##### 



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, DC 20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number: 0-18338
  I-FLOW CORPORATION
 (Exact name of registrant as
    specified in its charter)
  Delaware

33-0121984(State or other jurisdiction
    of
    incorporation or organization)

(IRS Employer
    Identification No.)20202 Windrow Drive,
    Lake Forest, CA(Address of Principal
    Executive Offices)

92630(Zip Code)   Registrants telephone number, including area code:
 (949) 206-2700
  Securities registered pursuant to Section 12(b) of the
    Act:
 None
 Securities registered pursuant to Section 12(g) of the
    Act:
 Common Stock, par value $0.001 per share
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
    DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




---



##### 



PART I
  Item 1.
    Business.  The
    Company
    I-Flows
    month-to-month
  (949) 206-2700
  Recent
    Developments
    ®
 1




---



##### 



Acquisitions
    and Divesititures
    The
    Companys Products
      Net Revenues by Market Segment

2006

2005

2004Regional Anesthesia


73
%


69
%


63
%IV Infusion Therapy


27
%


31
%


37
%   Regional
    Anesthesia
  Acute
    Pain Kits
  ® ® tm ®
    IV
    Infusion Therapy
  Elastomerics
  easy-to-use
 2




---



##### 



® tm
  Non-Electric IV
    Bag Delivery Systems
  easy-to-use ® ®
  Electronic
    Pumps
  tm ®
  Sales and
    Distribution
             3




---



##### 



Sales to Unaffiliated Customers:

2006


2005


2004(Amounts in thousands)United States

$
78,136


$
59,214


$
40,489Europe

$
12,840


$
10,497


$
9,214Asia/Pacific Rim


1,362



1,328



1,365Other


1,244



1,080



728All Foreign Countries in the
    Aggregate

$
15,446


$
12,905


$
11,307   Competition
      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
   4




---



##### 



Backlog
    Product
    Development
    Patents
    and Trademarks
        Government
    Regulation
       5




---



##### 



Employees
   6




---



##### 



Available
    Information
  Form 10-K, Form 10-Q, Form 8-K
  Item 1A.  Risk
    Factors.
  RISK
    FACTORS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE
    OPERATE
  The
    pending sale of InfuSystem to HAPC may not be
    consummated.
    
    our cash flow and financial condition could be adversely
    affected if the Company is unable to complete the transaction;
    the current stock price of our common stock may reflect a market
    assumption that the sale of InfuSystem will occur, and, thus, a
    failure to complete the transaction could result in a negative
    perception by the stock market of us generally and a decline in
    the market price of our common stock;
    changes in third-party reimbursement rates may adversely impact
    InfuSystems revenues. InfuSystem depends primarily on
    third-party reimbursement for the collection of its revenues.
    InfuSystem is paid directly by private insurers and governmental
    agencies, often on a fixed fee basis, for infusion services
    provided to patients. InfuSystems oncology revenues
    comprised 25% and 28% of our consolidated revenues for the years
    ended December 31, 2006 and 2005, respectively. If the
    average fees allowable by private insurers or governmental
    agencies were reduced, the negative impact on revenues of
    InfuSystem could have a material adverse effect on our financial
    condition and results of operations;
    our business could be adversely affected if we are unable to
    retain key customers, our employees at InfuSystem or attract
    replacements; and
    the value of our deferred tax assets could be impaired if the
    Company is unable to complete the transaction.  We have
    experienced net losses in prior periods and have an accumulated
    deficit. Future losses are possible.
   7




---



##### 



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.
    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.
    production-site
 8




---



##### 



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.
    We are
    dependent on our Medicare Supplier Number.
    Our
    revenues are heavily dependent on physicians acceptance of
    infusion therapy as a preferred therapy since a significant
    percentage of patients are treated with oral medications. If new
    oral medications are introduced or future clinical studies
    demonstrate that oral medications are as effective or more
    effective than infusion therapy, our business could be adversely
    affected.
  and/or
  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.
   9




---



##### 



Additional
    financings may be dilutive to stockholders, involve the issuance
    of securities that are more senior to our stock or impose
    operational restrictions.
    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.
   10




---



##### 



If one of
    our products proves to be defective or is misused by a health
    care practitioner or patient, we may be subject to claims of
    liability that could adversely affect our financial condition
    and the results of 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.
      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.
   11




---



##### 



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.
    Failure
    to achieve and maintain effective internal controls in
    accordance with Section 404 of the Sarbanes-Oxley Act could
    have a material adverse effect on our business and our stock
    price.
    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. 12




---



##### 



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.
    
    23,378,938 shares of common stock that are freely tradable
    in the public markets;
    521,931 shares of restricted stock that are subject to
    outstanding awards under our 2001 Equity Incentive Plan;
    185,109 shares of common stock underlying outstanding
    warrants which have been registered for resale under a
    Registration Statement on
    Form S-3
    (Registration
    No. 333-109096); and
    an aggregate of 3,842,285 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.    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 quotation system and may not qualify for listing on any
    stock exchange, in which case it may be difficult to find a
    market in our stock.
   13




---



##### 



Item 1B.
    Unresolved
    Staff Comments.    Item 2.
    Properties.    Item 3.
    Legal
    Proceedings.    Item 4.
    Submission
    of Matters to a Vote of Security Holders.   14




---



##### 



EXECUTIVE
    OFFICERS OF THE REGISTRANT
    Name

Age

PositionDonald M. Earhart


62


President, Chief Executive Officer
    and Chairman of the BoardJames J. Dal Porto


53


Executive Vice President, Chief
    Operating Officer, Director and SecretaryJames R. Talevich


