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SECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549

Form 10-K


FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

|    |  |                                                                                     
|--- |  | ------------------------------------------------------------------------------------
|[x] |  | ANNUAL REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended      December 31, 2001

OR

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 0R 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                                                       |  | 33-0121984                       
|                                                               |  |                                  
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (IRS Employer Identification No.)

|                                         |  |           
|---------------------------------------- |  | ----------
|20202 Windrow Drive, Lake Forest, CA     |  | 92630     
|                                         |  |           
|(Address of Principal Executive Offices) |  | (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

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

The aggregate market value of the 13,970,333 shares of voting common stock of
the registrant held by non-affiliates of the registrant on March 8, 2002, based
on the last sale price of such stock on the Nasdaq Small Cap Market on such
date, was $43,447,736.

Registrants outstanding stock as of March 8, 2002 was 15,356,944 shares of
Common Stock.

Information required by Part III of this Report on Form 10-K is incorporated by
reference to portions of the Registrants Proxy Statement for its 2002 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after the close of the Registrants year ended
December 31, 2001.





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TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I           
|                  | Item 1. BUSINESS                                                                             
|                  | Item 2. PROPERTIES                                                                           
|                  | Item 3. LEGAL PROCEEDINGS                                                                    
|                  | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II          
|                  | Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|                  | Item 6. SELECTED FINANCIAL DATA                                                              
|                  | Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                  | Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                  | Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                  | Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III         
|                  | Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                  | Item 11. EXECUTIVE COMPENSATION                                                              
|                  | Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                  | Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV          
|                  | Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES       
|INDEX TO EXHIBITS
|EXHIBIT 21       
|EXHIBIT 23.1     



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PART I




Item 1. BUSINESS

The Company

I-Flow Corporation (the Company or I-Flow) designs, develops, manufactures
and markets technically advanced, low-cost ambulatory drug delivery systems
that seek to redefine the standard of care by providing life enhancing, cost
effective solutions for pain management and infusion therapy. The Companys
products are used both in hospitals and alternate site settings, including
free-standing surgery centers and physicians offices.

Since its beginnings in 1985, I-Flow Corporation has established a reputation
in the medical and health care industry as an innovator in pain management and
drug delivery technology. Through product innovation and strategic
acquisitions, the Company has emerged as a leader in pain management, offering
highly effective therapies for physicians and their patients. I-Flows suite
of pain management products provides reliable and simple regional anesthesia
techniques that eliminate many of the side effects customarily associated with
narcotics and general anesthesia. Patients generally recover more rapidly
after surgery, which results in shorter hospital stays and reduced costs.

I-Flow currently manufactures a line of compact, portable infusion pumps,
catheters, needles and pain kits that administer medication directly to the
wound site as well as administer local anesthetics, chemotherapies,
antibiotics, diagnostic agents, nutritional supplements and other medications.
The Company has continued to introduce reliable, lightweight, portable infusion
pumps enabling patients to live ambulatory and, therefore, more productive
lifestyles. I-Flow sells and distributes its products throughout the United
States, Canada, Europe, Asia, Mexico, Brazil, Australia, New Zealand and the
Middle East. InfuSystem, Inc., a wholly owned subsidiary, is primarily engaged
in the rental of infusion pumps on a month-to-month basis for the cancer
infusion therapy market. Spinal Specialties, Inc., a wholly owned subsidiary
of I-Flow Corporation, is primarily engaged in the manufacturing and marketing
of custom regional anesthesia kits with expanded capabilities in interventional
radiology products.

The Company was incorporated in the State of California in July 1985. On July
30, 2001 the Company changed its state of incorporation to Delaware by merging
into a wholly owned subsidiary incorporated in Delaware. The Companys
corporate offices are located at 20202 Windrow Drive, Lake Forest, California
92630. The telephone number is (949) 206-2700 and its web site is located at
www.i-flowcorp.com.

Acquisitions

On February 11, 1998, the Company acquired all of the outstanding stock of
InfuSystems II, Inc. and Venture Medical, Inc. (collectively referred to as
InfuSystem). InfuSystem is a leading ambulatory infusion pump management
provider based in Madison Heights, Michigan. By delivering ambulatory pumps
and the related disposables from a variety of manufacturers to private medical
practices and clinics across the country, InfuSystem uses a distinctive
approach to service the cancer infusion therapy market.

On January 14, 2000, the Company acquired all of the outstanding stock of
Spinal Specialties, Inc. (Spinal Specialties), a designer and manufacturer of
custom spinal, epidural and nerve block infusion kits based in San Antonio,
Texas. Spinal Specialties provides a line of custom disposable products for
chronic and acute pain management, that are tailored to the specific needs of
the hospital, anesthesiologist and pain clinic.

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The Products

I-Flow offers the health care professional an array of cost-effective drug
delivery devices designed to meet the needs of todays managed care environment
both in the hospital and alternate site settings. The I-Flow family of
products is focused on three primary market segments  Regional Anesthesia, IV
Infusion Therapy and Oncology Infusion Services.

Regional Anesthesia

Chronic Pain Kits

This product line resulted from I-Flows acquisition of Spinal Specialties, and
it includes custom spinal, epidural, discogram and nerve block kits. These
disposable products for chronic pain management are tailored to the specific
needs of the anesthesiologist, hospital and pain management clinic. The spinal
tray line can be combined with I-Flows infusion systems to create new products
for managing acute and chronic pain.

Acute Pain Kits

The Acute Pain Kit product line includes the ON-Q® Pain Management System,
PainBuster® Pain Management System and C-blocTM Continuous Nerve Block System.
I-Flows ON-Q and PainBuster Systems offer continuous wound site pain
management, considered one of the most ideal treatments for post-operative
pain. This approach represents a significant improvement over traditional
methods of post-operative pain management. Since fewer narcotics are used,
there are fewer side effects. I-Flows C-bloc technology combines the
advantages of a custom nerve block kit with the added feature of a disposable
infusion pump. Recent studies have shown that C-bloc, when used for continuous
nerve block applications, significantly reduced pain scores and the use of
narcotics for pain control following shoulder surgeries.

The Companys SoakerTM Catheters (2.5 and 5 versions) were granted U.S. Food
and Drug Administration permission for use for pain management of large
surgical incisions in November 1999 and March 2000, respectively. The Soaker
Catheter, which attaches to I-Flows diverse line of infusion systems, provides
a continuous, even infusion of a non-narcotic, local anesthetic directly along
incisions for post-operative pain management.

IV Infusion Therapy

Elastomerics

I-Flows product line of elastomeric pumps delivers medication from an elastic
balloon that does not rely on gravity for proper delivery. These pumps are
small enough to fit into a patients pocket or be clipped to a patients
clothing. These characteristics provide patients with better mobility and a
quicker transition to rehabilitation. This easy-to-use technology provides the
health care professional with a device that is both safe and simple enough for
patients to use for self-administration of medication. The Companys
elastomeric line of products can be used for pain management medications,
antibiotics or other medications. Elastomeric products include the patented
Homepump Eclipse®, Homepump Eclipse CSeries and One-Step KVO.

Syringe Delivery Systems

I-Flows Syringe Delivery Systems are designed to provide accurate intravenous
push delivery from a syringe. The systems are cost-effective for both single
and multiple doses and provide health care professionals with a safe and
accurate alternative to gravity or IV push methods with a relatively easy
learning curve for patients. I-Flows products in this class include the
Medi-SIS 20 and Medi-SIS 60 Syringe Infusion Systems.

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Non-Electric IV Bag Delivery Systems

I-Flows non-electric products provide a safe and easy-to-use system for
controlled infusion. Pumps in this category are drug delivery systems
consisting of a reusable mechanical infuser and specially designed
administration sets. They can provide precise delivery of medications requiring
slow and continuous infusions. I-Flows products in this class include the
Paragon® and Sidekick® ambulatory infusion pumps and the Rely-A-Flow® Gravity
Set.

Electronic Pumps

The Companys products include I-Flow VIP, which can be used with VOICELINK®
Remote Programming System. The VOICELINK System enables caregivers to monitor
and program the devices for their patients with just a touch-tone phone. It is designed to provide accurate
and safe remote programming and delivery of four individual protocols
regardless of complexity.

Oncology Infusion Services

InfuSystem provides ambulatory infusion pump systems and supplies to oncology
offices and clinics for chemotherapy. Pumps from a variety of manufacturers
are offered to customers primarily on a rental basis. The Companys revenues
are primarily derived from billings to third party insurers.

The Markets

The Company participates in three market segments: Regional Anesthesia, IV
Infusion Therapy, and Oncology Infusion Services. Over the last three years,
I-Flow significantly expanded its product line and distribution capabilities to
establish itself as a leading participant in the regional anesthesia arena.
Management believes that this expansion, coupled with the Companys innovations
in pain management and infusion technologies, has placed I-Flow in a strong
position for future potential growth. The Company operates in two business
segments: manufacturing and marketing of medical infusion pumps and rentals of
medical infusion pumps. The rental business segment principally consists of
the activities of InfuSystem, Inc. within the oncology infusion services market
segment. See Note 10 in Notes to Consolidated Financial Statements.

The hospital market for I-Flows simple, portable regional anesthesia
technologies is currently virtually untapped. There are more than 50 million
operative procedures performed in the U.S. every year. I-Flow estimates that
its ON-Q® and PainBuster® systems could be used in at least
12 million of those
procedures. The Company also believes that the product lines of Spinal
Specialties can be potentially used in nearly all of the approximate 4 million
live births per year in the U.S.

The alternate site health care industry has
supported the need for ambulatory infusion devices. An ambulatory pump enables a patient to leave the hospital earlier,
making it very attractive to cost-conscious hospitals and to patients who favor
home treatment. I-Flows sales in the IV Infusion Therapy market include the
Companys intravenous elastomeric pumps, mechanical infusion devices and
electronic infusion pumps and disposables.

The Company participates in the Oncology Infusion Services market through the
activities of InfuSystem which provides infusion pump rentals and related
disposable products, primarily for chemotherapy.

The following table sets forth a summary of the Companys revenues by market
segment, excluding a $2,000,000 license fee received in 1999, expressed as
percentages of the total net revenues:

|                           |  |      |    |      |  |      |    |   |  |  |    |  
|-------------------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|Revenues by Market Segment |  | 2001 |    | 2000 |  | 1999
|                           |  |      |    |      |  |     
|Regional Anesthesia        |  |      | 25 | %    |  |      | 26 | % |  |  | 21 | %
|IV Infusion Therapy        |  |      | 44 | %    |  |      | 48 | % |  |  | 48 | %
|Oncology Infusion Services |  |      | 31 | %    |  |      | 26 | % |  |  | 31 | %

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Competition

The drug infusion industry is highly competitive. The Company competes in this
market based on price, service and product performance. Some of the
competitors have significantly greater resources than the Company for research
and development, manufacturing and marketing. As a result they may be better
able to compete for market share, even in areas in which the Companys products
may be superior. The industry is subject to technological changes and there
can be no assurance that the Company will be able to maintain any existing
technological advantage long enough to establish its products and to sustain
profitability.

The number of current competitors and the Companys current estimated
competitive position in terms of revenue for each of its product lines is noted
in the table below.

|                                             |  |                 |    |             |  |           |   | 
|-------------------------------------------- |  | --------------- | -- | ----------- |  | --------- | - | 
|                                             |  |                 |    |             |  | Company's
|                                             |  |                 |    |             |  | Estimated
|                                             |  | Number of Known |    | Competitive
|Market Description                           |  | Competitors     |    | Position   
|                                             |  |                 |    |            
|Elastomerics                                 |  |                 | 3  |             |  |           | 1 | 
|Chronic Pain Kits                            |  |                 | 11 |             |  |           | 8 | 
|Acute Pain Kits (Wound Site Pain Management) |  |                 | 8  |             |  |           | 1 | 
|Non-electric
Syringe Delivery Systems        |  |                 | 2  |             |  |           | 1 | 
|Non-electric IV Bag Delivery Systems         |  |                 | 4  |             |  |           | 2 | 
|Electronic Pumps                             |  |                 | 7  |             |  |           | 5 | 

Sales and Distribution

Distribution of the Companys products in the United States is currently
managed directly through its internal sales force as well as through a number
of national and regional medical product distributors. The Company relies on
regional U.S. medical product distributors for approximately 7% of its revenue.
There are no complete integrated contracts with any of these distributors.

During 1998, the Company entered into an agreement with B. Braun Melsungen AG,
a world leader in the manufacture and distribution of pharmaceuticals and
infusion products, to distribute I-Flows elastomeric infusion pumps in Western
Europe, Eastern Europe, the Middle East, Asia Pacific, South America and
Africa. The Company also entered into a similar agreement with B. Braun
Medical, Inc. to distribute I-Flows elastomeric pumps to B. Brauns full line
IV Infusion Therapy customers in the United States. These two relationships
have generated significant sales for the Company. During the years ended
December 31, 2001, 2000 and 1999, combined sales to these companies accounted
for approximately 18%,18% and 16%, respectively, of the Companys total
revenues.

In May 1999, the Company entered into an agreement with dj Orthopedics LLC
(formerly DonJoy, a division of Smith & Nephew, Inc.), a leading provider of
orthopedic braces, to distribute the Companys PainBuster® pain management
system exclusively in the United States and Canada for orthopedic surgery
applications. I-Flows PainBuster pain management system provides continuous
infusion of a non-narcotic, local anesthetic directly into the intraoperative
site for post-operative pain management. The agreement, as amended, called for
I-Flow to receive a nonrefundable $2 million licensing fee during 1999 and for
dj Orthopedics to make minimum purchases through 2001 in order to maintain
distribution rights. Under the terms of the agreement, dj Orthopedics
exclusive right to sell into the post-operative wound site pain management
market lapsed as of January 1, 2002 into a non-exclusive right to sell into
this market.

In June 1999, the Company signed a distribution agreement with Ethicon
Endo-Surgery, Inc., a Johnson & Johnson subsidiary, under which Ethicon
Endo-Surgery became the exclusive distributor of I-Flows ON-Q® Pain Management
System for all surgical applications excluding orthopedics. The ON-Q® Pain
Management System infuses non-narcotic local anesthetics directly into the
operative site, the patients primary source of post-operative pain. This
multi-year agreement required Ethicon Endo-Surgery to meet minimum purchase
commitments to maintain exclusive distribution rights. The agreement was
terminated by mutual agreement in October 2001. Under the terms of the
termination agreement, Ethicon Endo-Surgery ceased selling the ON-Q® Pain
Management System

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effective January 1, 2002, at which time the Company regained exclusive U.S.
distribution rights to the ON-Q® Pain Management System, which it began selling
on a direct basis through I-Flows direct sales organization.

The Company sells several of its products into the international market and has
signed agreements with distributors in various countries. Currently, the
Company is selling its products through distributors in Canada, Brazil, the
Benelux Countries, Germany, England, Ireland, Italy, Mexico, Spain, Korea,
Australia, New Zealand and Israel. Aggregate revenues from countries outside
of the United States represented approximately 22%, 22% and 20% of the
Companys total revenues for the years ended December 31, 2001, 2000 and 1999,
respectively. The Company does not have any capital investments in any foreign
operations except for its plant in Mexico.

Total revenues attributable to each geographic area into which the Company has
sales is as follows:

|                                       |  |      |            |      |  |      |            |  |  |   |            | 
|-------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|Sales to unaffiliated customers:       |  | 2001 |            | 2000 |  | 1999
|                                       |  |      |            |      |  |     
|United States                          |  | $    | 25,890,000 |      |  | $    | 24,870,000 |  |  | $ | 23,962,000 | 
|Europe                                 |  |      | 5,897,000  |      |  |      | 5,153,000  |  |  |   | 4,181,000  | 
|Asia                                   |  |      | 987,000    |      |  |      | 1,295,000  |  |  |   | 1,165,000  | 
|Other                                  |  |      | 531,000    |      |  |      | 648,000    |  |  |   | 476,000    | 
|All Foreign Countries in the Aggregate |  |      | 7,415,000  |      |  |      | 7,096,000  |  |  |   | 5,822,000  | 

The Company did not have a significant backlog of unfilled orders as of
December 31, 2001 or December 31, 2000.

Manufacturing and Operations

A substantial portion of the Companys products are manufactured by its Mexican
subsidiary, Block Medical de Mexico, S.A. de C.V. (Block). This plant has
been in operation since 1994 and has historically performed, and is currently
performing, the manufacture of all disposable IV Infusion Therapy devices and
tubing sets. The Company currently intends to maintain the plant in Mexico and
to manufacture a substantial portion of its products there. The Company
regularly reviews the use of outside vendors for production versus internal
manufacturing, analyzing factors such as the quality of the products received
from vendors, the costs of the products, timely delivery and employee
utilization.

