Table
      of Contents




UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549














FORM
      10-Q








(X)  Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For
      the
      quarterly period ended February 28, 2007





or





(  
      )  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 0-20212








ARROW
                  INTERNATIONAL, INC.(Exact
                  Name of Registrant as Specified in Its
                  Charter)





Pennsylvania
            23-1969991(State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            (I.R.S.
                Employer
              Identification
                No.)








2400
                Bernville Road, Reading, Pennsylvania
            19605(Address
                of Principal Executive Offices)
            (Zip
                Code)








Registrant's
                Telephone Number, Including Area Code:
            (610)
                378-0131








Indicate
      by check mark whether the Registrant is a well-known seasoned issuer, as defined
      in Rule 405 of the Securities Act.


YES X NO
      __





Indicate
      by check mark whether the Registrant is not required to file reports pursuant
      to
      Section 13 or Section 15(d) of the Act. YES __    
NO X





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 whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.


See
      definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
      the Exchange Act.  (check one):


Large
      Accelerated Filer X Accelerated Filer __          
Non-Accelerated Filer __





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
      __ No X




Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date.







Class
            
            Shares
                Outstanding at April 3, 2007Common
                Stock, No Par Value
            
            45,142,471











ARROW
      INTERNATIONAL, INC.





Form10-Q
      Index








PagePART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements (Unaudited)Consolidated
                  Balance Sheets at February 28,
                  2007and
                  August 31, 2006
            3-4Consolidated
                Statements of Income
            5-6Consolidated
                Statements of Cash
                Flows
            7-8Consolidated
                Statements of ComprehensiveIncome
                (Expense)
            9Notes
                to Consolidated Financial
                Statements
            10-18Item
                2.
            Management's
                Discussion and Analysis of
                FinancialCondition
                and Results of Operations
            19-30Item
                3.
            Quantitative
                and Qualitative Disclosures
                AboutMarket
                Risk
            31-32Item
                4.
            Controls
                and Procedures
            32-33PART
                II.
            OTHER
                INFORMATIONItem
                6.
            Exhibits
            33Signature
            
            
            34Exhibit
                Index
            
            35Certifications








(2)





PART
      I   FINANCIALINFORMATION





Item
      1. FinancialStatements





ARROW
      INTERNATIONAL, INC.


CONSOLIDATED
      BALANCESHEETS





(In
      thousands)


(Unaudited)




February
                  28,
              
              August
                  31,2007
              
              2006ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              149,432
              
              $
              148,576Marketable
                  securities
              
              
              23,281
              
              
              9,783Accounts
                  receivable, net
              
              
              102,773
              
              
              96,937Inventories
              
              
              107,256
              
              
              102,901Prepaid
                  expenses and other
              
              
              9,991
              
              
              7,808Prepaid
                  income taxes
              
              
              4,486
              
              
              9,506Deferred
                  income taxes
              
              
              14,595
              
              
              13,709Total
                  current assets
              
              
              411,814
              
              
              389,220Property,
                  plant and equipment
              
              
              376,616
              
              
              362,148Less
                  accumulated depreciation
              
              
              (198,211
              )
              
              (188,295
              )178,405
              
              
              173,853Goodwill
              
              
              42,881
              
              
              42,830Intangible
                  assets, net
              
              
              42,635
              
              
              45,787Other
                  assets
              
              
              10,118
              
              
              9,863Prepaid
                  pension costs
              
              
              34,090
              
              
              35,884Total
                  other assets
              
              
              129,724
              
              
              134,364Total
                  assets
              
              $
              719,943
              
              $
              697,437





See
      accompanying notes to consolidated financial statements





Continued





(3)




ARROW
        INTERNATIONAL, INC.
 CONSOLIDATED
        BALANCE SHEETS
  (In
        thousands, except share amounts)
 (Unaudited)
 February
                    28,
                
                August
                    31,2007
                
                2006LIABILITIESCurrent
                    liabilities:Current
                    maturities of long-term debt
                
                $
                979
                
                $
                995Notes
                    payable and lines of credit
                
                
                68,955
                
                
                70,979Cash
                    overdrafts
                
                
                1,295
                
                
                266Accounts
                    payable
                
                
                20,083
                
                
                23,316Accrued
                    liabilities
                
                
                21,885
                
                
                19,925Accrued
                    dividends
                
                
                9,474
                
                
                7,635Accrued
                    compensation
                
                
                15,211
                
                
                14,771Accrued
                    income taxes
                
                
                4,123
                
                
                200Total
                    current liabilities
                
                
                142,005
                
                
                138,087Long-term
                    debt
                
                
                -
                
                
                -Accrued
                    postretirement and pension benefit obligations
                
                
                19,685
                
                
                19,072Deferred
                    income taxes
                
                
                12,895
                
                
                14,730Commitments
                    and contingencies (Note 5)SHAREHOLDERS'
                    EQUITYPreferred
                    stock, no par value;
                  5,000,000
                    shares authorized;
                  none
                    issued
                
                
                -
                
                
                -Common
                    stock, no par value;
                  100,000,000
                    shares authorized;
                  52,957,626
                    shares issued
                
                
                45,661
                
                
                45,661Additional
                    paid-in capital
                
                
                41,567
                
                
                36,137Retained
                    earnings
                
                
                497,436
                
                
                485,618Treasury
                    stock at cost:
                  7,842,410
                    and 8,051,883 shares,
                  respectively
                
                
                (51,643
                )
                
                (53,022
                )Accumulated
                    other comprehensive
                  income
                
                
                12,337
                
                
                11,154Total
                    shareholders' equity
                
                
                545,358
                
                
                525,548Total
                    liabilities and
                  shareholders'
                    equity
                
                $
                719,943
                
                $
                697,437
   See
          accompanying notes to consolidated financial statements





(4)




ARROW
        INTERNATIONAL, INC.
 CONSOLIDTED
        STATEMENTSOF INCOME
  (In
        thousands, except share and per share amounts)
 (Unaudited)


For
                  the three months endedFebruary
                    28,
              
              February
                  28,2007
              
              2006Net
                  sales
              
              $
              125,469
              
              $
              116,504Cost
                  of goods sold
              
              
              62,137
              
              
              59,715Gross
                  profit
              
              
              63,332
              
              
              56,789Operating
                  expenses:Research
                  and development
              
              
              7,123
              
              
              7,058Selling,
                  general and administrative
              
              
              34,409
              
              
              31,894Restructuring
                  charge
              
              
              263
              
              
              (269
              )41,795
              
              
              38,683Operating
                  income
              
              
              21,537
              
              
              18,106Other
                  (income) expenses:Interest
                  expense, net of amount capitalized
              
              
              574
              
              
              189Interest
                  income
              
              
              (1,796
              )
              
              (907
              )Other,
                  net
              
              
              165
              
              
              106Other
                  (income) expenses, net
              
              
              (1,057
              )
              
              (612
              )Income
                  before income taxes
              
              
              22,594
              
              
              18,718Provision
                  for income taxes
              
              
              8,133
              
              
              6,084Net
                  income
              
              $
              14,461
              
              $
              12,634Basic
                  earnings per common share
              
              $
              0.32
              
              $
              0.29Diluted
                  earnings per common share
              
              $
              0.32
              
              $
              0.28Cash
                  dividends per common share
              
              $
              0.21
              
              $
              0.17Weighted
                  average shares outstanding
                used
                  in computing basic earnings
                per
                  common share
              
              
              45,079,853
              
              
              44,729,478Weighted
                  average shares outstanding
                used
                  in computing diluted earnings
                per
                  common share
              
              
              45,619,133
              
              
              45,275,773


See
      accompanying notes to consolidated financial statements





(5)




ARROW
            INTERNATIONAL, INC.
 CONSOLIDTED
            STATEMENTSOF INCOME
  (In
            thousands, except share and per share amounts)
 (Unaudited)
 
 For
                    the six months endedFebruary
                    28,
                
                February
                    28,2007
                
                2006Net
                    sales
                
                $
                248,322
                
                $
                230,148Cost
                    of goods sold
                
                
                123,208
                
                
                117,202Gross
                    profit
                
                
                125,114
                
                
                112,946Operating
                    expenses:Research
                    and development
                
                
                13,350
                
                
                13,509Selling,
                    general and administrative
                
                
                68,204
                
                
                64,479Restructuring
                    charge
                
                
                283
                
                
                (256
                )81,837
                
                
                77,732Operating
                    income
                
                
                43,277
                
                
                35,214Other
                    (income) expenses:Interest
                    expense, net of amount capitalized
                
                
                1,123
                
                
                369Interest
                    income
                
                
                (3,452
                )
                
                (1,516
                )Other,
                    net
                
                
                377
                
                
                118Other
                    (income) expenses, net
                
                
                (1,952
                )
                
                (1,029
                )Income
                    before income taxes
                
                
                45,229
                
                
                36,243Provision
                    for income taxes
                
                
                16,282
                
                
                11,779Net
                    income
                
                $
                28,947
                
                $
                24,464Basic
                    earnings per common share
                
                $
                0.64
                
                $
                0.55Diluted
                    earnings per common share
                
                $
                0.64
                
                $
                0.54Cash
                    dividends per common share
                
                $
                0.38
                
                $
                0.32Weighted
                    average shares outstanding
                  used
                    in computing basic earnings
                  per
                    common share
                
                
                45,020,979
                
                
                44,687,708Weighted
                    average shares outstanding
                  used
                    in computing diluted earnings
                  per
                    common share
                
                
                45,565,985
                
                
                45,221,520


See
      accompanying notes to consolidated financial statements





(6)




ARROW
        INTERNATIONAL, INC.
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
  (In
        thousands)
 (Unaudited)


For
                  the six months endedFebruary
                  28,
              
              February
                  28,2007
              
              2006Cash
                  flows from operating activities:Net
                  income
              
              $
              28,947
              
              $
              24,464Adjustments
                  to reconcile net income to net cash provided by
                operating
                  activities:Depreciation
              
              
              10,511
              
              
              10,275Amortization
              
              
              3,911
              
              
              2,800401(k)
                  plan stock contribution
              
              
              485
              
              
              466Deferred
                  income taxes
              
              
              (2,759
              )
              
              (350
              )(Gain)
                  on sale of property, plant and equipment
              
              
              (185
              )
              
              (58
              )Excess
                  tax benefit from exercise of stock options
              
              
              (475
              )
              
              (412
              )Stock
                  compensation charge
              
              
              1,753
              
              
              1,799Increase
                  (decrease) in provision for postretirement and pension
                benefit
                  obligation
              
              
              615
              
              
              (2,720
              )Decrease
                  (increase) in prepaid pension costs
              
              
              1,794
              
              
              (3,389
              )Changes
                  in operating assets and liabilitiesAccounts
                  receivable, net
              
              
              (4,175
              )
              
              (726
              )Inventories
              
              
              (3,762
              )
              
              (6,665
              )Prepaid
                  expenses and other
              
              
              (2,279
              )
              
              (5,600
              )Prepaid
                  income taxes
              
              
              5,019
              
              
              -Accounts
                  payable and accrued liabilities
              
              
              42
              
              
              (2,470
              )Accrued
                  compensation
              
              
              375
              
              
              (91
              )Accrued
                  income taxes
              
              
              4,300
              
              
              1,184Total
                  adjustments
              
              
              15,170
              
              
              (5,957
              )Net
                  cash provided by operating activities
              
              
              44,117
              
              
              18,507Cash
                  flows from investing activities:Capital
                  expenditures
              
              
              (16,213
              )
              
              (13,539
              )Purchases
                  of marketable securities
              
              
              (34,374
              )
              
              (6,040
              )Sales
                  and maturities of marketable securities
              
              
              20,876
              
              
              -Proceeds
                  from sale of property, plant and equipment
              
              
              592
              
              
              1,878(Increase)
                  decrease in intangible and other assets
              
              
              (1,028
              )
              
              33Net
                  cash (used) in investing activities
              
              
              (30,147
              )
              
              (17,668
              )Cash
                  flows from financing activities:(Decrease)
                  increase in notes payable and lines of credit
              
              
              (3,910
              )
              
              6,192Reduction
                  of current maturities of long-term debt
              
              
              (15
              )
              
              (55
              )Increase
                  in cash overdrafts
              
              
              1,029
              
              
              918Excess
                  tax benefit from exercise of stock options
              
              
              475
              
              
              412Dividends
                  paid
              
              
              (15,290
              )
              
              (13,395
              )Proceeds
                  from stock options exercised
              
              
              4,128
              
              
              2,758Net
                  cash (used in) financing activities
              
              
              (13,583
              )
              
              (3,170
              )Effects
                  of exchange rate changes on cash and cash equivalents
              
              
              469
              
              
              (158
              )Net
                  change in cash and cash equivalents
              
              
              856
              
              
              (2,489
              )Cash
                  and cash equivalents at beginning of year
              
              
              148,576
              
              
              119,326Cash
                  and cash equivalents at end of period
              
              $
              149,432
              
              $
              116,837
 See
        accompanying notes to consolidated financial statements


Continued


(7)




ARROW
          INTERNATIONAL, INC.
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS, continued
  (In
          thousands)
 (Unaudited)
 For
                  the six months endedFebruary
                  28,
              
              February
                  28,2007
              
              2006Supplemental
                  schedule of noncash investing and financing activities:Dividends
                  declared but not paid
              