56


Chief Financial Officer and
    Treasurer   Donald M. Earhart
  James J. Dal Porto
  James R. Talevich
 15




---



##### 



PART II
  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.  Common
    Stock Information
    High


Low20051st Quarter

$
19.21


$
15.452nd Quarter

$
18.05


$
13.173rd Quarter

$
17.75


$
12.454th Quarter

$
14.69


$
11.5720061st Quarter

$
16.64


$
12.862nd Quarter

$
14.10


$
10.823rd Quarter

$
12.80


$
10.104th Quarter

$
15.71


$
12.77       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


3,834,585
(1)

$
9.14



2,932,477
(2)Equity compensation plans not
    approved by security holders


7,700
(3)

$
10.88




(4)     (1)
    
    Includes 548,140 shares of restricted stock units with no
    exercise price and outstanding options, totaling
    3,286,445 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 2,700 shares of the
    Companys common stock under the I-Flow Corporation Stock
    Option Agreement with Orlando Rodrigues and 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 16




---



##### 



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.  Material
    Features of Non-Stockholder Approved Plans
  I-Flow
    Corporation Stock Option Agreement with Orlando
    Rodrigues
    Winters
    Options
   17




---



##### 



Stock
    Performance Graph
    
  12/31/01



12/31/02



12/31/03



12/31/04



12/31/05



12/31/06I-Flow Corporation



100.00




52.88




471.86




617.97




495.59




506.78Industry Index



100.00




80.89




119.67




140.20




153.92




162.32Nasdaq Market Index



100.00




68.81




103.79




112.93




115.49




127.41  18




---



##### 



Item 6.
    Selected
    Financial Data.  Form 10-K.
  Years Ended December 31,2006


2005


2004


2003


2002(Amounts in thousands, except per share amounts)Consolidated Statements of
    Operations Data:(1)(2)(3)Net product sales

$
93,582


$
72,119


$
51,796


$
34,021


$
24,370Cost of revenues


26,267



19,662



15,703



13,285



8,979Gross profit


67,315



52,457



36,093



20,736



15,391Operating expenses:Selling and marketing


57,731



49,899



41,199



17,450



9,631General and administrative


15,012



16,269



10,637



6,153



5,198Product development


2,436



2,549



2,779



2,361



2,104Total operating expenses


75,179



68,717



54,615



25,964



16,933Operating loss


(7,864
)


(16,260
)


(18,522
)


(5,228
)


(1,542
)Interest expense (income), net


(933
)


(937
)


(525
)


31



(12
)Loss from continuing operations
    before income taxes and cumulative effect of a change in
    accounting principle


(6,931
)


(15,323
)


(17,997
)


(5,259
)


(1,530
)Income tax provision (benefit)


(17,561
)


(2,334
)


2,050



(2,015
)


(634
)Income (loss) from continuing
    operations before cumulative effect of a change in accounting
    principle


10,630



(12,989
)


(20,047
)


(3,244
)


(896
)Discontinued operations:Income from discontinued
    operations, net of tax


3,044



4,584



2,937



1,418



1,335Gain on sale of discontinued
    operations, net of tax














2,283



Income (loss) before cumulative
    effect of a change in accounting principle


13,674



(8,405
)


(17,110
)


457



439Cumulative effect of a change in
    accounting principle for goodwill


















(3,474
)Net income (loss)

$
13,674


$
(8,405
)

$
(17,110
)

$
457


$
(3,035
)Per share of common stock, basic:Income (loss) from continuing
    operations before cumulative effect of a change in accounting
    principle

$
0.47


$
(0.58
)

$
(0.97
)

$
(0.20
)

$
(0.06
)Income from discontinued
    operations, net of tax


0.13



0.20



0.14



0.09



0.09Gain on sale of discontinued
    operations, net of tax














0.14



Income (loss) before cumulative
    effect of a change in accounting principle


0.60



(0.38
)


(0.83
)


0.03



0.03Cumulative effect of a change in
    accounting principle


















(0.23
)Net income (loss)

$
0.60


$
(0.38
)

$
(0.83
)

$
0.03


$
(0.20
)Per share of common stock, diluted:Income (loss) from continuing
    operations before cumulative effect of a change in accounting
    principle

$
0.44


$
(0.58
)

$
(0.97
)

$
(0.20
)

$
(0.06
)Income from discontinued
    operations, net of tax


0.13



0.20



0.14



0.09



0.09Gain on sale of discontinued
    operations, net of tax














0.14



Income (loss) before cumulative
    effect of a change in accounting principle


0.57



(0.38
)


(0.83
)


0.03



0.03Cumulative effect of a change in
    accounting principle


















(0.22
)Net income (loss)

$
0.57


$
(0.38
)

$
(0.83
)

$
0.03


$
(0.19
)Weighted-average common shares
    outstanding:Basic


22,887



22,397



20,628



16,384



15,368Diluted


24,071



22,397



20,628



16,384



15,879Consolidated Balance Sheet
    Data:(1)(2)(3)Working capital

$
56,548


$
49,733


$
57,948


$
31,467


$
16,657Total assets


112,146



82,953



84,430



51,896



33,061Long-term obligations


















1Total stockholders equity

$
92,004


$
70,049


$
73,219


$
44,773


$
27,470     (1)
    
    On September 29, 2006, the Company signed a definitive
    agreement to sell InfuSystem to HAPC for $140 million in
    the form of cash and a secured note, subject to certain purchase
    price adjustments based on the level of working capital. The
    cash portion of the purchase price will range from $65 to
    $85 million, depending on the amount HAPC pays to its
    shareholders who choose to convert their HAPC shares into cash. 19




