##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
file number: 0-18338
 I-FLOW CORPORATION
  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)
    o þ
  o þ
 þ o
 þ
  o þ o
 o þ




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures about Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accounting Fees and ServicesPART IVItem 15. Exhibits, Financial Statement SchedulesSIGNATURESINDEX TO EXHIBITSExhibit 21.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1    Table of Contents  
 PART I
 
 Item 1. Business.
 The Company
     Recent Developments
 ® ®
  2




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Acquisitions
 
 Divestitures
  The Companys Products
  Regional Anesthesia
 Acute Pain Kits
 ®
  IV Infusion Therapy
 Elastomerics
 ® .
 3




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Non-Electric IV Bag Delivery Systems
 ® ®
 Electronic Pumps
 ®
 Oncology Infusion Services
  The Companys Operating Segments
   Net Revenues by Market Segment
    
    2005
    
    2004
    
    2003Regional Anesthesia
    
    
    50
    %
    
    
    46
    %
    
    
    34
    %IV Infusion Therapy
    
    
    22
    %
    
    
    27
    %
    
    
    38
    %Oncology Infusion Services
    
    
    28
    %
    
    
    27
    %
    
    
    28
    %
 Manufacturing and Marketing Operating Segment
    Rentals Operating Segment
  4




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Competition
   CompanysNumber of Known
    
    EstimatedMarket
    
    CompetitiveU.S. Market Description
    
    Participants*
    
    PositionRegional AnesthesiaAcute Pain Kits (wound site pain management)
    
    
    11
    
    
    
    1IV Infusion TherapyElastomerics
    
    
    4
    
    
    
    1Oncology Infusion Services
    
    
    * *
    
    
    
    1
 
 *
    
    Includes the Company**
    
    The Oncology Infusion Services market is highly fragmented with numerous local competitors. Sales and Distribution
   
  5




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(Amounts in thousands)Sales to unaffiliated customers:
    
    2005
    
    2004
    
    2003United States
    
    $
    87,739
    
    
    $
    59,838
    
    
    $
    37,503Europe
    
    $
    10,497
    
    
    $
    9,214
    
    
    $
    7,588Asia / Pacific Rim
    
    
    1,328
    
    
    
    1,365
    
    
    
    969Other
    
    
    1,080
    
    
    
    728
    
    
    
    983All Foreign Countries in the Aggregate
    
    $
    12,905
    
    
    $
    11,307
    
    
    $
    9,540
 Backlog
  Manufacturing and Operations
  Product Development
  Patents and Trademarks
    Government Regulation
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7




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Employees
  Available Information
  
 Item 1A. Risk Factors.
 RISK FACTORS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE
 We have experienced net losses in prior periods and have an accumulated deficit. Future losses are
possible.
   We have invested substantial resources into the sales and marketing of the ON-Q PainBuster. If this
product does not achieve significant clinical acceptance or if our direct sales strategy is not
successful, our financial condition and operating results will be adversely affected.
  8




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Our customers frequently receive reimbursement from private insurers and governmental agencies. Any
change in the overall reimbursement system may adversely impact our business.
    Changes in reimbursement rates may adversely impact InfuSystems revenues.
  Changes in reimbursement rates may adversely impact the revenue that we earn from our developing
billing strategy for ON-Q.
  Our products are highly regulated by a number of governmental agencies. Any changes to the existing
rules and regulations of these agencies may adversely impact our ability to manufacture and market
our products.
   9




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Our compliance with laws frequently involves our subjective judgment. If we are wrong in any of our
interpretations of the laws, we could be subjected to substantial penalties for noncompliance.
  We may need to raise additional capital in the future to fund our operations. We may be unable to
raise funds when needed or on acceptable terms.
   Our intangible assets are subject to potential impairment charges that could adversely affect our
results of operations.
 Goodwill and Other
Intangible Assets
 10




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Our industry is intensely competitive and changes rapidly. If we are unable to maintain a
technological lead over our competitors, our business operations will suffer.
  We rely on independent suppliers for parts and materials necessary to assemble our products. Any
delay or disruption in the supply of parts may prevent us from manufacturing our products and
negatively impact our operations.
  Our success in the Oncology Infusion Services market is impacted by the availability of the
chemotherapy drugs that are used in our infusion pump systems.
  We manufacture the majority of our products in Mexico. Any difficulties or disruptions in the
operation of our plant may adversely impact our operations.
  11




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If one of our products proves to be defective or is misused by a health care practitioner or
patient, we may be subject to claims of liability that could adversely affect our financial
condition and the results of our operations.
  We are dependent on our proprietary technology and the patents, copyrights, and trademarks that
protect our products. If competitors are able to independently develop products of equivalent or
superior capabilities, the results of our operations could be adversely impacted.
   A significant portion of our sales is to customers in foreign countries. We may lose revenues,
market share, and profits due to exchange rate fluctuations and other factors related to our
foreign business.
   We currently rely on two distributors for a significant percentage of our sales. If our
relationship with these distributors were to deteriorate, our sales may materially decline.
  12




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The preparation of our financial statements in accordance with accounting principles generally
accepted in the United States requires us to make estimates, judgments, and assumptions that may
ultimately prove to be incorrect.
  Failure to achieve and maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our business and our stock price.
  RISK FACTORS RELATED SPECIFICALLY TO OUR COMMON STOCK
 The average trading volume for our common stock is relatively low when compared to most larger
companies. As a result, there may be less liquidity and more volatility associated with our common
stock, even if our business is doing well.
   
    
    announcements of technological innovations, new products, or clinical studies by us or others;
    
    government regulation;
    
    changes in the coverage or reimbursement rates of private insurers and governmental agencies;
    
    developments in patent or other proprietary rights;
    
    future sales of substantial amounts of our common stock by existing stockholders or by us; and
    
    comments by securities analysts and general market conditions.
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Future sales of our common stock by existing stockholders could negatively affect the market price
of our stock and make it more difficult for us to sell stock in the future.
  
    
    22,628,657 shares of common stock that are freely tradable in the public markets;
    
    215,109 shares of common stock underlying outstanding warrants which have been registered for
resale under a Registration Statement on Form S-3 (Registration No. 333-109096); and
    
    an aggregate of 4,153,912 shares of common stock that may be issued on the exercise of stock
options outstanding under our equity incentive plans.
  Anti-takeover devices may prevent a sale, or changes in the management, of I-Flow.
   We do not pay dividends and this may negatively affect the price of our stock.
  In the future, our common stock may be removed from listing on the Nasdaq quotation system and may
not qualify for listing on any stock exchange, in which case it may be difficult to find a market
in our stock.
  14




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Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
  
 Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  15




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EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionDonald M. Earhart
    
    
    61
    
    
    President, Chief Executive Officer and Chairman of the BoardJames J. Dal Porto
    
    
    52
    
    
    Executive Vice President, Chief Operating Officer, Director
and SecretaryJames R. Talevich
    
    
    55
    
    
    Chief Financial Officer and Treasurer
 Donald M. Earhart
 James J. Dal Porto
 James R. Talevich
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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 Common Stock Information
  High
    
    Low20041st Quarter
    
    $
    18.17
    
    
    $
    11.252nd Quarter
    
    $
    17.54
    
    
    $
    8.993rd Quarter
    
    $
    16.00
    
    
    $
    8.944th Quarter
    
    $
    21.15
    
    
    $
    12.9520051st Quarter
    
    $
    19.21
    
    
    $
    15.452nd Quarter
    
    $
    18.05
    
    
    $
    13.173rd Quarter
    
    $
    17.75
    
    
    $
    12.454th Quarter
    
    $
    14.69
    
    
    $
    11.57
    Total Number of
    
    Maximum Number (orShares Purchased
    
    Approximate DollarTotal
    
    
    
