
    
    
    
    
    
    
    
    2,783Common stock
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    21,314
    
    
    $
    (5
    )
    
    $
    21,309
 Reported as:Cash equivalents
    
    $
    3,175Short-term investments
    
    
    18,134Total
    
    $
    21,309
  (Amounts in thousands)Maturities of one year or less:Notes and bonds
    
    $
    54,682Original maturities of three months or less:Money market funds
    
    
    31,777Total
    
    $
    86,459
 F-18




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
  4.  Discontinued Operations
      (Amounts in thousands)Purchase price
    
    $
    100,000Termination fee
    
    
    3,000Working capital adjustments
    
    
    (798
    )Costs of disposition
    
    
    (3,035
    )Net proceeds from the sale
    
    
    99,167Less: Book value of net assets disposed of
    
    
    (23,077
    )Gain on sale of discontinued operations, before income taxes
    
    
    76,090Provision for income taxes
    
    
    (30,694
    )Gain on sale of discontinued operations, net of income taxes
    
    $
    45,396
 F-19




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
  Year Ended December 31,2007(1)(2)
    
    
    2006(2)
    
    
    2005(Amounts in thousands)Operating revenues
    
    $
    25,001
    
    
    $
    31,716
    
    
    $
    28,525Operating income
    
    $
    7,764
    
    
    $
    7,007
    
    
    $
    7,445Income taxes
    
    
    2,939
    
    
    
    3,963
    
    
    
    2,861Income from discontinued operations
    
    $
    4,825
    
    
    $
    3,044
    
    
    $
    4,584
 
 (1)
    
    Includes financial results for InfuSystem for the period January 1,
2007 through October 25, 2007, which was the date the sale of
InfuSystem was consummated.(2)
    
    InfuSystem recorded approximately $2,090,000 of divestiture expenses
during the year ended December 31, 2006. In October 2007, at the
closing of the sale of InfuSystem, the Company received reimbursement
of approximately $946,000 by HAPC of certain divestiture expenses
incurred in 2006 and 2007 by the Company directly resulting from the
sale transaction, including legal, audit and other professional fees.
Since the reimbursement of $946,000 included payments for services
incurred for 2006, divestiture expenses recorded during the year ended
December 31, 2007 resulted in a net credit of approximately $245,000.  (Amounts in thousands)Cash
    
    $
    1,956Accounts receivable, less allowance for doubtful accounts of $1,668
    
    
    9,630Inventories
    
    
    252Prepaid expenses and other current assets
    
    
    139Total current assets
    
    $
    11,977Property, net
    
    $
    13,142Goodwill
    
    
    2,174Total noncurrent assets
    
    $
    15,316Accounts payable
    
    $
    1,884Accrued payroll and related expenses
    
    
    1,056Accrued use taxes payable
    
    
    1,392Income taxes payable
    
    
    23Deferred taxes(1)
    
    
    3,267Other liabilities
    
    
    4Total current liabilities
    
    $
    7,626
 
 (1)
    
    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). F-20




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
 5.  Lines of Credit
   6.  Stockholders Equity
 Preferred Stock 
  Stockholder Rights Plan 
 Common Stock 
 F-21




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
       Stock Options and Warrants 
  F-22




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
       F-23




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
   7.  Income Taxes
 ,
   Years Ended December 31,2007
    
    
    2006
    
    
    2005(Amounts in thousands)Current:Federal
    
    $
    (8,118
    )
    
    $
    
    
    
    $
    (1,477
    )Foreign
    
    
    171
    
    
    
    48
    
    
    
    87State
    
    
    (3,267
    )
    
    
    58
    
    
    
    162Subtotal
    
    
    (11,214
    )
    
    
    106
    
    
    
    (1,228
    )Deferred:Federal
    
    
    5,035
    
    
    
    (13,274
    )
    
    
    (920
    )State
    
    
    3,679
    
    
    
    (4,393
    )
    
    
    (186
    )Subtotal
    
    
    8,714
    
    
    