              $
              9,474
              
              $
              7,612(Decrease)
                  in property, plant and
                equipment
                  in accounts payable
              
              $
              (2,248
              )
              $
              (22
              )Increase
                  in intangible assets in
                accrued
                  accounts payable
              
              $
              225
              
              $
              -





See
      accompanying notes to consolidated financial statements




(8)


ARROW
          INTERNATIONAL, INC.
 CONSOLIDATEDSTATEMENTS
          OF COMPREHENSIVE INCOME
          (EXPENSE)
 (in
          thousands)
 (unaudited)
   For
                    the three months endedFebruary
                    28,
                
                February
                    28,2007
                
                2006Net
                    income
                
                $
                14,461
                
                $
                12,634Other
                    comprehensive (expense) income:Foreign
                    currency translation adjustments
                
                
                (1,347
                )
                
                2,029Other
                    comprehensive (expense) income
                
                
                (1,347
                )
                
                2,029Total
                    comprehensive income
                
                $
                13,114
                
                $
                14,663
    For
                      the six months endedFebruary
                      28,
                  
                  February
                      28,2007
                  
                  2006
 Net
                      income
                  
                  $
                  28,947
                  
                  $
                  24,464Other
                      comprehensive income (expense):Foreign
                      currency translation adjustments
                  
                  
                  1,183
                  
                  
                  (149
                  )Other
                      comprehensive income (expense)
                  
                  
                  1,183
                  
                  
                  (149
                  )Total
                      comprehensive income
                  
                  $
                  30,130
                  
                  $
                  24,315
 See
        accompanying notes to consolidated financial statements
  (9)
 ARROW
              INTERNATIONAL, INC.
 Notes


(In
        thousands, except share and per share amounts)
 (unaudited)


Note
        1 -
        Basis of Presentation:
 
 These
        unaudited consolidated financial statements include all adjustments, consisting
        only of normal recurring accruals, which management considers necessary for
        a
        fair statement of the consolidated financial position, results of operations,
        cash flows and comprehensive income (expense) of Arrow International, Inc.
        (the
“Company”) for the interim periods presented. Results for the interim periods
        are not necessarily indicative of results for the entire year. Such statements
        are presented in accordance with the requirements of Form 10-Q and do not
        include all disclosures normally required by generally accepted accounting
        principles or those normally made on Form 10-K. These statements should be
        read
        in conjunction with the consolidated financial statements and notes thereto
        contained in the Company’s Annual Report on Form 10-K for the fiscal year ended
        August 31, 2006, as amended.
 
 Note
        2 -
        Accounting Policies:
 
 The
        Company has disclosed in Note 1 to its consolidated financial statements
        included in its Annual Report on Form 10-K for the fiscal year ended August
        31,
        2006 those accounting policies that it considers to be significant in
        determining its results of operations and financial position. There have
        been no
        material changes to the accounting policies previously identified and described
        in the Company’s 2006 Form 10-K. The accounting principles utilized by the
        Company in preparing its consolidated financial statements conform to generally
        accepted accounting principles in the United States of America.
 
 The
        preparation of these consolidated financial statements requires the Company’s
        management to make estimates and assumptions that affect the reported amounts
        of
        assets, liabilities, revenues and expenses, as well as the disclosure of
        contingent assets and liabilities at the date of its financial statements.
        The
        Company bases its estimates on historical experience, actuarial valuations
        and
        various other factors that are believed to be reasonable under the
        circumstances, the results of which form the basis for making judgments about
        the carrying value of assets and liabilities that are not readily apparent
        from
        other sources. Some of those judgments can be subjective and complex and,
        consequently, actual results may differ from these estimates under different
        assumptions or conditions. While for any given estimate or assumption made
        by
        the Company’s management there may be other estimates or assumptions that are
        reasonable, the Company believes that, given the current facts and
        circumstances, it is unlikely that applying any such other reasonable estimate
        or assumption would materially impact the financial statements.
 
 Note
        3 -
        Stock Option Plans:
 
 During
        the three months ended February 28, 2007 and February 28, 2006, the Company
        did
        not grant any options to key employees to purchase shares of the Company’s
        common stock pursuant to its 1999 Stock Incentive Plan (the “1999 Plan”), which
        was approved by the Company’s shareholders on June 19, 2000, with non-material
        amendments thereto approved by the Company’s Board of Directors on October 27,
        2004. During the six months ended February 28, 2007 and February 28, 2006,
        the
        Company granted 51,000 and 1,066,000 options, respectively, to key employees
        to
        purchase shares of the Company’s common stock pursuant to the 1999 Plan. The
        exercise price per share ranged from $32.09 to $35.32 for the options granted
        during the six months ended February 28, 2007 and ranged from $29.41 to $29.94
        for the options granted in the same period of fiscal 2006. These amounts
        represent the fair market value of the common stock of the Company on the
        respective dates that the options were granted. The options expire ten years
        from the grant date. The majority of options vest ratably over five years
        at one
        year intervals from the grant date. During the first six months of fiscal
        2007,
        the Company granted 25,000 options, which vest ratably over five years, and
        26,000 options, which vest in their entirety upon the second anniversary
        of the
        grant date, pursuant to the 1999 Plan.
 
 During
        the three months ended February 28, 2007 and February 28, 2006, the Company
        granted 0 and 30,000 options, respectively, to its directors to purchase
        shares
        of the Company’s common stock pursuant its 2006 Directors Stock Incentive Plan
        (the “2006 Directors Plan”), which was approved by the Company’s shareholders on
        January 18, 2006. The exercise price per share was $30.97 for the options
        granted in the three month period ended February 28, 2006. During the six
        months
        ended February 28, 2007, the Company did not grant any options to its directors
        to purchase shares of the Company’s common stock. During the six months ended
        February 28, 2006, the Company granted 30,000 options pursuant to the 2006
        Directors Plan and 10,000 options pursuant to its prior Directors Stock
        Incentive Plan, which expired in accordance with its terms on January 17,
        2006.
        The exercise price ranged from $30.92 to $30.97 for the options granted in
        the
        six months ended February 28, 2006, which represents the fair market value
        of
        the common stock of the Company on the date the options were granted. The
        options expire ten years from the grant date. The options fully vest one
        year
        from the grant date.





(10)
 ARROW
            INTERNATIONAL, INC.


Notes
        to
        Consolidated Financial Statements
 (In
        thousands, except share and per share amounts)
 (unaudited)




Stock
        option activity for the three and six month periods ended February 28, 2007
        is
        summarized in the tables below:
 
 For
                  the three months endedFebruary
                  28, 2007Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at December 1
              
              
              3,004,222
              
              $
              25.54Granted
              
              
              -
              
              
              -Exercised
              
              
              (59,653
              )
              $
              21.66Terminated
              
              
              (1,050
              )
              $
              28.76Outstanding
                  at February 28
              
              
              2,943,519
              
              $
              25.62
              
              $
              17,172Exercisable
                  at February 28
              
              
              1,730,851
              
              $
              23.12
              
              $
              8,979
 
 The
        intrinsic value of the stock options exercised during the three months ended
        February 28, 2007 was $303.
 
 For
                  the six months endedFebruary
                  28, 2007Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at September 1
              
              
              3,101,881
              
              $
              25.18Granted
              
              
              51,000
              
              $
              33.74Exercised
              
              
              (195,862
              )
              $
              21.06Terminated
              
              
              (13,500
              )
              $
              22.01Outstanding
                  at February 28
              
              
              2,943,519
              
              $
              25.62
              
              $
              17,172Exercisable
                  at February 28
              
              
              1,730,851
              
              $
              23.12
              
              $
              8,979
 
 The
        intrinsic value of the stock options exercised during the six months ended
        February 28, 2007 was $958.


(11)
 ARROW
            INTERNATIONAL, INC.


Notes
        to
        Consolidated Financial Statements
 (In
        thousands, except share and per share amounts)
 (unaudited)





Stock
        options outstanding at February 28, 2007 are summarized in the table
        below:
 
 Range
                  of
                Exercise
                  Prices
              
              Number
                Outstanding
              
              Weighted
                Average
                Remaining
                  ContractualLife
              
              Weighted
                Average
                Exercise
                Price
              
              NumberExercisable
              
              Weighted
                Average
                Remaining
                  ContractualLife
              
              Weighted
                Average
                Exercise
                Price$12.56
                  - $17.50
              
              173,190
              
              2.18
              
              $14.94
              
              173,190
              
              2.18
              
              $14.94$17.51
                  - $21.47
              
              587,715
              
              4.54
              
              $19.15
              
              584,515
              
              4.53
              
              $19.15$21.48
                  - $26.42
              
              913,614
              
              6.56
              
              $25.39
              
              658,646
              
              6.56
              
              $25.42$26.43
                  - $30.92
              
              1,171,000
              
              8.54
              
              $30.01
              
              283,500
              
              8.42
              
              $30.12$30.93
                  - $35.32
              
              98,000
              
              9.11
              
              $32.81
              
              31,000
              
              8.76
              
              $31.222,943,519
              
              
              
              
              
              1,730,851
 
 As
        of
        February 28, 2007, there was $7,462 of total unrecognized cost related to
        nonvested share-based compensation arrangements granted under the Company’s
        stock incentive plans. This cost is expected to be recognized over a weighted
        average period of six years. The total fair value of shares underlying stock
        options which vested during the three months ended February 28, 2007 and
        2006
        was $524 and $508, respectively. The total fair value of shares underlying
        stock
        options which vested during the six months ended February 28, 2007 and 2006
        was
        $3,714 and $2,140, respectively.
 
 The
        per
        share weighted average value of stock options granted in the first six months
        of
        fiscal 2007 and 2006 was $7.64 and $7.43, respectively. The fair value was
        estimated as of the grant date using the Black-Scholes option pricing model
        with
        the following average assumption:
 
 February
                  28,
                2007
              
              February
                  28,
                2006Risk-free
                  interest rate
              
              4.86%
                  - 4.99%
              
              3.71%
                  - 4.30%Dividend
                  yield
              
              2.10%
                  - 2.31%
              
              2.07%
                  - 2.13%Volatility
                  factor
              
              19.25%
                  - 19.61%
              
              23.14%
                  - 23.77%Expected
                  lives
              
              6
                  years
              
              6
                  years
 
 Note
        4 -
        New Accounting Standards:
 
 The
        FASB
        issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes-an
        interpretation of SFAS No. 109” (“FIN 48”), in July 2006. The intent of FIN 48
        is to clarify the accounting for uncertainty in income taxes recognized in
        an
        entity’s financial statements in accordance with SFAS No. 109. This
        interpretation imposes a recognition threshold and measurement attribute
        for
        financial statement disclosure of tax positions taken or expected to be taken
        on
        a tax return. This interpretation is effective for fiscal years beginning
        after
        December 15, 2006. The Company is currently evaluating the requirements of
        FIN
        48 and has not yet determined the impact that the adoption of this statement
        will have on its consolidated financial statements.
 
 The
        FASB
        issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
        Other Postretirement Plans-an amendment of SFAS No. 87, 88, 106 and 132(R)”, in
        September 2006. This statement requires that an employer recognize the
        overfunded or underfunded status of a defined benefit postretirement plan
        as an
        asset or liability in its statement of financial position and to recognize
        changes in that funded status in the year in which the changes occur through
        comprehensive income. This statement also requires an employer to measure
        the
        funded status of a plan as of the date of its year-end. The provisions of
        SFAS
        No. 158 will be effective for fiscal years ending after December 15, 2006.
        The
        Company currently estimates that the adoption of this statement will result
        in a
        charge of approximately $25,961 to accumulated other comprehensive expense
        as of
        August 31, 2007.
 
 The
        FASB
        issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
        Liabilities - Including an Amendment of FASB Statement No. 115.” This statement
        allows an entity to choose to measure many financial instruments and certain
        other items at fair value. The objective of this statement is to improve
        financial reporting by providing entities with the opportunity to mitigate
        volatility in reported earnings caused by measuring related assets and
        liabilities differently without having to apply complex hedge accounting
        provisions. The provisions of SFAS No. 159 will be effective for fiscal years
        beginning after November 15, 2007. The Company does not expect that the adoption
        of this statement will have a material impact on its consolidated financial
        statements.


(12)
 ARROW
              INTERNATIONAL, INC.
 Notes
          to
          Consolidated Financial Statements
 (In
          thousands, except share and per share amounts)
 (unaudited)
  Certain
            prior period information has been reclassified for comparative
            purposes.
 
 Note
            5 -
            Commitments and Contingencies:
 
 The
            Company is a party to certain legal actions, including product liability
            and
            employment matters, arising in the ordinary course of its business. From
            time to
            time, the Company is also subject to legal actions involving patent and
            other
            intellectual property claims.
 
 The
            Company had been a defendant in a lawsuit in the United States District
            Court in
            the Southern District of New York, in which the plaintiffs, Thierry Pourchez
            and
            Bard Access Systems Inc., alleged that the Company’s Cannon-Cath Ô split-tip hemodialysis catheters, which were acquired as part of the
            Company’s
            acquisition in November 2002 of specified assets of Diatek, Inc., infringed
            a
            patent owned by or licensed to the plaintiffs. In November 2003, this
            lawsuit
            was stayed pending the U.S. Patent and Trademark Office’s ruling on its
            re-examination of the patent at issue. In September 2005, the Court dismissed
            this lawsuit because the U.S. Patent and Trademark Office had not yet
            concluded
            its re-examination of the patent at issue. The plaintiffs may seek reinstatement
            of this lawsuit when the re-examination is concluded, which is expected
            to occur
            during the 2007 calendar year, although the Company cannot presently
            predict the
            precise timing. Based on information presently available to the Company,
            the
            Company believes that its products do not infringe any valid claim of
            the
            plaintiffs’ patent and that, consequently, it has meritorious legal defenses
            with respect to this action in the event it were to be reinstated.
 