    
    
    as Part of
    
    Value) of Shares thatNumber of
    
    Average
    
    Publicly
    
    May Yet Be PurchasedShares
    
    Price Paid
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Purchased
    
    per Share
    
    or Programs *
    
    Programs *January 1 through September 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    October 1 through October 31
    
    
    108,277
    
    
    $
    12.00
    
    
    
    108,277
    
    
    
    891,723November 1 through November 30
    
    
    177,499
    
    
    $
    11.98
    
    
    
    177,499
    
    
    
    714,224December 1 through December 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    285,776
    
    
    $
    11.99
    
    
    
    285,776
 
 *
    
    On July 27, 2004, the Companys board of directors authorized the repurchase of up to
1,000,000 shares of the Companys common stock. As a result of an extension authorized by the
board of directors on May 26, 2005, the stock repurchase program will expire on July 27, 2006,
unless the program is terminated earlier or extended to a later date by the board of directors. No
shares were repurchased as part of the stock repurchase program in 2004. 17




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Information About Our Equity Compensation Plans
  Number of SecuritiesRemaining Available forNumber of Securities
    
    Weighted-Average
    
    Future Issuance Underto be Issued Upon
    
    Exercise Price of
    
    Equity CompensationExercise of
    
    Outstanding
    
    Plans (excludingOutstanding Options,
    
    Options, Warrants
    
    SecuritiesPlan Category
    
    Warrants and Rights
    
    and Rights
    
    Reflected in Column (A)Equity
compensation plans
approved by
security holders
    
    
    4,134,412

(1)
    
    $
    8.90
    
    
    
    3,862,064

(2)Equity compensation
plans not approved
by security holders
    
    
    19,500

(3)
    
    $
    6.05
    
    
    
    
    (4)
 
 (1)
    
    Includes outstanding options to purchase shares of the Companys common stock under: (a) the
1987-1988 Incentive Stock Option Plan and Non-Statutory Stock Option Plan; (b) the 1992
Non-Employee Director Stock Option Plan; (c) the 1996 Stock Incentive Plan; and (d) the I-Flow
Corporation 2001 Equity Incentive Plan.(2)
    
    All shares of common stock that remain available for future issuance are under the I-Flow
Corporation 2001 Equity Incentive Plan.(3)
    
    Includes options to purchase 14,500 shares of the Companys common stock under the I-Flow
Corporation Stock Option Agreement with Orlando Rodrigues and options to purchase 5,000 shares
of the Companys common stock issued to Dr. Thomas Winters, M.D. to acquire the non-exclusive
rights to utilize intellectual property owned by Dr. Winters, including registered United
States patents. Dr. Winters was not, at the time, an employee, director or consultant to the
Company.(4)
    
    No shares available for future issuance. The Companys 2001 Restricted Stock Plan and 2003
Restricted Stock Plan have both been terminated. Material Features of Non-Stockholder Approved Plans
 I-Flow Corporation Stock Option Agreement with Orlando Rodrigues
  Winters Options
  18




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Item 6. Selected Financial Data.
  Years Ended December 31,(Amounts in thousands, except per share amounts)
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Consolidated Statements of Operations Data:(1) (2) (3)Revenues:Net product sales
    
    $
    72,119
    
    
    $
    51,796
    
    
    $
    34,021
    
    
    $
    24,370
    
    
    $
    20,168Rental income and other
    
    
    28,525
    
    
    
    19,349
    
    
    
    13,022
    
    
    
    10,293
    
    
    
    10,363Total revenues
    
    
    100,644
    
    
    
    71,145
    
    
    
    47,043
    
    
    
    34,663
    
    
    
    30,531Cost of revenues:Product cost of revenues
    
    
    19,662
    
    
    
    15,703
    
    
    
    13,192
    
    
    
    8,979
    
    
    
    8,734Rental cost of revenues
    
    
    8,022
    
    
    
    5,626
    
    
    
    4,018
    
    
    
    3,007
    
    
    
    3,182Total cost of revenues
    
    
    27,684
    
    
    
    21,329
    
    
    
    17,210
    
    
    
    11,986
    
    
    
    11,916Gross Profit
    
    
    72,960
    
    
    
    49,816
    
    
    
    29,833
    
    
    
    22,677
    
    
    
    18,615Operating expenses:Selling and marketing
    
    
    54,213
    
    
    
    44,394
    
    
    
    20,412
    
    
    
    11,760
    
    
    
    4,845General and administrative
    
    
    24,868
    
    
    
    16,391
    
    
    
    10,341
    
    
    
    8,099
    
    
    
    8,841Product development
    
    
    2,549
    
    
    
    2,779
    
    
    
    2,361
    
    
    
    2,104
    
    
    
    2,238Total operating expenses
    
    
    81,630
    
    
    
    63,564
    
    
    
    33,114
    
    
    
    21,963
    
    
    
    15,924Operating income (loss)
    
    
    (8,670
    )
    
    
    (13,748
    )
    
    
    (3,281
    )
    
    
    714
    
    
    
    2,691Interest expense (income), net
    
    
    (792
    )
    
    
    (525
    )
    
    
    46
    
    
    
    (6
    )
    
    
    44Income (loss) from continuing operations before income
taxes and cumulative effect of a change in accounting
principle
    
    
    (7,878
    )
    
    
    (13,223
    )
    
    
    (3,327
    )
    
    
    720
    
    
    
    2,647Income tax provision (benefit)
    
    
    527
    
    
    
    3,887
    
    
    
    (1,173
    )
    
    
    305
    
    
    
    1,067Income (loss) from continuing operations before cumulative
effect of a change in accounting principle
    
    
    (8,405
    )
    
    
    (17,110
    )
    
    
    (2,154
    )
    
    
    415
    
    
    
    1,580Discontinued operations:Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    328
    
    
    
    24
    
    
    
    (313
    )Gain on sale of discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    2,283
    
    
    
    
    
    
    
    Income (loss) before cumulative effect of a change in
accounting principle
    
    
    (8,405
    )
    
    
    (17,110
    )
    
    
    457
    
    
    
    439
    
    
    
    1,267Cumulative effect of a change in accounting principle for
goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,474
    )
    
    
    Net income (loss)
    
    $
    (8,405
    )
    
    $
    (17,110
    )
    
    $
    457
    
    
    $
    (3,035
    )
    
    $
    1,267Per share of common stock, basic:Income (loss) from continuing operations before cumulative
effect of a change in accounting principle
    
    $
    (0.38
    )
    
    $
    (0.83
    )
    
    $
    (0.13
    )
    
    $
    0.03
    
    
    $
    0.10Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    (0.02
    )Gain on sale of discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    0.14
    
    
    
    
    
    
    
    Income (loss) before cumulative effect of a change in
accounting principle
    
    
    (0.38
    )
    
    
    (0.83
    )
    
    
    0.03
    
    
    
    0.03
    
    
    
    0.08Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.23
    )
    
    
    Net income (loss)
    
    $
    (0.38
    )
    
    $
    (0.83
    )
    
    $
    0.03
    
    
    $
    (0.20
    )
    
    $
    0.08Per share of common stock, diluted:Income (loss) from continuing operations before cumulative
effect of a change in accounting principle
    
    $
    (0.38
    )
    
    $
    (0.83
    )
    
    $
    (0.13
    )
    
    $
    0.03
    
    
    $
    0.10Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    (0.02
    )Gain on sale of discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    0.14
    
    
    
    
    
    
    
    Income (loss) before cumulative effect of a change in
accounting principle
    
    
    (0.38
    )
    
    
    (0.83
    )
    
    
    0.03
    
    
    
    0.03
    
    
    
    0.08Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.22
    )
    
    
    Net income (loss)
    
    $
    (0.38
    )
    
    $
    (0.83
    )
    
    $
    0.03
    
    
    $
    (0.19
    )
    
    $
    0.08
 19




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Years Ended December 31,(Amounts in thousands, except per share amounts)
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Weighted-average common shares outstanding:Basic
    