---



##### 



This amount will not be known until the closing of the
    transaction. The closing of the transaction is subject to
    customary conditions and approval by the shareholders of HAPC,
    and currently is expected to close in the second quarter of
    2007. 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)
    
    Effective January 1, 2002, the Company changed its method
    of accounting for goodwill and other intangible assets as a
    result of adopting SFAS No. 142, Accounting for
    Goodwill and Other Intangible Assets. The Company recognized
    a transitional goodwill impairment loss of $3.5 million, or
    $0.22 per diluted share, as a cumulative effect of a change
    in accounting principle during the year ended December 31,
    2002.(3)
    
    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
    pending sale of InfuSystem to HAPC, management believes it is
    more likely than not that the Company will 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)
  2006

Mar. 31


June 30


Sept. 30(1)


Dec. 31(1)(Amounts in thousands, except per share amounts)Total 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


(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


(0.08
)


(0.03
)


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



24,581



24,544



23,124   20




---



##### 



2005

Mar. 31


June 30


Sept. 30


Dec. 31(2)Total revenues

$
16,270


$
17,851


$
18,154


$
19,844Gross profit


11,930



13,326



13,030



14,171Loss from continuing operations
    before income taxes


(3,942
)


(2,156
)


(3,007
)


(6,218
)Loss from continuing operations


(3,247
)


(1,612
)


(2,100
)


(6,030
)Income from discontinued
    operations, net of tax


1,238



967



1,612



767Net loss


(2,009
)


(645
)


(488
)


(5,263
)Per share of common
    stock  basic and diluted:Loss from continuing operations


(0.15
)


(0.07
)


(0.09
)


(0.27
)Net loss


(0.09
)


(0.03
)


(0.02
)


(0.23
)Weighted-average common
    shares  basic and diluted


22,236



22,389



22,518



22,465     (1)
    
    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
    pending sale of InfuSystem to HAPC, management believes it is
    more likely than not that the Company will 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.(2)
    
    The Company recognized approximately $5.3 million of
    stock-based compensation expense in connection with the upward
    repricing and acceleration of vesting of certain
    out-of-the-money
    stock options on November 9, 2005. 21




---



##### 



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  Forward-Looking
    Statements
  Forms 10-Q 8-K
  Overview
    ®
  Discontinued
    Operations of InfuSystem
  Accounting for Impairment or
    Disposal of Long-Lived Assets
 22




---



##### 



Year Ended December 31,2006


2005


2004(Amounts in thousands)Operating revenues

$
31,716


$
28,525


$
19,349Operating income(1)

$
7,007


$
7,445


$
4,774Income taxes


3,963



2,861



1,837Income from discontinued
    operations(1)

$
3,044


$
4,584


$
2,937     (1)
    
    Includes $2,090,000 of divestiture expenses recorded during the
    year ended December 31, 2006.    Consolidated
    Results of Operations for the Year Ended December 31, 2006
    Compared to the Year Ended December 31, 2005
  Revenue
      ® ® C-bloc ® tm
   23




---



##### 



Cost
    of Revenues
    Selling
    and Marketing Expenses
      SFAS No. 123-revised Share-Based Payment
    General
    and Administrative Expenses
    out-of-the-money
 24




---



##### 



out-of-the-money out-of-the-money
    Product
    Development Expenses
    Interest
    Income, Net
    Income
    Taxes
  Accounting for Income Taxes
      No. 93-17, Recognition of Deferred Tax Assets
 25




---



##### 



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). EITF 93-17 EITF 93-17,
  Consolidated
    Results of Operations for the Year Ended December 31, 2005
    Compared to the Year Ended December 31, 2004
  Revenue
        Cost
    of Revenues
    Selling
    and Marketing Expenses
        General
    and Administrative Expenses
   26




---



##### 



out-of-the-money out-of-the-money out-of-the-money
    Product
    Development Expenses
    Interest
    Income, Net
    Income
    Taxes
  Accounting for Income Taxes
    Liquidity
    and Capital Resources
     27




---



##### 



28




---



##### 



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

$
1,074


$
2,248


$



$



$
3,322Purchase Commitments with
    Suppliers(1)


6,506















6,506Total Contractual Obligations and
    Commercial Commitments

$
7,580


$
2,248


$



$



$
9,828     (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.  New
    Accounting Pronouncements
  Accounting for Uncertainty in
    Income Taxes
  Considering the Effects of Prior
    Year Misstatements when Quantifying Misstatements in Current
    Year Financial Statements
  Fair Value Measurements ,
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115
  Critical
    Accounting Policies
   29




---



##### 



Revenue
    Recognition
      month-to-month
  Accounts
    Receivable
    Inventories
  part-by-part first-in,
 30




---



##### 



Deferred
    Taxes
    EITF 93-17. EITF 93-17 EITF 93-17,
  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
   31




---



##### 



Financial
    Statement Schedule  SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS
  Balance at


Charged to





Balance atBeginning of


Costs and





End ofClassification

Period


Expenses


Deductions(1)


Period(Amounts in thousands)Year Ended December 31, 2004:Allowance for doubtful accounts

$
1,698


$
2,022


$
(820
)

$
2,900Reserve for obsolete inventories


2,156



264



(1,497
)


923Year 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
)


1,091       (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.  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  Rules 13a-15(e) 15d-15(e)
  (b)
    Management
    Report on Internal Control Over Financial
    Reporting  Rules 13a-15(f) 15d-15(f)
 32




---



##### 




    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.             33




---



##### 



(c)
    Change
    in Internal Control Over Financial Reporting    c-1
    Remediation of Material Weakness
    1.
    Replaced its outside tax specialist from a local tax firm with
    the tax practice of a Big 4 public accounting firm, which should
    have adequate expertise and resources to assist management in
    the analysis of the complex tax accounting disclosure
    matters; and2.
    With the assistance of the Big 4 public accounting firm,
    performed an extensive review of its tax provisions and related
    tax accounts as of September 30, 2006 and December 31,
    2006.  (d)
    Report
    of Independent Registered Public Accounting Firm      Management Report on Internal Control Over
    Financial Reporting Internal Control 
    Integrated Framework
     34




---



##### 



Internal Control  Integrated Framework Internal Control  Integrated Framework
  Share-Based Payment.
        Item 9B.
    Other
    Information   35




---



##### 



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.   36




---



##### 



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.