 The
            Company is currently a plaintiff in two related patent infringement lawsuits
            in
            the United States District Court in Baltimore, Maryland against Datascope
            Corp.
            of Montvale, New Jersey. The Company manufactures and sells the Arrow-TrerotolaTM
Percutaneous Thrombolytic Device (PTD®), which is used to mechanically declot
            native arterio-venous fistulae and synthetic hemodialysis grafts. The
            PTD was
            invented by Dr. Scott Trerotola while working at Johns Hopkins University.
            Johns
            Hopkins University, the owner of three patents covering the PTD, is also
            a
            plaintiff, and the Company is the exclusive licensee of the Trerotola
            patents.
            The Company has alleged that Datascope infringes these three patents.
            A trial is
            currently scheduled for June 2007.
  The
            Company also commenced a patent infringement lawsuit in the United States
            District Court in Boston, Massachusetts against Spire Corporation of
            Bedford,
            Massachusetts.  The Company is the owner of United States Patent No.
            6,872,198, which covers a method of inserting a double-Y-shaped multi-lumen
            catheter.  The Company has alleged that the use of Spire's Pourchez RetrOTM
High Flow Kink-Resistant Catheter infringes this patent.  This case is
            currently nearing the end of the discovery phase, and a trial is
            anticipated  during
            the 2007 calendar year, although the Company cannot presently predict
            the
            precise timing.
 
 Although
            the ultimate outcome of any of these actions is not expected to have
            a material
            adverse effect on the Company’s business or financial condition, whether an
            adverse outcome in any of these actions would materially adversely affect
            the
            Company’s reported results of operations in any future period cannot be
            predicted with certainty.
 
 Note
            6 -
            Inventories:
 
 Inventories
            are summarized as follows:
 February
                        28, 2007
                    
                    August
                        31, 2006Finished
                        goods
                    
                    $
                    42,378
                    
                    $
                    39,528Semi-finished
                        goods / work-in-process
                    
                    
                    36,812
                    
                    
                    34,178Raw
                        materials
                    
                    
                    28,066
                    
                    
                    29,195$
                    107,256
                    
                    $
                    102,901
 Note
            7 -
            Segment Reporting:
 
 SFAS
            No.
            131, “Disclosures about Segments of an Enterprise and Related Information”,
            requires the reporting of certain financial information for each operating
            segment. The Company has one operating segment as defined in this standard,
            based on the fact that its various business components do not possess
            the
            defined characteristics meeting the standard’s definition of operating segments.
            For instance, the Company’s current management structure is designed to operate
            the business as a whole, with no divisional responsibilities. In addition,
            over
            90% of the Company’s net sales are generated from catheter and catheter-related
            products. Therefore, the Company continues to operate as a single operating
            segment. The Company operates in three main geographic regions and information
            about its product and geographic areas is presented
            below.


(13)
 ARROW
            INTERNATIONAL, INC.


Notes
        to
        Consolidated Financial Statements
 (In
        thousands, except share and per share amounts)
 (unaudited)


The
        following tables provide quarterly and year-to-date information about the
        Company’s sales by product category:
 
 Quarter
                  ended
                February
                  28, 2007
              
              Quarter
                  ended
                February
                  28, 2006Critical
                Care
              
              Cardiac
                Care
              
              Critical
                Care
              
              Cardiac
                CareSales
                  to external
                customers
              
              $
              108,000
              
              $
              17,400
              
              $
              99,400
              
              $
              17,100
 
 Six
                  months ended
                February
                  28, 2007
              
              Six
                  months ended
                February
                  28, 2006Critical
                Care
              
              Cardiac
                Care
              
              Critical
                Care
              
              Cardiac
                CareSales
                  to external
                customers
              
              $
              212,300
              
              $
              36,000
              
              $
              196,300
              
              $
              33,800
 
 The
        following tables provide quarterly information about geographic
        areas:
 
 Quarter
                  ended
                February
                  28, 2007UnitedStates
              
              Europe
              
              Asia
                  and International
              
              ConsolidatedSales
                  to
                unaffiliated
                customers
              
              $
              75,000
              
              $
              27,200
              
              $
              23,200
              
              $
              125,400
 
 Quarter
                  ended
                February
                  28, 2006UnitedStates
              
              Europe
              
              Asia
                  and International
              
              ConsolidatedSales
                  to
                unaffiliated
                customers
              
              $
              72,000
              
              $
              23,200
              
              $
              21,300
              
              $
              116,500
 
 The
        following tables provide year-to-date information about geographic
        areas:
 
 Six
                  months ended
                February
                  28, 2007UnitedStates
              
              Europe
              
              Asia
                  and International
              
              ConsolidatedSales
                  to
                unaffiliated
                customers
              
              $
              148,500
              
              $
              53,100
              
              $
              46,700
              
              $
              248,300
 
 Six
                  months ended
                February
                  28, 2006UnitedStates
              
              Europe
              
              Asia
                  and International
              
              ConsolidatedSales
                  to
                unaffiliated
                customers
              
              $
              142,000
              
              $
              42,800
              
              $
              45,300
              
              $
              230,100


(14)
 ARROW
            INTERNATIONAL, INC.


Notes
        to
        Consolidated Financial Statements
 (In
        thousands, except share and per share amounts)
 (unaudited)


Note
      8 -
      Warranty:


The
        Company’s primary warranty obligation relates to sales of its intra-aortic
        balloon pumps, for which the Company typically offers a warranty of one year
        to
        its U.S. customers and two years to its international customers. The Company
        also offers a limited lifetime warranty of five years to its customers
        purchasing the latest version of its AutoCatTM2
        WAVE intra-aortic balloon pump and associated LightWAVETM catheter
        system .
        As of
        February 28, 2007 and February 28, 2006, the Company’s total estimated product
        warranty obligation was $800 and $574, respectively. Because this estimate
        is
        based primarily on historical experience, actual costs may differ from the
        amounts estimated. The change in warranty obligation for the three and six
        months ended February 28, 2007 and February 28, 2006 is as follows:
  For
                    the three months endedFebruary
                    28,
                
                February
                    28,2007
                
                2006Balance
                    as of December 1
                
                $
                813
                
                $
                600Additional
                    warranties issued
                
                
                319
                
                
                285Expirations
                    / Expenditures
                
                
                (332
                )
                
                (311
                )Balance
                    as of February 28
                
                $
                800
                
                $
                574
  
 For
                    the six months endedFebruary
                    28,
                
                February
                    28,2007
                
                2006Balance
                    as of September 1
                
                $
                719
                
                $
                660Additional
                    warranties issued
                
                
                730
                
                
                558Expirations
                    / Expenditures
                
                
                (649
                )
                
                (644
                )Balance
                    as of February 28
                
                $
                800
                
                $
                574
 Note
          9 -
          Retirement Benefits:
 
 Pension
        Plans:
 
 The
        Company has three noncontributory pension plans that cover substantially
        all
        employees. Benefits under the plans are based upon an employee's compensation
        and years of service and, where applicable, the provisions of negotiated
        labor
        contracts. It is the Company's policy to make contributions to these plans
        sufficient to meet the minimum funding requirements of applicable laws and
        regulations plus such additional amounts, if any, as the Company's actuarial
        consultants advise to be appropriate. The projected unit credit method is
        utilized for determination of actuarial amounts.
 
 Plan
        assets consist principally of U.S. government securities, short-term
        investments, other equity securities and cash equivalents.
 
 On
        September 1, 2000, the Company established a Defined Benefit Supplemental
        Executive Retirement Plan to provide pension benefits to selected executives
        and
        retired executives/directors of the Company. The plan is unfunded and the
        benefits provided under the plan are intended to be in addition to other
        employee retirement benefits offered by the Company, including but not limited
        to tax-qualified employee retirement plans.
 
 Postretirement
        Benefits Other Than Pensions:
 
 The
        Company provides limited amounts of postretirement health and life insurance
        benefit plan coverage for some of its employees. The determination of the
        cost
        of postretirement health benefit plans is based on comprehensive hospital,
        medical, surgical and dental benefit provisions (“Other Benefits”). The
        determination of the cost of postretirement life insurance benefits is based
        on
        stated policy amounts.


(15)
 ARROW
            INTERNATIONAL, INC.


Notes
        to
        Consolidated Financial Statements
 (In
        thousands, except share and per share amounts)
 (unaudited)
   The
        following summarizes the components of the net periodic benefit costs for
        the
        three and six months ended February
        28, 2007 and
        2006:
 
 Pension
                  Benefits
              
              Other
                  BenefitsFor
                  the three months ended
              
              For
                  the three months endedFebruary
                  28,
                2007
              
              February
                  28,
                2006
              
              February
                  28,
                2007
              
              February
                  28,
                2006Service
                  cost
              
              $
              1,396
              
              $
              1,126
              
              $
              161
              
              $
              138Interest
                  cost
              
              
              1,748
              
              
              1,301
              
              
              354
              
              
              261Expected
                  return on plan
                assets
              
              
              (2,445
              )
              
              (1,951
              )
              
              -
              
              
              -Amortization
                  of prior
                service
                  costs
              
              
              343
              
              
              279
              
              
              (3
              )
              
              (3
              )Amortization
                  of transition
                obligation
                  (asset)
              
              
              (3
              )
              
              (29
              )
              
              13
              
              
              11Amortization
                  of net
                actuarial
                  loss (gain)
              
              
              230
              
              
              464
              
              
              137
              
              
              139Net
                  periodic cost
              
              $
              1,269
              
              $
              1,190
              
              $
              662
              
              $
              546
 
 Pension
                  Benefits
              
              Other
                  BenefitsFor
                  the six months ended
              
              For
                  the six months endedFebruary
                  28,
                2007
              
              February
                  28,
                2006
              
              February
                  28,
                2007
              
              February
                  28,
                2006Service
                  cost
              
              $
              2,581
              
              $
              2,333
              
              $
              299
              
              $
              299Interest
                  cost
              
              
              3,354
              
              
              2,827
              
              
              671
              
              
              574Expected
                  return on plan
                assets
              
              
              (4,717
              )
              
              (4,097
              )
              
              -
              
              
              -Amortization
                  of prior
                service
                  costs
              
              
              688
              
              
              569
              
              
              (6
              )
              
              (6
              )Amortization
                  of transition
                obligation
                  (asset)
              
              
              (8
              )
              
              (48
              )
              
              25
              
              
              23Amortization
                  of net
                actuarial
                  loss (gain)
              
              
              407
              
              
              1,145
              
              
              247
              
              
              319Net
                  periodic cost
              
              $
              2,305
              
              $
              2,729
              
              $
              1,236
              
              $
              1,209
 
 Note
        10 -
        Restructuring Charges:
 
 As
        part
        of its plans to rationalize its production operations and related logistics
        in
        Europe, in November 2004, the Company determined to move its European
        Distribution Center, previously situated in Weesp, Netherlands, to a more
        centralized European location in the Limberg region of Belgium in order to
        have
        better access to existing carrier transportation networks and allow for more
        cost-competitive expansion of its European operations in the future. The
        Company
        continued to implement this relocation plan in the first half of fiscal 2007
        and
        presently expects to complete it and related logistics during fiscal 2007
        at an
        estimated total cost of $2,008. Restructuring charges related to this relocation
        and related logistics are summarized below:


(16)
 ARROW
            INTERNATIONAL, INC.