Product Development

The Company has focused its product development efforts on products in pain
management and ambulatory infusion systems markets and, with the majority of
its new products, it is expanding its market to include hospitals. In each of
the years ended December 31, 2001, 2000 and 1999, the Company incurred expenses
of approximately $2,238,000, $2,001,000 and $1,710,000, respectively, for
product development.

Patents and Trademarks

The Company has filed U.S. patent applications for substantially all of its
products. The total number of patents now held by the Company is approximately
40. These patents generally expire between 2009 to 2015, with the most
significant patents expiring in 2009. The Company has also filed for
intellectual property right protection in all foreign countries from which it
derives significant revenue. In the opinion of management, there are no
limitations on the Companys intellectual property that would have a material
adverse effect on the Company.

Copyrights have been obtained for the Vivus 4000® programming software. All of
the Companys product names are either registered trademarks or have trademark
applications pending. There can be no assurance that pending patent or
trademark applications will be approved or that any patents will provide
competitive advantages for the Companys products or will not be challenged or
circumvented by competitors.

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Regulations Governing the Companys Products and Manufacturing Operations

Development and manufacture of I-Flow products is regulated by the Food, Drug
and Cosmetic Act. Under the Act, the Company is required to register its
facilities and list its devices with the U.S. Food and Drug Administration, to
file notice of intent to market new products under Section 510(K) of the Act,
to track the location of certain of its products and to report any incidents of
death or serious injury relating to its products. To date, there have been no
reportable conditions found during any FDA inspections. Failure to comply with
any of these regulations can result in civil and criminal penalties upon the
Company and/or the recall, seizure or injunction of certain of its products.

The State of California, in addition to the FDA, has similar regulations and
requires annual production-site inspections to maintain the relevant
manufacturing license. State regulations also address the storage and handling
of certain chemicals and disposal of their wastes.

The Company is required to comply with federal, state and local environmental
laws. To date, however, there has been no significant effect of environmental
issues on the capital expenditures, earnings or competitive position of the
Company and there is currently no significant use of hazardous materials in the
manufacture of the Companys products.

Products intended for export are subject to additional regulations, including
compliance with ISO 9000. In May 1995, the Company received ISO 9001
certification, which indicates that I-Flows products meet specified uniform
standards of quality and testing. The Company was also granted permission to
use the CE mark on its products, which reflects approval of the Companys
products for export into 18 member countries of the European Community. In
December 1996, the Block operations, including its Mexico facility, were added
to the Companys ISO certification and permission was granted to use the CE
mark on the Block products.

Employees

As of March 1, 2002, the Company and its subsidiaries had a total of 171
full-time employees in the United States and an additional 186 employees at the
Companys wholly-owned subsidiary in Mexico. None of the Companys employees
in the United States are covered by a collective bargaining agreement. The
Company considers its relationship with its employees to be good. The Company
also uses temporary employees as needed, mainly in manufacturing.




Item 2. PROPERTIES

The Companys headquarters are located in Lake Forest, California, where the
Company leases a 51,000 square foot building. The Company entered the lease in
1997 and it has a term of ten years. (There is an option to extend the lease
for an additional 5 years.) The Company also leases a plant in Northern Mexico
for the manufacture of ambulatory infusion devices. The current plant lease
was entered into in 2000 and has a term of five years. The plant currently
operates at approximately 60% of capacity. The Companys Infusystem subsidiary
rents a building in Detroit, Michigan. Finally, the Company leases a building
in San Antonio, Texas to manufacture the Spinal Specialties regional anesthesia
devices. The lease was entered into in 2002 and has a term of 3 years.
Management believes that the above properties provide the Company with
sufficient space to continue to operate its business as currently conducted.




Item 3. LEGAL PROCEEDINGS

As of March 1, 2002, the Company was involved in legal proceedings in the
normal course of operations. Although the outcome of the proceedings cannot be
determined, in the opinion of management any resulting future liability will
not have a material adverse effect on the Company and its subsidiaries, taken
as a whole.




Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the three
months ended December 31, 2001.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information concerning the executive officers of
the Company as of March 1, 2002. There are no family relationships between any
of the executive officers or directors of the Company. The executive officers
are chosen annually at the first meeting of the board of directors following
the annual meeting of stockholders and, subject to the terms of any employment
agreement, serve at the will and pleasure of the board of directors.

|                               |  |     |    |          |  |                                                               
|------------------------------ |  | --- | -- | -------- |  | --------------------------------------------------------------
|Name                           |  | Age |    | Position
|                               |  |     |    |         
|Donald M. Earhart              |  |     | 57 |          |  | President, Chief Executive Officer and
Chairman of the Board  
|                              
|Henry Tsutomu Tai, Ph.D., M.D. |  |     | 58 |          |  | Secretary and Director                                        
|                              
|James J. Dal Porto             |  |     | 48 |          |  | Executive Vice President, Chief Operating
Officer and Director
|                              
|James R. Talevich              |  |     | 51 |          |  | Chief Financial Officer and Treasurer                         

Donald M. Earhart, has been Chairman of the Board since March 1991 and Chief
Executive Officer since July 1990. Mr. Earhart joined the Company as President
and Chief Operating Officer in June 1990. Mr. Earhart, who holds a Bachelor of
Engineering degree from Ohio State University and a Masters Degree in Business
Administration from Roosevelt University, has over 25 years experience in the
medical products industry. Prior to joining the Company, from 1986 to 1990,
Mr. Earhart was a Corporate Officer and the President of the Optical Division
of Allergan, Inc. Prior to his employment at Allergan, he was a Corporate
Officer and Division President of Bausch and Lomb and was an operations manager
of Abbott Laboratories. He has also served as an engineering consultant at
Peat, Marwick, Mitchell & Co. and as an engineer with Eastman Kodak Company.

Henry Tsutomu Tai, Ph.D., M.D. is the initial progenitor of the Companys
product and business concept in multiple-drug infusion systems and founding
director. Dr. Tai has been on the board of directors since 1985, serving as
Chairman from 1985 to 1988. Dr. Tai has been the Secretary of the Company
since 1990. Dr. Tai has been a consultant in hematology and oncology since
1977. Dr. Tai holds a Bachelor of Arts degree in Molecular Biology from
Harvard University and a Ph.D. in Molecular Biology and an M.D. from the
University of Southern California. He has done postdoctoral research in the
molecular biology of tumor virus DNA at the Weizman Institute of Science in
Israel and at the California Institute of Technology.

James J. Dal Porto joined the Company in October 1989 to serve as Controller.
Mr. Dal Porto was promoted to Treasurer in October 1990, to Vice President of
Finance and Administration in March 1991, to Executive Vice President, Chief
Financial Officer in March 1993 and to Chief Operating Officer in February
1994. Mr. Dal Porto served as Financial Planning Manager and Manager of
Property Accounting and Local Taxation at CalComp, a high technology
manufacturing company, from 1984 to 1989. Mr. Dal Porto holds a Bachelor of
Science degree in Economics from the University of California, Los Angeles, and
a Masters in Business Administration from California State University,
Northridge.

James R. Talevich became Chief Financial Officer in August 2000. Prior to
joining I-Flow, he was Chief Financial Officer of Gish Biomedical, Inc. from
1999 to 2000 and Chief Financial Officer of Tectrix Fitness Equipment from 1995
to 1999. Prior to 1996, he held financial management positions with
Mallinckrodt Medical, Inc., Sorin Biomedical, Inc., a medical products
subsidiary of Fiat S.p.A., Pfizer, Inc., Sensormedics Corporation, a privately
held medical device company, Baxter Travenol Laboratories, Inc., and KPMG Peat
Marwick. Mr. Talevich holds a Bachelor of Arts Degree in Physics from
California State University, Fullerton and a Masters in Business Administration
from the University of California at Los Angeles, and is a Certified Public
Accountant.

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PART II




Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Companys Common Stock trades on The Nasdaq Small Cap Market under the
symbol IFLO. The table below sets forth the high and low sales prices of the
Companys common stock as reported by Nasdaq.

|     |             |  |      |      |     |  |   |      | 
|---- | ----------- |  | ---- | ---- | --- |  | - | ---- | 
|     |             |  | High |      | Low
|     |             |  |      |      |    
|2000 |             |  |      |      |     |  |   |     
|     | 1st Quarter |  | $    | 6.50 |     |  | $ | 3.44 | 
|     | 2nd Quarter |  | $    | 7.50 |     |  | $ | 2.50 | 
|     | 3rd Quarter |  | $    | 3.97 |     |  | $ | 2.63 | 
|     | 4th Quarter |  | $    | 3.13 |     |  | $ | 0.75 | 
|2001 |             |  |      |      |     |  |   |     
|     | 1st Quarter |  | $    | 2.81 |     |  | $ | 1.38 | 
|     | 2nd Quarter |  | $    | 3.20 |     |  | $ | 1.45 | 
|     | 3rd Quarter |  | $    | 3.50 |     |  | $ | 1.93 | 
|     | 4th Quarter |  | $    | 3.30 |     |  | $ | 2.10 | 

American Stock Transfer & Trust Company is the Companys transfer agent for
its common stock. As of March 8, 2002, the Company had
391
shareholders of record and, based upon information received from nominee
holders, the Company believes it has approximately 7,900 total beneficial
holders.

The Company has not paid, and does not currently expect to pay in the
foreseeable future, cash dividends on its common stock.

9



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Item 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data have been derived from the
Companys consolidated statements of operations for the years ended December 31,
2001, 2000 and 1999 and consolidated balance sheets as of December 31, 2001 and
2000 which are included herein, and have been audited by Deloitte & Touche LLP,
independent auditors. The Companys consolidated statements of operations for
the years ended December 31, 1998 and 1997 and the consolidated balance sheets
as of December 31, 1999, 1998 and 1997 which are not included herein, have also
been audited by Deloitte & Touche LLP, independent auditors. The information set
forth below is not necessarily indicative of the expectations of results for
future operations and should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Annual Report
on Form 10-K.

|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |        |        |        | 
|---------------------------------------------- | ------------------------------------------- | ------------------------ | ------- | ------ | ------------------------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ----- | ------ | ------ | ------ | 
|                                               |                                             |                          |         |        | Years Ended December 31,
|(Amounts in thousands, except                  |                                             |                         
|per share amounts)                             |                                             | 2001                     |         | 2000   |                          | 1999   |        | 1998   |        | 1997  
|                                               |                                             |                          |         |        |                          |        |        |        |        |       
|Consolidated Statements of Operations Data:(1) |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|Revenues:                                      |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|                                               | Net product sales                           |                          | $       | 22,904 |                          |        | $      | 23,497 |        |        | $      | 19,272 |        |        | $      | 17,006 |        |        | $     | 17,678 |       
|                                               | Rental income and other                     |                          |         | 10,401 |                          |        |        | 8,469  |        |        |        | 8,512  |        |        |        | 6,586  |        |        |       | 64     |       
|                                               | Licensing fees                              |                          |         |       |                          |        |        |       |        |        |        | 2,000  |        |        |        |       |        |        |       |       |       
|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|                                               |                                             | Total revenues           |         |        | 33,305                   |        |        |        | 31,966 |        |        |        | 29,784 |        |        |        | 23,592 |        |       |        | 17,742 |       
|Cost of revenues                               |                                             |                          | 14,011  |        |                          |        | 13,710 |        |        |        | 11,824 |        |        |        | 10,219 |        |        |        | 8,450 |       
|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|Gross Profit                                   |                                             |                          | 19,294  |        |                          |        | 18,256 |        |        |        | 17,960 |        |        |        | 13,373 |        |        |        | 9,292 |       
|Operating expenses:                            |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|                                               | Selling and marketing                       |                          |         | 5,504  |                          |        |        | 5,115  |        |        |        | 4,193  |        |        |        | 4,178  |        |        |       | 3,197  |       
|                                               | General and administrative                  |                          |         | 9,385  |                          |        |        | 8,150  |        |        |        | 7,604  |        |        |        | 5,834  |        |        |       | 3,836  |       
|                                               | Product development                         |                          |         | 2,238  |                          |        |        | 2,001  |        |        |        | 1,710  |        |        |        | 1,507  |        |        |       | 1,480  |       
|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|                                               |                                             | Total operating expenses |         |        | 17,127                   |        |        |        | 15,266 |        |        |        | 13,507 |        |        |        | 11,519 |        |       |        | 8,513  |       
|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|                                               | Operating income                            |                          |         | 2,167  |                          |        |        | 2,990  |        |        |        | 4,453  |        |        |        | 1,854  |        |        |       | 779    |       
|                                               | Interest and other expense, net             |                          |         | 44     |                          |        |        | 265    |        |        |        | 404    |        |        |        | 684    |        |        |       | 334    |       
|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|                                               | Income before income taxes                  |                          |         | 2,123  |                          |        |        | 2,725  |        |        |        | 4,049  |        |        |        | 1,170  |        |        |       | 445    |       
|                                               | Income tax provision (benefit)              |                          |         | 856    |                          |        |        | 1,113  |        |        |        | (4,763 | )      |        |        | 69     |        |        |       | 80     |       
|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|                                               | Net income                                  |                          | $       | 1,267  |                          |        | $      | 1,612  |        |        | $      | 8,812  |        |        | $      | 1,101  |        |        | $     | 365    |       
|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|                                               | Net income per share, basic                 |                          | $       | 0.08   |                          |        | $      | 0.11   |        |        | $      | 0.61   |        |        | $      | 0.08   |        |        | $     | 0.02   |       
|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|                                               | Net income per share, diluted               |                          | $       | 0.08   |                          |        | $      | 0.10   |        |        | $      | 0.58   |        |        | $      | 0.08   |        |        | $     | 0.02   |       
|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|                                               | Weighted-average common shares outstanding: |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |        |       
|                                               |                                             |                          | Basic   |        |                          | 15,231 |        |        |        | 15,002 |        |        |        | 14,387 |        |        |        | 13,479 |       |        |        | 12,210 | 
|                                               |                                             |                          | Diluted |        |                          | 15,749 |        |        |        | 15,647 |        |        |        | 15,116 |        |        |        | 13,711 |       |        |        | 13,030 | 
|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|Consolidated Balance Sheet Data:(2)(3)         |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       
|                                               | Working capital                             |                          | $       | 15,822 |                          |        | $      | 14,441 |        |        | $      | 13,565 |        |        | $      | 6,588  |        |        | $     | 4,573  |       
|                                               | Total assets                                |                          |         | 35,704 |                          |        |        | 35,215 |        |        |        | 31,768 |        |        |        | 24,336 |        |        |       | 17,634 |       
|                                               | Long-term obligations                       |                          |         | 83     |                          |        |        | 1,303  |        |        |        | 1,548  |        |        |        | 2,680  |        |        |       | 1,579  |       
|                                               | Total shareholders equity                  |                          |         | 29,769 |                          |        |        | 27,618 |        |        |        | 24,670 |        |        |        | 14,817 |        |        |       | 10,588 |       
|                                               |                                             |                          |         |        |                          |        |        |        |        |        |        |        |        |        |        |        |        |        |       |       



---

|(1) |  | Certain amounts previously reported have been reclassified to conform
with the presentation at December 31, 2001.                             
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | In February 1998, the Company acquired InfuSystem II, Inc. and Venture
Medical, Inc. See Note 3 of Notes to Consolidated Financial Statements.
|   
|   
|   
|   
|(3) |  | In January 2000, the Company acquired Spinal Specialties, Inc. See Note
4 of Notes to Consolidated Financial Statements.                      