38(2) Financial Statement
    Schedule included herein:Schedule II 
    Valuation and Qualifying Accounts


32All 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). 37




---



##### 



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  Consolidated
    Financial Statements
  PageReport of
    Independent Registered Public Accounting Firm


F-1Consolidated
    Balance Sheets as of December 31, 2006 and 2005


F-2Consolidated
    Statements of Operations and Comprehensive Operations For the
    Years Ended December 31, 2006, 2005 and 2004


F-3Consolidated
    Statements of Stockholders Equity for the Years Ended
    December 31, 2006, 2005 and 2004


F-4Consolidated
    Statements of Cash Flows for the Years Ended December 31,
    2006, 2005 and 2004


F-5Notes to
    Consolidated Financial Statements


F-6Financial Statement
    Schedule Schedule II  Valuation and Qualifying
    Accounts


32   38




---



##### 



Report of
    Independent Registered Public Accounting Firm            Share-Based Payment.
    
     F-1




---



##### 



I-FLOW
    CORPORATION
  CONSOLIDATED
    BALANCE SHEETS
  December 31,


December 31,2006


2005(Amounts in thousands,except share and per shareamounts)ASSETSCurrent assets:Cash and cash equivalents

$
9,288


$
11,413Short-term investments


18,134



13,276Accounts receivable, less
    allowance for doubtful accounts of $3,405 and $1,649 at
    December 31, 2006 and 2005, respectively


18,935



13,423Inventories


13,611



11,529Prepaid expenses and other current
    assets


1,485



1,206Deferred taxes


3,260



Current assets  held
    for sale


11,977



11,790Total current assets


76,690



62,637Property, net


2,843



2,575Other intangible assets, net


2,754



2,655Other long-term assets


137



155Deferred taxes


14,406



Non-current assets 
    held for sale


15,316



14,931Total assets

$
112,146


$
82,953LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
4,249


$
3,178Accrued payroll and related
    expenses


7,171



4,953Income taxes payable


18



228Other current liabilities


1,078



926Current liabilities 
    held for sale


7,626



3,619Total current liabilities


20,142



12,904Commitments 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, 23,900,869
    and 22,628,657 shares issued and outstanding at
    December 31, 2006 and 2005, respectively


119,092



110,890Accumulated other comprehensive
    loss


(163
)


(242
)Accumulated deficit


(26,925
)


(40,599
)Net stockholders equity


92,004



70,049Total liabilities and
    stockholders equity

$
112,146


$
82,953   See accompanying Notes to Consolidated Financial
    Statements.
 F-2




---



##### 



I-FLOW
    CORPORATION
  CONSOLIDATED
    STATEMENTS OF OPERATIONS AND COMPREHENSIVE
    OPERATIONS
  Year Ended December 31,2006


2005


2004(Amounts in thousands, except pershare amounts)Net product sales

$
93,582


$
72,119


$
51,796Cost of revenues


26,267



19,662



15,703Gross profit


67,315



52,457



36,093Operating expensesSelling and marketing


57,731



49,899



41,199General and administrative


15,012



16,269



10,637Product development


2,436



2,549



2,779Total operating expenses


75,179



68,717



54,615Operating loss


(7,864
)


(16,260
)


(18,522
)Interest income, net


933



937



525Loss from continuing operations
    before income taxes


(6,931
)


(15,323
)


(17,997
)Income tax provision (benefit)


(17,561
)


(2,334
)


2,050Income (loss) from continuing
    operations


10,630



(12,989
)


(20,047
)Discontinued operations:Income from discontinued
    operations, net of tax


3,044



4,584



2,937Net income (loss)

$
13,674


$
(8,405
)

$
(17,110
)Per share of common stock, basic:Income (loss) from continuing
    operations

$
0.47


$
(0.58
)

$
(0.97
)Income from discontinued operations


0.13



0.20



0.14Net income (loss)

$
0.60


$
(0.38
)

$
(0.83
)Per share of common stock, diluted:Income (loss) from continuing
    operations

$
0.44


$
(0.58
)

$
(0.97
)Income from discontinued operations


0.13



0.20



0.14Net income (loss)

$
0.57


$
(0.38
)

$
(0.83
)Weighted-average shares:Basic


22,887



22,397



20,628Diluted


24,071



22,397



20,628Comprehensive Operations:Net income (loss)

$
13,674


$
(8,405
)

$
(17,110
)Unrealized gain (loss) on
    securities


96



(32
)


(69
)Foreign currency translation
    adjustments


(17
)


80



(29
)Comprehensive income (loss)

$
13,753


$
(8,357
)

$
(17,208
)   See accompanying Notes to Consolidated Financial
    Statements.
 F-3




---



##### 



I-FLOW
    CORPORATION
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
  AccumulatedOtherCommon Stock


Comprehensive


AccumulatedShares


Amount


Income (Loss)


Deficit


Net(Amounts in thousands)Balance, January 1, 2004


18,306


$
60,049


$
(192
)