    (17,667
    )
    
    
    (1,106
    )Total income tax (benefit) provision
    
    $
    (2,500
    )
    
    $
    (17,561
    )
    
    $
    (2,334
    )
 F-24




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
   Years Ended December 31,2007
    
    2006
    
    2005Tax at federal statutory rate
    
    
    (35.0
    )%
    
    
    (35.0
    )%
    
    
    (35.0
    )%State income taxes, net of federal benefit
    
    
    4.6
    %
    
    
    (40.7
    )%
    
    
    (3.5
    )%Foreign operations
    
    
    0.2
    %
    
    
    0.7
    %
    
    
    0.6
    %Valuation allowance
    
    
    1.6
    %
    
    
    (167.5
    )%
    
    
    20.0
    %Nondeductible charges
    
    
    5.4
    %
    
    
    2.6
    %
    
    
    1.3
    %Effect of change in tax rate
    
    
    
    
    
    
    (8.9
    )%
    
    
    162(m) limitation
    
    
    0.4
    %
    
    
    
    
    
    
    Credits
    
    
    (0.6
    )%
    
    
    (5.2
    )%
    
    
    (0.3
    )%Other
    
    
    1.6
    %
    
    
    0.6
    %
    
    
    1.7
    %Total
    
    
    (21.8
    )%
    
    
    (253.4
    )%
    
    
    (15.2
    )%
  December 31,
    
    
    December 31,2007
    
    
    2006(Amounts in thousands)Net operating losses
    
    $
    
    
    
    $
    6,547Amortization of goodwill and other intangibles
    
    
    1,183
    
    
    
    1,540Reserves not currently deductible
    
    
    10,146
    
    
    
    9,374Asset impairment
    
    
    2,439
    
    
    
    Credits
    
    
    
    
    
    
    2,694Total deferred tax assets
    
    
    13,768
    
    
    
    20,155Valuation allowance
    
    
    (1,557
    )
    
    
    (686
    )Total net deferred income taxes
    
    
    12,211
    
    
    
    19,469State taxes
    
    
    (622
    )
    
    
    (1,552
    )Deferred income
    
    
    (1,248
    )
    
    
    Depreciation
    
    
    (338
    )
    
    
    (251
    )Total deferred tax liabilities
    
    
    (2,208
    )
    
    
    (1,803
    )Net deferred income taxes
    
    $
    10,003
    
    
    $
    17,666
   F-25




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
     (Amounts in thousands)Unrecognized tax benefits balance at December 31, 2006
    
    $
    2,042Gross increases for tax positions of prior years
    
    
    317Gross increases for tax positions of current year
    
    
    2,839Gross decrease for tax positions related to discontinued operations(1)
    
    
    (3,713
    )Unrecognized tax benefits balance at December 31, 2007
    
    $
    1,485
 
 (1)
    
    Pursuant to the sale of InfuSystem on October 25, 2007, the Company
recorded a liability in accordance with FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others,in the amount
of $3.7 million, which represents the estimated fair value of its
indemnification to HAPC for all tax exposures arising prior to the
closing of the sale of InfuSystem and is recorded net of a federal tax
benefit in the amount of $2.7 million.    F-26




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
 8.  Commitments and Contingencies
   (Amounts in thousands)Year Ended December 31,2008
    
    $
    9702009
    
    
    7822010
    
    
    496Total
    
    $
    2,248
  Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
   F-27




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
  9.  Employee Benefit Plan
  10.  Related Party Transactions
  11.  Subsequent Events
  12.  Restatement of the Financial Statements
 Statement of Cash Flows
   F-28




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##### Table of Contents



I-FLOW CORPORATION
 Notes to Consolidated Financial Statements  (Continued)
    As Previously(Amounts in thousands)
    
    Reported
    
    As RestatedExcess tax benefit from exercise of stock options and vested restricted stock
and restricted stock units
    
    $
    (10,748
    )
    