    
    22,397
    
    
    
    20,628
    
    
    
    16,384
    
    
    
    15,368
    
    
    
    15,231Diluted
    
    
    22,397
    
    
    
    20,628
    
    
    
    16,384
    
    
    
    15,879
    
    
    
    15,749Consolidated Balance Sheet Data: (1) (2)Working capital
    
    $
    49,733
    
    
    $
    57,948
    
    
    $
    31,467
    
    
    $
    16,657
    
    
    $
    15,822Total assets
    
    
    82,953
    
    
    
    84,430
    
    
    
    51,896
    
    
    
    33,061
    
    
    
    35,704Long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    83Total stockholders equity
    
    $
    70,049
    
    
    $
    73,219
    
    
    $
    44,773
    
    
    $
    27,470
    
    
    $
    29,769
 (1)
    
    Effective January 1, 2002, the Company changed its method of accounting for goodwill and
other intangible assets as a result of adopting Statement of Financial Accounting Standards
No. 142, Accounting for Goodwill and Other Intangible Assets. The Company recognized a
transitional goodwill impairment loss of $3.5 million as a cumulative effect of a change in
accounting principle during the six months ended June 30, 2002. The amounts previously
reported for the first quarter of 2002 have been revised to include the $3.5 million
cumulative effect of this change in accounting principle. The effect of the change on the
first quarter 2002 results was to reduce net income by $3.5 million, or $0.22 per diluted
share, for the cumulative effect of this accounting change.(2)
    
    In November 2003, the Company sold Spinal Specialties, Inc., a wholly owned subsidiary. The
operations of Spinal Specialties have been excluded from continuing operations for all periods
presented. See Note 4 of Notes to Consolidated Financial Statements.(3)
    
    The Company recorded a full valuation allowance against its deferred tax assets in the fourth
quarter of 2004. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 (Amounts in thousands, except per share amounts)
 2005
    
    Mar. 31
    
    June 30
    
    Sept. 30
    
    Dec. 31 (1)Total revenues
    
    $
    22,741
    
    
    $
    24,183
    
    
    $
    26,795
    
    
    $
    26,925Gross profit
    
    
    16,639
    
    
    
    17,824
    
    
    
    19,239
    
    
    
    19,258Loss before income taxes
    
    
    (1,931
    )
    
    
    (584
    )
    
    
    (393
    )
    
    
    (4,970
    )Net loss
    
    
    (2,009
    )
    
    
    (645
    )
    
    
    (488
    )
    
    
    (5,263
    )Per share of common stock  basic and diluted:Loss from continuing operations
    
    
    (0.09
    )
    
    
    (0.03
    )
    
    
    (0.02
    )
    
    
    (0.23
    )Net loss
    
    
    (0.09
    )
    
    
    (0.03
    )
    
    
    (0.02
    )
    
    
    (0.23
    )Weighted-average common shares  basic and diluted
    
    
    22,236
    
    
    
    22,389
    
    
    
    22,518
    
    
    
    22,465
 2004
    
    Mar. 31
    
    June 30
    
    Sept. 30
    
    Dec. 31 (2)Total revenues
    
    $
    14,169
    
    
    $
    17,167
    
    
    $
    18,688
    
    
    $
    21,121Gross profit
    
    
    9,487
    
    
    
    11,946
    
    
    
    13,311
    
    
    
    15,072Loss before income taxes
    
    
    (2,356
    )
    
    
    (2,434
    )
    
    
    (2,814
    )
    
    
    (5,619
    )Net loss
    
    
    (1,500
    )
    
    
    (1,504
    )
    
    
    (1,770
    )
    
    
    (12,336
    )Per share of common stock  basic and diluted:Loss from continuing operations
    
    
    (0.08
    )
    
    
    (0.07
    )
    
    
    (0.08
    )
    
    
    (0.56
    )Net loss
    
    
    (0.08
    )
    
    
    (0.07
    )
    
    
    (0.08
    )
    
    
    (0.56
    )Weighted-average common shares  basic and diluted
    
    
    18,282
    
    
    
    20,933
    
    
    
    21,501
    
    
    
    21,950
 
 (1)
    
    The Company recognized approximately $5.3 million of stock-based compensation expense in
connection with the upward repricing and acceleration of vesting of certain out-of-the-money
stock options on November 9, 2005.(2)
    
    The Company recorded a full valuation allowance against its deferred tax assets in the fourth
quarter of 2004. 20




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements
  Critical Accounting Policies
  Revenue Recognition
    21




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##### Table of Contents



Accounts Receivable
  Inventories
  Deferred Taxes
  Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
 22




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##### Table of Contents



Overview
   Divestiture of Spinal Specialties
   Consolidated Results of Operations for the Year Ended December 31, 2005 Compared to the Year Ended
December 31, 2004
 Revenue
    23




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Cost of Revenues
   Selling and Marketing Expenses
   24




---



##### Table of Contents



General and Administrative Expenses
 Share-Based Payment
 Product Development Expenses
  Interest Income, Net
  Income Taxes
  25




---



##### Table of Contents



Consolidated Results of Operations for the Year Ended December 31, 2004 Compared to the Year Ended
December 31, 2003
 Revenue
     Cost of Revenue
  26




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##### Table of Contents



Selling and Marketing Expenses
  General and Administrative Expenses
  Product Development Expenses
  Income Taxes
   Liquidity and Capital Resources
 27
    Table of Contents            28




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##### Table of Contents



Contractual Obligations and Commercial Commitments
  Payment Due by PeriodMore than 5(Amounts in thousands)
    
    Less than 1 year
    
    1 to 3 years
    
    3 to 5 years
    
    years
    
    TotalOperating Lease Obligations for Facilities
    
    $
    881
    
    
    $
    1,756
    
    
    $
    428
    
    
    $
    643
    
    
    $
    3,708Purchase Commitments with Suppliers
    
    
    4,462
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,462Total Contractual Obligations and
Commercial Commitments
    
    $
    5,343
    
    
    $
    1,756
    
    
    $
    428
    
    
    $
    643
    
    
    $
    8,170
 New Accounting Pronouncements
 Inventory
Costs Inventory Pricing.
   Accounting for Conditional Asset
Retirement Obligations Accounting for Asset Retirement Obligations
 Accounting Changes and Error Corrections  A Replacement
of APB Opinion No. 20 and FASB Statement No. 3
 29




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
 Interest Rate Risk
   Foreign Currency
  
 Item 8. Financial Statements and Supplementary Data.
 Financial Statements
  Financial Statement Schedule
 VALUATION AND QUALIFYING ACCOUNTS
 (Amounts in thousands)
 Balance at
    
    Charged to Costs
    
    
    
    
    
    Balance at End ofClassification
    
    Beginning of Period
    
    and Expenses
    
    Deductions (1)
    
    PeriodYEAR ENDED DECEMBER 31, 2003:Allowance for doubtful accounts
    
    $
    1,975
    
    
    $
    701
    
    
    $
    (978
    )
    
    $
    1,698Reserve for obsolete inventories
    
    
    1,721
    
    
    
    799
    
    
    
    (364
    )
    
    
    2,156YEAR ENDED DECEMBER 31, 2004:Allowance for doubtful accounts
    
    
    1,698
    
    
    
    2,022
    
    
    
    (820
    )
    
    
    2,900Reserve for obsolete inventories
    
    
    2,156
    
    
    
    264
    
    
    
    (1,497
    )
    
    
    923YEAR ENDED DECEMBER 31, 2005:Allowance for doubtful accounts
    
    
    2,900
    
    
    
    1,926
    
    
    
    (1,454
    )
    
    
    3,372Reserve for obsolete inventories
    
    
    923
    
    
    
    232
    
    
    
    (76
    )
    
    
    1,079
 
 
 (1)
    
    Deductions in all years reported represent reductions to the reserve accounts and the related
asset accounts. Specifically, deductions from the reserve for allowance for doubtful accounts
represent the write-off of
uncollectible accounts receivable balances. Deductions from the reserve for obsolete inventories
represent the write-off and disposal of specific inventory items. 30




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Selected Quarterly Financial Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 (a) Disclosure Controls and Procedures
  (b) Management Report on Internal Control Over Financial Reporting
  
    
    Pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
    
    Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
    
    Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect
on the financial statements.
    31




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(c) Change in Internal Controls
  (d) Report of Independent Registered Public Accounting Firm
 
     32




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Item 9B. Other Information
  33




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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.
  