Notes
        to
        Consolidated Financial Statements
 (In
        thousands, except share and per share amounts)
 (unaudited)


Actual
                  Costs ExpensedEstimate
                  ofTotalExpectedRestructuringCharges
              
              As
                  ofAugust31, 2006
              
              For
                  theThreeMonthsEndedNovember30, 2006
              
              For
                  theThreeMonthsEndedFebruary28, 2007
              
              Total
                  toDate
              
              Costsexpensedbut
                  not yetpaid as ofFebruary28, 2007Severance
                  and related
                expenses
              
              $
              868
              
              $
              618
              
              $
              -
              
              $
              47
              
              $
              665
              
              $
              337Lease
                  termination costs
              
              
              607
              
              
              581
              
              
              -
              
              
              -
              
              
              581
              
              
              309Property,
                  plant and
                equipment
                  carrying
                cost
                  and costs of
                disposal
              
              
              120
              
              
              59
              
              
              -
              
              
              4
              
              
              63
              
              
              -Other,
                  including
                equipment
                  and
                inventory
                  moving
                costs,
                  employee
                relocation
                  costs, and
                external
                  consulting
                fees
              
              
              413
              
              
              299
              
              
              20
              
              
              15
              
              
              334
              
              
              -Total
                  restructuring
                charges
              
              $
              2,008
              
              $
              1,557
              
              $
              20
              
              $
              66
              
              $
              1,643
              
              $
              646
 
 In
        the
        second quarter of fiscal 2007, the Company decided to transfer all intra-aortic
        balloon catheter manufacturing from its Everett, Massachusetts facility into
        other of its existing manufacturing facilities in Hradec Kralove, Czech
        Republic. This decision supports its operating principles for quality, safety,
        customer service and cost, and is expected to simplify manufacturing processes
        and reduce manufacturing costs for the intra-aortic balloon catheter. Severance
        payments relate to 36 employees primarily in manufacturing at this facility.
        The
        Company expects this transfer of its intra-aortic balloon catheter manufacturing
        to be completed during the first six months of fiscal 2008 at an estimated
        total
        cost of $1,458. Restructuring charges related to this transfer are summarized
        below:
 
 Actual
                  Costs ExpensedEstimate
                  ofTotal ExpectedRestructuringCharges
              
              For
                  the ThreeMonths Ended February 28,2007
              
              Total
                  to Date
              
              Costsexpensed
                  butnot yet paid asofFebruary
                  28,2007Severance
                  and related
                expenses
              
              $
              848
              
              $
              197
              
              $
              197
              
              $
              197Lease
                  termination costs
              
              
              
              
              
              -
              
              
              -
              
              
              -Property,
                  plant and
                equipment
                  carrying
                cost
                  and costs of
                disposal
              
              
              200
              
              
              -
              
              
              -
              
              
              -Other,
                  including
                equipment
                  and
                inventory
                  moving
                costs,
                  employee
                relocation
                  costs, and
                external
                  consulting
                fees
              
              
              410
              
              
              -
              
              
              -
              
              
              -Total
                  restructuring
                charges
              
              $
              1,458
              
              $
              197
              
              $
              197
              
              $
              197


(17)
 ARROW
              INTERNATIONAL, INC.
 Notes
          to
          Consolidated Financial Statements
 (In
          thousands, except share and per share amounts)
 (unaudited)
  
 Note
          11 -
          Earnings Per Share:
 
 The
          following is a reconciliation of weighted average common shares outstanding
          assuming dilution used in the calculation of earnings per share for the
          three
          and six months ended February 28, 2007 and 2006:
 For
                      the three
                  
                  
                  For
                      the threemonths
                      ended
                  
                  
                  months
                      endedFebruary
                      28, 2007
                  
                  
                  February
                      28, 2006Net
                      income
                  
                  $
                  14,461
                  
                  $
                  12,634Weighted
                      average common shares outstanding
                  
                  
                  45,080
                  
                  
                  44,729Incremental
                      common shares issuable: stock options
                    and
                      awards
                  
                  
                  539
                  
                  
                  547Weighted
                      average common shares outstanding
                    assuming
                      dilution
                  
                  
                  45,619
                  
                  
                  45,276Basic
                      earnings per common share
                  
                  $
                  0.32
                  
                  $
                  0.29Diluted
                      earnings per common share
                  
                  $
                  0.32
                  
                  $
                  0.28
   For
                      the six
                  
                  
                  For
                      the sixmonths
                      ended
                  
                  
                  months
                      endedFebruary
                      28, 2007
                  
                  
                  February
                      28, 2006Net
                      income
                  
                  $
                  28,947
                  
                  $
                  24,464Weighted
                      average common shares outstanding
                  
                  
                  45,021
                  
                  
                  44,688Incremental
                      common shares issuable: stock options
                    and
                      awards
                  
                  
                  545
                  
                  
                  534Weighted
                      average common shares outstanding
                    assuming
                      dilution
                  
                  
                  45,566
                  
                  
                  45,222Basic
                      earnings per common share
                  
                  $
                  0.64
                  
                  $
                  0.55Diluted
                      earnings per common share
                  
                  $
                  0.64
                  
                  $
                  0.54
 Stock
          options outstanding to purchase 26,000 and 44,000 shares of common stock
          for the
          three months ended February 28, 2007 and 2006, respectively, and 16,429
          and
          250,709 shares for the six months ended February 28, 2007 and 2006,
          respectively, were not included in the computation of earnings per share
          assuming dilution because the options’ exercise prices were higher than the
          average market price of the Company’s common stock.


(18)
 ARROW
            INTERNATIONAL, INC.


Item
        2.  Management's
        Discussion and Analysis of Financial Condition and Results
 of
        Operations
 
 ***The
        following discussion includes certain forward-looking statements. Such
        forward-looking statements are subject to a number of factors, including
        material risks, uncertainties and contingencies, which could cause actual
        results to differ materially from the forward-looking statements. For a
        discussion of important factors that could cause actual results to differ
        materially from the forward-looking statements, see Item 1A. Risk Factors
        in the
        Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2006,
        as amended, and the Company’s other reports and documents filed with the
        Securities and Exchange Commission.***
 
 **Executive
        Overview**
 
 Arrow
        is
        a worldwide developer, manufacturer and marketer of a broad range of clinically
        advanced, disposable catheters, heart assist devices and related products
        for
        critical and cardiac care. The Company markets its products to physicians
        and
        hospitals through a combination of direct selling, independent distributors
        and
        group purchasing organizations. Within each hospital, marketing efforts are
        targeted to those physicians, including critical care specialists,
        cardiologists, anesthesiologists, interventional radiologists, nephrologists,
        emergency and trauma physicians, electrophysiologists and surgeons, most
        likely
        to use the Company’s products. The Company’s largest geographical markets are
        the United States, Europe and Asia.
 
 The
        Company’s ability to grow its net income largely depends upon generating
        increased sales of its products, particularly its higher margin products,
        and
        further improving its operating efficiency. The Company’s sales growth is driven
        by its development and marketing of clinically advanced new products and
        enhancements to its existing products to increase their effectiveness, ease
        of
        use, safety and reliability, as well as to expand the clinical applications
        for
        which their use is appropriate. In this regard, in the first half of fiscal
        2007, the Company introduced its Arrow Pressure Injectable PICC (Peripherally
        Inserted Central Catheter) as a complement to its central venous access product
        line, which continues to gain market acceptance. The Company also continues
        to
        increase sales of its new Maximal Barrier central venous access kit, which
        was
        introduced in the second quarter of fiscal 2006 as part of its ongoing efforts
        to meet physicians’ needs for safety and management of risk of infection in the
        hospital setting. In addition to central venous access, the Company’s research
        and development efforts are also currently focused on the following core
        product
        areas: regional anesthesia; cardiac assist, which efforts resulted in the
        introduction in the fourth quarter of fiscal 2006 of the latest version of
        its
        AutoCatTM2 WAVE IAB pump and associated LightWAVETM catheter system; dialysis
        access; and hemodynamic monitoring, which includes continued development
        of the
        second generation version of its HemoSonicTM cardiac output monitoring system. On
        March 23, 2007, the Company decided to limit its active involvement in the
        development of the CorAide, its left ventricular assist device licensed from
        The
        Cleveland Clinic Foundation, and, in concert with the Cleveland Clinic, to
        seek
        an alternative arrangement for bringing this technology to market.
 
 The
        Company is focused on improving operating margins and sales growth by increasing
        the efficiency and overall capacity of its manufacturing operations and better
        aligning production facilities with key geographic markets, while maintaining
        effective cost-containment programs. In this regard, in April 2004, the Company
        initiated a multi-year capital investment plan to increase its worldwide
        manufacturing capacity to better meet customer demand and rationalize its
        production operations, which entailed the construction and acquisition of
        additional manufacturing facilities in Zdar, Czech Republic and Chihuahua,
        Mexico, which were completed in fiscal 2006. Production began at both the
        new
        Chihuahua facility and the new Zdar facility in fiscal 2006, and in the first
        half of fiscal 2007 the Company has continued to improve its production
        technology by investing in new state-of-the-art equipment and processes in
        connection with this capital investment program. Also, in furtherance of
        its
        strategy to increase the efficiency of its manufacturing operations, in the
        second quarter of fiscal 2007, the Company decided to transfer its intra-aortic
        balloon catheter manufacturing from its Everett, Massachusetts facility into
        other of its existing manufacturing facilities in Hradec Kralove, Czech
        Republic, which transfer is expected to be completed during the first six
        months
        of fiscal 2008. The Company has also completed the consolidation of certain
        of
        its U.S.-based manufacturing operations and has implemented enhanced good
        manufacturing practices and compliance procedures designed to achieve the
        highest practicable levels of product quality assurance, all as part of its
        Project Operational Excellence program. As a result of these initiatives,
        the
        Company continues to make significant progress in enhancing product quality,
        reducing customer backorders and improving manufacturing efficiency and
        cost-effectiveness.
 
 In
        addition, in recent years, in an effort to better serve customers in key
        geographic markets and more closely tailor its direct marketing activities
        to a
        larger and more global base of customers, the Company has made selective
        acquisitions of some of its distributors and/or distribution rights in key
        U.S.
        and international markets, including most recently its acquisition of certain
        assets of its former UK distributor, Kimal PLC, in the third quarter of fiscal
        2006, thereby increasing the percentage of its sales generated by its direct
        sales force and improving gross profit margins.


(19)
 ARROW
            INTERNATIONAL, INC.





**Results
        of Operations**
 
 **Three
        Months Ended February 28, 2007 Compared to Three Months Ended February 28,
        2006**
 
 *Net
        Sales*
 Net
        sales
        for the three months ended February 28, 2007 increased by $8.9 million, or
        7.6%,
        to $125.4 million from $116.5 million in the same period of last year due
        primarily to an increase in critical care product sales, increased sales
        of $1.2
        million by the Company’s United Kingdom subsidiary due to higher sales prices
        resulting from direct selling in this region following the Company’s acquisition
        of certain assets of its former United Kingdom distributor, Kimal PLC (“Kimal”),
        in April 2006, and a favorable foreign exchange impact during the second
        quarter
        of fiscal 2007 as a result of the weakness of the U.S. dollar relative to
        currencies of countries in which the Company operates direct sales subsidiaries.
        This foreign exchange impact resulted in increased sales for the quarter
        of $1.0
        million. The following is a summary of the Company’s sales by product
        platform:
 Sales
                    by Product Platform($
                    in millions)
                
                Quarter
                    endedFebruary
                    28,
                
                February
                    28,2007
                
                2006Central
                    Venous Catheters
                
                $
                66.5
                
                $
                60.9Specialty
                    Catheters
                
                
                39.7
                
                
                36.6Non-Arrow
                    distributed products
                
                
                1.8
                
                
                1.9Subtotal
                    Critical Care
                
                
                108.0
                
                
                99.4Cardiac
                    Care
                
                
                17.4
                
                
                17.1Total
                
                $
                125.4
                
                $
                116.5
 Sales
        of
        critical care products increased by 8.7% to $108.0 million in the second
        quarter
        of fiscal 2007 from $99.4 million in the comparable prior year period due
        primarily to increased sales of central venous and specialty catheters. Sales
        of
        central venous catheters increased in the second quarter of fiscal 2007 due
        primarily to a continued increase in the number of hospitals that are upgrading
        to the Company’s new Maximal Barrier central venous access kit. Sales of
        specialty catheters increased in the second quarter of fiscal 2007 due primarily
        to improved sales of arterial products, peripheral nerve block products and
        epidural products. Sales of cardiac care products increased by 1.8% to $17.4
        million in the second quarter of fiscal 2007 from $17.1 million in the
        comparable prior year period due to increased international sales of
        intra-aortic balloon, or IAB, pumps, including sales of the latest version
        of
        the AutoCatTM2 WAVE IAB pump and associated LightWAVETM catheter system, offset in
        part by a decrease in sales of Super Arrow-Flex® and diagnostic catheters. Total
        Company U.S. sales increased by 4.2% to $75.0 million from $72.0 million
        in the
        comparable prior year period due primarily to increased sales of specialty
        and
        central venous catheters. International sales increased by 13.3% to $50.4
        million in the second quarter of fiscal 2007 from $44.5 million in the
        comparable prior year period principally as a result of increased sales of
        central venous catheters, specialty catheters and IAB pumps. International
        sales
        in the quarter were positively impacted by increased sales of $1.2 million
        by
        the Company’s United Kingdom subsidiary, as noted above, and by $1.0 million due
        to the effect of foreign currency exchange rates, also as noted above.
        International sales represented 40.2% of net sales in the second quarter
        of
        fiscal 2007 compared to 38.2% in the same prior year period.
 
 The
        ARROWg+ard® conversion percentages, which are the number of units sold with the
        ARROWg+ard® antiseptic surface treatments as a percentage of the Company’s total
        multilumen and hemodialysis unit sales, decreased to 35% of total Company
        sales
        in the second quarter of fiscal 2007 from 36% in the comparable prior year
        period. The ARROWg+ard® conversion percentages for the U.S. market increased to
        65% in the second quarter of fiscal 2007 from 63% in the comparable prior
        year
        period. The ARROWg+ard® conversion percentage for the second quarter of fiscal
        2006 has been restated to correct an error in the previously reported percentage
        calculation.


(20)
 ARROW
            INTERNATIONAL, INC.





*NEO♥Care
        Product Recall*
 As
        previously reported, in December 2004, the Company announced a voluntary
        nationwide recall of all of its NEO♥PICC® 1.9 FR Peripherally Inserted Central
        Catheters (the “NeoPICC Catheters”) as a result of having received several
        reports of adverse events involving the utilization of the NeoPICC Catheters.
        The NeoPICC Catheter is part of the Company’s NEO♥Care product line of catheters
        and related procedure kits for neonatal intensive care that it acquired from
        Klein Baker Medical, Inc. in March 2003. The Company cooperated with the
        Food
        and Drug Administration (the “FDA”) in conducting the voluntary recall.
 