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Quarterly Financial Data

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

(Amounts in thousands, except per share amounts)

|                                                    |  |         |        |         |  |          |        |         |  |   |        |  |  |   |        | 
|--------------------------------------------------- |  | ------- | ------ | ------- |  | -------- | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|2001                                                |  | Mar. 31 |        | June 30 |  | Sept. 30 |        | Dec. 31
|                                                    |  |         |        |         |  |          |        |        
|Total revenues                                      |  | $       | 7,992  |         |  | $        | 8,479  |         |  | $ | 7,991  |  |  | $ | 8,843  | 
|Gross profit                                        |  |         | 4,646  |         |  |          | 5,010  |         |  |   | 4,688  |  |  |   | 4,950  | 
|Income before income taxes                          |  |         | 545    |         |  |          | 710    |         |  |   | 788    |  |  |   | 80     | 
|Net income                                          |  |         | 316    |         |  |          | 399    |         |  |   | 411    |  |  |   | 141    | 
|Basic net income per share                          |  |         | 0.02   |         |  |          | 0.03   |         |  |   | 0.03   |  |  |   | 0.01   | 
|Basic average common shares                         |  |         | 15,010 |         |  |          | 15,249 |         |  |   | 15,293 |  |  |   | 15,319 | 
|Diluted net income per share                        |  |         | 0.02   |         |  |          | 0.03   |         |  |   | 0.03   |  |  |   | 0.01   | 
|Diluted average common and common equivalent shares |  |         | 15,503 |         |  |          | 15,642 |         |  |   | 15,956 |  |  |   | 15,954 | 

|                                                    |  |         |        |         |  |          |        |         |  |   |        |  |  |   |        | 
|--------------------------------------------------- |  | ------- | ------ | ------- |  | -------- | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|2000                                                |  | Mar. 31 |        | June 30 |  | Sept. 30 |        | Dec. 31
|                                                    |  |         |        |         |  |          |        |        
|Total revenues                                      |  | $       | 7,467  |         |  | $        | 7,740  |         |  | $ | 7,371  |  |  | $ | 9,388  | 
|Gross profit                                        |  |         | 4,478  |         |  |          | 4,314  |         |  |   | 4,060  |  |  |   | 5,404  | 
|Income before income taxes                          |  |         | 719    |         |  |          | 438    |         |  |   | 434    |  |  |   | 1,134  | 
|Net income                                          |  |         | 431    |         |  |          | 252    |         |  |   | 258    |  |  |   | 671    | 
|Basic net income per share                          |  |         | 0.03   |         |  |          | 0.02   |         |  |   | 0.02   |  |  |   | 0.04   | 
|Basic average common shares                         |  |         | 14,886 |         |  |          | 15,015 |         |  |   | 15,039 |  |  |   | 15,058 | 
|Diluted net income per share                        |  |         | 0.03   |         |  |          | 0.02   |         |  |   | 0.02   |  |  |   | 0.04   | 
|Diluted average common and common equivalent shares |  |         | 15,783 |         |  |          | 15,772 |         |  |   | 15,624 |  |  |   | 15,334 | 

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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain disclosures made by the Company in this report and in other reports and
statements released by the Company are and will be forward-looking in nature,
such as comments which express the Companys opinions about trends and factors
that may impact future operating results. Disclosures that use words such as
believes, anticipates, or expects or use similar expressions are intended
to identify forward-looking statements. Forward looking statements are subject
to certain risks and uncertainties, which could cause actual results to differ
significantly from those expected, and readers are cautioned not to place undue
reliance on these forward-looking statements. The Company undertakes no
obligation to republish revised forward-looking statements to reflect the
occurrence of unanticipated events. Readers are also urged to carefully review
and consider the various disclosures made by the Company in this report which
seek to advise interested parties of the risks and other factors that affect
the Companys business, as well as in the Companys reports on Forms 10-K, 10-Q
and 8-K that are periodically filed with the Securities and Exchange
Commission. The risks affecting the Companys business include reliance on the
success of the home health care industry, the reimbursement system currently in
place and future changes to that system, competition in the industry, economic
conditions in foreign countries, technological changes and product
availability. All forward-looking statements, whether made in this report or
elsewhere, should be considered in context with the various disclosures made by
the Company about its business.

Significant Accounting Policies

I-Flow prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, the Company is required to make certain estimates, judgments and
assumptions that the Company believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the periods presented. The significant
accounting policies which the Company believes are the most critical to aid in
fully understanding and evaluating our reported financial results include the
following:

Revenue Recognition

The Company recognizes revenue from product sales at the time of shipment and
passage of title. The Company also offers the right of return for defective
products, and continuously monitors and tracks such product returns. Also, the
Company records a provision for the estimated amount of future returns based on
historical experience and any notification received of pending returns. While
returns have historically been insignificant apart from the
termination of the Companys distribution agreement with Ethicon
Endo-Surgery, Inc. in 2001, the Company cannot guarantee that
it will continue to experience the same return rates as in the past. Any
significant increase in product returns could have a material adverse impact on
its operating results for the period or periods in which the returns
materialize.

The Company recognizes rental revenues from medical pumps over the term of the
related agreement, generally on a month to month basis. Pump rentals are
billed at the Companys established rates, which often differ from
contractually allowable rates provided by third party payors such as Medicare,
Medicaid and commercial insurance carriers. The Company records net rental
revenues at the estimated realizable amounts from patients and third party
payors. The Company may experience significant extended payment terms with
certain of these third party payors, however, it continuously monitors
reimbursement rates from third party payors and timing of payments. Any
significant change in reimbursement or collection rates could have a material
impact on the Companys operating results for the period or periods in which
the change occurs.

Inventories

The Company values inventory at the lower of the actual cost to purchase or
manufacture the inventory and the current estimated market value of the
inventory. The Company regularly reviews inventory quantities on hand and
records a provision for excess and obsolete inventory based primarily on the
estimated forecast of product demand and production requirements for the next
two years. A significant increase in the demand for the Companys

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##### Table of Contents



products could result in a short-term increase in the cost of inventory
purchases while a significant decrease in demand could result in an increase in
the amount of excess inventory quantities on hand. Additionally, the Companys
estimates of future product demand may prove to be inaccurate, in which case
the Company may have understated or overstated the provision required for
excess and obsolete inventory. In the future, if inventory is determined to be
overvalued, the Company would be required to recognize such costs in cost of
goods sold at the time of such determination. Likewise, if inventory is
determined to be undervalued, the Company may have over-reported cost of goods
sold in previous periods and would be required to recognize such additional
operating income at the time of sale. Therefore, although the Company seeks to
ensure the accuracy of its forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of its inventory and reported operating
results.

Deferred Taxes

The Company recognizes deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance based on
historical taxable income, projected future taxable income and the expected
timing of the reversals of existing temporary differences. If the Company
continues to operate at a profit in the future and generate sufficient future
taxable income, it could be required to reverse the current valuation allowance
against the deferred tax assets which would result in a substantial decrease in
the Companys effective tax rate. Likewise, if the Company is unable to
operate at a profit and unable to generate sufficient future taxable income, it
could be required to establish an additional valuation allowance against all or
a significant portion of its deferred tax assets resulting in a substantial
increase in its effective tax rate and a material adverse impact on operating
results.

Consolidated Results of Operations for the Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

Net revenues during the year ended December 31, 2001 were $33,305,000 compared
to $31,966,000 for the prior year, an increase of 4%. Net product revenues
decreased 3% in 2001 to $22,904,000 compared to $23,497,000 in 2000, while
rental income increased 23% in 2001 to $10,401,000 compared to $8,469,000 in
2000. The increase in rental income is attributable to an increase in infusion
pump rentals for chemotherapy by the Companys InfuSystem subsidiary.

The Companys revenues during 2001 and 2000 were generated in three primary
market segments: regional anesthesia, IV infusion therapy, and oncology
infusion services. Regional anesthesia product revenues for 2001, which
included the PainBuster® and ON-Q® Pain Management Systems, the Soaker
Catheter and Spinal Specialties products, decreased by 1% to $8,241,000 in 2001
compared to $8,310,000 for fiscal 2000. The decrease from the prior year
resulted from an inventory repurchase of approximately $963,000 from Ethicon
Endo-Surgery, Inc. in December 2001 which was accounted for as a sales return,
related to the termination of the Companys distribution agreement with
Ethicon, previously the Companys exclusive U.S. distributor for the ON-Q Pain
Management System. Under the termination agreement, the Company gained the
exclusive U.S. distribution rights to the ON-Q Pain Management System effective
January 1, 2002.

IV Infusion Therapy product sales which includes the Companys intravenous
elastomeric pumps, mechanical infusion devices and electronic infusion pumps
and disposables decreased 3% in 2001 to $14,701,000 compared to $15,187,000 in
2000. This decrease resulted primarily from the timing of shipments to a
specific distributor and the negative effect on sales of the strong U.S. dollar
relative to other currencies. The Company has an agreement with B. Braun
Melsungen AG, a world leader in the manufacture and distribution of
pharmaceuticals and infusion products, to distribute I-Flows elastomeric
infusion pumps in Western Europe, Eastern Europe, the Middle East, Asia
Pacific, South America and Africa. The Company also has a similar agreement
under which B. Braun Medical, Inc. distributes I-Flows elastomeric pumps to B.
Brauns IV Infusion Therapy customers in the United States. During the year
ended December 31, 2001, 2000 and 1999, combined sales to these companies
accounted for approximately 18%, 18% and 16%, respectively, of the Companys
net revenues.

13



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##### Table of Contents



Revenues for oncology infusion services provided by the Companys InfuSystem
subsidiary increased 22% to $10,363,000 in 2001 compared to $8,469,000 in
2000. This increase is due to additional client facilities converting to the
InfuSystem pump management system as well as the negotiation of additional
contracts with managed care organizations. The additional managed care
contracts increase the proportion of patients at each client facility for which
InfuSystem is able to successfully bill and collect for pump services. The
fiscal year ended December 31, 2000 was a transition year for InfuSystem, whose
customer base was significantly affected by changes in medical insurance
coverage practices and procedures for patient medical reimbursement utilized by
managed care organizations and other healthcare payors. During this
transition, InfuSystem essentially rebuilt its customer base by strengthening
existing managed care contracts and by adding new contracts with such leading
healthcare providers as the M.D. Anderson Cancer Center, Blue Cross/Blue Shield
Affiliates, U.S. Oncology, United Healthcare, Beech Street Corporation,
Nylcare, One Health Plan and Integrated Health Plan.

Cost of revenues was $14,011,000 during the year ended December 31, 2001,
compared to $13,710,000 in the prior year, an increase of 2%. As a percentage
of total revenues, cost of revenues decreased by one percentage point for the
year ended December 31, 2001 compared to the prior year.

Selling and marketing expenses for the year ended December 31, 2001 increased
$389,000 or 8% from the prior year. This increase was primarily attributable
to additional salaries and recruiting costs related to the building of a new
direct sales force during the end of fiscal 2001 necessary to support sales of
the ON-Q® Pain Management System during 2002. As a percentage of total
revenues, selling and marketing expenses increased by less than one percentage
point over the prior year.

General and administrative expenses for the year ended December 31, 2001
increased $1,235,000 or 15% from the prior year. This increase was primarily
due to higher professional fees, investor relations expenses, compensation and
various other costs associated with the growth in the business. As a
percentage of total revenues, general and administrative expenses increased
over the prior year by 3%.

Product development expenses include research and development for new products
and the cost of obtaining and maintaining regulatory approvals of products and
processes. Product development expenses for the year ended December 31, 2001
increased $237,000 or 12% from the prior year due primarily to increased
efforts on the new pain management products. The Company will continue to
incur product development expenses as it continues its efforts to introduce new
technology and cost-efficient products into the market. Product development has
remained relatively consistent as a percentage of net product sales
during 2001 compared to 2000.

During the year ended December 31, 2001, the Company recorded income tax
expense of $856,000, compared to income tax expense of $1,113,000 recorded for
the year ended December 31, 2000. The Companys effective tax rate remained
relatively constant from year to year, decreasing from 40.8% in 2000 to 40.3 %
in 2001.

Consolidated Results of Operations for the Year Ended December 31, 2000
Compared to the Year Ended December 31, 1999

Net revenues during the year ended December 31, 2000 were $31,966,000 compared
to $29,784,000 for the prior year, an increase of 7%. In January 2000, the
Company acquired Spinal Specialties, Inc. (Spinal Specialties), a designer
and manufacturer of custom spinal, epidural and nerve block kits based in San
Antonio, Texas. Revenues generated by Spinal Specialties of $1,960,000 for the
period from January 14, 2000 (date of acquisition) through December 31, 2000
were included in net revenues for the year ended December 31, 2000. Net
product revenues increased from $19,272,000 in 1999 to $23,497,000 in 2000, an
increase of 22%.

The Companys revenues during 2000 and 1999 were generated in three primary
market segments: regional anesthesia, IV infusion therapy, and oncology
infusion services. Revenues during 1999 also included a one-time $2,000,000
license fee related to the distribution of the Companys PainBuster® Pain
Management System. Regional anesthesia product revenues for 2000, which
included the PainBuster® and ON-Q® Pain Management Systems and Spinal
Specialties products, increased by 43% to $8,254,000 compared to $5,758,000 for
fiscal 1999, excluding the license fee. The $2,496,000 increase was primarily
related to $1,960,000 in revenues generated by Spinal Specialties during 2000
subsequent to its acquisition in January 2000.

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IV Infusion Therapy product sales increased 13% in 2000 to $15,243,000 compared
to $13,514,000 in 1999 due to increased orders by domestic and international
distributors. In March 1998, the Company entered into an agreement with B.
Braun Melsungen AG, a world leader in the manufacture and distribution of
pharmaceuticals and infusion products, to distribute I-Flows elastomeric
infusion pumps in Western Europe, Eastern Europe, the Middle East, Asia
Pacific, South America and Africa. The Company also entered into a similar
agreement under which B. Braun Medical, Inc. distributes I-Flows elastomeric
pumps to B.Brauns full line IV Infusion Therapy customers in the United
States. During the year ended December 31, 2000, 1999 and 1998, combined sales
to these companies accounted for approximately 18%, 16% and 20%, respectively,
of the Companys net revenues.

Revenues for oncology infusion services provided by the Companys InfuSystem
subsidiary were $8,469,000 in 2000 compared to $8,512,000 in 1999. The fiscal
year ended December 31, 2000 was a transition year for Infusystem, whose
customer base was significantly affected by changes in medical insurance
coverage practices and procedures for patient medical reimbursement utilized by
managed care organizations and other healthcare payors. During this transition
InfuSystem essentially rebuilt its customer base by strengthening existing
managed care contracts and adding new contracts with such leading healthcare
providers as Blue Cross/Blue Shield Affiliates, U.S. Oncology, United
Healthcare, Beech Street Corporation, Nylcare, One Health Plan and Integrated
Health Plan.

In May 1999, the Company entered into an agreement with dj Orthopedics LLC
(formerly DonJoy, a division of Smith & Nephew, Inc.), a leading provider of
orthopedic braces, to distribute the Companys PainBuster Pain Management
System exclusively in the United States and Canada for orthopedic surgery
applications. I-Flows PainBuster® Pain Management System provides continuous
infusion of a non-narcotic, local anesthetic directly into the intraoperative
site for post-operative pain management. I-Flow received a nonrefundable $2
million licensing fee during 1999 and required dj Orthopedics to make minimum
purchases in order to maintain its distribution rights.

In June 1999, the Company signed a distribution agreement with Ethicon
Endo-Surgery, Inc., a Johnson & Johnson company, under which Ethicon
Endo-Surgery became the exclusive distributor of I-Flows ON-Q® Pain Management
System for all surgical applications excluding orthopedics. The ON-Q® Pain
Management System infuses non-narcotic local anesthetics directly into the
operative site, the patients primary source of post-operative pain. This
multi-year agreement required Ethicon Endo-Surgery to meet minimum purchase
commitments to maintain its exclusive distribution rights.

Cost of revenues was $13,710,000 during the year ended December 31, 2000,
compared to $11,824,000 in the prior year, an increase of 16%. As a percentage
of total revenue, cost of revenues increased by three percentage points for the
year ended December 31, 2000 compared to the prior year, due primarily to the
licensing fees received in 1999 which were not received in the year ended
December 31, 2000.

Selling and marketing expenses for the year ended December 31, 2000 increased
$922,000 or 22% from the prior year. This increase was primarily related to
the acquisition of Spinal Specialties. Selling and marketing expenses
associated with Spinal Specialties totaled $500,000 for the period from January
14, 2000 (date of acquisiton) through December 31, 2000. As a percentage of
net product sales, selling and marketing expenses remained unchanged as
compared to 1999.

General and administrative expenses for the year ended December 31, 2000
increased $546,000 or 7% from the prior year. This increase was primarily due
to higher personnel costs, insurance costs and various other costs associated
with the growth in the business as well as the addition of Spinal Specialties.
For the period from January 14, 2000 (date of acquisition) through December 31,
2000 general and administrative expenses for Spinal Specialties were $414,000.
As a percentage of net product sales, general and administrative expenses
decreased from the prior year by 5%. This decrease represents an overall
effort by management to control spending.

Product development expenses for the year ended December 31, 2000 increased
from the prior year by $291,000, or 17%, due primarily to increased efforts on
the new pain management products. The Company will continue to incur product
development expenses as it continues its efforts to introduce new technology
and cost-efficient products into the market. Product development has remained
relatively consistent as a percentage of net product sales.