$
(15,084
)

$
44,773Exercise of common stock options
    and warrants


924



1,856











1,856Reversal of tax benefit from
    exercise of stock options






(2,000
)










(2,000
)Stock-based compensation






2,711











2,711Sale of common stock, net


2,990



43,087











43,087Unrealized loss on securities










(69
)






(69
)Foreign currency translation
    adjustment










(29
)






(29
)Net loss














(17,110
)


(17,110
)Balance, December 31, 2004


22,220



105,703



(290
)


(32,194
)


73,219Exercise of common stock options
    and warrants


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
)

$
92,004   See accompanying Notes to Consolidated Financial
    Statements.
 F-4




---



##### 



I-FLOW
    CORPORATION
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2006


2005


2004(Amounts in thousands)Cash flows from operating
    activities:Net income (loss)

$
13,674


$
(8,405
)

$
(17,110
)Income from discontinued operations


(3,044
)


(4,584
)


(2,937
)Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating activities:Deferred taxes


(17,666
)


(1,106
)


4,349Stock-based compensation


5,116



6,129



2,414Depreciation and amortization


1,432



1,416



671Provision for doubtful accounts
    receivable


442



666



725Write-off of inventory obsolescence


72



232



242Loss on disposal of property


40







Changes in operating assets and
    liabilities, net of effect of discontinued operations:Accounts receivable


(5,954
)


(3,004
)


(3,200
)Inventories


(2,154
)


(3,622
)


(1,758
)Prepaid expenses and other


(279
)


(409
)


(213
)Accounts payable and accrued
    payroll and related expenses


3,289



(72
)


3,311Income taxes payable


(210
)


146



(115
)Other liabilities


152



218



353Net cash used in operating
    activities from continuing operations


(5,090
)


(12,395
)


(13,268
)Net cash provided by operating
    activities of discontinued operations


8,872



6,519



4,448Net cash provided by (used in)
    operating activities


3,782



(5,876
)


(8,820
)Cash flows from investing
    activities:Capital expenditures


(1,193
)


(583
)


(939
)Purchases of investments


(19,600
)


(18,825
)


(35,515
)Maturities of investments


14,838



37,620



1,375Sale of investments






1,984



Patents and licensing right
    acquisitions


(628
)


(1,631
)


(499
)Net cash provided by (used in)
    investing activities from continuing operations


(6,583
)


18,565



(35,578
)Net cash used in investing
    activities from discontinued operations


(2,506
)


(6,835
)


(5,644
)Net cash provided by (used in)
    investing activities


(9,089
)


11,730



(41,242
)Cash flows from financing
    activities:Purchase of treasury stock






(3,425
)


Proceeds from exercise of stock
    options and warrants


2,691



1,347



1,856Net proceeds from sale of common
    stock










43,087Net cash provided by (used in)
    financing activities from continuing operations


2,691



(2,078
)


44,943Net cash provided by financing
    activities from discontinued operations










Net cash provided by (used in)
    financing activities


2,691



(2,078
)


44,943Effect of exchange rates on cash


(17
)


80



(45
)Net increase (decrease) in cash and
    cash equivalents


(2,633
)


3,856



(5,164
)Net increase (decrease) in cash and
    cash equivalents from discontinued operations


508



(1,604
)


(751
)Cash and cash equivalents at
    beginning of year


11,413



9,161



15,076Cash and cash equivalents at end of
    year

$
9,288


$
11,413


$
9,161SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid

$
47


$



$
1Income tax payments

$
286


$
305


$
126Tax benefit from exercise of stock
    options

$



$



$
(2,000
)SUPPLEMENTAL SCHEDULE OF
    NONCASH INVESTING ACTIVITIES:Property acquisitions

$
1,126


$



$
   See accompanying Notes to Consolidated Financial
    Statements.
 F-5




---



##### 



I-FLOW
    CORPORATION
  Notes
    to Consolidated Financial Statements
  1.
    Nature of
    Operations and Summary of Significant Accounting
    Policies  Nature of Operations month-to-month
  Principles of Consolidation
  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 , other-than-temporary
 F-6




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Inventories first-in,
  2006


2005(Amounts in thousands)Raw Materials

$
7,784


$
6,654Work in Process


2,024



1,881Finished Goods


3,803



2,994Total

$
13,611


$
11,529   Long-Lived Assets Accounting for Impairment
    or Disposal of Long-Lived Assets
  Property
  2006


2005(Amounts in thousands)Furniture, fixtures and equipment

$
9,878


$
8,869Accumulated depreciation and
    amortization


(7,035
)


(6,294
)Total

$
2,843


$
2,575   Goodwill Goodwill
    and Other Intangible Assets
    Revenue Recognition
   F-7




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
   month-to-month
        Sales to Unaffiliated Customers:

2006


2005


2004(Amounts in thousands)United States

$
78,136


$
59,214


$
40,489Europe


12,840



10,497



9,214Asia / Pacific Rim


1,362



1,328



1,365Other


1,244



1,080



728Total

$
93,582


$
72,119


$
51,796   Accounts Receivable
  Product Warranties
  Income Taxes Accounting for Income Taxes
 F-8




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Accounting for Stock-Based
    Compensation SFAS No. 123-revised Share-Based Payment Accounting
    for Stock-Based Compensation Accounting for Stock Issued to Employees Share-Based
    Payment
    Year Ended December 31,2006


2005


2004(Amounts in thousands)Continuing operations:Selling and marketing

$
2,373


$
1,924


$
1,612General and administrative


2,794



5,554



802Subtotal


5,167



7,478



2,414Discontinued operations:Selling and administrative


254



266



198General and administrative


141



819



99Subtotal


395



1,085



297Total

$
5,562


$
8,563


$
2,711   Accounting for Stock Appreciation
    Rights and Other Variable Stock Option or Award Plans,
 F-9