    $
    (8,565
    )(1)Income taxes payable
    
    
    22,680
    
    
    
    (13,003
    )(2)Net cash provided by (used in) operating activities from continuing operations
    
    
    26,909
    
    
    
    (6,591
    )Net cash provided by operating activities of discontinued operations
    
    
    3,276
    
    
    
    7,464
    (3)Net cash provided by operating activities
    
    
    30,185
    
    
    
    873Origination of note receivable, HAPC
    
    
    (32,703
    )
    
    
    
    (4)Net cash used in investing activities from continuing operations
    
    
    (44,423
    )
    
    
    (11,720
    )Net cash provided by investing activities from discontinued operations
    
    
    67,616
    
    
    
    64,225
    (5)Net cash provided by investing activities
    
    
    23,193
    
    
    
    52,505Excess tax benefit from exercise of stock options and vested restricted stock
and restricted stock units
    
    
    10,748
    
    
    
    8,565
    (1)Net cash provided by financing activities from continuing operations
    
    
    16,344
    
    
    
    14,161Net cash provided by financing activities from discontinued operations
    
    
    
    
    
    
    2,183
    (1)Net cash provided by financing activities
    
    
    16,344
    
    
    
    16,344SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:Issuance of note receivable, HAPC
    
    
    
    
    
    
    32,703
    (6)
 
 (1)
    
    Includes the reclassification effect of $2.2 million in excess tax benefits.(2)
    
    Includes the reclassification effect of $33.6 million in income taxes payable and $2.1
million in APIC excess tax benefits.(3)
    
    Includes the reclassification effect of $2.1 million in APIC excess tax benefits and $4.3
million in income taxes payable and other, less $2.2 million in excess tax benefits.(4)
    
    Includes the reclassification effect of $32.7 million in issuance of note receivable, HAPC as
a non-cash transaction.(5)
    
    Includes the reclassification effect of $3.4 million in adjustments to cash from the sale of
InfuSystem.(6)
    
    Includes the reclassification effect of $32.7 million in issuance of note receivable, HAPC as
a non-cash transaction. F-29




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##### Table of Contents



SIGNATURES
  I-FLOW CORPORATIONDated: October 21, 2008
    By:
    /s/  Donald M. EarhartDonald M. EarhartChairman, President and Chief Executive Officer  Signature
    
    Title/s/  Donald M. Earhart
    
    Chairman, President and ChiefDonald M. Earhart
    
    Executive
Officer (Principal Executive Officer)/s/  James J. Dal Porto
    
    Executive Vice President, ChiefJames J. Dal Porto
    
    Operating
Officer, Director and Secretary/s/  James R. Talevich
    
    Chief Financial Officer andJames R. Talevich
    
    Treasurer
(Principal Financial and Accounting Officer)/s/  John H. Abeles
    
    DirectorJohn H. Abeles, M.D./s/  Jack H. Halperin
    
    DirectorJack H. Halperin/s/  Joel S. Kanter
    
    DirectorJoel S. Kanter/s/  Erik H. Loudon
    
    DirectorErik H. Loudon/s/  Henry Tsutomu Tai
    
    DirectorHenry Tsutomu Tai, Ph.D., M.D.
 F-30




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Exhibit2.1
    
    Stock Purchase Agreement, dated October 28, 2004, by and between Integra LifeSciences Corporation
and I-Flow Corporation(1)2.2
    
    Merger Agreement, dated July 27, 2001, by and between I-Flow Corporation, a Delaware corporation,
and I-Flow Corporation, a California corporation(2)2.3
    
    Agreement and Plan of Merger, dated January 13, 2000, by and among I-Flow Corporation, Spinal
Acquisition Corp., Spinal Specialties, Inc. and the Shareholders of Spinal Specialties, Inc.(3)2.4
    
    Agreement and Plan of Merger, dated February 9, 1998, by and among I-Flow Corporation, I-Flow
Subsidiary, Inc., Venture Medical, Inc., InfuSystems II, Inc. and the Shareholders of Venture
Medical, Inc. and InfuSystems II, Inc.(4)2.5
    