 Item 14. Principal Accounting Fees and Services.
  34




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##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules.
 (a)
    
    Documents filed as part of this report:
 Page in ThisReport(1) Financial StatementsThe documents described in the Index to Consolidated Financial Statements are included in this report.
    

    36(2) Financial Statement Schedule included herein:Schedule
II  Valuation and Qualifying Accounts
    

    30All other schedules are omitted, as the required information is inapplicable.(3) ExhibitsThe list of exhibits contained in the accompanying Index to Exhibits is incorporated herein by reference.
 (b)
    
    See (a)(3) above.(c)
    
    There are no financial statements required by Regulation S-X (17 CFR 210) which are or will be excluded from the annual report
to shareholders by Rule 14a-3(b).
 35




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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm:Audit of Consolidated Financial Statements
    
    
    F-1Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    F-2Consolidated Statements of Operations and Comprehensive Operations For the Years Ended
December 31, 2005, 2004 and 2003
    
    
    F-3Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2005,
2004 and 2003
    
    
    F-4Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-7Financial Statement ScheduleSchedule II  Valuation and Qualifying Accounts
    
    
    30
 36




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Report of Independent Registered Public Accounting Firm
 
       
 F-1




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##### Table of Contents



I-FLOW CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
 December 31,
    
    December 31,2005
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    13,877
    
    
    $
    10,021Short-term investments
    
    
    13,276
    
    
    
    34,087Accounts receivable, less allowance for
doubtful accounts of $3,372 and $2,900
at December 31, 2005 and 2004,
respectively
    
    
    22,344
    
    
    
    15,765Inventories, net
    
    
    11,717
    
    
    
    8,365Prepaid expenses and other current assets
    
    
    1,423
    
    
    
    921Total current assets
    
    
    62,637
    
    
    
    69,159Property, net
    
    
    14,867
    
    
    
    11,097Goodwill
    
    
    2,639
    
    
    
    2,639Other intangible assets, net
    
    
    2,655
    
    
    
    1,407Other long-term assets
    
    
    155
    
    
    
    128Total assets
    
    $
    82,953
    
    
    $
    84,430Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    3,839
    
    
    $
    4,392Accrued payroll and related expenses
    
    
    6,616
    
    
    
    5,995Accrued use taxes payable
    
    
    1,173
    
    
    
    Income taxes payable
    
    
    337
    
    
    
    115Other current liabilities
    
    
    939
    
    
    
    709Total current liabilities
    
    
    12,904
    
    
    
    11,211Commitments and contingencies (Note 8)Stockholders equityPreferred 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, 22,628,657
and 22,219,849 shares issued and
outstanding at December 31, 2005 and
2004, respectively
    
    
    110,890
    
    
    
    105,703Accumulated other comprehensive loss
    
    
    (242
    )
    
    
    (290
    )Accumulated deficit
    
    
    (40,599
    )
    
    
    (32,194
    )Net stockholders equity
    
    
    70,049
    
    
    
    73,219Total liabilities and stockholders equity
    
    $
    82,953
    
    
    $
    84,430
 See accompanying Notes to Consolidated Financial Statements.
 F-2




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I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(Amounts in thousands, except per share amounts)
 Years ended December 31,2005
    
    2004
    
    2003Revenues:Net product sales
    
    $
    72,119
    
    
    $
    51,796
    
    
    $
    34,021Rental income and other
    
    
    28,525
    
    
    
    19,349
    
    
    
    13,022Total revenues
    
    
    100,644
    
    
    
    71,145
    
    
    
    47,043Cost of revenues:Product cost of revenues
    
    
    19,662
    
    
    
    15,703
    
    
    
    13,192Rental cost of revenues
    
    
    8,022
    
    
    
    5,626
    
    
    
    4,018Total cost of revenues
    
    
    27,684
    
    
    
    21,329
    
    
    
    17,210Gross profit
    
    
    72,960
    
    
    
    49,816
    
    
    
    29,833Operating expensesSelling and marketing
    
    
    54,213
    
    
    
    44,394
    
    
    
    20,412General and administrative
    
    
    24,868
    
    
    
    16,391
    
    
    
    10,341Product development
    
    
    2,549
    
    
    
    2,779
    
    
    
    2,361Total operating expenses
    
    
    81,630
    
    
    
    63,564
    
    
    
    33,114Operating loss
    
    
    (8,670
    )
    
    
    (13,748
    )
    
    
    (3,281
    )Interest expense (income), net
    
    
    (792
    )
    
    
    (525
    )
    
    
    46Loss from continuing operations before income taxes
    
    
    (7,878
    )
    
    
    (13,223
    )
    
    
    (3,327
    )Income tax provision (benefit)
    
    
    527
    
    
    
    3,887
    
    
    
    (1,173
    )Income (loss) from continuing operations
    
    
    (8,405
    )
    
    
    (17,110
    )
    
    
    (2,154
    )Discontinued operations:Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    328Gain on sale of discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    2,283Net income (loss)
    
    $
    (8,405
    )
    
    $
    (17,110
    )
    
    $
    457Per share of common stock, basic and diluted:Income (loss) from continuing operations
    
    $
    (0.38
    )
    
    $
    (0.83
    )
    
    $
    (0.13
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    0.02Gain on sale of discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    0.14Net income (loss)
    
    $
    (0.38
    )
    
    $
    (0.83
    )
    
    $
    0.03Comprehensive Operations:Net income (loss)
    
    $
    (8,405
    )
    
    $
    (17,110
    )
    
    $
    457Unrealized loss on securities
    
    
    (32
    )
    
    
    (69
    )
    
    
    Foreign currency translation adjustments
    
    
    80
    
    
    
    (29
    )
    
    
    (97
    )Comprehensive income (loss)
    
    $
    (8,357
    )
    
    $
    (17,208
    )
    
    $
    360
 See accompanying Notes to Consolidated Financial Statements.
 F-3




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I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Amounts in thousands)
 AccumulatedOtherComprehensiveCommon Stock
    
    Income
    
    AccumulatedShares
    
    Amount
    
    (Loss)
    
    Deficit
    
    NetBalance, December 31, 2002
    
    
    15,473
    
    
    $
    43,106
    
    
    $
    (95
    )
    
    $
    (15,541
    )
    
    $
    27,470Exercise of common stock options and
warrants
    
    
    1,092
    
    
    
    2,070
    
    
    
    
    
    
    
    
    
    
    
    2,070Tax benefit from exercise of stock options
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    2,000Stock-based compensation
    
    
    74
    
    
    
    1,268
    
    
    
    
    
    
    
    
    
    
    
    1,268Sale of common stock, net
    
    
    1,667
    
    
    
    11,563
    
    
    
    
    
    
    
    
    
    
    
    11,563Grants of common stock warrants
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    42Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    (97
    )
    
    
    
    
    
    
    (97
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    457
    
    
    
    457Balance, December 31, 2003
    
    
    18,306
    
    
    
    60,049
    
    
    
    (192
    )
    
    
    (15,084
    )
    
    
    44,773Exercise of common stock options and
warrants
    
    
    924
    
    
    
    1,856
    
    
    
    
    
    
    
    
    
    
    
    1,856Reversal of tax benefit from exercise of
stock options
    
    
    