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Year Ended December 31,2006

2005

2004Expected life (in years)

5.0

5.0

5.0Risk-free interest rate

4.53%  5.07%

3.70%  4.39%

3.64%  3.70%Volatility

55%  57%

58%  89%

89%  90%Dividend yield

0.00%

0.00%

0.00%       No. FAS 123R-3, Transition Election Related to Accounting for Tax Effects of
    Share-Based Payment Awards.
   F-10




---



##### 



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, 2003


3,243


$
2.84Options granted


1,132


$
13.50Options exercised


(918
)

$
2.04Options forfeited or expired


(109
)

$
7.35Options 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


$
10.66



2.58


$
17,493Options vested and exercisable at
    December 31, 2006


2,950


$
10.60



2.48


$
15,949     The above table excludes equity awards granted to sales
    representatives and sales management with exercise prices below
    fair market value. Such awards have been included in the
    restricted stock units table below.   F-11




---



##### 



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



3.34


$
1.20



363,282


$
1.20$ 1.29 - $ 2.50


391,832



1.04


$
2.11



344,075


$
2.17$ 2.51 - $ 3.37


353,412



2.58


$
3.29



348,560


$
3.29$ 3.38 - $13.54


246,712



2.94


$
11.33



137,219


$
11.53$13.55


738,854



2.01


$
13.55



738,854


$
13.55$13.56 - $15.10


330,553



3.35


$
14.10



149,767


$
14.30$15.11 - $17.56


115,000



3.33


$
16.51



114,000


$
16.52$17.57 - $17.58


718,500



3.01


$
17.58



718,500


$
17.58$17.59 - $19.04


5,000



3.13


$
18.18



5,000


$
18.18$19.05 - $19.81


31,000



2.91


$
19.81



31,000


$
19.81Total


3,294,145



2.58


$
10.66



2,950,257


$
10.60       out-of-the-money
    out-of-the-money.
 F-12




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
  out-of-the-money
    Year Ended December 31,2005


2004(Amounts in thousands, except per share amounts)Net income (loss)  as
    reported

$
(8,405
)

$
(17,110
)Add: Stock-based employee and
    director compensation included in net income (loss), net of tax


8,549



1,073Deduct: Total stock-based employee
    and director compensation expense determined under fair value
    based method for all awards, net of tax


(15,308
)


(4,806
)Net loss  pro forma

$
(15,164
)

$
(20,843
)Basic and diluted earnings (loss)
    per share  as reported

$
(0.38
)

$
(0.83
)Basic and diluted loss per
    share  pro forma

$
(0.68
)

$
(1.01
)  F-13




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
  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, 2003





$







$
Shares issued










329



13.82Shares vested or released














Shares forfeited










(37
)


13.55Nonvested 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


$
13.95       Earnings Per Share Earnings Per Share
   F-14




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
       Year Ended December 31,2006


2005


2004(Amounts in thousands,except per share amounts)Numerator:Income (loss) from continuing
    operations, net of tax

$
10,630


$
(12,989
)

$
(20,047
)Income from discontinuing
    operations, net of tax


3,044



4,584



2,937Net income (loss)

$
13,674


$
(8,405
)

$
(17,110
)Denominators:Denominator for basic earnings
    per share:Weighted-average number of common
    shares outstanding


22,887



22,397



20,628Effect 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


24,071



22,397



20,628Basic earnings per share:Income (loss) from continuing
    operations

$
0.47


$
(0.58
)

$
(0.97
)Income from discontinuing
    operations


0.13



0.20



0.14Net income (loss)

$
0.60


$
(0.38
)

$
(0.83
)Diluted earnings per share:Income (loss) from continuing
    operations

$
0.44


$
(0.58
)

$
(0.97
)Income from discontinuing
    operations


0.13



0.20



0.14Net income (loss)

$
0.57


$
(0.38
)

$
(0.83
)     Comprehensive Income 
  Use of Estimates 
 F-15




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Foreign Currency 
  New Accounting Pronouncements 
  Misstatements when Quantifying Misstatements in Current
    Year Financial Statements
  Fair Value Measurements
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115
  2.
    Goodwill
    and Other Intangible Assets  Goodwill and Other Intangible
    Assets
 F-16




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
      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   As of December 31, 2005Carrying


AccumulatedAmount


Amortization


Net(Amounts in thousands)Patents

$
2,857


$
1,113


$
1,744Licensing Rights


1,101



190



911Total

$
3,958


$
1,303


$
2,655      F-17




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
   3.
    Investments    December 31, 2006GrossAmortized


UnrealizedCost


Losses


Fair Value(Amounts in thousands)Money market funds

$
2,478


$



$
2,478Certificates of deposits


2,100







2,100U.S. agency  non
    callable


1,998







1,998Corporate debentures and bonds


11,955



(5
)


11,950Commercial paper


2,783







2,783Total

$
21,314


$
(5
)

$
21,309   Reported as:Cash equivalents

$
3,175Short-term investments


18,134Total

$
21,309   December 31, 2005GrossAmortized


UnrealizedCost


Losses


Fair Value(Amounts in thousands)Money market funds

$
6,639


$



$
6,639U.S. agency discount notes


1,400







1,400U.S. agency  non
    callable


3,842



(33
)


3,809Corporate debentures and bonds


8,543



(67
)


8,476Commercial paper


1,790



(1
)


1,789Total

$
22,214


$
(101
)