During the year ended December 31, 1999, the Company recorded a net income tax
benefit of $4,763,000 as a result of a reduction in the valuation allowance for
deferred tax assets. By comparison, during the year ended December

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##### Table of Contents



31, 2000, the Company recorded income tax expense of $1,113,000. The Companys
deferred tax assets primarily relate to net operating loss carryforwards for
federal and state tax purposes that can be used to offset taxes on future
earnings. The valuation allowance on the deferred tax assets was reduced, as
it became more likely that the Company will incur future profits and therefore
will be able to realize the tax benefits.

Liquidity and Capital Resources

During the year ended December 31, 2001, cash of $5,577,000 was provided by
operating activities consisting of net income of $1,267,000 plus non-cash
expenses of $4,232,000, plus net changes in operating assets and liabilities of
$78,000.

The Company used cash for investing activities during the year ended December
31, 2001 by acquiring net leasehold improvements, furniture, fixtures,
equipment and other assets of $1,819,000 for use in its operations. In
addition during fiscal 2001, there was a net cash outflow related to other
assets of $417,000 and the Company paid $165,000 in connection with the Spinal
Specialties acquisition.

During the year ended December 31, 2001, cash
of $2,319,000 was used in
financing activities consisting primarily of net payments on the line of credit
of $500,000, and net payments on notes payable of $1,975,000 offset by proceeds of
$156,000 from the exercise of stock options.

As of December 31, 2001, the Company had cash and cash equivalents of
$2,033,000 and net receivables of $10,010,000. Management believes the
Companys funds are sufficient to provide for its short and long-term projected
needs for operations. However, the Company may decide to sell additional
equity or increase its borrowings in order to fund increased product
development or for other purposes.

The Company has a working capital line of credit with a bank expiring in
December 2002. Under the line of credit, the Company may borrow up to the
lesser of $4,000,000 or 80% of eligible accounts receivable and 25% of eligible
inventory, as defined, at the banks prime rate plus 0.50% (5.25% at December
31, 2001). As of December 31, 2001, there were funds available for borrowing
of $3,600,000, and no amounts outstanding.

The Companys InfuSystem subsidiary has a revolving line of credit with a bank
under which it may borrow up to $2,500,000 or 80% of eligible accounts
receivable, as defined, at the banks prime rate less 0.25% (4.50% at December
31, 2001). There were no outstanding borrowings under the line as of December
31, 2001 and the entire amount was available for borrowing. The line expires
April 1, 2003.

The lines of credit and the notes are collateralized by substantially all of
the Companys assets and require the Company to comply with certain covenants
principally relating to working capital and liquidity. As of December 31,
2001, the Company believes that it was in compliance with all such covenants.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations(SFAS 141) and
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets(SFAS 142). They also issued Statement of Financial
Accounting Standards No. 143, Accounting for Obligations Associated with the
Retirement of Long-Lived Assets(SFAS 143), and Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets(SFAS 144), in August and October 2001, respectively.

SFAS 141 requires that all business combinations initiated after June 30, 2001
be accounted for under the purchase method. SFAS 141 superseded APB Opinion No.
16, Business Combinations, and Statement of Financial Accounting Standards No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprisesand is
effective for all business combinations initiated after June 30, 2001.

SFAS 142 addresses the financial accounting and reporting for acquired goodwill
and other intangible assets. Under SFAS 142, the Company is no longer required
to amortize goodwill and other intangible assets with indefinite lives

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##### Table of Contents



but will be required to subject these assets to periodic testing for
impairment. SFAS 142 supersedes Accounting Principles Board (APB) Opinion No. 17, Intangible Assets,
effective for fiscal years beginning after December 15, 2001. The Company is
currently evaluating the provisions of SFAS 142 but expects that the provisions
of SFAS 142 will not have a material adverse impact on its consolidated results
of operations and financial position upon adoption. In the year ended December
31, 2001, the Company recorded goodwill amortization of approximately $800,000.

SFAS 143 establishes accounting standards for the recognition and measurement
of an asset retirement obligation and its associated asset retirement cost. It
also provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS 143 is effective for fiscal
years beginning after June 15, 2002, with early adoption permitted. The
Company is currently evaluating the provisions of SFAS 143 but expects that
the provisions of SFAS 143 will not have a material impact on its consolidated
results of operations and financial position upon adoption.

SFAS 144 establishes a single accounting model for the impairment or disposal
of long-lived assets and new standards for reporting discontinued operations.
SFAS 144 superseded Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Ofand APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.The
provisions of SFAS 144 are effective in fiscal years beginning after December
15, 2001 and, in general, are to be applied prospectively. The Company is
currently evaluating the provisions of SFAS 144 but expects that the provisions
of SFAS 144 will not have a material impact on its consolidated results of
operations and financial position upon adoption.

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##### Table of Contents






Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Companys financial instruments include cash and cash equivalents and
long-term debt. At December 31, 2001, the carrying values of the Companys
financial instruments approximated fair values based on current market prices
and rates.

It is the Companys current policy not to enter into derivative financial
instruments. The Company does not currently have any significant direct
foreign currency exposure at December 31, 2001.




Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements

The Independent Auditors Report and the Consolidated Financial Statements
listed in the Index to Consolidated Financial Statements in Item 14 are
filed as part of this report.

Financial Statement Schedules

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                                 |  |                     |           |                  |  |            |         |        |  |                   |          |   |  |  |           | 
|-------------------------------- |  | ------------------- | --------- | ---------------- |  | ---------- | ------- | ------ |  | ----------------- | -------- | - |  |  | --------- | 
|                                 |  | Balance at          |           | Charged to Costs |  |            |         |        |  | Balance at End of
|Classification                   |  | Beginning of Period |           | and Expenses     |  | Deductions |         | Period
|                                 |  |                     |           |                  |  |            |         |       
|YEAR ENDED DECEMBER 31, 1999:    |  |                     |           |                  |  |            |         |        |  |                   |          |   |  |  |           | 
|Allowance for doubtful accounts  |  |                     | 1,824,000 |                  |  |            | 501,000 |        |  |                   |          |   |  |  | 2,325,000 | 
|Reserve for obsolete inventories |  |                     | 1,220,000 |                  |  |            | 808,000 |        |  |                   | (360,000 | ) |  |  | 1,668,000 | 
|YEAR ENDED DECEMBER 31, 2000:    |  |                     |           |                  |  |            |         |        |  |                   |          |   |  |  |           | 
|Allowance for doubtful accounts  |  |                     | 2,325,000 |                  |  |            | 425,000 |        |  |                   | (263,000 | ) |  |  | 2,487,000 | 
|Reserve for obsolete inventories |  |                     | 1,668,000 |                  |  |            | 248,000 |        |  |                   | (386,000 | ) |  |  | 1,530,000 | 
|YEAR ENDED DECEMBER 31, 2001:    |  |                     |           |                  |  |            |         |        |  |                   |          |   |  |  |           | 
|Allowance for doubtful accounts  |  |                     | 2,487,000 |                  |  |            | 165,000 |        |  |                   | (72,000  | ) |  |  | 2,580,000 | 
|Reserve for obsolete inventories |  |                     | 1,530,000 |                  |  |            | 439,000 |        |  |                   | (170,000 | ) |  |  | 1,799,000 | 




Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

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##### Table of Contents






PART III




Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

There is incorporated herein by reference the information required by this
Item included in the Companys Proxy Statement for the 2002 Annual Meeting of
Stockholders under the captions Election of Directors and Section 16(a)
Beneficial Ownership Reporting Compliance, which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of
the fiscal year ended December 31, 2001 and the information from the section
entitled Executive Officers of the Registrant in Part I of this report.




Item 11. EXECUTIVE COMPENSATION

There is incorporated herein by reference the information required by this Item
included in the Companys Proxy Statement for the 2002 Annual Meeting of
Stockholders under the captions Board Compensation, Executive Compensation,
Report of the Compensation Committee, Compensation Committee Interlock
Insider Participation and Stock Performance Graph which will be filed with
the Securities and Exchange Commission no later than 120 days after the close
of the fiscal year ended December 31, 2001.




Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

There is incorporated herein by reference the information required by this
Item included in the Companys Proxy Statement for the 2002 Annual Meeting of
Stockholders under the caption Principal Shareholders and Stock Ownership of
Management, which will be filed with the Securities and Exchange Commission
no later than 120 days after the close of the fiscal year ended December 31,
2001.




Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

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##### Table of Contents






PART IV




Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



|(a) |  | Documents filed as part of this Report:
|--- |  | ---------------------------------------

|                                                   |                                                                                                                               |                     |   
|-------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | ------------------- | --
|(1) Financial Statements                           |                                                                                                                               |                    
|                                                  
|                                                   | The documents described in the Index to Consolidated Financial Statements
are included in this report starting at page F-1. |                     |   
|                                                  
|(2) Financial Statement Schedules included herein: |                                                                                                                               | Page in This
Report
|                                                   |                                                                                                                               |                     |   
|                                                   | Schedule II  Valuation and Qualifying Accounts                                                                             |                     | 18
|                                                  
|                                                   | All other schedules are omitted, as the required information is inapplicable                                                  |                     |   
|                                                  
|(3) Exhibits                                       |                                                                                                                               |                    
|                                                  
|                                                   | The list of exhibits contained in the accompanying Index to Exhibits is
herein incorporated by reference                      |                     |   



|(b) |  | Reports on Form 8-K
|--- |  | -------------------

There were no reports on Form 8-K filed during the quarter ended December 31,
2001.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                        |  |     
|----------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                        |  | Page
|                                                                                                                        |  |     
|Independent Auditors Report                                                                                            |  | F-1 
|                                                                                                                       
|Consolidated Balance Sheets as of December 31, 2001 and 2000                                                            |  | F-2 
|                                                                                                                       
|Consolidated Statements of Operations and Comprehensive Operations
For the Years Ended December 31, 2001, 2000 and 1999 |  | F-3 
|                                                                                                                       
|Consolidated Statements of Shareholders Equity for the
Years Ended December 31, 2001, 2000 and 1999                    |  | F-4 
|                                                                                                                       
|Consolidated Statements of Cash Flows for the Years
Ended December 31, 2001, 2000 and 1999                              |  | F-5 
|                                                                                                                       
|Notes to Consolidated Financial Statements                                                                              |  | F-6 

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Independent Auditors Report

To the Board of Directors and Stockholders of
    I-Flow Corporation:

We have audited the accompanying consolidated balance sheets of I-Flow
Corporation and subsidiaries (the Company) as of December 31, 2001 and 2000,
and the related consolidated statements of operations and comprehensive
operations, shareholders equity and cash flows for each of the three years in
the period ended December 31, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)(2). These financial
statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of I-Flow Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP
Costa Mesa, California
March 8, 2002

F-1



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CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                  |                                                                                                                            |      |        |              |   |              |        |         |   | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ---- | ------ | ------------ | - | ------------ | ------ | ------- | - | 
|                                                                                                                                                                  |                                                                                                                            |      |        | December 31, |   | December 31,
|(Amounts in thousands, except share and per share amounts)                                                                                                        |                                                                                                                            | 2001 |        | 2000        
|                                                                                                                                                                  |                                                                                                                            |      |        |             
|Assets                                                                                                                                                            |                                                                                                                            |      |        |              |   |              |        |        
|Current assets:                                                                                                                                                   |                                                                                                                            |      |        |              |   |              |        |        
|                                                                                                                                                                  | Cash and cash equivalents                                                                                                  |      | $      | 2,033        |   |              | $      | 1,184   |  
|                                                                                                                                                                  | Accounts receivable, less allowance for doubtful accounts of $2,580
and $2,487 at December 31, 2001 and 2000, respectively |      |        | 10,010       |   |              |        | 12,487  |  
|                                                                                                                                                                  | Inventories, net                                                                                                           |      |        | 6,984        |   |              |        | 4,161   |  
|                                                                                                                                                                  | Prepaid expenses and other current assets                                                                                  |      |        | 353          |   |              |        | 360     |  
|                                                                                                                                                                  | Deferred taxes                                                                                                             |      |        | 2,294        |   |              |        | 2,543   |  
|                                                                                                                                                                  |                                                                                                                            |      |        |              |   |              |        |        
|                                                                                                                                                                  | Total current assets                                                                                                       |      |        | 21,674       |   |              |        | 20,735  |  
|Property, net                                                                                                                                                     |                                                                                                                            |      | 4,805  |              |   |              | 4,591  |        
|Goodwill and other intangibles, net                                                                                                                               |                                                                                                                            |      | 7,017  |              |   |              | 7,641  |        
|Notes receivable and other non-current assets                                                                                                                     |                                                                                                                            |      | 166    |              |   |              | 11     |        
|Deferred taxes                                                                                                                                                    |                                                                                                                            |      | 2,042  |              |   |              | 2,237  |        
|                                                                                                                                                                  |                                                                                                                            |      |        |              |   |              |        |        
|Total assets                                                                                                                                                      |                                                                                                                            | $    | 35,704 |              |   | $            | 35,215 |        
|                                                                                                                                                                  |                                                                                                                            |      |        |              |   |              |        |        
|Liabilities and Shareholders Equity                                                                                                                              |                                                                                                                            |      |        |              |   |              |        |        
|Current liabilities:                                                                                                                                              |                                                                                                                            |      |        |              |   |              |        |        
|                                                                                                                                                                  | Accounts payable                                                                                                           |      | $      | 3,115        |   |              | $      | 2,673   |  
|                                                                                                                                                                  | Accrued payroll and related expenses                                                                                       |      |        | 1,875        |   |              |        | 1,482   |  
|                                                                                                                                                                  | Income taxes payable                                                                                                       |      |        | 576          |   |              |        | 644     |  
|                                                                                                                                                                  | Current portion of long-term debt                                                                                          |      |        | 221          |   |              |        | 976     |  
|                                                                                                                                                                  | Line of credit                                                                                                             |      |        |             |   |              |        | 500     |  
|                                                                                                                                                                  | Other liabilities                                                                                                          |      |        | 65           |   |              |        | 19      |  
|                                                                                                                                                                  |                                                                                                                            |      |        |              |   |              |        |        
|                                                                                                                                                                  | Total current liabilities                                                                                                  |      |        | 5,852        |   |              |        | 6,294   |  
|                                                                                                                                                                  |                                                                                                                            |      |        |              |   |              |        |        
|Long-term debt, less current portion                                                                                                                              |                                                                                                                            |      | 83     |              |   |              | 1,303  |        
|Commitments and contingencies (Note 7)                                                                                                                            |                                                                                                                            |      |        |              |   |              |        |        
|                                                                                                                                                                  |                                                                                                                            |      |        |              |   |              |        |        
|Shareholders equity                                                                                                                                              |                                                                                                                            |      |        |              |   |              |        |        
|                                                                                                                                                                  | Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding                           |      |        |             |   |              |        |        |  
|Common stock, $0.001 par value; 40,000,000 shares authorized, 15,344,550 and
15,051,929 shares issued and outstanding at December 31, 2001 and 2000,
respectively |                                                                                                                            |      | 42,274 |              |   |              | 40,741 |        
|                                                                                                                                                                  | Common stock warrants                                                                                                      |      |        |             |   |              |        | 615     |  
|                                                                                                                                                                  | Accumulated other comprehensive income                                                                                     |      |        | 1            |   |              |        | 35      |  
|                                                                                                                                                                  | Accumulated deficit                                                                                                        |      |        | (12,506      | ) |              |        | (13,773 | )
|                                                                                                                                                                  |                                                                                                                            |      |        |              |   |              |        |        
|                                                                                                                                                                  | Total shareholders equity                                                                                                 |      |        | 29,769       |   |              |        | 27,618  |  
|                                                                                                                                                                  |                                                                                                                            |      |        |              |   |              |        |        
|Total liabilities and shareholders equity                                                                                                                        |                                                                                                                            | $    | 35,704 |              |   | $            | 35,215 |        
|                                                                                                                                                                  |                                                                                                                            |      |        |              |   |              |        |        

See accompanying Notes to Consolidated Financial Statements.