    
    
    
    (2,000
    )
    
    
    
    
    
    
    
    
    
    
    (2,000
    )Stock-based compensation
    
    
    
    
    
    
    2,711
    
    
    
    
    
    
    
    
    
    
    
    2,711Sale of common stock, net
    
    
    2,990
    
    
    
    43,087
    
    
    
    
    
    
    
    
    
    
    
    43,087Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    (69
    )
    
    
    
    
    
    
    (69
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    (29
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,110
    )
    
    
    (17,110
    )Balance, December 31, 2004
    
    
    22,220
    
    
    
    105,703
    
    
    
    (290
    )
    
    
    (32,194
    )
    
    
    73,219Exercise of common stock options and
warrants
    
    
    533
    
    
    
    1,347
    
    
    
    
    
    
    
    
    
    
    
    1,347Stock-based compensation
    
    
    
    
    
    
    7,214
    
    
    
    
    
    
    
    
    
    
    
    7,214Issuance of stock from stock upward
repricing event
    
    
    162Purchase and retirement of treasury stock
    
    
    (286
    )
    
    
    (3,425
    )
    
    
    
    
    
    
    
    
    
    
    (3,425
    )Issuance of common stock options for
licensing rights
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    51Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    
    
    
    
    (32
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    80Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,405
    )
    
    
    (8,405
    )Balance, December 31, 2005
    
    
    22,629
    
    
    $
    110,890
    
    
    $
    (242
    )
    
    $
    (40,599
    )
    
    $
    70,049
 See accompanying Notes to Consolidated Financial Statements.
 F-4




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I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 Year ended December 31,2005
    
    2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    (8,405
    )
    
    $
    (17,110
    )
    
    $
    457Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (328
    )Gain on sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    (2,283
    )Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:Stock-based compensation
    
    
    7,214
    
    
    
    2,711
    
    
    
    941Depreciation and amortization
    
    
    4,884
    
    
    
    2,575
    
    
    
    2,513Provision for doubtful accounts receivable
    
    
    1,926
    
    
    
    2,022
    
    
    
    701Loss on disposal of property
    
    
    371
    
    
    
    
    
    
    
    213Provision for inventory obsolescence
    
    
    232
    
    
    
    264
    
    
    
    799Deferred taxes
    
    
    
    
    
    
    4,108
    
    
    
    (1,257
    )Expense related to common stock warrants
    
    
    
    
    
    
    
    
    
    
    42Changes in operating assets and liabilities, net of effect of
discontinued operations:Accounts receivable
    
    
    (8,505
    )
    
    
    (5,395
    )
    
    
    (3,171
    )Inventories
    
    
    (3,584
    )
    
    
    (1,814
    )
    
    
    (1,360
    )Prepaid expenses and other
    
    
    (529
    )
    
    
    (269
    )
    
    
    (243
    )Accounts payable and accrued payroll and related expenses
    
    
    68
    
    
    
    3,856
    
    
    
    1,636Income taxes payable
    
    
    222
    
    
    
    (121
    )
    
    
    30Other liabilities
    
    
    230
    
    
    
    353
    
    
    
    296Net cash used in operating activities from continuing operations
    
    
    (5,876
    )
    
    
    (8,820
    )
    
    
    (1,014
    )Net cash used in operating activities of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (56
    )Net cash used in operating activities
    
    
    (5,876
    )
    
    
    (8,820
    )
    
    
    (1,070
    )Cash flows from investing activities:Capital expenditures
    
    
    (7,418
    )
    
    
    (6,603
    )
    
    
    (3,671
    )Purchases of investments
    
    
    (18,825
    )
    
    
    (35,515
    )
    
    
    Maturities of investments
    
    
    37,620
    
    
    
    1,375
    
    
    
    Sale of investments
    
    
    1,984
    
    
    
    
    
    
    
    Patents and licensing right acquisitions
    
    
    (1,631
    )
    
    
    (499
    )
    
    
    12Net proceeds from sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    5,044Net cash provided by (used in) investing activities from continuing operations
    
    
    11,730
    
    
    
    (41,242
    )
    
    
    1,385Net cash used in investing activities from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (382
    )Net cash provided by (used in) investing activities
    
    
    11,730
    
    
    
    (41,242
    )
    
    
    1,003Cash flows from financing activities:Purchase of treasury stock
    
    
    (3,425
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options and warrants
    
    
    1,347
    
    
    
    1,856
    
    
    
    2,070Net proceeds from sale of common stock
    
    
    
    
    
    
    43,087
    
    
    
    11,563Principal payments on debt
    
    
    
    
    
    
    
    
    
    
    (77
    )Net cash provided by (used in) financing activities
    
    
    (2,078
    )
    
    
    44,943
    
    
    
    13,556Effect of exchange rates on cash
    
    
    80
    
    
    
    (45
    )
    
    
    (4
    )Net increase (decrease) in cash and cash equivalents
    
    
    3,856
    
    
    
    (5,164
    )
    
    
    13,485Cash and cash equivalents at beginning of year
    
    
    10,021
    
    
    
    15,185
    
    
    
    1,700Cash and cash equivalents at end of year
    
    $
    13,877
    
    
    $
    10,021
    
    
    $
    15,185
 (Table continued on next page)
 See accompanying Notes to Consolidated Financial Statements.
 F-5




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I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 Year ended December 31,2005
    
    2004
    
    2003SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid
    
    $
    
    
    
    $
    1
    
    
    $
    65Income tax payments
    
    $
    305
    
    
    $
    126
    
    
    $
    29Tax benefit from exercise of stock options
    
    $
    
    
    
    $
    (2,000
    )
    
    $
    2,000SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES:Property acquisitions
    
    $
    643
    
    
    $
    
    
    
    $
    
 See accompanying Notes to Consolidated Financial Statements.
 F-6




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Notes to Consolidated Financial Statements
 1.
    
    Nature of Operations and Summary of Significant Accounting Policies
 Nature of Operations 
 Principles of Consolidation 
 Cash and Cash Equivalents 
 Short-term Investments  Accounting for Certain Investments in Debt and Equity Securities ,
 Inventories 
 (Amounts in thousands)
    
    2005
    
    
    2004Raw Materials
    
    $
    7,128
    
    
    $
    5,145Work in Process
    
    
    2,001
    
    
    
    1,369Finished Goods
    
    
    3,667
    
    
    
    2,774Reserve for Obsolescence
    
    
    (1,079
    )
    
    
    (923
    )Total
    
    $
    11,717
    
    
    $
    8,365
 Long Lived Assets  Accounting for Impairment or Disposal of
Long-Lived Assets .
 Property 
 F-7




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##### Table of Contents



(Amounts in thousands)
    
    2005
    
    
    2004Furniture, fixtures and equipment
    
    $
    9,960
    
    
    $
    9,314Rental equipment
    
    
    19,790
    
    
    
    13,055Accumulated depreciation and amortization
    
    
    (14,883
    )
    
    
    (11,272
    )Total
    
    $
    14,867
    
    
    $
    11,097
 Goodwill  Goodwill and
Other Intangible Assets
 Revenue Recognition 
    Accounts Receivable 
 Product Warranties 
 Income Taxes  Accounting for Income Taxes
 F-8




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##### Table of Contents



Accounting for Stock-Based Compensation  Accounting for Stock Issued to
Employees Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans, Accounting for Stock-Based Compensation .
   Year Ended December 31,(Amounts in thousands, except per share amounts)
    
    2005
    
    
    2004
    
    
    2003Net income (loss)  as reported
    
    $
    (8,405
    )
    
    $
    (17,110
    )
    
    $
    457Stock-based employee compensation included in net income (loss), net of tax
    
    
    8,549
    
    
    
    1,073
    
    
    
    471Total stock-based employee compensation expense determined under fair
value based method for all awards, net of tax
    
    
    (15,308
    )
    