$
22,113   Reported as:Cash equivalents

$
8,837Short-term investments


13,276Total

$
22,113     (Amounts in thousands)Notes and bonds:Maturities of one year or less

$
18,831Money market funds:Original maturities of three
    months or less


2,478Total

$
21,309  F-18




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
  available-for-sale
  4.
    Discontinued
    Operations      Year Ended December 31,2006


2005


2004(Amounts in thousands)Operating revenues

$
31,716


$
28,525


$
19,349Operating income(1)

$
7,007


$
7,445


$
4,774Income taxes


3,963



2,861



1,837Income from discontinued
    operations(1)

$
3,044


$
4,584


$
2,937     (1)
    
    Includes $2,090,000 of divestiture expenses recorded during the
    year ended December 31, 2006. F-19




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
    December 31,


December 31,2006


2005(Amounts in thousands)Cash

$
1,956


$
2,463Accounts receivable, less
    allowance for doubtful accounts of $1,668 and $1,723 at
    December 31, 2006 and 2005, respectively


9,630



8,921Inventories


252



188Prepaid expenses and other current
    assets


139



218Total current assets

$
11,977


$
11,790Property, net

$
13,142


$
12,292Goodwill


2,174



2,639Total noncurrent assets

$
15,316


$
14,931Accounts payable

$
1,884


$
662Accrued payroll and related
    expenses


1,056



1,663Accrued use taxes payable


1,392



1,173Income taxes payable


23



109Deferred taxes(1)


3,267



Other liabilities


4



12Total current liabilities

$
7,626


$
3,619     (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).
    See Note 7 on Income Taxes.  5.
    Lines of
    Credit      6.
    Stockholders
    Equity  Preferred Stock 
 F-20




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Stockholder Rights Plan 
  Common Stock 
   F-21




---



##### 



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




---



##### 



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




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
  No. 96-18.
    7.
    Income
    Taxes    and/or
 F-24




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
     December 31, 2006


December 31, 2005


December 31, 2004Continuing


Discontinued


Continuing


Discontinued


Continuing


DiscontinuedOperations


Operations


Operations


Operations


Operations


Operations(Amounts in thousands)Current:Federal

$



$



$
(1,477
)

$
1,477


$
(2,279
)

$
2,279Foreign


48







87











State


58



231



162



278



16



187Subtotal


106



231



(1,228
)


1,755



(2,263
)


2,466Deferred:Federal


(13,274
)


3,323



(920
)


920



3,714



(525
)State


(4,393
)


409



(186
)


186



599



(104
)Subtotal


(17,667
)


3,732



(1,106
)


1,106



4,313



(629
)Total income tax (benefit)
    provision

$
(17,561
)

$
3,963


$
(2,334
)

$
2,861


$
2,050


$
1,837       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). EITF 93-17 EITF 93-17
 F-25




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
     December 31, 2006


December 31, 2005


December 31, 2004Continuing


Discontinued


Continuing


Discontinued


Continuing


DiscontinuedOperations


Operations


Operations


Operations


Operations


OperationsTax at federal statutory rate


(35.0
)%


35.0
%


(35.0
)%


35.0
%


(35.0
)%


35.0
%State income taxes, net of federal
    benefit


(40.7
)%


5.9
%


(3.5
)%


6.5
%


(4.1
)%


6.7
%Foreign operations


0.7
%






0.6
%






(0.5
)%


Valuation allowance


(167.5
)%


2.9
%


20.0
%






50.5
%


Nondeductible charges


2.6
%


0.3
%


1.3
%


0.3
%


1.6
%


0.3
%Effect of change in tax rate


(8.9
)%


















Credits


(5.2
)%






(0.3
)%






(1.0
)%


Basis difference






12.1
%














Other


0.6
%


0.4
%


1.7
%


(3.4
)%


(0.1
)%


(3.5
)%Total


(253.4
)%


56.6
%


(15.2
)%


38.4
%


11.4
%


38.5
%       December 31,


December 31,2006


2005(Amounts in thousands)Net operating losses

$
6,547


$
15,355Amortization of goodwill and other
    intangibles


1,540



1,831Reserves not currently deductible


9,374



7,332State taxes


(1,552
)


(1,333
)Credits


2,694



1,511Depreciation


(251
)


183Total deferred income taxes


18,352



24,879Valuation allowance


(686
)


(24,879
)Net deferred income taxes

$
17,666


$
      F-26




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
      8.
    Commitments
    and Contingencies      (Amounts thousands)Year Ended December 31,2007

$
1,0742008


9702009


7822010


4962011


Thereafter


Total

$
3,322      F-27




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
         9.
    Employee
    Benefit Plan    10.
    Related
    Party Transactions  10-year
  11.
    Unaudited
    Quarterly Financial Data   F-28




---



##### 



I-FLOW
    CORPORATION
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Restatement:
    As PreviouslyReported


As Restated(Amounts in thousands)Deferred tax assets 
    current

$
10,814


$
3,596Deferred tax assets 
    non-current


14,540



13,025Total assets


113,511



104,778Common stock


124,505



115,772Net stockholders equity


97,259



88,526  F-29




---



##### 



SIGNATURES
       By:
    /s/  Donald
    M. Earhart       Signature

Title/s/  Donald
    M. EarhartDonald
    M. Earhart

Chairman, President and Chief
    Executive Officer (Principal
    Executive Officer)/s/  James
    J. Dal PortoJames
    J. Dal Porto

Executive Vice President, Chief
    Operating Officer, Director and
    Secretary/s/  James
    R. TalevichJames
    R. Talevich

Chief Financial Officer and
    Treasurer (Principal Financial and
    Accounting Officer)/s/  John
    H. AbelesJohn
    H. Abeles, M.D.