F-2



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CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE OPERATIONS

|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |        | 
|------------------------------------------------ | -------------------------- | ---- | ------------------------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                 |                            |      | Years ended December 31,
|                                                 |                            |      |                         
|(Amounts in thousands, except per share amounts) |                            | 2001 |                          | 2000   |  | 1999
|                                                 |                            |      |                          |        |  |     
|Revenues:                                        |                            |      |                          |        |  |      |        |        |  |   |        |       
|                                                 | Net product sales          |      | $                        | 22,904 |  |      | $      | 23,497 |  |   | $      | 19,272 | 
|                                                 | Rental income and other    |      |                          | 10,401 |  |      |        | 8,469  |  |   |        | 8,512  | 
|                                                 | Licensing fees             |      |                          |       |  |      |        |       |  |   |        | 2,000  | 
|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |       
|                                                 | Total revenues             |      |                          | 33,305 |  |      |        | 31,966 |  |   |        | 29,784 | 
|Cost of revenues                                 |                            |      | 14,011                   |        |  |      | 13,710 |        |  |   | 11,824 |       
|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |       
|Gross profit                                     |                            |      | 19,294                   |        |  |      | 18,256 |        |  |   | 17,960 |       
|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |       
|Operating expenses                               |                            |      |                          |        |  |      |        |        |  |   |        |       
|                                                 | Selling and marketing      |      |                          | 5,504  |  |      |        | 5,115  |  |   |        | 4,193  | 
|                                                 | General and administrative |      |                          | 9,385  |  |      |        | 8,150  |  |   |        | 7,604  | 
|                                                 | Product development        |      |                          | 2,238  |  |      |        | 2,001  |  |   |        | 1,710  | 
|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |       
|                                                 | Total operating expenses   |      |                          | 17,127 |  |      |        | 15,266 |  |   |        | 13,507 | 
|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |       
|Operating income                                 |                            |      | 2,167                    |        |  |      | 2,990  |        |  |   | 4,453  |       
|Interest and other expense, net                  |                            |      | 44                       |        |  |      | 265    |        |  |   | 404    |       
|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |       
|Income before income taxes                       |                            |      | 2,123                    |        |  |      | 2,725  |        |  |   | 4,049  |       
|Income tax provision (benefit)                   |                            |      | 856                      |        |  |      | 1,113  |        |  |   | (4,763 | )     
|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |       
|Net income                                       |                            | $    | 1,267                    |        |  | $    | 1,612  |        |  | $ | 8,812  |       
|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |       
|Net income per share
Basic                       |                            | $    | 0.08                     |        |  | $    | 0.11   |        |  | $ | 0.61   |       
|Diluted                                          |                            |      | 0.08                     |        |  |      | 0.10   |        |  |   | 0.58   |       
|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |       
|Comprehensive Operations:                        |                            |      |                          |        |  |      |        |        |  |   |        |       
|Net income                                       |                            | $    | 1,267                    |        |  | $    | 1,612  |        |  | $ | 8,812  |       
|Foreign currency translation adjustments         |                            |      | (34                      | )      |  |      | 9      |        |  |   | 26     |       
|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |       
|Comprehensive income                             |                            | $    | 1,233                    |        |  | $    | 1,621  |        |  | $ | 8,838  |       
|                                                 |                            |      |                          |        |  |      |        |        |  |   |        |       

See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

|                                          |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   |        |  
|----------------------------------------- |  | --------------- | ---- | ------------ |  | ------ | ---- | ------------- |  | ----------- | ------ | ------ |  | ------- | ------ | ----- |  | - | ---- | - |  | ----------- | --- | - |  | - | ------- | - |  | - | ------ | -
|                                          |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  | Accumulated |     |   |  |   |         |   |  |  
|                                          |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  | Other       |     |   |  |   |         |   |  |  
|                                          |  | Preferred Stock |      | Common Stock |  | Common |      | Comprehensive |  |             |        |        |  |         |        |      
|                                          |  |                 |      |              |  | Stock  |      | Income        |  | Accumulated |        |        |  |        
|(Amounts in thousands)                    |  | Shares          |      | Amount       |  | Shares |      | Amount        |  | Warrants    |        | (Loss) |  | Deficit |        | Total
|                                          |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |      
|Balance, January 1, 1999                  |  |                 | 301  |              |  | $      | 686  |               |  |             | 14,044 |        |  | $       | 37,735 |       |  | $ | 615  |   |  | $           |    |   |  | $ | (24,219 | ) |  | $ | 14,817 |  
|Exercise of common stock options          |  |                 |      |              |  |        |      |               |  |             | 326    |        |  |         | 869    |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   | 869    |  
|Tax impact from exercise of stock options |  |                 |      |              |  |        |      |               |  |             |        |        |  |         | 309    |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   | 309    |  
|Stock based compensation                  |  |                 |      |              |  |        |      |               |  |             |        |        |  |         | 101    |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   | 101    |  
|Purchase price adjustment                 |  |                 |      |              |  |        |      |               |  |             |        |        |  |         | (286   | )     |  |   |      |   |  |             |     |   |  |   |         |   |  |   | (286   | )
|Conversion of preferred stock             |  |                 | (301 | )            |  |        | (686 | )             |  |             | 322    |        |  |         | 686    |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   |        |  
|Reversal of preferred stock dividend      |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             |     |   |  |   | 22      |   |  |   | 22     |  
|Foreign currency translation adjustment   |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             | 26  |   |  |   |         |   |  |   | 26     |  
|Net income                                |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             |     |   |  |   | 8,812   |   |  |   | 8,812  |  
|                                          |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   |        |  
|Balance, December 31, 1999                |  |                 |     |              |  | $      |     |               |  |             | 14,692 |        |  | $       | 39,414 |       |  | $ | 615  |   |  | $           | 26  |   |  | $ | (15,385 | ) |  | $ | 24,670 |  
|Exercise of common stock options          |  |                 |      |              |  |        |      |               |  |             | 182    |        |  |         | 406    |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   | 406    |  
|Common stock issued for acquisition       |  |                 |      |              |  |        |      |               |  |             | 200    |        |  |         | 750    |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   | 750    |  
|Settlement of escrow shares               |  |                 |      |              |  |        |      |               |  |             | (22    | )      |  |         | (67    | )     |  |   |      |   |  |             |     |   |  |   |         |   |  |   | (67    | )
|Tax impact from exercise of stock options |  |                 |      |              |  |        |      |               |  |             |        |        |  |         | (145   | )     |  |   |      |   |  |             |     |   |  |   |         |   |  |   | (145   | )
|Stock based compensation                  |  |                 |      |              |  |        |      |               |  |             |        |        |  |         | 383    |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   | 383    |  
|Foreign currency translation adjustment   |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             | 9   |   |  |   |         |   |  |   | 9      |  
|Net income                                |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             |     |   |  |   | 1,612   |   |  |   | 1,612  |  
|                                          |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   |        |  
|Balance, December 31, 2000                |  |                 |     |              |  | $      |     |               |  |             | 15,052 |        |  | $       | 40,741 |       |  | $ | 615  |   |  | $           | 35  |   |  | $ | (13,773 | ) |  | $ | 27,618 |  
|Exercise of common stock options          |  |                 |      |              |  |        |      |               |  |             | 293    |        |  |         | 156    |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   | 156    |  
|Tax impact from exercise of stock options |  |                 |      |              |  |        |      |               |  |             |        |        |  |         | 129    |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   | 129    |  
|Expiration of common stock warrants       |  |                 |      |              |  |        |      |               |  |             |        |        |  |         | 615    |       |  |   | (615 | ) |  |             |     |   |  |   |         |   |  |   |        |  
|Stock based compensation                  |  |                 |      |              |  |        |      |               |  |             |        |        |  |         | 633    |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   | 633    |  
|Foreign currency translation adjustment   |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             | (34 | ) |  |   |         |   |  |   | (34    | )
|Net income                                |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             |     |   |  |   | 1,267   |   |  |   | 1,267  |  
|                                          |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   |        |  
|Balance, December 31, 2001                |  |                 |     |              |  | $      |     |               |  |             | 15,345 |        |  | $       | 42,274 |       |  | $ |     |   |  | $           | 1   |   |  | $ | (12,506 | ) |  | $ | 29,769 |  
|                                          |  |                 |      |              |  |        |      |               |  |             |        |        |  |         |        |       |  |   |      |   |  |             |     |   |  |   |         |   |  |   |        |  

See accompanying Notes to Consolidated Financial Statements.

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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |       |        |        |  
|-------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------------- | ----- | ----------------------- | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | -
|                                                               |                                                                                   |                                                                                      |                                                           |       | Year ended December 31,
|                                                               |                                                                                   |                                                                                      |                                                           |       |                        
|(Amounts in thousands)                                         |                                                                                   | 2001                                                                                 |                                                           | 2000  |                         | 1999  
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |       
|Cash flows from operating activities:                          |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|                                                               | Net income                                                                        |                                                                                      | $                                                         | 1,267 |                         |        | $      | 1,612 |        |        | $      | 8,812 |       
|                                                               | Adjustments to reconcile net income to net cash provided by
operating activities: |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |       |       
|                                                               |                                                                                   | Deferred taxes                                                                       |                                                           |       | 573                     |        |        |       | 1,087  |        |        |       | (5,569 | )     
|                                                               |                                                                                   | Depreciation and amortization                                                        |                                                           |       | 2,661                   |        |        |       | 2,648  |        |        |       | 2,490  |       
|                                                               |                                                                                   | Loss on disposal of property                                                         |                                                           |       | 3                       |        |        |       | 10     |        |        |       | 37     |       
|                                                               |                                                                                   | Stock based compensation                                                             |                                                           |       | 633                     |        |        |       | 383    |        |        |       | 101    |       
|                                                               |                                                                                   | Change in inventory obsolescence reserve                                             |                                                           |       | 269                     |        |        |       | (138   | )      |        |       | 448    |       
|                                                               |                                                                                   | Change in allowance for doubtful accounts                                            |                                                           |       | 93                      |        |        |       | 162    |        |        |       | 378    |       
|                                                               |                                                                                   | Changes in operating assets and liabilities, net of effect of business
acquisitions: |                                                           |       |                         |        |        |       |        |        |        |       |        |       
|                                                               |                                                                                   |                                                                                      | Accounts receivable                                       |       |                         | 2,380  |        |       |        | (3,696 | )      |       |        | (1,562 | )
|                                                               |                                                                                   |                                                                                      | Inventories                                               |       |                         | (3,092 | )      |       |        | (283   | )      |       |        | 172    |  
|                                                               |                                                                                   |                                                                                      | Prepaid expenses and other                                |       |                         | 19     |        |       |        | 235    |        |       |        | 14     |  
|                                                               |                                                                                   |                                                                                      | Accounts payable and accrued payroll and related expenses |       |                         | 959    |        |       |        | (106   | )      |       |        | 1,058  |  
|                                                               |                                                                                   |                                                                                      | Income taxes payable                                      |       |                         | (68    | )      |       |        | (260   | )      |       |        | 607    |  
|                                                               |                                                                                   |                                                                                      | Other liabilities                                         |       |                         | (120   | )      |       |        | 70     |        |       |        | 82     |  
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Net cash provided by operating activities                      |                                                                                   |                                                                                      | 5,577                                                     |       |                         |        | 1,724  |       |        |        | 7,068  |      
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Cash flows from investing activities:                          |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|                                                               |                                                                                   | Capital expenditures                                                                 |                                                           |       | (1,819                  | )      |        |       | (2,948 | )      |        |       | (1,048 | )     
|                                                               |                                                                                   | Cash paid for acquisition, net of cash received                                      |                                                           |       | (165                    | )      |        |       | (584   | )      |        |       | (286   | )     
|                                                               |                                                                                   | Change in other assets                                                               |                                                           |       | (417                    | )      |        |       | (232   | )      |        |       | (178   | )     
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Net cash used in investing activities                          |                                                                                   |                                                                                      | (2,401                                                    | )     |                         |        | (3,764 | )     |        |        | (1,512 | )    
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Cash flows from financing activities:                          |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|                                                               |                                                                                   | Net proceeds (repayments) from line of credit                                        |                                                           |       | (500                    | )      |        |       | 412    |        |        |       | (1,891 | )     
|                                                               |                                                                                   | Proceeds from issuance of note payable                                               |                                                           |       |                        |        |        |       | 812    |        |        |       | 163    |       
|                                                               |                                                                                   | Payments on notes payable                                                            |                                                           |       | (1,975                  | )      |        |       | (1,604 | )      |        |       | (1,935 | )     
|                                                               |                                                                                   | Proceeds from exercise of stock options and warrants                                 |                                                           |       | 156                     |        |        |       | 406    |        |        |       | 378    |       
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Net cash provided by (used in) financing activities            |                                                                                   |                                                                                      | (2,319                                                    | )     |                         |        | 26     |       |        |        | (3,285 | )    
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Effect of exchange rates on cash                               |                                                                                   |                                                                                      | (8                                                        | )     |                         |        | 6      |       |        |        | (50    | )    
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Net increase (decrease) in cash and cash equivalents           |                                                                                   |                                                                                      | 849                                                       |       |                         |        | (2,008 | )     |        |        | 2,221  |      
|Cash and cash equivalents at beginning of year                 |                                                                                   |                                                                                      | 1,184                                                     |       |                         |        | 3,192  |       |        |        | 971    |      
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Cash and cash equivalents at end of year                       |                                                                                   | $                                                                                    | 2,033                                                     |       |                         | $      | 1,184  |       |        | $      | 3,192  |      
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|SUPPLEMENTAL CASH FLOW INFORMATION:                            |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Interest paid                                                  |                                                                                   | $                                                                                    | 98                                                        |       |                         | $      | 256    |       |        | $      | 476    |      
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Income tax payments                                            |                                                                                   | $                                                                                    | 413                                                       |       |                         | $      | 245    |       |        | $      | 36     |      
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Non cash preferred stock conversion                            |                                                                                   | $                                                                                    |                                                          |       |                         | $      |       |       |        | $      | 686    |      
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Tax impact from exercise of stock options                      |                                                                                   | $                                                                                    | 129                                                       |       |                         | $      | (145   | )     |        | $      | 309    |      
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Settlement of escrow shares                                    |                                                                                   | $                                                                                    |                                                          |       |                         | $      | 67     |       |        | $      |       |      
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Liabilities issued and assumed in connection with acquisition: |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|                                                               | Fair value of assets acquired (including intangibles)                             |                                                                                      | $                                                         | 165   |                         |        | $      | 2,222 |        |        | $      |      |       
|                                                               | Cash outflows for business acquisition                                            |                                                                                      |                                                           | (165  | )                       |        |        | (584  | )      |        |        | (286  | )     
|                                                               | Common stock and warrants issued                                                  |                                                                                      |                                                           |      |                         |        |        | (750  | )      |        |        | 286   |       
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      
|Liabilities issued and assumed                                 |                                                                                   | $                                                                                    |                                                          |       |                         | $      | 888    |       |        | $      |       |      
|                                                               |                                                                                   |                                                                                      |                                                           |       |                         |        |        |       |        |        |        |      

See accompanying Notes to Consolidated Financial Statements.

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##### Table of Contents



Notes to Consolidated Financial Statements



|1. |  | Summary of Significant Accounting Policies
|-- |  | ------------------------------------------

Nature of Operations-I-Flow Corporation (I-Flow or the Company) was
incorporated in California on July 17, 1985. On July 30, 2001, the Company
reincorporated in the State of Delaware by merging into a wholly owned
subsidiary incorporated in Delaware. The Company designs, develops and markets
technically advanced, low-cost ambulatory infusion systems that seek to
redefine the standard of care by providing life enhancing, cost effective
solutions for pain management and infusion therapy. The Companys products are
used both in hospitals and alternate site settings. I-Flow manufactures a
growing line of compact, portable infusion pumps, catheters and pain kits that
administer medication directly to the wound site as well as administer local
anesthetic, chemotherapy, antibiotics, nutritional supplements and other
medications. InfuSystem, Inc., a wholly-owned subsidiary, is primarily engaged
in the rental of medical infusion pumps. The rentals are on a month-to-month
basis and are treated as operating leases.

Principles of Consolidation The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany accounts and transactions have
been eliminated.

Cash and Cash Equivalents-Cash and cash equivalents consist of cash in the
bank, money-market funds and U.S. Treasury bills with an original maturity date
of 90 days or less.

Inventories-Inventories are stated at the lower of cost (determined on a
first in, first out basis) or market. Inventories consisted of the following
as of December 31:

|                |  |      |           |      |  |   |           | 
|--------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                |  | 2001 |           | 2000
|                |  |      |           |     
|Raw Materials   |  | $    | 4,553,000 |      |  | $ | 3,221,000 | 
|Work in Process |  |      | 199,000   |      |  |   | 171,000   | 
|Finished Goods  |  |      | 2,232,000 |      |  |   | 769,000   | 
|                |  |      |           |      |  |   |           | 
|Total           |  | $    | 6,984,000 |      |  | $ | 4,161,000 | 
|                |  |      |           |      |  |   |           | 

Long Lived Assets The Company accounts for the impairment and disposition of
long-lived assets in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of.In accordance with SFAS 121,
long-lived assets to be held are reviewed for events or changes in
circumstances, which indicate that their carrying value may not be recoverable.
The Company periodically reviews the carrying value of long-lived assets to
determine whether or not impairment to such value has occurred and has
determined that there was no impairment at December 31, 2001.