 To
        address the inspectional observations of the FDA and to facilitate the
        integration of its NEO♥Care manufacturing operations into its other existing
        facilities, in January 2005 the Company temporarily ceased the manufacture,
        shipment and sale of its entire NEO♥Care product line, including the NeoPICC
        Catheters, until it has completed the implementation of all corrective actions
        related to the FDA’s inspections. The Company presently expects to submit a new
        510(k) pre-market notification to the FDA for a modified version of the NeoPICC
        Catheter before the end of the 2007 calendar year and, as previously reported,
        has decided to delay the resumption of production of the NEO♥Care product line,
        including the NeoPICC Catheters, until it receives FDA marketing clearance
        for
        these modifications.
 
 *Gross
        Profit*
 Gross
        profit increased by 11.4% to $63.3 million in the three months ended February
        28, 2007 from $56.8 million in the same period of fiscal 2006. Gross margin
        increased to 50.5% during the three months ended February 28, 2007 from 48.8%
        in
        the comparable prior year period. The increase in gross margin was due primarily
        to (1) higher gross margins in the second quarter of fiscal 2007 resulting
        from
        the additional gross profit generated in the United Kingdom as a
        result of direct selling in this region following the Company’s purchase of
        certain assets of Kimal in April 2006, (2) lower manufacturing costs as a
        result
        of improved manufacturing processes, and (3) a favorable foreign exchange
        impact, but was offset in part by changes in product and geographic sales
        mix as
        a larger proportion of products were sold at lower gross margins.
  *Research
        and Development*
 Research
        and development expenses increased by 1.4% to $7.2 million in the three months
        ended February 28, 2007 from $7.1 million in the comparable prior year period.
        Research and development spending in the second quarter of fiscal 2007 was
        impacted by increased expenditures related to regulatory compliance and
        increased spending on the Company’s critical care product line. These increases
        in research and development spending were offset in part by decreased spending
        in the second quarter of fiscal 2007 on the Company’s cardiac care product line,
        mostly attributable to decreased spending on the CorAide TM continuous flow ventricular assist system, the Company’s joint research and
        development program with The Cleveland Clinic Foundation, as well as decreased
        consulting fees related to the temporarily suspended NEO♥Care product line. As a
        percentage of net sales, these expenses were 5.7% in the second quarter of
        fiscal 2007 compared to 6.1% in the same period of fiscal 2006.
 
 *CorAide
        LVAS*
 On
        March
        23, 2007, the Company’s Board of Directors determined to limit the Company’s
        active involvement in the development of the CorAide left ventricular assist
        system, or LVAS, and, in concert with The Cleveland Clinic Foundation, to
        seek
        an alternative arrangement for bringing this technology to market. The Company,
        in consultation with the Cleveland Clinic, is in the process of evaluating
        these
        alternatives, including the potential involvement of a third party to continue
        the development and commercialization of this device. Over the next several
        months, the Company plans to wind down its activities in connection with
        this
        program while continuing to provide ongoing support for patients currently
        supported by the device. This decision was based on the Company’s assessment of
        the additional resources required to complete development of the CorAideTM versus
        the use of these resources to advance other research and development related
        to
        its core product areas. The Company does not expect any material impact on
        its
        financial statements as a result of this decision.
 
 During
        the third quarter of fiscal 2006, the researchers conducting the previously
        reported European clinical trial of the CorAideTM LVAS identified the need for
        several modifications to the device. As a result, the Company decided not
        to
        proceed with the enrollment of additional patients in the trial until these
        design modifications have been assessed and implemented and, accordingly,
        did
        not enroll any patients during the second quarter of fiscal 2007.
 
 The
        Company views the CorAideTM LVAS as a long-term development program. The current
        version of the CorAideTM device is intended to provide support for Class IV
        congestive heart failure patients waiting for heart transplantation, candidates
        for bridging to natural recovery of ventricular function and patients requiring
        longer-term support. Notwithstanding its recent decision to limit its active
        involvement in the development of the device, the Company continues to believe
        that the CorAideTM’s smaller size, less invasive surgical approach and inherently
        simpler design promises better opportunities for broader market acceptance
        than
        currently marketed LVAS devices.


(21)
 ARROW
            INTERNATIONAL, INC.





*Selling,
      General and Administrative*


Selling,
        general and administrative expenses increased by 7.8% to $34.4 million during
        the three months ended February 28, 2007 from $31.9 million in the comparable
        prior year period and, as a percentage of net sales, were 27.4% in both
        quarters. This increase was due primarily to increased sales expenses of
        (1)
        $1.4 million related to the buildup of the Company’s U.S. sales force, including
        increases in personnel and commissions, (2) $0.9 million of incremental
        operational costs related to the establishment of the Company’s United Kingdom
        direct sales subsidiary following its acquisition of certain assets of Kimal
        in
        April 2006, (3) approximately $0.7 million related to the Company’s pension
        and
        post-retirement welfare plans based on adjusting certain estimated data received
        in the second quarter of each fiscal year, (4) $0.6 million related to an
        increase in the accrual for the Company’s income growth bonus plan for its
        executive officers and key management employees, (5) $0.5 million related
        to the
        Company’s cost of providing medical insurance to its employees, for which the
        Company is self-insured, due primarily to an increase in the number of large
        claims, (6) $0.5 million of amortization expense related primarily to the
        intangible assets included as part of the Kimal acquisition, and (7) $0.3
        million of increased expenses resulting from the weakness of the U.S. dollar
        relative to currencies of countries in which the Company operates direct
        sales
        subsidiaries. These increases were offset in part by decreased expenses of
        (1)
        $0.6 million related to the Company’s retired officers’ life insurance policies
        and (2) $1.8 million for other matters that were individually not
        material.
 
 *Project
        Operational Excellence*
 During
        the second quarter of fiscal 2007, the Company continued to take additional
        steps in implementing its Project Operational Excellence program designed
        to
        help it achieve operational process excellence in four key areas: product
        quality, safety, customer service and cost. This program includes (1) as
        discussed below under “Liquidity and Capital Resources - Investing Activities -
        Multi-Year Capital Investment Plan,” restructuring the Company’s manufacturing
        to increase production capacity and better align its production facilities
        with
        the geographical markets they serve, (2) improving the effectiveness of the
        Company’s production technology by investing in new, state-of-the-art
        manufacturing equipment and processes, and (3) developing and implementing
        enhanced good manufacturing practices and quality systems to maintain and
        enhance process excellence. In connection with its efforts to enhance its
        quality system compliance, the Company incurred less than $0.1 million of
        outside consulting costs and internal out-of-pocket travel expenses in the
        second quarter of fiscal 2007 and does not currently expect ongoing costs
        to be
        material. The Company incurred $1.4 million of costs related to this compliance
        program in fiscal 2006. All of these compliance-related costs, in both fiscal
        2007 and 2006, have been recorded as selling, general and administrative
        expenses. The Company continues to embed these new practices and procedures
        into
        its corporate culture as part of its ongoing commitment to high quality
        standards.
 
 *Restructuring
        Charges*
 The
        Company recorded $0.3 million of restructuring expense in the second quarter
        of
        fiscal 2007 compared to $0.3 million of income in the second quarter of fiscal
        2006. The restructuring expenses in the second quarter of fiscal 2007 related
        primarily to accrued severance costs associated with the Company’s decision to
        relocate all its intra-aortic balloon catheter manufacturing from its Everett,
        Massachusetts facility into other of its existing manufacturing facilities
        in
        Hradec Kralove, Czech Republic. This decision supports its operating principles
        for quality, safety, customer service and cost, and is expected to simplify
        manufacturing processes and reduce manufacturing costs for the intra-aortic
        balloon catheter. Severance payments relate to 36 employees primarily in
        manufacturing at this facility. The Company expects this transfer of its
        intra-aortic balloon catheter manufacturing to be completed during the first
        six
        months of fiscal 2008 at an estimated total cost of $1.5 million. The Company
        also plans to establish a new electrical and instrumentation research and
        development center and intra-aortic balloon pump manufacturing facility in
        the
        greater Boston, Massachusetts area. The restructuring income in the second
        quarter of fiscal 2006 related primarily to a pre-tax gain of $0.3 million
        from
        the sale of the Company’s San Antonio, Texas facility and certain related
        equipment.
 
 *Operating
        Income*
 Principally
        due to the above factors, operating income increased in the second quarter
        of
        fiscal 2007 by 19.3% to $21.6 million from $18.1 million in the comparable
        prior
        year period.
 
 *Other
        Expenses (Income), Net*
 Other
        expenses (income), net, which consists principally of interest expense, interest
        income and foreign exchange gains and losses associated with the Company's
        direct sales subsidiaries, was $1.1 million of income in the second quarter
        of
        fiscal 2007 compared to $0.6 million of income in the same prior year period,
        due primarily to the Company earning a higher amount of interest in the second
        quarter of fiscal 2007 on its investments of cash balances, offset in part
        by
        higher interest expense related to the Company’s borrowings under its credit
        facilities and other sources of financing.
  *Income
        Before Income Taxes*
 As
        a
        result of the factors discussed above, income before income taxes increased
        during the second quarter of fiscal 2007 by 20.9% to $22.6 million, or 18.0%
        of
        net sales, from $18.7 million, or 16.1% of net sales, in the comparable prior
        year period.
 
 *Effective
        Tax Rate*
 For
        the
        second quarter of fiscal 2007, the Company’s effective income tax rate increased
        to 36.0% from 32.5% in the comparable prior year period, or 350 basis points,
        due to a reduction in export-related tax deductions, which resulted in an
        increase of approximately 200 basis points, and increased state income taxes,
        which resulted in an increase of approximately 250 basis points. These increases
        were offset in part by the enactment of legislation in December 2006 to renew
        the U.S. research and development tax credit, which enabled the Company to
        record during the second quarter of fiscal 2007 a retroactive favorable
        adjustment for the 2006 tax year, resulting in a decrease of approximately
        100
        basis points. The Company currently anticipates its estimated effective tax
        rate
        for the full fiscal 2007 to be 35.5%.


(22)
 ARROW
            INTERNATIONAL, INC.




*U.S.
        Tax Matters*
 In
        October 2004, the President signed The American Jobs Creation Act of 2004
        (the
“Act”).  The Act included some of the most significant changes to corporate
        taxation since 1996 and, among other things, eliminated the Extra Territorial
        Income (“ETI”) Exclusion deduction, a tax incentive that benefits U.S. companies
        to manufacture export products domestically, over a three-year phase out
        period
        beginning in 2005. However, the phase out allowed the Company to obtain a
        significant percentage of the ETI benefit for fiscal 2006 with a smaller
        benefit
        anticipated for fiscal 2007. The ETI will be totally phased out by the Company's
        2008 fiscal year end.  Additionally, the Act provided for a new tax
        deduction for U.S. domestic manufacturers beginning in the Company's fiscal
        year
        2006.  This new deduction began at 3% of the Company’s U.S. domestic
        manufacturing income for the Company's fiscal years 2006 and 2007, increasing
        to
        6% for the Company's fiscal years 2008 to 2010 and achieves its maximum rate
        of
        9% for the Company's fiscal years 2011 and beyond.  While the Company is
        not yet able to make an exact calculation of the overall effect of these
        changes, management believes that the phased out repeal of the ETI benefit
        during fiscal 2006 and 2007, and the phase in of the new manufacturing deduction
        benefit from fiscal 2006 to 2011 should not have a material adverse effect
        on
        the Company's effective tax rate, although it believes that the net effect
        will
        be less of an income tax benefit to the Company for the remainder of fiscal
        2007
        and beyond.
 
 *Czech
        Republic Tax Holiday*
 During
        the second quarter of fiscal 2006, the Company’s effective income tax rate
        reflected a benefit from a tax holiday in respect of the Company’s Czech
        Republic operations. This tax holiday was in effect for a five-year period
        through August 2006, and was limited to the amount of property, plant and
        equipment purchased in the Czech Republic. Because this tax holiday expired
        in
        fiscal 2006, the Company ceased to benefit from it in fiscal 2007.
 
 *Net
        Income*
 Net
        income in the second quarter of fiscal 2007 increased by 13.4% to $14.4 million
        from $12.7 million in the comparable fiscal 2006 period. As a percentage
        of net
        sales, net income represented 11.5% in the three months ended February 28,
        2007
        compared to 10.9% in the same period of fiscal 2006.
 
 *Per
        Share Information*
 Basic
        earnings per common share were $0.32 in the three months ended February 28,
        2007, up 10.3%, or $0.03 per share, from $0.29 in the comparable prior year
        period. Diluted earnings per common share were $0.32 in the three months
        ended
        February 28, 2007, up 14.3%, or $0.04 per share, from $0.28 in the comparable
        prior year period. Weighted average shares of common stock outstanding used
        in
        computing basic earnings per common share increased to 45,079,853 in the
        second
        quarter of fiscal 2007 from 44,729,478 in the comparable prior year period
        primarily as a result of additional stock option exercises since February
        28,
        2006. Weighted average shares of common stock outstanding used in computing
        diluted earnings per common share increased to 45,619,133 in the second quarter
        of fiscal 2007 from 45,275,773 in the comparable prior year period primarily
        as
        a result of additional stock option exercises since February 28,
        2006.
 