Director/s/  Jack
    H. HalperinJack
    H. Halperin

Director/s/  Joel
    S. KanterJoel
    S. Kanter

Director/s/  Erik
    H. LoudonErik
    H. Loudon

Director/s/  Henry
    Tsutomu TaiHenry
    Tsutomu Tai, Ph.D., M.D.

Director  F-30




---



##### 



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) (26)3
.1

Amended and Restated Certificate
    of Incorporation of I-Flow Corporation, a Delaware Corporation(6)3
.2

Bylaws of I-Flow Corporation, a
    Delaware Corporation(2)3
.3

Certificate of Designation
    Regarding Series A Junior Participating Cumulative
    Preferred Stock(7)4
.1

Specimen Common Stock Certificate
    (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)*




---



##### 



Exhibit No.

Exhibit10
.12

Addendum to manufacturing plant
    lease agreement (23)10
.13

Lease Agreement between Industrial
    Developments International, Inc. as Landlord and I-Flow
    Corporation as Tenant dated April 14, 1997(17)10
.14

Block Medical de Mexico lease
    agreement dated December 7, 1999 (22)10
.15

Amendment to Loan Agreement
    between Silicon Valley Bank and I-Flow Corporation dated
    January 30, 2004 (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

Loan Agreement, dated
    March 31, 2000, by and among InfuSystem, Inc., I-Flow
    Corporation and Old Kent Bank(10)10
.18

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
.19

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
.20

Second Amended and Restated
    Promissory Note, dated April 1, 2004, between InfuSystem,
    Inc. and Fifth Third Bank (formerly Old Kent Bank)(10)10
.21

Promissory Note with Donald M.
    Earhart dated June 15, 2001 (8)*10
.22

Underwriting Agreement, dated
    April 13, 2004 (21)10
.23

Employment Agreement with Donald
    M. Earhart, dated May 16, 1990 (18)*10
.24

Amendment No. 1 to Employment
    Agreement with Donald M. Earhart, dated June 21, 2001 (8)*10
.25

Amendment No. 2 to Employment
    Agreement with Donald M. Earhart, dated February 23, 2006
    (25)*10
.26

Amended and Restated Employment
    Agreement with James J. Dal Porto, dated June 21, 2001 (8)*10
.27

Amendment No. 1 to Employment
    Agreement with James J. Dal Porto, dated February 23, 2006
    (25)*10
.28

Employment Agreement with James R.
    Talevich, dated June 30, 2000 (19) *10
.29

Amendment No. 1 to Employment
    Agreement with James R. Talevich, dated February 23, 2006
    (25)*10
.30

Agreement Re: Change in Control
    with Donald M. Earhart, dated June 21, 2001 (8)*10
.31

Amendment No. 1 to Agreement
    Re: Change in Control with Donald M. Earhart, dated
    February 23, 2006 (25)*10
.32

Agreement Re: Change in Control
    with James J. Dal Porto dated June 21, 2001 (8)*10
.33

Amendment No. 1 to Agreement
    Re: Change in Control with James J. Dal Porto, dated
    February 23, 2006 (25)*10
.34

Agreement Re: Change in Control
    with James R. Talevich, dated June 21, 2001 (8)*10
.35

Amendment No. 1 to Agreement
    Re: Change in Control with James R. Talevich, dated
    February 23, 2006 (25)*10
.36

Form of Restricted Stock Agreement
    (25)*10
.37

Amendment to Loan Agreement, dated
    as of April 30, 2005, between I-Flow Corporation and
    Silicon Valley Bank (24)10
.38

Amendment to Loan Agreement, dated
    as of April 29, 2006, between I-Flow Corporation and
    Silicon Valley Bank10
.39

Form of Indemnification Agreement
    (25)21
.1

List of Subsidiaries23
.1

Consent of Independent Registered
    Public Accounting Firm




---



##### 



Exhibit No.

Exhibit31
.1

Certification of Chief Executive
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 200231
.2

Certification of Chief Financial
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 200232
.1

Certification of Chief Executive
    Officer and Chief Financial Officer Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002     *
    
    Management contract or compensatory plan or arrangement required
    to be filed as an exhibit pursuant to applicable rules of the
    Securities and Exchange Commission.  (1)
    
    Incorporated by reference to exhibit with this title filed with
    the Companys Quarterly Report on Form
    10-Q for the
    quarter ended September 30, 2003.(2)
    
    Incorporated by reference to exhibit with this title filed with
    the Companys Current Report on
    Form 8-K
    filed on August 3, 2001.(3)
    
    Incorporated by reference to exhibit with this title filed with
    the Companys Quarterly Report on Form
    10-Q for the
    quarter ended March 31, 2000.(4)
    
    Incorporated by reference to exhibit with this title filed with
    the Companys Current Report on
    Form 8-K/A
    filed on March 6, 1998.(5)
    
    Incorporated by reference to exhibit with this title filed with
    the Companys Current Report on
    Form 8-K
    dated July 22, 1996.(6)
    
    Incorporated by reference to exhibit with this title filed with
    the Companys Current Report on
    Form 8-K
    dated May 29, 2002.(7)
    
    Incorporated by reference to exhibit with this title filed with
    the Companys Current Report on
    Form 8-K
    filed on March 13, 2002.(8)
    
    Incorporated by reference to exhibit with this title filed with
    the Companys Quarterly Report on Form
    10-Q for the
    quarter ended 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 Current Report on
    Form 8-K
    filed on October 4, 2006.(27)
    
    Incorporated by reference to exhibit with this title filed with
    the Companys Current Report on
    Form 8-K
    filed on February 28, 2007.