Property Property is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the related assets, ranging from two
to seven years. Leasehold improvements are amortized using the straight-line
method over the life of the asset or the remaining term of the lease, whichever
is shorter. Property consisted of the following as of December 31:

|                                          |  |      |            |      |  |   |            |  
|----------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                          |  | 2001 |            | 2000
|                                          |  |      |            |     
|Furniture, fixtures and equipment         |  | $    | 6,837,000  |      |  | $ | 5,724,000  |  
|Rental and demonstration equipment        |  |      | 5,494,000  |      |  |   | 5,031,000  |  
|Accumulated depreciation and amortization |  |      | (7,526,000 | )    |  |   | (6,164,000 | )
|                                          |  |      |            |      |  |   |            |  
|Total                                     |  | $    | 4,805,000  |      |  | $ | 4,591,000  |  
|                                          |  |      |            |      |  |   |            |  

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Goodwill and Other Intangibles Goodwill represents the excess purchase cost
over the net assets acquired and is amortized over five to fifteen years using
the straight-line method. Other intangible assets include patents, acquired
workforce value and acquired technology which are being amortized using the
straight-line method over two to seven years. Accumulated amortization of
goodwill and other intangible assets amounted to $5,456,000 and $4,608,000 as
of December 31, 2001 and 2000, respectively. The Company periodically reviews
the recoverability of the carrying value of goodwill, intangibles and other
long-lived assets using the methodology prescribed in SFAS 121. The Company
also reviews these assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of these assets is determined by comparing the
forecasted undiscounted future net cash flows from the operations to which the
assets relate, based on managements best estimates using appropriate
assumptions and projections at the time, to the carrying amount of the assets.
If the carrying value is determined not to be recoverable from future operating
cashflows, the asset is deemed impaired and an impairment loss is recognized
equal to the amount by which the carrying amount exceeds the estimated fair
value of the asset. At December 31, 2001, the Company believes there has been
no impairment of the value of goodwill and other intangible assets.

Revenue Recognition Revenue from product sales is recognized at the time of
shipment and passage of title. Provision is made currently for estimated
product returns and warranty obligations.

Rental revenue from medical pumps is recorded as earned over the term of the
related rental agreements, normally on a month-to-month basis. Pump rentals
are billed at the Companys established rates, which often differ from
contractually allowable rates provided by third party payors such as Medicare,
Medicaid and commercial insurance carriers. Provision is made currently to
reduce revenue to the estimated allowable amount per such contractual rates.

During the fourth quarter of 2001, the Company repurchased inventory from
Ethicon Endo-Surgery, Inc. as part of the termination of a distribution
agreement. The repurchase was accounted for as a sales return, and
approximately $963,000 related to this transaction is included in accounts
payable as of December 31, 2001.

Income Taxes The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income
Taxes, which requires that the Company recognize deferred tax liabilities and
assets based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities, using enacted tax rates in
effect in the years the differences are expected to reverse. Deferred income
tax benefit (expense) results from the change in net deferred tax assets or
deferred tax liabilities. A valuation allowance is recorded when it is more
likely than not that some or all or any deferred tax assets will not be
realized.

Accounting for Stock Based Compensation The Company accounts for employee
stock options using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees
and Financial Accounting Standards Board (FASB) Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans, and has adopted the disclosure-only alternative of SFAS No. 123,
Accounting for Stock-Based Compensation(See Note 6). Stock options issued to
consultants and vendors are accounted for at fair value in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18,
Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction With Selling Goods or Services(See Note 6).

Earnings Per Share Pursuant to SFAS No. 128, Earnings Per Share, the Company
provides dual presentation of Basic and Diluted earnings per share (EPS).

Basic EPS excludes dilution from common stock equivalents and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution from common stock equivalents, such as outstanding stock
options, calculated using the treasury stock method. Common stock equivalents
have not been included in calculating diluted EPS where inclusion would be
anti-dilutive.

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##### Table of Contents



The following is a reconciliation between the components of the basic and
diluted earnings per share calculations:

|                             |                                                      |               |  |                          |         |      |  |            |         |  |  |            |         | 
|---------------------------- | ---------------------------------------------------- | ------------- |  | ------------------------ | ------- | ---- |  | ---------- | ------- |  |  | ---------- | ------- | 
|                             |                                                      |               |  | Years ended December 31,
|                             |                                                      |               |  |                         
|                             |                                                      |               |  | 2001                     |         | 2000 |  | 1999      
|                             |                                                      |               |  |                          |         |      |  |           
|Basic net income per share   |                                                      |               |  |                          |         |      |  |            |         |  |  |           
|                             | Weighted-average number of common
shares outstanding |               |  | 15,231,000               |         |      |  | 15,002,000 |         |  |  | 14,387,000 |        
|                             | Effect of dilutive securities:                       |               |  |                          |         |      |  |            |         |  |  |            |        
|                             |                                                      | Stock options |  |                          | 518,000 |      |  |            | 645,000 |  |  |            | 729,000 | 
|                             |                                                      |               |  |                          |         |      |  |            |         |  |  |           
|Diluted net income per share |                                                      |               |  |                          |         |      |  |            |         |  |  |           
|                             | Weighted-average number of common
shares outstanding |               |  | 15,749,000               |         |      |  | 15,647,000 |         |  |  | 15,116,000 |        
|                             |                                                      |               |  |                          |         |      |  |            |         |  |  |           

Comprehensive IncomePursuant to SFAS No. 130, Reporting Comprehensive
Income, the Company has included a calculation of comprehensive income in its
accompanying consolidated statements of operations and comprehensive operations
for the years ended December 31, 2001, 2000 and 1999.

Use of EstimatesThe preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.

Foreign CurrencyThe financial position and results of operations of the
Companys foreign subsidiary are generally measured using the local currency as
the functional currency. Assets and liabilities of the subsidiary are
translated at the exchange rate in effect at each year-end. Income statement
accounts are translated at the average rate of exchange prevailing during the
year. Translation adjustments arising from differences in exchange rates from
period to period are included as a separate component within shareholders
equity. Realized gains or losses from foreign currency transactions are
included in operations as incurred.

New Accounting Pronouncements In June
2001, the FASB issued SFAS No. 141, Business Combinations(SFAS 141) and
SFAS No. 142, Goodwill and Other
Intangible Assets(SFAS 142). They also issued SFAS No. 143, Accounting for Obligations Associated with the
Retirement of Long-Lived Assets(SFAS 143), and SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets(SFAS 144), in August and October 2001, respectively.

SFAS 141 requires that all business combinations initiated after June 30, 2001
be accounted for under the purchase method. SFAS 141 superseded APB Opinion No.
16, Business Combinations, and SFAS No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprisesand is
effective for all business combinations initiated after June 30, 2001.

SFAS 142 addresses the financial accounting and reporting for acquired goodwill
and other intangible assets. Under SFAS 142, the Company is no longer required
to amortize goodwill and other intangible assets with indefinite lives but will
be required to subject these assets to periodic testing for impairment. SFAS
142 supersedes APB Opinion No. 17, Intangible Assets, effective for fiscal
years beginning after December 15, 2001. The Company is currently evaluating
the provisions of SFAS 142 but expects that the provisions of SFAS 142 will not
have a material adverse impact on its consolidated results of operations and
financial position upon adoption. In the year ended December 31, 2001, the
Company recorded goodwill amortization of approximately $800,000.

SFAS 143 establishes accounting standards for the recognition and measurement
of an asset retirement obligation and its associated asset retirement cost. It
also provides accounting guidance for legal obligations associated with

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the retirement of tangible long-lived assets. SFAS 143 is effective for
fiscal years beginning after June 15, 2002, with early adoption permitted.
The Company is currently evaluating the provisions of SFAS 143 but expects
that the provisions of SFAS 143 will not have a material impact on its
consolidated results of operations and financial position upon adoption.

SFAS 144 establishes a single accounting model for the impairment or disposal
of long-lived assets and new standards for reporting discontinued operations.
SFAS 144 superseded SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Ofand APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.The
provisions of SFAS 144 are effective in fiscal years beginning after December
15, 2001 and, in general, are to be applied prospectively. The Company is
currently evaluating the provisions of SFAS 144 but expects that the provisions
of SFAS 144 will not have a material impact on its consolidated results of
operations and financial position upon adoption.

ReclassificationsCertain prior year amounts have been reclassified to
conform to the current year presentation.



|2. |  | Acquisition of InfuSystems II, Inc. and Venture Medical, Inc.
|-- |  | -------------------------------------------------------------

On February 9, 1998, the Company acquired
InfuSystems II, Inc. (InfuSystems)
and Venture Medical, Inc. (VMI). VMI and InfuSystems were subsequently merged
with and into the Companys InfuSystem subsidiary effective as of February 11,
1998.

At each of the six-month, one-year, eighteen-month and two-year anniversaries
of the closing, if the value of the Companys Common Stock at such time was
less than the value of its Common Stock as of the closing ($2.98 per share),
then the Company was obligated to pay additional amounts as merger
consideration. In February 1999, the Company paid cash of $286,000 pursuant to
the valuation floor provision for the one-year anniversary. There was no
adjustment required for the eighteen-month and two-year anniversaries.
Pursuant to APB Opinion No. 16, Business Combinations, there was no incremental
value ascribed to these additional payments for purchase accounting purposes.
During 2000, certain shares held in escrow, pursuant to the Agreement, were
distributed in a final purchase price adjustment. As a result, the Company
reacquired 22,000 common shares and reduced goodwill by $67,000.



|3. |  | Acquisition of Spinal Specialties, Inc.
|-- |  | ---------------------------------------

On January 14, 2000, the Company acquired Spinal Specialties, Inc., a designer
and manufacturer of custom spinal, epidural and nerve block infusion kits based
in San Antonio, Texas, for $1.5 million. The purchase price included $584,000
in cash and 200,000 shares of I-Flow common stock with a fair value of $3.75
per share for a total stock value of approximately $750,000. An additional
$165,000 of contingent purchase price was paid in January 2001. The
transaction was recorded using the purchase method of accounting and resulted
in the recording of $1,905,000 in goodwill.

During fiscal 1999 the operations of Spinal Specialties were not significant in
relation to the consolidated operating results of the Company presented in the
accompanying consolidated statements of operations and comprehensive
operations.



|4. |  | Lines of Credit and Long-Term Debt
|-- |  | ----------------------------------

The Company has a line of credit, expiring in December 2002, under which it may
borrow up to the lesser of $4,000,000 or 80% of eligible accounts receivable
and 25% of eligible inventories, as defined. There was $3,600,000 available
for borrowing under the line and no balance outstanding as of December 31,
2001. Interest is payable monthly at the banks prime rate (4.75% at
December 31, 2001) plus 0.50%.

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Additionally, the Companys wholly-owned subsidiary, InfuSystem, has a line of
credit agreement, expiring April 1, 2003. Under the terms of this line of
credit agreement, Infusystem may borrow up to the lesser of $2,500,000 or 80%
of its eligible accounts receivable, as defined. There was $2,500,000
available for borrowing under the line as of December 31, 2001. There were no
amounts outstanding under the line of credit as of December 31, 2001. Interest
is payable monthly at 0.25% below the banks prime rate (4.50% at December 31,
2001).

The lines of credit and the notes are collateralized by substantially all of
the Companys assets and require the Company to comply with certain covenants
principally relating to working capital and liquidity. As of December 31,
2001, the Company believes that it was in compliance with all such covenants.

The Companys long term debt consists of the following at December 31:

|                                                                                                                                                                     |  |      |         |      |  |   |           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | --------- | 
|                                                                                                                                                                     |  | 2001 |         | 2000
|                                                                                                                                                                     |  |      |         |     
|Note Payabledue in equal monthly principal
installments of $46,296 plus interest at the banks
prime rate plus 1%. Repaid in May 2001                                |  | $    |        |      |  | $ | 1,250,000 | 
|Installment Notesunder which interest is payable
monthly at 0.50% over the banks prime rate, due on
various dates; collateralized by all assets of
InfuSystem, Inc. |  |      | 260,000 |      |  |   | 914,000   | 
|Other                                                                                                                                                                |  |      | 44,000  |      |  |   | 115,000   | 
|                                                                                                                                                                     |  |      |         |      |  |   |           | 
|Total                                                                                                                                                                |  |      | 304,000 |      |  |   | 2,279,000 | 
|Less current portion                                                                                                                                                 |  |      | 221,000 |      |  |   | 976,000   | 
|                                                                                                                                                                     |  |      |         |      |  |   |           | 
|Total long-term debt                                                                                                                                                 |  | $    | 83,000  |      |  | $ | 1,303,000 | 
|                                                                                                                                                                     |  |      |         |      |  |   |           | 

The notes contain covenants primarily relating to the maintenance of certain
financial ratios, all of which the Company believes that it was in compliance
with as of December 31, 2001.

Future principal payments on long-term debt are as follows:

|                        |  |   |         | 
|----------------------- |  | - | ------- | 
|Year ended December 31: |  |   |         | 
|                        |  |   |         | 
|2002                    |  | $ | 221,000 | 
|2003                    |  |   | 82,000  | 
|2004                    |  |   | 1,000   | 
|                        |  |   |         | 
|Total                   |  | $ | 304,000 | 
|                        |  |   |         | 

At December 31, 2001, the Company was contingently liable for $192,000 under an
irrevocable standby letter of credit which expires in August 2002.



|5. |  | Shareholders Equity
|-- |  | --------------------

Preferred Stock- During the year ended December 31, 1999, 301,250 shares of
the Series B Preferred Stock were converted into 321,333 shares of the
Companys Common Stock. As of December 31, 2000 and December 31, 2001, there
were no shares of Preferred Stock issued and outstanding.

As of December 31, 2001, the Company was authorized to issue 5,000,000 shares
of preferred stock with a par value of $0.001 per share, in one or more series.

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On March 8, 2002, the Company filed a Certificate of Designation with the State
of Delaware designating 300,000 shares of preferred stock as Series A Junior
Participating Cumulative Preferred Stock (Series A Preferred Stock). The
Series A Preferred Stock is nonredeemable and, unless otherwise provided, is
subordinate to any other series of the Companys preferred stock. A holder of
a share of Series A Preferred Stock is entitled to receive when, as and if
declared, the greater of (i) cash and non-cash dividends in an amount equal to
100 times the dividends declared on each share of common stock or (ii) a
preferential annual dividend of $1.00 per preferred share ($0.01 per one
one-hundredth (1/100) of a preferred share). Each share of Series A Preferred
Stock has one hundred (100) votes per share (one vote per one one-hundredth
(1/100) of a preferred share), voting together with the shares of common stock.
In the event of any merger, consolidation or other transaction in which shares
of common stock are exchanged, the holder of a share of Series A Preferred
Stock shall be entitled to receive 100 times the amount received per common
share. The rights of the Series A Preferred Stock as to dividends, voting and
liquidation preferences are protected by antidilution provisions.

Stockholder Rights Plan On February 26, 2002, the Board of Directors of the
Company adopted a Stockholder Rights Plan (the Rights Plan). The Rights Plan
provides for a dividend of one right (a Right) to purchase fractions of
shares of the Companys Series A Preferred Stock for each share of the
Companys common stock. Under certain conditions involving an acquisition by
any person or group of 15% or more of the common stock, the Rights permit the
holders (other than the 15% holder) to purchase the Companys common stock at a
50% discount upon payment of an exercise price of $30 per Right. In addition,
in the event of certain business combinations, the Rights permit the purchase
of the common stock of an acquiror at a 50% discount. Under certain
conditions, the Rights may be redeemed by the Board of Directors in whole, but
not in part, at a price of $0.001 per Right. The Rights have no voting
privileges and are attached to and automatically trade with the Companys
common stock. The Rights shall expire on February 26, 2012, unless earlier
redeemed or exchanged, unless the distribution date has previously occurred and
the Rights have separated from the shares of common stock, in which case the
Rights will remain outstanding for ten years from the date they separate.

Common Stock- In December 2001 the Board of Directors of the Company approved
a Restricted Stock Plan pursuant to which employees of the Company may be
offered the opportunity to acquire common stock of the Company. A total of
125,000 shares were authorized for issuance under the plan. As of December 31,
2001, no shares were issued under the plan.