 **Six
        Months Ended February 28, 2007 Compared to Six Months Ended February 28,
        2006**
 
 *Net
        Sales*
 Net
        sales
        for the six months ended February 28, 2007 increased by $18.2 million, or
        7.9%,
        to $248.3 million from $230.1 million in the same period of last year due
        primarily to an increase in critical care and cardiac care product sales,
        increased sales of $2.5 million by the Company’s United Kingdom subsidiary due
        to higher sales prices resulting from direct selling in this region following
        the Company’s acquisition of certain assets of Kimal, its former United Kingdom
        distributor, in April 2006, and a favorable foreign exchange impact during
        the
        first half of fiscal 2007 as a result of the weakness of the U.S. dollar
        relative to currencies of countries in which the Company operates direct
        sales
        subsidiaries. This foreign exchange impact resulted in increased sales for
        the
        six months ended February 28, 2007 of $1.7 million. The following is a summary
        of the Company’s sales by product platform:
 Sales
                    by Product Platform($
                    in millions)
                
                Six
                    months endedFebruary
                    28,
                
                February
                    28,2007
                
                2006Central
                    Venous Catheters
                
                $
                129.7
                
                $
                119.6Specialty
                    Catheters
                
                
                79.0
                
                
                72.7Non-Arrow
                    distributed products
                
                
                3.6
                
                
                4.0Subtotal
                    Critical Care
                
                
                212.3
                
                
                196.3Cardiac
                    Care
                
                
                36.0
                
                
                33.8Total
                
                $
                248.3
                
                $
                230.1


(23)
 ARROW
            INTERNATIONAL, INC.





Sales
      of
      critical care products increased by 8.2% to $212.3 million in the first half
      of
      fiscal 2007 from $196.3 million in the comparable prior year period due
      primarily to increased sales of central venous and specialty catheters. Sales
      of
      central venous catheters increased in the first half of fiscal 2007 due
      primarily to a continued increase in the number of hospitals that are upgrading
      to the Company’s new Maximal Barrier central venous access kit. Sales of
      specialty catheters increased in the first half of fiscal 2007 due primarily
      to
      improved sales of arterial products, peripheral nerve block products and
      epidural products. Sales of cardiac care products increased by 6.5% to $36.0
      million in the first half of fiscal 2007 from $33.8 million in the comparable
      prior year period due primarily to increased sales of IAB pumps, including
      sales
      of the latest version of the AutoCatTM2 WAVE IAB pump and associated LightWAVETM
catheter system, offset in part by a decrease in sales of Super Arrow-Flex® and
      diagnostic catheters. Total Company U.S. sales increased by 4.6% to $148.5
      million in the first six months of fiscal 2007 from $142.0 million in the
      comparable prior year period due primarily to increased sales of specialty
      and
      central venous catheters. International sales increased by 13.3% to $99.8
      million in the first half of fiscal 2007 from $88.1 million in the comparable
      prior year period principally as a result of increased sales of central venous
      catheters, specialty catheters and IAB pumps. International sales in the first
      half of fiscal 2007 were positively impacted by increased sales of $2.5 million
      by the Company’s United Kingdom subsidiary, as noted above, and by $1.7 million
      due to the effect of foreign currency exchange rates, also as noted above.
      International sales represented 40.2% of net sales in the first half of fiscal
      2007 compared to 38.3% in the same prior year period.


The
        ARROWg+ard® conversion percentages, which are the number of units sold with the
        ARROWg+ard® antiseptic surface treatments as a percentage of the Company’s total
        multilumen and hemodialysis unit sales, decreased to 36% of total Company
        sales
        in the first half of fiscal 2007 from 37% in the comparable prior year period.
        The ARROWg+ard® conversion percentages for the U.S. market increased to 65% in
        the first half of fiscal 2007 from 63% in the comparable prior year period.
        The
        ARROWg+ard® conversion percentage for the first half of fiscal 2006 has been
        restated to correct an error in the previously reported percentage
        calculation.
 
 *Gross
        Profit*
 Gross
        profit increased by 10.8% to $125.1 million in the six months ended February
        28,
        2007 from $112.9 million in the same period of fiscal 2006. Gross margin
        increased to 50.4% during the six months ended February 28, 2007 from 49.1%
        in
        the comparable prior year period. The increase in gross margin was due primarily
        to (1) higher gross margins in the first half of fiscal 2007 resulting from
        the additional gross profit generated in the United Kingdom as a
        result of direct selling in this region following the Company’s purchase of
        certain assets of Kimal in April 2006, (2) lower manufacturing costs as a
        result
        of improved manufacturing processes, and (3) a favorable foreign exchange
        impact, but was offset in part by changes in product and geographic sales
        mix as
        a larger proportion of products were sold at lower gross margins.
  *Research
        and Development*
 Research
        and development expenses decreased by 0.7% to $13.4 million during the six
        months ended February 28, 2007 from $13.5 million in the comparable prior
        year
        period. This decrease in research and development spending was due primarily
        to
        decreased spending in the first half of fiscal 2007 on the Company’s cardiac
        care product line, mostly attributable to decreased spending on the
        CorAide TM continuous flow ventricular assist system, the Company’s joint research and
        development program with The Cleveland Clinic Foundation, as well as consulting
        fees related to the temporarily suspended NEO♥Care product line. These decreases
        in research and development spending were offset in part by increased
        expenditures related to regulatory compliance and increased spending on the
        Company’s critical care product line. As a percentage of net sales, these
        expenses were 5.4% in the first half of fiscal 2007 compared to 5.9% in the
        same
        period of fiscal 2006.
 
 *Selling,
        General and Administrative*
 Selling,
        general and administrative expenses increased by 5.7% to $68.2 million during
        the six months ended February 28, 2007 from $64.5 million in the comparable
        prior year period and, as a percentage of net sales, decreased to 27.5% in
        the
        first half of fiscal 2007 from 28.0% in the comparable period of fiscal 2006.
        This increase was due primarily to increased expenses of (1) $1.7 million
        of
        incremental operational costs related to the establishment of the Company’s
        United Kingdom direct sales subsidiary following its acquisition of certain
        assets of Kimal in April 2006, (2) $1.3 million related to the buildup of
        the Company’s U.S. sales force, including increases in personnel and sales
        commissions, (3) $1.1 million of amortization expense related primarily to
        the
        intangible assets included as part of the Kimal acquisition, (4) approximately
        $0.7 million related to the Company’s pension
        and
        post-retirement welfare plans based on adjusting certain estimated data received
        in the second quarter of each fiscal year, (5) $0.6 million of increased
        expenses resulting from the weakness of the U.S. dollar relative to currencies
        of countries in which the Company operates direct sales subsidiaries, and
        $0.2
        million due to increased expenses related to personnel, and (6) $0.5 million
        related to an increase in the accrual for the Company’s income growth bonus plan
        for its executive officers and key management employees. These increases
        were
        offset in part by decreased expenses of (1) $0.6 million related to the
        Company’s retired officers’ life insurance policies, (2) $0.4 million related to
        the Company’s Project Operational Excellence program, and (3) $1.4 million for
        other matters that were individually not material.


(24)
 ARROW
            INTERNATIONAL, INC.




*Restructuring
        Charges*
 The
        Company recorded $0.3 million of restructuring expense in the first half
        of
        fiscal 2007 compared to $0.3 million of income in the first half of fiscal
        2006.
        The restructuring expenses recorded in the first half of fiscal 2007 related
        primarily to accrued severance costs associated with the Company’s decision to
        relocate all its intra-aortic balloon catheter manufacturing from its Everett,
        Massachusetts facility into other of its existing manufacturing facilities
        in
        Hradec Kralove, Czech Republic. This decision supports its operating principles
        for quality, safety, customer service and cost, and is expected to simplify
        manufacturing processes and reduce manufacturing costs for the intra-aortic
        balloon catheter. Severance payments relate to 36 employees primarily in
        manufacturing at this facility. The Company expects this transfer of its
        intra-aortic balloon catheter manufacturing to be completed during the first
        six
        months of fiscal 2008 at an estimated total cost of $1.5 million. The Company
        also plans to establish a new electrical and instrumentation research and
        development center and intra-aortic balloon pump manufacturing facility in
        the
        greater Boston, Massachusetts area. The restructuring income recorded in
        the
        first half of fiscal 2006 related primarily to a pre-tax gain of $0.3 million
        from the sale of the Company’s San Antonio, Texas facility and certain related
        equipment.


(25)
 ARROW
            INTERNATIONAL, INC.




*Operating
        Income*
 Principally
        due to the above factors, operating income increased in the first half of
        fiscal
        2007 by 23.0% to $43.3 million from $35.2 million in the comparable prior
        year
        period.
 
 *Other
        Expenses (Income), Net*
 Other
        expenses (income), net, which consists principally of interest expense, interest
        income and foreign exchange gains and losses associated with the Company's
        direct sales subsidiaries, was $2.0 million of income in the first half of
        fiscal 2007 compared to $1.0 million of income in the same prior year period,
        due primarily to the Company earning a higher amount of interest in the first
        half of fiscal 2007 on its investments of cash balances, offset in part by
        higher interest expense related to the Company’s borrowings under its credit
        facilities and other sources of financing.
  *Income
        Before Income Taxes*
 As
        a
        result of the factors discussed above, income before income taxes increased
        during the first half of fiscal 2007 by 24.9% to $45.2 million, or 18.2%
        of net
        sales, from $36.2 million, or 15.7% of net sales, in the comparable prior
        year
        period.
 
 *Effective
        Tax Rate*
 For
        the
        first half of fiscal 2007, the Company’s effective income tax rate increased to
        36.0% from 32.5% in the comparable prior year period, or 350 basis points,
        due
        to a reduction in export-related tax deductions, which resulted in an increase
        of approximately 250 basis points, and increased state income taxes, which
        resulted in an increase of approximately 200 basis points. These increases
        were
        offset in part by the impact resulting from the temporary non-renewal in
        the
        first quarter of fiscal 2007 of the U.S. research and development tax credit,
        followed by the enactment of legislation in December 2006 to renew this tax
        credit, all of which resulted in a decrease of approximately 100 basis
        points.
 
 *Net
        Income*
 Net
        income in the first half of fiscal 2007 increased by 18.0% to $28.9 million
        from
        $24.5 million in the comparable fiscal 2006 period. As a percentage of net
        sales, net income represented 11.6% in the six months ended February 28,
        2007
        compared to 10.6% in the same period of fiscal 2006.
 
 *Per
        Share Information*
 Basic
        earnings per common share were $0.64 in the six months ended February 28,
        2007,
        up 16.4%, or $0.09 per share, from $0.55 in the comparable prior year period.
        Diluted earnings per common share were $0.64 in the six months ended February
        28, 2007, up 18.5%, or $0.10 per share, from $0.54 in the comparable prior
        year
        period. Weighted average shares of common stock outstanding used in computing
        basic earnings per common share increased to 45,020,979 in the first half
        of
        fiscal 2007 from 44,687,708 in the comparable prior year period primarily
        as a
        result of additional stock option exercises since February 28, 2006. Weighted
        average shares of common stock outstanding used in computing diluted earnings
        per common share increased to 45,565,985 in first half of fiscal 2007 from
        45,221,520 in the comparable prior year period primarily as a result of
        additional stock option exercises since February 28, 2006.
 
 **Liquidity
        and Capital Resources**
 
 *Operating
        Activities*
 *Cash
        from Operations.* Arrow’s
        primary source of funds continues to be cash generated from operations, as
        shown
        in the Company’s consolidated statements of cash flows included in Item 1 of
        this report. For the six months ended February 28, 2007, net cash provided
        by
        operations was $44.1 million, an increase of $25.6 million from the comparable
        prior year period, due primarily to an increase in net income, as described
        above under “Six Months Ended February 28, 2007 Compared to Six Months Ended
        February 28, 2006 - Net Sales”, and changes in certain working capital and other
        accounts, including prepaid pension costs, prepaid income taxes, accrued
        income
        taxes, accrued post-retirement and pension benefit obligation, and inventories,
        all as described below.
 
 *Prepaid
        Pension Costs.* Prepaid
        pension costs decreased $1.8 million in the first six months of fiscal 2007
        compared to a $3.4 million increase in the first six months of fiscal 2006,
        primarily as a result of payments of $8.8 million made in the first half
        of
        fiscal 2006 to fund the Company’s post-retirement and pension benefit
        obligation.
 
 *Prepaid
        Income Taxes.* Prepaid
        income taxes decreased $5.0 million in the first six months of fiscal 2007
        compared to no activity in the same period of fiscal 2006 due to payments
        received from the Japanese Government in the first half of fiscal 2007 in
        connection with the Japanese tax assessment, as further discussed below.
 
 *Accrued
        Income Taxes.* Accrued
        income taxes increased $3.9 million in the first half of fiscal 2007 compared
        to
        a $0.7 million increase in the same period of fiscal 2006 due primarily to
        an
        increase in the tax provision as a result of higher pre-tax income and a
        higher
        effective tax rate, as discussed above under “Six Months Ended February 28, 2007
        Compared to Six Months Ended February 28, 2006 - Effective Tax Rate”, and the
        timing of estimated income tax payments.
  (26)
 ARROW
                INTERNATIONAL, INC.
  *Accrued
            Post-Retirement and Pension Benefit Obligation.* Accrued
            post-retirement and pension benefit obligation increased $0.6 million
            in the
            first six months of fiscal 2007 compared to a $2.8 million decrease in
            the first
            six months of fiscal 2006 primarily as a result of payments in the first
            half of
            fiscal 2006 to fund the Company’s post-retirement and pension benefit
            obligation, as described above.
 