    Agreement for Purchase and Sale of Assets, dated July 3, 1996, by and among I-Flow Corporation,
Block Medical, Inc. and Hillenbrand Industries, Inc.(5)2.6
    
    Stock Purchase Agreement, dated as of September 29, 2006, by and among I-Flow Corporation,
InfuSystem, Inc., HAPC, Inc. and Iceland Acquisition Subsidiary, Inc. (including the Form of
Services Agreement, attached thereto as Exhibit A, the Form of License Agreement attached thereto
as Exhibit B and the Term Sheet attached thereto as Exhibit C)(27)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.(29)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.(31)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.(33)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.(34)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.(35)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.(36)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(36)2.14
    
    Form of Share Purchase Agreement(36)2.15
    
    Second Form of Share Purchase Agreement(36)2.16
    
    Form of Irrevocable Proxy(36)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.(38)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(39)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(37)3.3
    
    Certificate of Designation Regarding Series A Junior Participating Cumulative Preferred Stock(7)




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##### Table of Contents



Exhibit No.
    
    Exhibit4.1
    
    Specimen Common Stock Certificate(20)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
    
    Form of Securities Purchase Agreement, dated September 2, 2003(1)10.2
    
    I-Flow Corporation Amended and Restated 2001 Equity Incentive Plan(11)*10.3
    
    2003 Restricted Stock Plan of I-Flow Corporation(10)*10.4
    
    2001 Restricted Stock Plan of I-Flow Corporation(12)*10.5
    
    1996 Stock Incentive Plan(13)*10.6
    
    1992 Non-Employee Director Stock Option Plan(14)*10.7
    
    1987-1988 Incentive Stock Option Plan and Non-Statutory Stock Option Plan, restated as of
March 23, 1992(15)*10.8
    
    License and Transfer Agreement with SoloPak Pharmaceuticals Inc., dated March 6, 1996(16)10.9
    
    Summary of the terms of the COIP for 2005(23)*10.10
    
    Summary of the terms of the COIP for 2006(25)*10.11
    
    Summary of the terms of the COIP for 2007(27)*10.12
    
    Summary of the terms of the 2008 Executive Performance Incentive Plan(40)*10.13
    
    Addendum to manufacturing plant lease agreement(23)10.14
    
    Lease Agreement between Industrial Developments International, Inc. as Landlord and I-Flow
Corporation as Tenant dated April 14, 1997(17)10.15
    
    Block Medical de Mexico lease agreement dated December 7, 1999(22)10.16
    
    Amended and Restated Loan and Security Agreement between Silicon Valley Bank and I-Flow
Corporation dated 
May 8, 2003(10)10.17
    
    Amendment to Loan Agreement between Silicon Valley Bank and I-Flow Corporation dated January 30,
2004(22)10.18
    
    Amendment to Loan Agreement, dated as of April 30, 2005, between I-Flow Corporation and Silicon
Valley Bank(24)10.19
    
    Amendment to Loan Agreement, dated as of April 29, 2006, between I-Flow Corporation and Silicon
Valley Bank(26)10.20
    
    Amendment to Loan Agreement between Silicon Valley Bank and I-Flow Corporation, dated as of
July 16, 2007(32)10.21
    
    Loan Agreement, dated March 31, 2000, by and among InfuSystem, Inc., I-Flow Corporation and Old
Kent Bank(10)10.22
    
    First Amendment to Loan Agreement, dated April 1, 2002, by and among InfuSystem, Inc., I-Flow
Corporation and Fifth Third Bank (formerly Old Kent Bank)(10)10.23
    
    Second Amendment to Loan Agreement, dated April 1, 2003, by and among InfuSystem, Inc., I-Flow
Corporation and Fifth Third Bank (formerly Old Kent Bank)(10)10.24
    
    Second Amended and Restated Promissory Note, dated April 1, 2004, between InfuSystem, Inc. and
Fifth Third Bank (formerly Old Kent Bank)(10)




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##### Table of Contents



Exhibit No.
    