    
    (4,806
    )
    
    
    (1,024
    )Net loss  pro forma
    
    $
    (15,164
    )
    
    $
    (20,843
    )
    
    $
    (96
    )Basic and diluted earnings (loss) per share  as reported
    
    $
    (0.38
    )
    
    $
    (0.83
    )
    
    $
    0.03Basic and diluted loss per share  pro forma
    
    $
    (0.68
    )
    
    $
    (1.01
    )
    
    $
    (0.01
    )
  F-9




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##### Table of Contents



Year Ended December 31,2005
    
    2004
    
    2003Expected life (in years)
    
    
    3-5
    
    
    
    5.0
    
    
    
    5.0Risk-free interest rate
    
    
    4.09
    %
    
    
    3.70
    %
    
    
    3.08
    %Volatility
    
    
    81
    %
    
    
    89
    %
    
    
    93
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
 Earnings Per Share  Earnings Per Share
    Year Ended December 31,(Amounts in thousands, except per share amounts)
    
    2005
    
    
    2004
    
    
    2003Net income (loss) (Numerator)
    
    $
    (8,405
    )
    
    $
    (17,110
    )
    
    $
    457Basic net income per share (Denominator):Weighted-average number of common shares outstanding
    
    
    22,397
    
    
    
    20,628
    
    
    
    16,384Effect of dilutive securities:Stock options and unvested restricted stock
    
    
    
    
    
    
    
    
    
    
    Diluted net income per share (Denominator):Weighted-average number of common and common
equivalent shares outstanding
    
    
    22,397
    
    
    
    20,628
    
    
    
    16,384Net income ( loss) per share:Basic and diluted
    
    $
    (0.38
    )
    
    $
    (0.83
    )
    
    $
    0.03
  Comprehensive Income  Reporting Comprehensive Income
 Use of Estimates 
 Foreign Currency 
 F-10




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##### Table of Contents



New Accounting Pronouncements Inventory
Costs Inventory Pricing.
   Accounting for Conditional Asset
Retirement Obligations Accounting for Asset Retirement Obligations
 Accounting Changes and Error Corrections  A Replacement
of APB Opinion No. 20 and FASB Statement No. 3
 2. Goodwill and Other Intangible Assets
  F-11




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##### Table of Contents



As of December 31, 2005Carrying
    
    
    Accumulated(Amounts in thousands)
    
    Amount
    
    
    Amortization
    
    
    NetPatents
    
    $
    2,857
    
    
    $
    1,113
    
    
    $
    1,744Licensing Rights
    
    
    1,101
    
    
    
    190
    
    
    
    911Total
    
    $
    3,958
    
    
    $
    1,303
    
    
    $
    2,655
 As of December 31, 2004Carrying
    
    
    Accumulated(Amounts in thousands)
    
    Amount
    
    
    Amortization
    
    
    NetPatents
    
    $
    2,310
    
    
    $
    903
    
    
    $
    1,407Licensing Rights
    
    
    150
    
    
    
    150
    
    
    
    Total
    
    $
    2,460
    
    
    $
    1,053
    
    
    $
    1,407
   3. Investments
  Gross(Amounts in thousands)
    
    Amortized
 
    UnrealizedDecember 31, 2005
    
    Cost
    
    Losses
    
    Fair ValueMoney market funds
    
    $
    6,639
    
    
    $
    
    
    
    $
    6,639U.S. agency discount notes
    
    
    1,400
    
    
    
    
    
    
    
    1,400U.S. agency  non callable
    
    
    3,842
    
    
    
    (33
    )
    
    
    3,809Corporate debentures and bonds
    
    
    8,543
    
    
    
    (67
    )
    
    
    8,476Commercial paper
    
    
    1,790
    
    
    
    (1
    )
    
    
    1,789Total
    
    $
    22,214
    
    
    $
    (101
    )
    
    $
    22,113Reported as:Cash equivalents
    
    
    
    
    
    
    
    
    
    $
    8,837Short-term investments
    
    
    
    
    
    
    
    
    
    
    13,276Total
    
    
    
    
    
    
    
    
    
    $
    22,113
 F-12




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##### Table of Contents



Gross(Amounts in thousands)
    
    Amortized
    
    UnrealizedDecember 31, 2004
    
    Cost
    
    Losses
    
    Fair ValueMoney market funds
    
    $
    1,903
    
    
    $
    
    
    
    $
    1,903U.S. agency discount notes
    
    
    13,073
    
    
    
    (8
    )
    
    
    13,065U.S. agency  non callable
    
    
    4,560
    
    
    
    (13
    )
    
    
    4,547Corporate debentures and bonds
    
    
    8,356
    
    
    
    (43
    )
    
    
    8,313Commercial paper
    
    
    14,506
    
    
    
    (5
    )
    
    
    14,501Total
    
    $
    42,398
    
    
    $
    (69
    )
    
    $
    42,329Reported as:Cash equivalents
    
    
    
    
    
    
    
    
    
    $
    8,242Short-term investments
    
    
    
    
    
    
    
    
    
    
    34,087Total
    
    
    
    
    
    
    
    
    
    $
    42,329
  (Amounts in thousands)Notes and bonds:Maturities of one year or less
    
    $
    15,474Money market funds:Original maturities of three months or less
    
    
    6,639Total
    
    $
    22,113
  4. Divestiture of Spinal Specialties
   5. Lines of Credit
   F-13




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##### Table of Contents



6. Stockholders Equity
 Preferred Stock 
  Stockholder Rights Plan 
 Common Stock 
 F-14




---



##### Table of Contents



Stock Options and Warrants 
  F-15




---



##### Table of Contents



F-16




---



##### Table of Contents



(Amounts in thousands)
    
    2005
    
    2004
    
    2003Options to Employees
    
    $
    8,545
    
    
    $
    2,467
    
    
    $
    400Options to Consultants
    
    
    14
    
    
    
    92
    
    
    
    182Restricted Stock
    
    
    4
    
    
    
    152
    
    
    
    359Employee Options Related to Discontinued Operations (Note 4)
    
    
    
    
    
    
    
    
    
    
    327Total
    
    $
    8,563
    
    
    $
    2,711
    
    
    $
    1,268
  Weighted-AverageNumber of
    
    ExerciseShares
    
    PriceBalance, December 31, 2002 (2,611,385 exercisable at a
weighted-average price of $2.31)
    
    
    4,503,921
    
    
    $
    2.19Granted (weighted-average fair value of $4.50 per share)
    
    
    527,000
    
    
    $
    6.02Canceled/Expired
    
    
    (711,069
    )
    
    $
    2.63Exercised
    
    
    (1,082,440
    )
    
    $
    2.02Balance, December 31, 2003 (1,680,888 exercisable at a
weighted-average price of $2.25)
    
    
    3,237,412
    
    
    $
    2.77Granted (weighted-average fair value of $9.52 per share)
    
    
    1,453,884
    
    
    $
    13.72Canceled/Expired
    
    
    (146,310
    )
    
    $
    5.49Exercised
    
    
    (918,162
    )
    
    $
    2.04Balance, December 31, 2004 (1,595,649 exercisable at a
weighted-average price of $2.70)
    
    
    3,626,824
    
    
    $
    5.57Granted (weighted-average fair value of $16.61 per share)
    
    
    1,315,500
    
    
    $
    13.55Canceled/Expired
    
    
    (259,707
    )
    
    $
    5.04Exercised
    
    
    (528,705
    )
    
    $
    2.48Balance, December 31, 2005 (3,509,059 exercisable at a
weighted-average price of $10.01)
    
    
    4,153,912
    
    
    $
    8.90
  F-17




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##### Table of Contents



Options Outstanding
    
    
    
    
    
    Options ExercisableWeighted-Average
    
    
    
    
    
    
    
    
    