 *Inventories.* Inventories increased $4.4 million in the first half of fiscal 2007 compared
            to
            a $7.2 million increase in the same period of fiscal 2006. The increase
            in 2007
            was due primarily to (1) increased finished and semi-finished goods resulting
            from the Company’s worldwide initiatives to produce and maintain sufficient
            levels of inventory required to meet growing customer demand, and (2)
            increased
            work-in-process inventory resulting from the conversion of raw material
            inventory during the first half of fiscal 2007 primarily related to the
            addition
            of new production lines in the Company’s new Zdar, Czech Republic and Chihuahua,
            Mexico facilities. This increase was offset in part by reduced inventory
            value
            due to lower manufacturing costs, partially as a result of the Company’s
            manufacturing capital investment program and Project Operational
            Excellence.
 
 *Accounts
            Receivable.* Accounts
            receivable, measured in days sales outstanding during the period, increased
            to
            75 days at February 28, 2007 from 73 days at August 31, 2006.
 
 As
            of
            February 28, 2007, the Company had an accounts receivable balance from
            its
            Italian customers of $11.8 million, of which approximately 71% is related
            to
            Italian Government-backed hospital customers. The Company increased its
            direct
            sales in this region following its acquisition of AB Medica in September
            2004 by
            taking over the sales formerly conducted by this former distributor.
            As of
            February 28, 2007, the days sales outstanding was 304 days, which is
            significantly higher than that of the Company’s overall February 28, 2007
            average customer days sales outstanding of 75 days. However, according
            to
            information provided by Italy’s National Health Service as of July 19, 2006, the
            average days sales outstanding for medical equipment supply companies
            in the
            Italian market ranges from approximately 300 to 340 days. The Company’s payment
            terms in this market are generally 90 days. The Company has concluded
            that the
            Government of Italy typically delays payments to its government-backed
            hospitals, which in turn has impacted the Company’s overall days sales
            outstanding. The Italian Government-backed hospitals have historically
            paid
            customers 100% of their outstanding receivables. As a result, the Company
            currently believes that the ultimate collectibility of these receivables,
            net of
            discounts, is not a significant risk. However, because the Company’s assessment
            of this situation is based in part on political factors beyond its control,
            the
            Company cannot assure that all of these receivables will be collected
            or when
            they will be collected, and will continue to evaluate their collectibility
            and
            establish reserves when and to the extent necessary. As of February 28,
            2007,
            the Company had recorded an allowance of $0.1 million to reserve for
            specifically identified, potentially uncollectible, private Italian customer
            balances.
 
 The
            Company currently evaluates all of its trade receivables on a regular
            basis,
            including those with its Italian customers, to ensure that each receivable
            is
            recorded at net realizable value.
 
 *Japanese
            Tax Assessment.* In
            March
            2004, the Company made a payment of $10.0 million to settle a tax assessment
            related to an ongoing Japanese Government tax audit of the Company’s transfer
            pricing with its Japanese subsidiary. In order to recover a majority
            of this
            Japanese tax assessment, the Company initiated competent authority proceedings
            with the Internal Revenue Service in the U.S. In the fourth quarter of
            fiscal
            2006, the competent authority proceedings were completed and the Company
            recorded a favorable tax credit of $3.7 million to reflect relief from
            a tax
            assessment related to transfer pricing between the U.S. and the Company’s
            Japanese subsidiary for its fiscal years 1998 through 2004. During the
            first
            half of fiscal 2007, the Company received two refund payments totaling
            $5.0
            million from the Japanese Government in settlement of this tax
            matter.
 
 *Investing
            Activities*
 Net
            cash
            used in the Company’s investing activities increased to $30.1 million in the six
            months ended February 28, 2007 from $17.7 million in the comparable period
            of
            fiscal 2006, due primarily to incremental purchases of marketable securities
            in
            the first half of fiscal 2007 and increased capital expenditures in support
            of
            its multi-year capital investment plan, as discussed below.
 
 *Multi-Year
            Capital Investment Plan.* In
            April
            2004, the Company’s Board of Directors authorized the initiation of a multi-year
            capital investment plan to increase its worldwide manufacturing capacity
            and
            rationalize its production operations. This plan was initiated to improve
            customer service, support projections for future growth and to integrate
            operations acquired in recent years, and included the construction or
            acquisition of additional manufacturing facilities in Zdar, Czech Republic
            and
            Chihuahua, Mexico, which was commenced in the first quarter of fiscal
            2005 and
            completed during fiscal 2006. During the second quarter of fiscal 2006,
            production of multi-lumen central venous catheters began at the new Chihuahua
            facility and, in August 2006, production began at the Company’s new Zdar
            facility. As of August 31, 2006, the Company had incurred a total of
            $29.3
            million related to the construction of these new facilities, but did
            not make
            any material expenditures related to this construction during the first
            half of
            fiscal 2007, and currently expects any further expenditures to be immaterial.
            However, the Company is continuing to invest in new equipment in connection
            with
            this capital investment program and, accordingly, as of February 28,
            2007, had
            spent a total of $11.1 million for this new equipment and expects to
            incur an
            additional $3.9 million through the end of fiscal 2008, subject to fluctuations
            in foreign exchange rates.
 (27)
 ARROW
                INTERNATIONAL, INC.
  As
          part
          of its plans to rationalize its production operations and related logistics
          in
          Europe, in November 2004 the Company determined to move its European
          Distribution Center, previously situated in Weesp, Netherlands, to a more
          centralized European location in the Limberg region of Belgium in order
          to have
          better access to existing carrier transportation networks and allow for
          more
          cost-competitive expansion of its European operations in the future. The
          Company
          continued to implement this relocation plan in the first six months of
          fiscal
          2007 and presently expects to complete it and related logistics during
          fiscal
          2007 at an estimated total cost of $2.0 million. As of February 28, 2007,
          the
          Company had incurred costs of $1.6 million related to this relocation,
          of which
          $1.0 million had been paid, and expects to incur the remaining $0.4 million
          during the remainder of fiscal 2007.
 
 *Financing
          Activities*
 Financing
          activities used $13.6 million of net cash in the first six months of fiscal
          2007
          compared to using $3.2 million in the same period of fiscal 2006, primarily
          as a
          result of (1) the Company’s repayment of a portion of the indebtedness under its
          revolving credit facilities and (2) an increase in dividend payments following
          the Company’s increase in the amount of its quarterly dividend during the second
          quarter of fiscal 2006. Cash used by financing activities, however, was
          reduced
          by an increase in proceeds from stock option exercises.
 
 *Credit
          Facilities.* To
          provide additional liquidity and flexibility in funding its operations,
          the
          Company from time to time also borrows amounts under credit facilities
          and other
          external sources of financing. At February 28, 2007, the Company had a
          revolving
          credit facility providing a total of $90.0 million in available revolving
          credit
          for general business purposes, of which $67.6 million was outstanding,
          all of
          which is owed by its foreign subsidiaries. Under this credit facility,
          the
          Company is required to comply with the following financial covenants: maintain
          a
          ratio of total liabilities to tangible net worth (total assets less total
          liabilities and intangible assets) of no more than 1.5 to 1; a limitation
          on
          certain mergers, consolidations and sales of assets by the Company or its
          subsidiaries; a limitation on the Company’s and its subsidiaries’ incurrence of
          liens; and a requirement that the lender approve the incurrence of additional
          indebtedness unrelated to the revolving credit facility when the aggregate
          principal amount of such new additional indebtedness exceeds $75.0 million.
          At
          February 28, 2007, the Company was in compliance with all such covenants.
          Failure to remain in compliance with these covenants could trigger an
          acceleration of the Company’s obligation to repay all outstanding borrowings
          under this credit facility. The adoption of Statement of Financial Accounting
          Standards (SFAS) No. 158 during fiscal 2007 will not have a material impact
          on
          its compliance with any of these debt covenants. The Company is currently
          considering refinancing some of its borrowings under this credit facility
          with
          longer term fixed rate debt.
 
 Certain
          subsidiaries of the Company have other revolving credit facilities totaling
          the
          U.S. dollar equivalent of $31.8 million, of which $1.4 million was outstanding
          as of February 28, 2007.
 
 Interest
          rate terms for both U.S. and foreign bank credit facilities are based on
          either
          bids provided by the lender, London Interbank Offered Rates (LIBOR) or
          Tokyo
          Interbank Offered Rates (TIBOR), plus applicable margins. Interest is payable
          monthly during the revolving credit period. Combined borrowings under these
          facilities increased $2.0 million and $5.7 million during the six months
          ended
          February 28, 2007 and February 28, 2006, respectively, all of which was
          related
          to borrowings by the Company’s foreign subsidiaries.


(28)
 ARROW
            INTERNATIONAL, INC.




*Contractual
        Obligations*
 A
        summary
        of all of the Company’s contractual obligations and commercial commitments as of
        February 28, 2007 was as follows:
 
 Payments
                  due
                or
                Commitment
                  Expiration
                by
                  PeriodContractual
                  Obligations and
                Commercial
                  Commitments
              
              Total
              
              Lessthan
                1
                  year
              
              1
                  -
                  3
                years
              
              3
                  -
                  5
                years
              
              Morethan
                  5
                years(in
                  Millions)Current
                  maturities of long-term debt
              
              $
              1.0
              
              $
              1.0
              
              $
              -
              
              $
              -
              
              $
              -Operating
                  leases
              
              
              21.4
              
              
              4.6
              
              
              5.7
              
              
              4.0
              
              
              7.1Purchase
                  obligations (1)
              
              
              34.1
              
              
              34.1
              
              
              -
              
              
              -
              
              
              -Other
                  long-term obligations
              
              
              0.3
              
              
              -
              
              
              0.1
              
              
              0.1
              
              
              0.1Lines
                  of credit (2)
              
              
              69.0
              
              
              69.0
              
              
              -
              
              
              -
              
              
              -Standby
                  letters of credit
              
              
              2.2
              
              
              2.2
              
              
              -
              
              
              -
              
              
              -Total
                  cash contractual obligations and
                commercial
                  commitments
              
              $
              128.0
              
              $
              110.9
              
              $
              5.8
              
              $
              4.1
              
              $
              7.2
 
 (1)
        Includes open purchase orders primarily relating to the purchase of raw
        materials, equipment and certain consulting and information system
        services.
 
 (2)
        Includes short-term indebtedness of the Company and its subsidiaries under
        various revolving credit facilities, as discussed above.
 
 *Inflation
        and Seasonality*
 During
        the periods discussed above, the overall effects of inflation and seasonality
        on
        the Company’s business were not significant.
 
 *Outlook*
 Based
        upon its present plans, the Company believes that cash generated from its
        operations and available credit resources, including its ability to extend
        maturities of borrowings outstanding under its lines of credit in the ordinary
        course consistent with past practice, will be adequate to repay current portions
        of long-term debt, to finance currently planned capital expenditures, including
        those remaining pursuant to the Company’s multi-year capital investment plan, as
        discussed above, and to meet the currently foreseeable liquidity needs of
        the
        Company.


(29)
 ARROW
            INTERNATIONAL, INC.




**Critical
        Accounting Policies and Estimates**
 
 The
        Company has disclosed in Note 1 to its consolidated financial statements
        in its
        Annual Report on Form 10-K for the fiscal year ended August 31, 2006 those
        accounting policies that it considers to be significant in determining its
        results of operations and financial position. There have been no material
        changes to the critical accounting policies previously identified and described
        in the Company’s 2006 Form 10-K. The accounting principles utilized by the
        Company in preparing its consolidated financial statements conform to generally
        accepted accounting principles in the United States of America.
 
 The
        preparation of these consolidated financial statements requires the Company’s
        management to make estimates and assumptions that affect the reported amounts
        of
        assets, liabilities, revenues and expenses, as well as the disclosure of
        contingent assets and liabilities at the date of its financial statements.
        The
        Company bases its estimates on historical experience, actuarial valuations
        and
        various other factors that are believed to be reasonable under the
        circumstances, the results of which form the basis for making judgments about
        the carrying value of assets and liabilities that are not readily apparent
        from
        other sources. Some of those judgments can be subjective and complex and,
        consequently, actual results may differ from these estimates under different
        assumptions or conditions. While for any given estimate or assumption made
        by
        the Company’s management there may be other estimates or assumptions that are
        reasonable, the Company believes that, given the current facts and
        circumstances, it is unlikely that applying any such other reasonable estimate
        or assumption would materially impact the financial statements.
 
 **New
        Accounting Standards**
 
 The
        FASB
        issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes-an
        interpretation of SFAS No. 109” (“FIN 48”), in July 2006. The intent of FIN 48
        is to clarify the accounting for uncertainty in income taxes recognized in
        an
        entity’s financial statements in accordance with SFAS No. 109. This
        interpretation imposes a recognition threshold and measurement attribute
        for
        financial statement disclosure of tax positions taken or expected to be taken
        on
        a tax return. This interpretation is effective for fiscal years beginning
        after
        December 15, 2006. The Company is currently evaluating the requirements of
        FIN
        48 and has not yet determined the impact that the adoption of this statement
        will have on its consolidated financial statements.
 