    Exhibit10.25
    
    Promissory Note with Donald M. Earhart dated June 15, 2001(8)*10.26
    
    Underwriting Agreement, dated April 13, 2004(21)10.27
    
    Employment Agreement with Donald M. Earhart, dated May 16, 1990(18)*10.28
    
    Amendment No. 1 to Employment Agreement with Donald M. Earhart, dated June 21, 2001(8)*10.29
    
    Amendment No. 2 to Employment Agreement with Donald M. Earhart, dated February 23, 2006(25)*10.30
    
    Amendment No. 3 to Employment Agreement with Donald M. Earhart, dated February 21, 2008(40)*10.31
    
    Amended and Restated Employment Agreement with James J. Dal Porto, dated June 21, 2001(8)*10.32
    
    Amendment No. 1 to Employment Agreement with James J. Dal Porto, dated February 23, 2006(25)*10.33
    
    Amendment No. 2 to Employment Agreement with James J. Dal Porto, dated February 21, 2008(40)*10.34
    
    Employment Agreement with James R. Talevich, dated June 30, 2000(19)*10.35
    
    Amended and Restated Employment Agreement for James R. Talevich, dated May 24, 2007(30)*10.36
    
    Amendment No. 1 to Employment Agreement with James R. Talevich, dated February 23, 2006(25)*10.37
    
    Amendment No. 2 to Employment Agreement with James R. Talevich, dated February 21, 2008(40)*10.38
    
    Agreement Re: Change in Control with Donald M. Earhart, dated June 21, 2001(8)*10.39
    
    Amendment No. 1 to Agreement Re: Change in Control with Donald M. Earhart, dated February 23,
2006(25)*10.40
    
    Amendment No. 2 to Agreement Re: Change in Control with Donald M. Earhart, dated February 21,
2008(40)*10.41
    
    Agreement Re: Change in Control with James J. Dal Porto dated June 21, 2001(8)*10.42
    
    Amendment No. 1 to Agreement Re: Change in Control with James J. Dal Porto, dated February 23,
2006(25)*10.43
    
    Amendment No. 2 to Agreement Re: Change in Control with James J. Dal Porto, dated February 21,
2008(40)*10.44
    
    Agreement Re: Change in Control with James R. Talevich, dated June 21, 2001(8)*10.45
    
    Amendment No. 1 to Agreement Re: Change in Control with James R. Talevich, dated February 23,
2006(25)*10.46
    
    Amendment No. 2 to Agreement Re: Change in Control with James R. Talevich, dated February 21,
2008(40)*10.47
    
    Form of Restricted Stock Agreement(25)*10.48
    
    Form of Indemnification Agreement(25)21.1
    
    List of Subsidiaries23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    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.




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##### Table of Contents



(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
June 30, 2001.(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 June 1, 2005.(12)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.(13)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Definitive Proxy Statement filed on March 27, 1996.(14)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.(15)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Post-Effective Amendment to its Registration Statement (No.
33-41207) filed on October 27, 1992.(16)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.(17)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K dated April 14, 1997.(18)
    
    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.(19)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.(20)
    
    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.(21)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on April 14, 2004.(22)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2003.(23)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Annual Report on Form 10 -K for the fiscal year ended
December 31, 2004.(24)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on May 9, 2005.(25)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on March 1, 2006.(26)
    
    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, 2006.(27)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on October 4, 2006.




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##### Table of Contents



(28)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on February 28, 2007.(29)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on May 1, 2007.(30)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on May 29, 2007.(31)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on July 2, 2007.(32)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on July 19, 2007.(33)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on July 31, 2007.(34)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on September 13, 2007.(35)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on September 19, 2007.(36)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on October 19, 2007.(37)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on December 11, 2007.(38)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on December 17, 2007.(39)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on February 6, 2008.(40)
    
    Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K filed on February 26, 2008.