    Weighted-Number
    
    Remaining
    
    Weighted-
    
    Number
    
    AverageOf Shares
    
    Contractual
    
    Average
    
    Of Shares
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life in Years
    
    Exercise Price
    
    Exercisable
    
    Price$  0.00
- $  1.04
    
    
    446,500
    
    
    
    3.75
    
    
    $
    0.28
    
    
    
    244,000
    
    
    $
    0.51$  1.28
- $  1.66
    
    
    425,165
    
    
    
    3.67
    
    
    $
    1.41
    
    
    
    334,946
    
    
    $
    1.35$  1.77
- $  2.50
    
    
    504,241
    
    
    
    1.53
    
    
    $
    2.45
    
    
    
    490,885
    
    
    $
    2.46$  2.60
- $  3.37
    
    
    569,461
    
    
    
    2.61
    
    
    $
    3.14
    
    
    
    446,930
    
    
    $
    3.21$  3.80 - $13.54
    
    
    262,691
    
    
    
    3.57
    
    
    $
    11.20
    
    
    
    144,611
    
    
    $
    11.78$13.55 - $13.55
    
    
    772,854
    
    
    
    3.01
    
    
    $
    13.55
    
    
    
    772,854
    
    
    $
    13.55$13.78 - $17.56
    
    
    395,500
    
    
    
    3.96
    
    
    $
    15.34
    
    
    
    389,500
    
    
    $
    15.34$17.58 - $17.58
    
    
    740,500
    
    
    
    4.01
    
    
    $
    17.58
    
    
    
    740,500
    
    
    $
    17.58$17.59 - $19.04
    
    
    6,000
    
    
    
    4.13
    
    
    $
    18.08
    
    
    
    6,000
    
    
    $
    18.08$19.81 - $19.81
    
    
    31,000
    
    
    
    3.91
    
    
    $
    19.81
    
    
    
    31,000
    
    
    $
    19.81Total
    
    
    4,153,912
    
    
    
    3.23
    
    
    $
    8.90
    
    
    
    3,601,226
    
    
    $
    9.75
 7. Income Taxes
 Accounting for Income
Taxes
  Years Ended December 31,(Amounts in thousands)
    
    2005
    
    2004
    
    2003Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    Foreign
    
    
    87
    
    
    
    
    
    
    $
    State
    
    
    440
    
    
    
    203
    
    
    
    84Subtotal
    
    
    527
    
    
    
    203
    
    
    
    84Deferred:Federal
    
    
    
    
    
    
    3,189
    
    
    
    (1,161
    )State
    
    
    
    
    
    
    495
    
    
    
    (96
    )Subtotal
    
    
    
    
    
    
    3,684
    
    
    
    (1,257
    )Total income tax (benefit) provision
    
    $
    527
    
    
    $
    3,887
    
    
    $
    (1,173
    )
   F-18




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##### Table of Contents



Years Ended December 31,2005
    
    2004
    
    2003Tax at federal statutory rate
    
    
    (35.0
    %)
    
    
    (35.0
    %)
    
    
    (35.0
    %)State income taxes, net of federal benefit
    
    
    3.6
    %
    
    
    (3.6
    %)
    
    
    (2.5
    %)Foreign operations
    
    
    1.1
    %
    
    
    (0.5
    %)
    
    
    (1.2
    %)Research credit
    
    
    (0.6
    %)
    
    
    (1.0
    %)
    
    
    (1.4
    %)Valuation Allowance
    
    
    35.2
    %
    
    
    67.9
    %
    
    
    0.0
    %Nondeductible charges
    
    
    3.0
    %
    
    
    2.1
    %
    
    
    3.7
    %Other
    
    
    (0.6
    %)
    
    
    (0.5
    %)
    
    
    1.1
    %Total
    
    
    6.7
    %
    
    
    29.4
    %
    
    
    (35.3
    %)
  December 31,(Amounts in thousands)
    
    2005
    
    2004Net operating losses
    
    $
    15,356
    
    
    $
    13,634Amortization of goodwill and other intangibles
    
    
    2,050
    
    
    
    2,389Reserves not currently deductible
    
    
    9,056
    
    
    
    4,475State taxes
    
    
    (1,320
    )
    
    
    (995
    )Credits
    
    
    1,512
    
    
    
    1,469Depreciation
    
    
    (1,512
    )
    
    
    (1,574
    )Total deferred income taxes
    
    
    25,142
    
    
    
    19,398Valuation allowance
    
    
    (25,142
    )
    
    
    (19,398
    )Net deferred income taxes
    
    $
    
    
    
    $
    
   8. Commitments and Contingencies
  F-19




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##### Table of Contents



(Amounts in thousands)Years Ended December 31,2006
    
    $
    8812007
    
    
    7192008
    
    
    6052009
    
    
    4322010
    
    
    428Thereafter
    
    
    643Total
    
    $
    3,708
      9. Employee Benefit Plan
  F-20




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##### Table of Contents



10. Operating Segments and Revenue Data
   
 Manufacturing and(Amounts in thousands)
    
    Marketing
    
    Rentals
    
    Consolidated2005:Revenues
    
    $
    72,119
    
    
    $
    28,525
    
    
    $
    100,644Operating income (loss)
    
    
    (17,116
    )
    
    
    8,446
    
    
    
    (8,670
    )Assets
    
    
    53,715
    
    
    
    29,238
    
    
    
    82,953Depreciation and amortization
    
    
    1,416
    
    
    
    3,468
    
    
    
    4,884Property additions
    
    
    620
    
    
    
    6,798
    
    
    
    7,4182004:Revenues
    
    $
    51,796
    
    
    $
    19,349
    
    
    $
    71,145Operating income (loss)
    
    
    (18,678
    )
    
    
    4,930
    
    
    
    (13,748
    )Assets
    
    
    66,903
    
    
    
    17,527
    
    
    
    84,430Depreciation and amortization
    
    
    671
    
    
    
    1,904
    
    
    
    2,575Property additions
    
    
    491
    
    
    
    6,112
    
    
    
    6,6032003:Revenues
    
    $
    34,021
    
    
    $
    13,022
    
    
    $
    47,043Operating income (loss)
    
    
    (5,404
    )
    
    
    2,123
    
    
    
    (3,281
    )Assets
    
    
    41,026
    
    
    
    10,870
    
    
    
    51,896Depreciation and amortization
    
    
    1,305
    
    
    
    1,208
    
    
    
    2,513Property additions
    
    
    1,135
    
    
    
    2,536
    
    
    
    3,671
  F-21




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##### Table of Contents



(Amounts in thousands)Sales to unaffiliated customers:
    
    2005
    
    2004
    
    2003United States
    
    $
    87,739
    
    
    $
    59,838
    
    
    $
    37,503Europe
    
    
    10,497
    
    
    
    9,214
    
    
    
    7,588Asia / Pacific Rim
    
    
    1,328
    
    
    
    1,365
    
    
    
    969Other
    
    
    1,080
    
    
    
    728
    
    
    
    983Total
    
    $
    100,644
    
    
    $
    71,145
    
    
    $
    47,043
 11. Related Party Transactions
   F-22




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##### Table of Contents



SIGNATURES
  I-FLOW CORPORATIONDated: March 3, 2006
    
    By:
    
    /s/ Donald M. EarhartDonald M. EarhartChairman, President and Chief Executive Officer
  Signature
    
    Title/s/ Donald M. Earhart

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

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

James R. Talevich
    
    Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)/s/ John H. Abeles

John H. Abeles, M.D.
    
    Director/s/ Jack H. Halperin

Jack H. Halperin
    
    Director/s/ Joel S. Kanter

Joel S. Kanter
    
    Director/s/ Erik H. Loudon

Erik H. Loudon
    
    Director/s/ Henry Tsutomu Tai

Henry Tsutomu Tai, Ph.D., M.D.
    