 The
        FASB
        issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
        Other Postretirement Plans-an amendment of SFAS No. 87, 88, 106 and 132(R)”, in
        September 2006. This statement requires that an employer recognize the
        overfunded or underfunded status of a defined benefit postretirement plan
        as an
        asset or liability in its statement of financial position and to recognize
        changes in that funded status in the year in which the changes occur through
        comprehensive income. This statement also requires an employer to measure
        the
        funded status of a plan as of the date of its year-end. The provisions of
        SFAS
        No. 158 will be effective for fiscal years ending after December 15, 2006.
        The
        Company currently estimates that the adoption of this statement will result
        in a
        charge of approximately $26.0 million to accumulated other comprehensive
        expense
        as of August 31, 2007.
 
 The
        FASB
        issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
        Liabilities - Including an Amendment of FASB Statement No. 115.” This statement
        allows an entity to choose to measure many financial instruments and certain
        other items at fair value. The objective of this statement is to improve
        financial reporting by providing entities with the opportunity to mitigate
        volatility in reported earnings caused by measuring related assets and
        liabilities differently without having to apply complex hedge accounting
        provisions. The provisions of SFAS No. 159 will be effective for fiscal years
        beginning after November 15, 2007. The Company does not expect that the adoption
        of this statement will have a material impact on its consolidated financial
        statements.
 
 **Cautionary
        Statement Under The Private Securities Litigation Reform Act of
        1995**
 
 Certain
        statements contained in this report or in other written or oral statements
        made
        from time to time by the Company may contain forward-looking statements within
        the meaning of Section 27A of the Securities Act of 1933 and Section 21E
        of the
        Securities Act of 1934 (the “Exchange Act”). Such statements may use words such
        as “anticipate,” “estimate,” “expect,” “plan,” “believe,” “may,” “intend” and
        similar words or terms. Although the Company believes that the expectations
        in
        such forward-looking statements are reasonable, the Company cannot assure
        you
        that such expectations will prove to have been correct. The forward-looking
        statements are based upon a number of assumptions and estimates that, while
        presented with specificity and considered reasonable by the Company, are
        inherently subject to significant business, economic and competitive risks,
        uncertainties and contingencies which are beyond the control of the Company,
        and
        upon assumptions with respect to future business decisions which are subject
        to
        change. Accordingly, the forward-looking statements are only an estimate,
        and
        actual results will vary from the forward-looking statements, and these
        variations may be material. The Company is not obligated to update any
        forward-looking statement, but investors are urged to consult any further
        disclosures the Company makes in its filings with the Securities and Exchange
        Commission (the “SEC”). Consequently, the inclusion of the forward-looking
        statements should not be regarded as a representation by the Company of results
        that actually will be achieved. Forward-looking statements are necessarily
        speculative in nature, and it is usually the case that one or more of the
        assumptions in the forward-looking statements do not materialize. Investors
        are
        cautioned not to place undue reliance on the forward-looking statements.
        The
        Company cautions investors that the factors set forth below, which are described
        in further detail in Item 1A. Risk Factors in the Company’s Annual Report on
        Form 10-K for the fiscal year ended August 31, 2006, as amended, and in its
        other filings with the SEC, could cause the Company’s results to differ
        materially from those stated in the forward-looking statements. These factors
        include: (1) stringent regulation of the Company’s products by the U.S. Food and
        Drug Administration and, in some jurisdictions, by state, local and foreign
        governmental authorities; (2) the highly competitive market for medical devices
        and the rapid pace of product development and technological change in this
        market; (3) pressures imposed by the health care industry to reduce the cost
        or
        usage of medical products and services, as well as pressures on pricing
        resulting from consolidation within the medical device industry; (4) dependence
        on patents and proprietary rights to protect the Company’s trade secrets and
        technology, and the need for litigation to enforce or defend these rights;
        (5)
        risks associated with the Company’s international operations; (6) potential
        product liability risks inherent in the design, manufacture and marketing
        of
        medical devices; (7) risks relating to interruptions in the supply of or
        increases in the price of essential raw materials or components; (8) dependence
        upon strong relationships with physicians for research, development, marketing
        and sale of many of the Company’s products; (9) risks associated with the
        Company’s use of derivative financial instruments; and (10) dependence on the
        continued service of key members of the Company’s management.




(30)
 ARROW
            INTERNATIONAL, INC.




Item
          3.  Quantitative
          and Qualitative Disclosures About Market Risk
 
 During
          the six month periods ended February 28, 2007 and 2006, the percentage
          of the
          Company’s sales invoiced in currencies other than U.S. dollars was 29.0% and
          26.3%, respectively. In addition, a part of the Company’s cost of goods sold is
          denominated in foreign currencies. The Company enters into foreign currency
          forward contracts and foreign currency option contracts, which are derivative
          financial instruments, with major financial institutions to reduce the
          effect of
          these foreign currency risk exposures, primarily on U.S. dollar cash inflows
          resulting from the collection of intercompany receivables denominated in
          foreign
          currencies and to hedge anticipated sales in foreign currencies to foreign
          subsidiaries. Such transactions occur throughout the year and are probable,
          but
          not firmly committed. Foreign currency forward contracts are marked to
          market
          each accounting period, and the resulting gains or losses on these contracts
          are
          recorded in other (income) / expense of the Company’s consolidated statements of
          income. Gains and losses on these contracts are offset by changes in the
          U.S.
          dollar value of the foreign currency denominated assets, liabilities and
          transactions being hedged. The premiums paid on the foreign currency option
          contracts are recorded as assets and amortized over the life of the option.
          Other than the risk associated with the financial condition of the
          counterparties, the Company’s maximum exposure related to foreign currency
          options is limited to the premiums paid. The total premiums authorized
          to be
          paid in any fiscal year cannot exceed $1.0 million pursuant to the terms
          of the
          Foreign Currency Management Policy Statement approved by the Company’s Board of
          Directors in fiscal 2001. Gains and losses on purchased option contracts
          result
          from changes in intrinsic or time value. Both time value and intrinsic
          value
          gains and losses are recorded in shareholders’ equity (as a component of
          comprehensive income) until the period in which the underlying sale by
          the
          foreign subsidiary to an unrelated third party is recognized, at which
          point
          those deferred gains and losses are recognized in net sales. By their nature,
          all such contracts involve risk, including the risk of nonperformance by
          counterparties. Accordingly, losses relating to these contracts could have
          a
          material adverse effect upon the Company’s business, financial condition and
          results of operations. Based upon the Company’s knowledge of the financial
          condition of the counterparties to its existing foreign currency forward
          contracts, the Company believes that it does not have any material exposure
          to
          any individual counterparty. The Company’s policy prohibits the use of
          derivative instruments for speculative purposes. The Company expects to
          continue
          to utilize foreign currency forward contracts to manage its exposure, although
          there can be no assurance that the Company’s efforts in this regard will be
          successful. As of February 28, 2007, outstanding foreign currency forward
          contracts totaling the U.S. dollar equivalent of $33.2 million mature at
          various
          dates through November 2007. As of February 28, 2007, the Company had no
          foreign
          currency option contracts outstanding. The Company expects to continue
          to
          utilize foreign currency forward contracts and foreign currency option
          contracts
          to manage its exposure, although there can be no assurance that the Company’s
          efforts in this regard will be successful.
 
 The
          Company’s exposure to credit risk consists principally of trade receivables.
          Hospitals and international dealers account for a substantial portion of
          trade
          receivables and collateral is generally not required. The Company believes
          its
          risk associated with this concentration is limited due to its on-going
          credit
          review procedures.
  (31)
 ARROW
              INTERNATIONAL, INC.
 At
          February 28, 2007, the Company had foreign currency forward contracts to
          sell
          foreign currencies which mature at various dates through May 2007. The
          following
          table identifies foreign currency forward contracts to sell foreign currencies
          at February 28, 2007 and August 31, 2006:
 
 February
                    28, 2007
                
                August
                    31, 2006Notional
                  Amounts
                
                Fair
                    Market
                  Value
                
                Notional
                  Amounts
                
                Fair
                    Market
                  ValueForeign
                    currency: (U.S. Dollar Equivalents)Japanese
                    yen
                
                $
                833
                
                $
                847
                
                $
                2,177
                
                $
                2,146Canadian
                    dollar
                
                
                3,337
                
                
                3,344
                
                
                1,437
                
                
                1,448Euro
                
                
                9,646
                
                
                9,688
                
                
                7,694
                
                
                7,694Mexican
                    peso
                
                
                899
                
                
                892
                
                
                913
                
                
                909African
                    rand
                
                
                838
                
                
                826
                
                
                1,827
                
                
                1,793British
                    pound
                
                
                -
                
                
                -
                
                
                3,989
                
                
                4,007$
                15,553
                
                $
                15,597
                
                $
                18,037
                
                $
                17,997
 
 At
          February 28, 2007, the Company also had foreign currency forward contracts
          to
          buy foreign currencies which mature at various dates through November 2007.
          The
          following table identifies forward exchange contracts to buy foreign currencies
          at February 28, 2007 and August 31, 2006:
 
 February
                    28, 2007
                
                August
                    31, 2006Notional
                  Amounts
                
                Fair
                    Market
                  Value
                
                Notional
                  Amounts
                
                Fair
                    Market
                  ValueForeign
                    currency: (U.S. Dollar Equivalents)Czech
                    koruna
                
                $
                17,676
                
                $
                17,936
                
                $
                19,168
                
                $
                19,510
 
 From
          time
          to time, the Company purchases foreign currency option contracts to hedge
          anticipated sales in foreign currencies to foreign subsidiaries. The option
          premiums paid are recorded as assets and amortized over the life of the
          option.
          Other than the risk associated with the financial condition of the
          counterparties, the Company’s maximum exposure related to foreign currency
          options is limited to the premiums paid. During the six months ended February
          28, 2007 and 2006, the Company did not recognize any time value or intrinsic
          value losses against cost of sales. At February 28, 2007, the Company did
          not
          have any unrealized holding losses related to these foreign currency option
          contracts. The Company had no foreign currency option contracts outstanding
          at
          February 28, 2007 and August 31, 2006.
 
 Operations
          of the Company are also exposed, in the normal course of business, to
          fluctuations in interest rates. In fiscal 2005 and 2004, the Company entered
          into interest rate swaps to reduce the impact of its Japanese floating
          rate
          debt. These swap agreements allowed the Company to exchange floating rate
          for
          fixed rate interest payments over the life of the agreement. The differential
          was accrued as interest rates changed and was recorded as interest expense.
          The
          effect of these agreements was to limit interest rate exposure to between
          1.63%
          and 1.75% on $2.1 million of the Company’s revolving credit. In the first
          quarter of fiscal 2007, the Company terminated these interest rate swaps
          and
          recorded less than $0.1 million to other expense in recognition of the
          loss
          incurred to terminate the agreement. During the first half of both fiscal
          2007
          and 2006, the Company recorded less than $0.1 million of interest expense
          in
          connection with these swap agreements.
 
 Item
          4.
          Controls and Procedures
 
 **Evaluation
          of Disclosure Controls and Procedures**
 
 An
          evaluation was performed under the supervision and with the participation
          of the
          Company’s management, including its Chief Executive Officer, or CEO, and its
          Chief Financial Officer, or CFO, of the effectiveness of the Company’s
          disclosure controls and procedures (as defined in Rule 13a-15(e) under
          the
          Securities Exchange Act of 1934) as of February 28, 2007. Based on that
          evaluation, the Company’s management, including its CEO and CFO, have concluded
          that the Company’s disclosure controls and procedures are effective to ensure
          that information required to be disclosed in the reports that the Company
          files
          or submits under the Securities Exchange Act of 1934 is recorded, processed,
          summarized and reported within the time periods specified in the SEC’s rules and
          forms, and is accumulated and communicated to the Company’s management,
          including its CEO and CFO, to allow timely decisions regarding required
          disclosure.
  (32)
 ARROW
                INTERNATIONAL, INC.
 **Changes
          in Internal Control Over Financial Reporting**





There
      have
      been no changes in the Company’s internal control over financial reporting that
      occurred during the three months ended February 28, 2007 that have
      materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting.





PART
      II          OTHERINFORMATION




Item
              6.
            Exhibits





(a)
            Exhibits
              
              See Exhibit Index on page 35 for a list
                of the Exhibits filed as part of this
                report.




























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 ARROW
            INTERNATIONAL, INC.




SIGNATURE








Pursuant
      to the requirements 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.







ARROW
                INTERNATIONAL, INC.Date: April
              9, 2007
            By:
            /s/ Frederick
              J. HirtFrederick
              J. HirtChief
                Financial Officer and
              Senior
                Vice President of Finance
              (Principal
                Financial Officer and
              Chief
                Accounting Officer)








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 ARROW
            INTERNATIONAL, INC.




EXHIBITINDEX





Exhibit
                Number
            
            Description
                of Exhibit
            
            Method
                of Filing31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of the Chief Executive
                Officer
            
            Furnished
                herewith31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of the Chief Financial
                Officer
            
            Furnished
                herewith32.1
            
            Section
                1350 Certification of the Chief Executive Officer
            
            Furnished
                herewith32.2
            
            Section
                1350 Certification of the Chief Financial Officer
            
            Furnished
                herewith










(35)