Stock Options and Warrants- During the year ended December 31, 2001, warrants
for the purchase of 250,000 shares of the Companys Common Stock expired
unexercised and the $615,000 original valuation of the warrants was
reclassified to common stock.

In May 1996, the shareholders of the Company approved a new equity incentive
plan (the 1996 Plan) which provides for the grant of stock options (including
incentive stock options or nonqualified stock options) and other stock-based
benefits to directors, officers, employees, consultants and advisors of the
Company and its affiliated entities. The maximum number of shares of Common
Stock which may be the subject of awards granted under the 1996 Plan may not
exceed 2,500,000 shares in the aggregate, subject to adjustments for stock
splits or other adjustments as discussed below. The shares available under the
1996 Plan may either be authorized and unissued shares or shares reacquired by
the Company through open market purchases or otherwise. Under the terms of the
1996 Plan, if any award granted under the 1996 Plan expired, terminated or was
forfeited before the exercise thereof or the payment in full thereof, the
shares covered by the unexercised or unpaid portion became available for new
grants under the 1996 Plan. Options granted become exercisable at such times
as determined by the Compensation Committee of the Board of Directors and
expire on various dates up to ten years from the date of grant. The 1996 Plan
was terminated on May 17, 2001 concurrent with the shareholder approval of the
I-Flow Corporation 2001 Equity Incentive Plan (the 2001 Plan). Options
granted under the 1996 Plan which were currently outstanding as of the date of
plan termination were unaffected by the plan termination and continued to vest
under their original terms.

The Company has issued options under the 1996 Plan to purchase an aggregate of
651,336 shares of its Common Stock to certain key employees at exercise prices
below fair market value as deferred compensation for services rendered.
Compensation expense related to stock options, including stock options granted
to non-employees as

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discussed below, aggregating $633,000, $383,000, and $101,000 has been recorded
for each of the years ended December 31, 2001, 2000 and 1999, respectively.
The remaining deferred compensation as of December 31, 2001 was approximately
$931,000 and will be amortized as the related awards are earned and vested
through 2006.

On May 17, 2001, the shareholders of the Company approved the I-Flow
Corporation 2001 Equity Incentive Plan (the 2001 Plan) which provides for the
grant of stock options (including incentive stock options or nonqualified stock
options), restricted stock, and other stock-based benefits to officers,
employees, consultants and advisors of the Company and its affiliated entities.
Non-employee directors are not eligible to receive awards under the 2001 Plan.
The maximum number of shares of Common Stock which may be the subject of awards
granted under the 2001 Plan may not exceed 750,000 shares in the aggregate,
subject to adjustments for stock splits or other adjustments as discussed
below. The shares available under the 2001 Plan may either be authorized but
unissued shares or shares reacquired by the Company through open market
purchases or otherwise. If any award granted under the 2001 Plan expires,
terminates or is forfeited before the exercise thereof or the payment in full
thereof, the shares covered by the unexercised or unpaid portion will become
available for new grants under the 2001 Plan. Options granted become
exercisable at such times as determined by the Compensation Committee of the
Board of Directors and expire on various dates up to ten years from the date of
grant.

The Company also has a stock option plan approved by the shareholders in 1992
which provides for the granting of options to non-employee directors to
purchase up to 400,000 shares of the Companys common stock at exercise prices
not less than the fair market value of the Companys common stock at the date
of grant. Under the terms of the plan, options to purchase 10,000 shares of
the Companys common stock are to be granted to each non-employee director
serving in such capacity as of the first business day of January of each year
as long as the plan remains in existence. Options granted become exercisable
in four equal installments, with one installment occurring at the end of each
calendar quarter subsequent to the date of grant. The options expire at the
earlier of five years from the date of grant or two years after termination of
the option holders status as a director.

During fiscal year 2000, the Company granted options to nonemployees to
purchase 36,000 shares of the Companys common stock in connection with
consulting services. These options have exercise prices equal to the estimated
fair market value of the underlying shares at the date of grant and generally
vest over one year. The fair value of these options using the Black-Scholes
Pricing Model with the following weighted-average assumptions  expected life,
5 years, 79% stock volatility, average risk-free interest rate of 4.7%, and no
dividends during the expected term, was $50,000, of which $10,000 and $40,000
was recorded as expense during the years ended December 31, 2000 and December
31, 2001, respectively.

During fiscal year 2001, the Company granted options to nonemployees to
purchase 15,000 shares of the Companys common stock in connection with
consulting services. These options have exercise prices equal to the estimated
fair market value of the underlying shares at the date of grant and generally
vest over one year. The fair value of these options using the Black-Scholes
Pricing Model with the following weighted-average assumptions  expected life,
5 years, 90% stock volatility, average risk-free interest rate of 4.75%, and no
dividends during the expected term, was $13,000, of which $4,000 was recorded
as expense during the year ended December 31, 2001.

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Stock option activity for all plans is summarized as follows:

|                                                                                        |                                                          |  |           |           |                |   |           |      | 
|--------------------------------------------------------------------------------------- | -------------------------------------------------------- |  | --------- | --------- | -------------- | - | --------- | ---- | 
|                                                                                        |                                                          |  |           |           |                |   | Weighted-
|                                                                                        |                                                          |  | Number of |           | Average       
|                                                                                        |                                                          |  | Shares    |           | Exercise Price
|                                                                                        |                                                          |  |           |           |               
|Balance, January 1, 1999 (1,865,735 exercisable at a weighted-average price of $2.21)   |                                                          |  | 3,313,385 |           |                |   | 2.16      |     
|                                                                                        | Granted (weighted-average fair value of $1.92 per share) |  |           | 163,500   |                |   |           | 3.06 | 
|                                                                                        | Canceled/Expired                                         |  |           | (244,329  | )              |   |           | 2.06 | 
|                                                                                        | Exercised                                                |  |           | (326,365  | )              |   |           | 1.81 | 
|                                                                                        |                                                          |  |           |           |                |   |           |     
|Balance, December 31, 1999 (1,974,317 exercisable at a weighted-average price of $2.27) |                                                          |  | 2,906,191 |           |                |   | 2.27      |     
|                                                                                        | Granted (weighted-average fair value of $2.57 per share) |  |           | 1,119,434 |                |   |           | 3.39 | 
|                                                                                        | Canceled/Expired                                         |  |           | (350,266  | )              |   |           | 3.19 | 
|                                                                                        | Exercised                                                |  |           | (182,266  | )              |   |           | 2.47 | 
|                                                                                        |                                                          |  |           |           |                |   |           |     
|Balance, December 31, 2000 (2,140,504 exercisable at a weighted-average price of $2.31) |                                                          |  | 3,493,093 |           |                |   | 2.49      |     
|                                                                                        | Granted (weighted-average fair value of $1.21 per share) |  |           | 1,402,629 |                |   |           | 1.43 | 
|                                                                                        | Canceled/Expired                                         |  |           | (356,784  | )              |   |           | 2.33 | 
|                                                                                        | Exercised                                                |  |           | (292,621  | )              |   |           | 2.04 | 
|                                                                                        |                                                          |  |           |           |                |   |           |     
|Balance, December 31, 2001 (2,397,074 exercisable at a weighted-average price of $2.34) |                                                          |  | 4,246,317 |           |                | $ | 2.17      |     
|                                                                                        |                                                          |  |           |           |                |   |           |     

Options to purchase 636,000 and 108,900 shares of the Companys Common Stock
were available for grant under the 2001 Plan and the non-employee directors
plan, respectively, as of December 31, 2001.

The following table summarizes information concerning outstanding and
exercisable options for all plans as of December 31, 2001:

|                         |  |                     |           |                     |  |                |      |             |  |                |      |  |  |  |           |  |  |   |      | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------------- | ---- | ----------- |  | -------------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                         |  | Options Outstanding |           | Options Exercisable
|                         |  |                     |           |                    
|                         |  |                     |           |                     |  | Weighted-      |      |             |  |                |      |  |  |  |           |  |  |  
|                         |  |                     |           |                     |  | Average        |      |             |  |                |      |  |  |  |           |  |  |  
|                         |  | Number              |           | Remaining           |  | Weighted-      |      | Number      |  | Weighted-     
|                         |  | Of Shares           |           | Contractual         |  | Average        |      | Of Shares   |  | Average       
|Range of Exercise Prices |  | Outstanding         |           | Life in Years       |  | Exercise Price |      | Exercisable |  | Exercise Price
|                         |  |                     |           |                     |  |                |      |             |  |               
|$0.25 - $1.04            |  |                     | 342,394   |                     |  |                | 3.70 |             |  | $              | 1.01 |  |  |  | 207,273   |  |  | $ | 0.98 | 
|$1.28 - $1.28            |  |                     | 1,160,629 |                     |  |                | 4.36 |             |  | $              | 1.28 |  |  |  | 193,282   |  |  | $ | 1.28 | 
|$1.38 - $1.84            |  |                     | 462,000   |                     |  |                | 3.07 |             |  | $              | 1.61 |  |  |  | 405,250   |  |  | $ | 1.63 | 
|$2.03 - $2.49            |  |                     | 502,847   |                     |  |                | 1.34 |             |  | $              | 2.22 |  |  |  | 436,805   |  |  | $ | 2.23 | 
|$2.50 - $2.50            |  |                     | 440,226   |                     |  |                | 3.53 |             |  | $              | 2.50 |  |  |  | 387,122   |  |  | $ | 2.50 | 
|$2.53 - $3.15            |  |                     | 464,914   |                     |  |                | 2.41 |             |  | $              | 2.89 |  |  |  | 286,115   |  |  | $ | 2.94 | 
|$3.37 - $3.37            |  |                     | 594,307   |                     |  |                | 4.62 |             |  | $              | 3.37 |  |  |  | 282,405   |  |  | $ | 3.37 | 
|$3.38 - $5.25            |  |                     | 279,000   |                     |  |                | 2.14 |             |  | $              | 3.87 |  |  |  | 198,822   |  |  | $ | 3.88 | 
|                         |  |                     |           |                     |  |                |      |             |  |                |      |  |  |  |           |  |  |   |      | 
|Total                    |  |                     | 4,246,317 |                     |  |                | 3.40 |             |  | $              | 2.17 |  |  |  | 2,397,074 |  |  | $ | 2.34 | 
|                         |  |                     |           |                     |  |                |      |             |  |                |      |  |  |  |           |  |  |   |      | 

The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost has
been recognized for stock option grants to employees and non-employee directors
with exercise prices equal to the fair market value of the underlying shares at
the grant date. Had compensation cost for the Companys option plans been
determined based on the fair value of the options at the grant date consistent
with the provisions of SFAS No. 123, the Companys net income and net income
per share would have been the pro forma amounts indicated below:

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|                                                 |  |                          |       |      |  |      |       |  |  |   |       | 
|------------------------------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                 |  | Years Ended December 31,
|                                                 |  |                         
|(Amounts in thousands, except per share amounts) |  | 2001                     |       | 2000 |  | 1999
|                                                 |  |                          |       |      |  |     
|Net income  as reported                         |  | $                        | 1,267 |      |  | $    | 1,612 |  |  | $ | 8,812 | 
|Net income (loss)  pro forma                    |  | $                        | (127  | )    |  | $    | 23    |  |  | $ | 8,238 | 
|Basic earnings per share  as reported           |  | $                        | 0.08  |      |  | $    | 0.11  |  |  | $ | 0.61  | 
|Basic earnings (loss) per share  pro forma      |  | $                        | (0.01 | )    |  | $    | 0.00  |  |  | $ | 0.57  | 
|Diluted earnings per share  as reported         |  | $                        | 0.08  |      |  | $    | 0.10  |  |  | $ | 0.58  | 
|Diluted earnings (loss) per share  pro forma    |  | $                        | (0.01 | )    |  | $    | 0.00  |  |  | $ | 0.55  | 

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999: no dividend yield; expected
volatility 90% in 2001, 79% in 2000, and 75% in 1999; risk-free interest rate
of 4.75% in 2001, 4.7% in 2000, and 5.7% in 1999; and expected lives of 5
years.



|6. |  | Income Taxes
|-- |  | ------------

The Company accounts for income taxes under the provisions of SFAS No. 109
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are established for temporary differences between the financial
reporting basis and the tax basis of the Companys assets and liabilities at
tax rates expected to be in effect when such assets or liabilities are realized
or settled.

The income tax provision (benefit) for the years ended December 31, 2001 2000
and 1999 are summarized follows:

|                              |  |                          |         |      |  |      |           |   |  |   |             |  
|----------------------------- |  | ------------------------ | ------- | ---- |  | ---- | --------- | - |  | - | ----------- | -
|                              |  | Years Ended December 31,
|                              |  |                         
|                              |  | 2001                     |         | 2000 |  | 1999
|                              |  |                          |         |      |  |     
|Current:                      |  |                          |         |      |  |      |           |   |  |   |             |  
|Federal                       |  | $                        | 203,000 |      |  | $    | 77,000    |   |  | $ | 797,000     |  
|State                         |  |                          | 80,000  |      |  |      | 85,000    |   |  |   | 5,000       |  
|                              |  |                          |         |      |  |      |           |   |  |   |             |  
|                              |  |                          | 283,000 |      |  |      | 162,000   |   |  |   | 802,000     |  
|Deferred:                     |  |                          |         |      |  |      |           |   |  |   |             |  
|Federal                       |  |                          | 545,000 |      |  |      | 811,000   |   |  |   | 1,213,000   |  
|State                         |  |                          | 28,000  |      |  |      | 276,000   |   |  |   | 361,000     |  
|                              |  |                          |         |      |  |      |           |   |  |   |             |  
|                              |  |                          | 573,000 |      |  |      | 1,087,000 |   |  |   | 1,574,000   |  
|Change in valuation allowance |  |                          |        |      |  |      | (136,000  | ) |  |   | (7,139,000  | )
|                              |  |                          |         |      |  |      |           |   |  |   |             |  
|Total                         |  | $                        | 856,000 |      |  | $    | 1,113,000 |   |  |   | ($4,763,000 | )
|                              |  |                          |         |      |  |      |           |   |  |   |             |  

A deferred tax asset in the amount of $465,000 was acquired in conjunction with
the acquisition of InfuSystem II, Inc. and Venture Medical, Inc. in 1998. A
valuation allowance of $465,000 was established for the deferred tax asset. If
this deferred tax asset is realized, the benefit will first go to reduce any
unamortized goodwill remaining from the acquisition.

The reconciliations of income tax provision computed at federal statutory rate
of 35% to income tax provision (benefit) provided in the financial statements
are as follows:

F-14



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##### Table of Contents



|      |                                            |  |                          |      |      |  |      |      |    |  |        |        |   
|----- | ------------------------------------------ |  | ------------------------ | ---- | ---- |  | ---- | ---- | -- |  | ------ | ------ | --
|      |                                            |  | Years Ended December 31,
|      |                                            |  |                         
|      |                                            |  | 2001                     |      | 2000 |  | 1999
|      |                                            |  |                          |      |      |  |     
|      | Tax at federal statuatory rate             |  |                          | 35.0 | %    |  |      | 35.0 | %  |  |        | 35.0   | % 
|      | State income taxes, net of federal benefit |  |                          | 5.5  | %    |  |      | 6.5  | %  |  |        | 5.8    | % 
|      | Foreign operations                         |  |                          | (2.3 | %)   |  |      | (0.7 | %) |  |        | 0.1    | % 
|      | Research credit                            |  |                          | (5.0 | %)   |  |      | (1.1 | %) |  |        | (1.4   | %)
|      | Goodwill                                   |  |                          | 7.3  | %    |  |      | 5.3  | %  |  |        | 2.0    | % 
|      | Acquisition transactions                   |  |                          | 0.0  | %    |  |      | 0.0  | %  |  |        | 17.3   | % 
|      | Change in valuation allowance              |  |                          |     |      |  |      | (5.0 | %) |  |        | (176.3 | %)
|      | Other                                      |  |                          | (0.2 | %)   |  |      | 0.8  | %  |  |        | (0.2   | %)
|      |                                            |  |                          |      |      |  |      |      |    |  |        |       
|Total |                                            |  | 40.3                     | %    |      |  | 40.8 | %    |    |  | (117.7 | %)    
|      |                                            |  |                          |      |      |  |      |      |    |  |        |       

As of December 31, 2001 and 2000, the Company had net deferred tax assets
comprised of the following:

|                                               |  |              |            |      |  |   |            |  
|---------------------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                                               |  | December 31,
|                                               |  |             
|Deferred Tax Assets:                           |  | 2001         |            | 2000
|                                               |  |              |            |     
|Net operating losses                           |  | $            | 1,402,000  |      |  | $ | 1,485,000  |  
|Amortization of goodwill and other intangibles |  |              | 2,355,000  |      |  |   | 2,520,000  |  
|Reserves not currently deductible              |  |              | 1,717,000  |      |  |   | 2,431,000  |  
|Cash to accrual adjustment                     |  |              |           |      |  |   | (188,000   | )
|State taxes                                    |  |              | (245,000   | )    |  |   | (248,000   | )
|Credits                                        |  |              | 998,000    |      |  |   | 731,000    |  
|Accrued compensation and related costs         |  |              | 551,000    |      |  |   | 360,000    |  
|Depreciation                                   |  |              | (74,000    | )    |  |   | 57,000     |  
|                                               |  |              |            |      |  |   |            |  
|Total deferred income taxes                    |  |              | 6,704,000  |      |  |   | 7,148,000  |  
|Valuation allowance                            |  |              | (2,368,000 | )    |  |   | (2,368,000 | )
|                                               |  |              |            |      |  |   |            |  
|Net deferred income taxes                      |  | $            | 4,336,000  |      |  | $ | 4,780,000  |  
|                                               |  |              |            |      |  |   |            |  

At December 31, 2001, the Company had a federal net operating loss
carryforwards of approximately $4,126,000 which begin to expire in the year
2006. Due to certain tax regulations, future use of a portion of the net
operating loss carryforwards is limited to approximately $600,000 per year.
Tax credits for federal taxes of approximately $788,000 begin to expire in
2007.