    Director




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Exhibit2.1
    
    Stock Purchase Agreement, dated October 28, 2004, by and between Integra LifeSciences
Corporation and I-Flow Corporation (1)2.2
    
    Merger Agreement, dated July 27, 2001, by and between I-Flow Corporation, a Delaware
corporation, and I-Flow Corporation, a California corporation (2)2.3
    
    Agreement and Plan of Merger, dated January 13, 2000, by and among I-Flow Corporation,
Spinal Acquisition Corp., Spinal Specialties, Inc. and the Shareholders of Spinal
Specialties, Inc. (3)2.4
    
    Agreement and Plan of Merger, dated February 9, 1998, by and among I-Flow Corporation,
I-Flow Subsidiary, Inc., Venture Medical, Inc., InfuSystems II, Inc. and the Shareholders
of Venture Medical, Inc. and InfuSystems II, Inc. (4)2.5
    
    Agreement for Purchase and Sale of Assets, dated July 3, 1996, by and among I-Flow
Corporation, Block Medical, Inc. and Hillenbrand Industries, Inc. (5)3.1
    
    Amended and Restated Certificate of Incorporation of I-Flow Corporation, a Delaware
Corporation (6)3.2
    
    Bylaws of I-Flow Corporation, a Delaware Corporation (2)3.3
    
    Certificate of Designation Regarding Series A Junior Participating Cumulative Preferred
Stock (7)4.1
    
    Specimen Common Stock Certificate (20)4.2
    
    Warrant Agreement, dated February 13, 1990, between the Company and American Stock
Transfer & Trust Company, as warrant agent (9)4.3
    
    Rights Agreement, dated as of March 8, 2002, by and between I-Flow Corporation and
American Stock Transfer & Trust Company, as rights agent, which includes, as Exhibit A,
the Form of Rights Certificate, the Form of Assignment and the Form of Election to
Purchase (7)4.4
    
    Warrant to Purchase Stock, dated May 8, 2003, between I-Flow Corporation and Silicon
Valley Bank (10)4.5
    
    Registration Rights Agreement, dated May 8, 2003, between I-Flow Corporation and Silicon
Valley Bank (10)4.6
    
    Form of Warrant, dated September 4, 2003 (1)4.7
    
    Form of Registration Rights Agreement, dated September 4, 2003 (1)10.1
    
    Form of Securities Purchase Agreement, dated September 2, 2003 (1)10.2
    
    I-Flow Corporation Amended and Restated 2001 Equity Incentive Plan (11) *10.3
    
    2003 Restricted Stock Plan of I-Flow Corporation (10)*10.4
    
    2001 Restricted Stock Plan of I-Flow Corporation (12)*10.5
    
    1996 Stock Incentive Plan (13)*10.6
    
    1992 Non-Employee Director Stock Option Plan (14)*10.7
    
    1987-1988 Incentive Stock Option Plan and Non-Statutory Stock Option Plan, restated as of
March 23, 1992 (15)*10.8
    
    License and Transfer Agreement with SoloPak Pharmaceuticals Inc., dated March 6, 1996 (16)10.9
    
    Summary of the terms of the COIP for 2005 (23)*10.10
    
    Summary of the terms of the COIP for 2006 (25)*10.11
    
    Addendum to manufacturing plant lease agreement (23)10.12
    
    Lease Agreement between Industrial Developments International, Inc. as Landlord and
I-Flow Corporation as Tenant dated April 14, 1997 (17)10.13
    
    Block Medical de Mexico lease agreement dated December 7, 1999 (22)




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##### Table of Contents



Exhibit No.
    
    Exhibit10.14
    
    Amendment to Loan Agreement between Silicon Valley Bank and I-Flow Corporation dated
January 30, 2004 (22)10.15
    
    Amended and Restated Loan and Security Agreement between Silicon Valley Bank and I-Flow
Corporation dated May 8, 2003 (10)10.16
    
    Loan Agreement, dated March 31, 2000, by and among InfuSystem, Inc., I-Flow Corporation
and Old Kent Bank (10)10.17
    
    First Amendment to Loan Agreement, dated April 1, 2002, by and among InfuSystem, Inc.,
I-Flow Corporation and Fifth Third Bank (formerly Old Kent Bank) (10)10.18
    
    Second Amendment to Loan Agreement, dated April 1, 2003, by and among InfuSystem, Inc.,
I-Flow Corporation and Fifth Third Bank (formerly Old Kent Bank) (10)10.19
    
    Second Amended and Restated Promissory Note, dated April 1, 2004, between InfuSystem,
Inc. and Fifth Third Bank (formerly Old Kent Bank) (10)10.20
    
    Promissory Note with Donald M. Earhart dated June 15, 2001 (8)*10.21
    
    Underwriting Agreement, dated April 13, 2004 (21)10.22
    
    Employment Agreement with Donald M. Earhart, dated May 16, 1990 (18)*10.23
    
    Amendment No. 1 to Employment Agreement with Donald M. Earhart, dated June 21, 2001 (8)*10.24
    
    Amendment No. 2 to Employment Agreement with Donald M. Earhart, dated February 23, 2006
(25)*10.25
    
    Amended and Restated Employment Agreement with James J. Dal Porto, dated June 21, 2001
(8)*10.26
    
    Amendment No. 1 to Employment Agreement with James J. Dal Porto, dated February 23, 2006
(25)*10.27
    
    Employment Agreement with James R. Talevich, dated June 30, 2000 (19) *10.28
    
    Amendment No. 1 to Employment Agreement with James R. Talevich, dated February 23, 2006
(25)*10.29
    
    Agreement Re: Change in Control with Donald M. Earhart, dated June 21, 2001 (8)*10.30
    
    Amendment No. 1 to Agreement Re: Change in Control with Donald M. Earhart, dated February
23, 2006 (25)*10.31
    
    Agreement Re: Change in Control with James J. Dal Porto dated June 21, 2001 (8)*10.32
    
    Amendment No. 1 to Agreement Re: Change in Control with James J. Dal Porto, dated
February 23, 2006 (25)*10.33
    
    Agreement Re: Change in Control with James R. Talevich, dated June 21, 2001 (8)*10.34
    
    Amendment No. 1 to Agreement Re: Change in Control with James R. Talevich, dated February
23, 2006 (25)*10.35
    
    Form of Restricted Stock Agreement (25)*10.36
    
    Amendment to Loan Agreement, dated as of April 30, 2005, between I-Flow Corporation and
Silicon Valley Bank (24)10.37
    
    Form of Indemnification Agreement (25)21.1
    
    List of Subsidiaries23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232.1
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002




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##### Table of Contents



*
    
    Management contract or compensatory plan or arrangement required to be filed as
an exhibit pursuant to applicable rules of the Securities and Exchange Commission.(1)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended September 30, 2003.(2)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on August 3, 2001.(3)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended March 31, 2000.(4)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K/A filed on March 6, 1998.(5)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated July 22, 1996.(6)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated May 29, 2002.(7)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on March 13, 2002.(8)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended June 30, 2001.(9)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10-K for the fiscal year ended September 30, 1990.(10)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended June 30, 2003.(11)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on June 1, 2005.(12)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2002.(13)
    
    Incorporated by reference to exhibit with this title filed with the Companys Definitive
Proxy Statement filed on March 27, 1996.(14)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.(15)
    
    Incorporated by reference to exhibit with this title filed with the Companys Post-Effective
Amendment to its Registration Statement (No. 33-41207) filed on October 27, 1992.(16)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.(17)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated April 14, 1997.




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##### Table of Contents



(18)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10-K for the fiscal year ended September 30, 1990.(19)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.(20)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended March 31, 2002.(21)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on April 14, 2004.(22)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2003.(23)
    
    Incorporated by reference to exhibit with this title filed with the Companys Annual Report
on Form 10 -K for the fiscal year ended December 31, 2004.(24)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on May 9, 2005.(25)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on March 1, 2006.