The net deferred tax assets of December 31, 2001 were offset by a valuation
allowance of $2,368,000. During the year ended December 31, 2002, the future
realization of the reserved portion of the net deferred tax assets was not
determined by management to be more likely than not, based on current and
projected taxable income.

F-15



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##### Table of Contents





|7. |  | Commitments and Contingencies
|-- |  | -----------------------------

In July 1997, the Company entered into a noncancelable operating lease for a
51,000 square foot building for its primary facility. The lease agreement
contains certain scheduled rent increases (which are accounted for on a
straight-line basis) and expires in June 2007.

Future minimum lease payments under the lease are as follows:

|                         |  |   |           | 
|------------------------ |  | - | --------- | 
|Years Ended December 31, |  |   |           | 
|                         |  |   |           | 
|2002                     |  | $ | 466,000   | 
|2003                     |  |   | 487,000   | 
|2004                     |  |   | 428,000   | 
|2005                     |  |   | 428,000   | 
|2006                     |  |   | 428,000   | 
|Thereafter               |  |   | 214,000   | 
|                         |  |   |           | 
|Total                    |  | $ | 2,451,000 | 
|                         |  |   |           | 

Rent expense for the years ended December 31, 2001, 2000 and 1999 was $629,000,
$627,000 and $571,000, respectively.

The Company is also involved in litigation arising from the normal course of
operations. In the opinion of management, the ultimate impact of such
litigation will not have a material adverse effect on the Companys financial
position and results of operations.



|8. |  | Employee Benefit Plan
|-- |  | ---------------------

The Company has a 401(k) retirement plan in which any full time employee may
participate. The Company contributes $0.33 for each dollar of employee
contribution up to a maximum employer contribution of 1.32% of participants
annual salaries. The maximum employer contribution at 1.32% corresponds to an
employee contribution of 4% of annual salary. Such contributions totaled
$88,000 and $108,000 for the years ended December 31, 2001 and 2000,
respectively. No employer contributions were authorized during the year ended
December 31, 1999. The Company does not provide post-retirement benefits to
its employees.



|9. |  | Business Segments
|-- |  | -----------------

The Company operates in two business segments: manufacturing and marketing of
medical infusion pumps and rentals of medical infusion pumps. The rental
business segment principally consists of the activities of InfuSystem, Inc.
within the oncology infusion services market segment. The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies (Note 1).

F-16



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##### Table of Contents



Business segment information is as follows for the years ended December 31,
2001, 2000 and 1999:

|                              |  |                   |            |         |  |              |            |  |  |   |            | 
|----------------------------- |  | ----------------- | ---------- | ------- |  | ------------ | ---------- |  |  | - | ---------- | 
|                              |  | Manufacturing and |            |         |  |              |            |  |  |  
|                              |  | Marketing         |            | Rentals |  | Consolidated
|                              |  |                   |            |         |  |             
|2001:                         |  |                   |            |         |  |              |            |  |  |   |            | 
|Revenues                      |  | $                 | 22,904,000 |         |  | $            | 10,401,000 |  |  | $ | 33,305,000 | 
|Operating income              |  |                   | 74,000     |         |  |              | 2,093,000  |  |  |   | 2,167,000  | 
|Assets                        |  |                   | 24,458,000 |         |  |              | 11,246,000 |  |  |   | 35,704,000 | 
|Depreciation and amortization |  |                   | 1,494,000  |         |  |              | 1,167,000  |  |  |   | 2,661,000  | 
|Property additions            |  |                   | 1,001,000  |         |  |              | 818,000    |  |  |   | 1,819,000  | 
|                              |  |                   |            |         |  |              |            |  |  |   |            | 
|2000:                         |  |                   |            |         |  |              |            |  |  |   |            | 
|Revenues                      |  | $                 | 23,497,000 |         |  | $            | 8,469,000  |  |  | $ | 31,966,000 | 
|Operating income              |  |                   | 1,426,000  |         |  |              | 1,564,000  |  |  |   | 2,990,000  | 
|Assets                        |  |                   | 23,631,000 |         |  |              | 11,584,000 |  |  |   | 35,215,000 | 
|Depreciation and amortization |  |                   | 1,646,000  |         |  |              | 1,002,000  |  |  |   | 2,648,000  | 
|Property additions            |  |                   | 860,000    |         |  |              | 2,088,000  |  |  |   | 2,948,000  | 
|                              |  |                   |            |         |  |              |            |  |  |   |            | 
|1999:                         |  |                   |            |         |  |              |            |  |  |   |            | 
|Revenues                      |  | $                 | 21,272,000 |         |  | $            | 8,512,000  |  |  | $ | 29,784,000 | 
|Operating income              |  |                   | 2,507,000  |         |  |              | 1,946,000  |  |  |   | 4,453,000  | 
|Assets                        |  |                   | 22,291,000 |         |  |              | 9,477,000  |  |  |   | 31,768,000 | 
|Depreciation and amortization |  |                   | 1,456,000  |         |  |              | 1,034,000  |  |  |   | 2,490,000  | 
|Property additions            |  |                   | 416,000    |         |  |              | 632,000    |  |  |   | 1,048,000  | 
|                              |  |                   |            |         |  |              |            |  |  |   |            | 

Sales to major customers as a percentage of total revenues are shown in the
table below for the years ended December 31:

|                                           |  |      |    |      |  |      |    |   |  |  |    |  
|------------------------------------------ |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                           |  | 2001 |    | 2000 |  | 1999
|                                           |  |      |    |      |  |     
|Customer A  elastomeric infusion products |  |      | 18 | %    |  |      | 18 | % |  |  | 16 | %
|Customer B  elastomeric infusion products |  |      | 8  | %    |  |      | 8  | % |  |  | 11 | %
|Customer C  elastomeric infusion products |  |      | 8  | %    |  |      | 11 | % |  |  | 9  | %

All of the Companys rental revenue is domestic. Export sales of medical
products represented 22%, 22% and 20% of total revenue during 2001, 2000 and
1999, respectively. Total revenue by geographical region is summarized as
follows:

|                                 |  |      |            |      |  |      |            |  |  |   |            | 
|-------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|Sales to unaffiliated customers: |  | 2001 |            | 2000 |  | 1999
|                                 |  |      |            |      |  |     
|United States                    |  | $    | 25,890,000 |      |  | $    | 24,870,000 |  |  | $ | 23,962,000 | 
|Europe                           |  |      | 5,897,000  |      |  |      | 5,153,000  |  |  |   | 4,181,000  | 
|Asia / Pacific Rim               |  |      | 987,000    |      |  |      | 1,295,000  |  |  |   | 1,165,000  | 
|Other                            |  |      | 531,000    |      |  |      | 648,000    |  |  |   | 476,000    | 
|                                 |  |      |            |      |  |      |            |  |  |   |            | 
|Total                            |  | $    | 33,305,000 |      |  | $    | 31,966,000 |  |  | $ | 29,784,000 | 
|                                 |  |      |            |      |  |      |            |  |  |   |            | 



|10. |  | Related Party Transactions
|--- |  | --------------------------

During June 2001, the Company loaned its chief executive officer $150,000 for
personal use. The unsecured note receivable due from the chief executive
officer bears interest at 5.58% per annum and is to be repaid over a ten year
period through bi-weekly payroll deductions. As of December 31, 2001, the
amount due to the Company under the note receivable is approximately $144,000,
the majority of which is included in notes receivable and other noncurrent
assets in the accompanying consolidated balance sheets.

During fiscal 2001, the Company made an interest-free loan to the chief
executive officer of the Company totaling $250,000. This amount was repaid in
full during fiscal 2001.

F-17



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                       |                                                                  |                        
|---------------------- | ---------------------------------------------------------------- | -----------------------
|                       | I-FLOW CORPORATION                                              
|                      
|Dated:  March 30, 2002 | By:                                                              | /s/   Donald M. Earhart
|                       |                                                                 
|                       | Donald M. Earhart,
Chairman, President & Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 2002.

|                                                      |  |                                                                              
|----------------------------------------------------- |  | -----------------------------------------------------------------------------
|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 and Director               
|                                                     
|/s/   James R. TalevichJames R. Talevich              |  | Chief Financial Officer (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 and Secretary                                                       





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##### Table of Contents






INDEX TO EXHIBITS

Set forth below is a list of the exhibits included or incorporated by
reference as part of this report:

|            |  |                                                                                                                                                                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                       
|2.1         |  | Merger Agreement by and between I-Flow Corporation, a Delaware
corporation, and I-Flow Corporation, a California corporation, dated
July 27, 2001 (1)                                                                                                                 
|           
|3.1         |  | Certificate of Incorporation of I-Flow Corporation, a Delaware
corporation (1)                                                                                                                                                                                        
|           
|3.2         |  | Bylaws of I-Flow Corporation, a Delaware Corporation (1)                                                                                                                                                                                                              
|           
|3.3         |  | Certificate of Designation Regarding Series A Junior Participating
Cumulative Preferred Stock (15)                                                                                                                                                                    
|           
|4.1         |  | Specimen Common Stock Certificate (2)                                                                                                                                                                                                                                 
|           
|4.2         |  | Warrant Agreement between the Company and American Stock Transfer &
Trust Company, as Warrant Agent, dated February 13, 1990 (3)                                                                                                                                      
|           
|4.3         |  | Form of Warrant dated July 22, 1996, issued in conjunction with the
acquisition of Block Medical, Inc. (16)                                                                                                                                                           
|           
|4.4         |  | 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 Right
Certificate, the Form of Assignment and Form of Election to Purchase (15)
|           
|10.1        |  | 1987-1988 Incentive Stock Option Plan and Non-Statutory Stock Option
Plan Restated as of March 23, 1992 (5) *                                                                                                                                                         
|           
|10.2        |  | 1992 Non-Employee Director Stock Option Plan (6) *                                                                                                                                                                                                                    
|           
|10.3        |  | License and Transfer Agreement with SoloPak Pharmaceuticals Inc.,
dated March 6, 1996 (7)                                                                                                                                                                             
|           
|10.4        |  | 1996 Stock Incentive Plan (8) *                                                                                                                                                                                                                                       
|           
|10.5        |  | Agreement for Purchase and Sale of Assets dated as of July 3, 1996 by
and among I-Flow Corporation, Block Medical, Inc. and Hillenbrand
Industries, Inc. (4)                                                                                                          
|           
|10.6        |  | Lease Agreement between Industrial Developments International, Inc.
as Landlord and I-Flow Corporation as Tenant dated April 14, 1997 (9)                                                                                                                             
|           
|10.7        |  | Agreement and Plan of Merger by and among I-Flow Corporation, I-Flow
Subsidiary, Inc., Venture Medical, Inc., and InfuSystems II, Inc. and
the Shareholders of Venture Medical, Inc. and InfuSystems II, Inc. (10)                                                    
|           
|10.8        |  | Loan and Security Agreement between Silicon Valley Bank and I-Flow
Corporation dated September 28, 1995 (11)                                                                                                                                                          





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##### Table of Contents



|            |  |                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                                                                      
|            |  |                                                                                                                                                                                              
|           
|10.9        |  | Amendment to Loan Agreement between Silicon Valley Bank and
I-Flow Corporation dated March 2, 1998 (11)                                                                                      
|           
|10.10       |  | Agreement and Plan of Merger by and Among I-Flow Corporation, Spinal
Acquisition Corp., Spinal Specialties, Inc. and the Shareholders of
Spinal Specialties, Inc. dated January 13, 2000 (12)
|           
|10.11       |  | I-Flow Corporation 2001 Equity Incentive Plan (2) *                                                                                                                                          
|           
|10.20       |  | Employment Agreement with Donald M. Earhart dated May 16, 1990 (13) *                                                                                                                        
|           
|10.21       |  | Amendment #1 to Employment Agreement with Donald M. Earhart dated
June 21, 2001 (2)*                                                                                                         
|           
|10.22       |  | Promissory Note with Donald M. Earhart dated June 15, 2001 (2)                                                                                                                               
|           
|10.23       |  | Amended and Restated Employment Agreement with James J. Dal Porto
dated June 21, 2001 (2) *                                                                                                  
|           
|10.24       |  | Employment Agreement with James R. Talevich dated June 30, 2000 (14) *                                                                                                                       
|           
|10.25       |  | Agreement Re: Change in Control with Donald M. Earhart dated June 21,
2001 (2) *                                                                                                             
|           
|10.26       |  | Agreement Re: Change in Control with James J. Dal Porto dated June
21, 2001 (2) *                                                                                                            
|           
|10.27       |  | Agreement Re: Change in Control with James R. Talevich dated June 21,
2001 (2)*                                                                                                              
|           
|21.         |  | List of Subsidiaries                                                                                                                                                                         
|           
|23.1        |  | Independent Auditor's Consent                                                                                                                                                                



---

|*   |  | 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 Current Report on Form 8-K on August 3, 2001.                                                             
|   
|   
|   
|   
|(2) |  | 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.                                        
|   
|   
|   
|   
|(3) |  | Incorporated by reference to exhibit with this title filed with the
Companys Registration Statement (#33-32263-LA) declared effective
February 1, 1990.                                
|   
|   
|   
|   
|(4) |  | Incorporated by reference to exhibit with this title filed with the
Companys Report on Form 8-K dated July 22, 1996.                                                                   
|   
|   
|   
|   
|(5) |  | Incorporated by reference to exhibit with this title filed with the
Companys Post Effective Amendment to its Registration Statement
(#33-41207-LA) declared effective November 6, 1992.
|   
|   
|   
|   
|(6) |  | Incorporated by reference to exhibit with this title filed with the
Companys Form 10-K for its fiscal year ended December 31, 1991.                                                    
|   
|   
|   
|   
|(7) |  | Incorporated by reference to exhibit with this title filed with the
Companys Form 10-K for its fiscal year ended December 31, 1995.                                                    





---



##### Table of Contents



|(8)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Registration Statement (#333-16547) declared effective November
20, 1996.                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(9)  |  | Incorporated by reference to exhibit with this title filed with the
Companys Report on Form 8-K dated April 14, 1997.                                                        
|    
|    
|    
|    
|(10) |  | Incorporated by reference to exhibit with this title filed with the
Companys Report on Form 8-K dated February 9, 1998.                                                      
|    
|    
|    
|    
|(11) |  | Incorporated by reference to exhibit with this title filed with the
Companys Form 10-K for its fiscal year ended December 31, 1997.                                          
|    
|    
|    
|    
|(12) |  | 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.                             
|    
|    
|    
|    
|(13) |  | Incorporated by reference to exhibit with this title filed with the
Companys Form 10-K for its fiscal year ended September 30, 1990.                                         
|    
|    
|    
|    
|(14) |  | Incorporated by reference to exhibit with this title filed with the
Companys Form 10-K for its fiscal year ended December 31, 2000.                                          
|    
|    
|    
|    
|(15) |  | Incorporated by reference to exhibit with this title filed with the
Companys Current Report on Form 8-K, filed with the Securities and
Exchange Commission on March 13, 2002.
|    
|    
|    
|    
|(16) |  | Incorporated by reference to exhibit with this title filed with the
Companys Registration Statement on Form S-3, filed February 10, 1997.