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 May 31, 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
            (I.R.S.
                EmployerIncorporation
                or Organization)
            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 FilerX
              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 July 2, 2007Common
                Stock, No Par Value
            45,276,650
















ARROW
      INTERNATIONAL, INC.





Form10-Q
      Index











PagePART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements (Unaudited)Consolidated
                Balance Sheets at May 31,
                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
            10-19Item
                2.
            Management's
                Discussion and Analysis of
                FinancialCondition
                and Results of Operations
            20-31Item
                3.
            Quantitative
                and Qualitative Disclosures
                AboutMarket
                Risk
            32-33Item
                4.
            Controls
                and Procedures
            33PART
                II.
            OTHER
                INFORMATIONItem
                1A.
            Risk
                Factors
            33Item
                6.
            Exhibits
            34Signature
            
            35Exhibit
                Index
            
            36Certifications





(2)


PART
      I   FINANCIAL INFORMATION





Item1.
      Financial Statements





ARROW
      INTERNATIONAL, INC.


CONSOLIDATEDBALANCE
      SHEETS





(In
      thousands)


(Unaudited)





May
                31,
            
            August
                31,2007
            
            2006ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            160,174
            
            $
            148,576Marketable
                securities
            
            
            13,179
            
            
            9,783Accounts
                receivable, net
            
            
            104,809
            
            
            96,937Inventories
            
            
            113,954
            
            
            102,901Prepaid
                expenses and other
            
            
            9,552
            
            
            7,808Prepaid
                income taxes
            
            
            3,910
            
            
            9,506Deferred
                income taxes
            
            
            12,504
            
            
            13,709Total
                current assets
            
            
            418,082
            
            
            389,220Property,
                plant and equipment
            
            
            382,688
            
            
            362,148Less
                accumulated depreciation
            
            
            (201,621
            )
            
            (188,295
            )181,067
            
            
            173,853Goodwill
            
            
            42,901
            
            
            42,830Intangible
                assets, net
            
            
            40,860
            
            
            45,787Other
                assets
            
            
            10,132
            
            
            9,863Prepaid
                pension costs
            
            
            33,194
            
            
            35,884Total
                other assets
            
            
            127,087
            
            
            134,364Total
                assets
            
            $
            726,236
            
            $
            697,437











See
      accompanying notes to consolidated financial statements





Continued





(3)


ARROW
        INTERNATIONAL, INC.
 CONSOLIDATED
        BALANCE SHEETS
 
 (In
        thousands, except share amounts)
 (Unaudited)






May
                31,
              2007
            
            August
                31,
              2006LIABILITIESCurrent
                liabilities:Current
                maturities of long-term debt
            
            $
            973
            
            $
            995Notes
                payable and lines of credit
            
            
            62,748
            
            
            70,979Cash
                overdrafts
            
            
            1,174
            
            
            266Accounts
                payable
            
            
            19,046
            
            
            23,316Accrued
                liabilities
            
            
            21,355
            
            
            19,925Accrued
                dividends
            
            
            9,503
            
            
            7,635Accrued
                compensation
            
            
            17,395
            
            
            14,771Accrued
                income taxes
            
            
            6,210
            
            
            200Total
                current liabilities
            
            
            138,404
            
            
            138,087Accrued
                postretirement and pension benefit obligations
            
            
            20,174
            
            
            19,072Deferred
                income taxes
            
            
            11,359
            
            
            14,730Commitments
                and contingencies (Note 6)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
            
            
            45,050
            
            
            36,137Retained
                earnings
            
            
            502,441
            
            
            485,618Treasury
                stock at cost:
              7,701,369
                and 8,051,883 shares,
              respectively
            
            
            (50,714
            )
            
            (53,022
            )Accumulated
                other comprehensiveincome
            
            
            13,861
            
            
            11,154Total
                shareholders' equity
            
            
            556,299
            
            
            525,548Total
                liabilities andshareholders'
                equity
            
            $
            726,236
            
            $
            697,437








See
      accompanying notes to consolidated financial statements


(4)




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





For
                the three months endedMay
                31,
              2007
            
            May
                31,
              2006Net
                sales
            
            $
            130,496
            
            $
            122,257Cost
                of goods sold
            
            
            64,354
            
            
            63,023Gross
                profit
            
            
            66,142
            
            
            59,234Operating
                expenses:Research
                and development
            
            
            7,034
            
            
            7,199Selling,
                general and administrative
            
            
            35,797
            
            
            32,602Special
                charges
            
            
            789
            
            
            -Restructuring
                charge
            
            
            431
            
            
            13044,051
            
            
            39,931Operating
                income
            
            
            22,091
            
            
            19,303Other
                (income) expenses:Interest
                expense, net of amount capitalized
            
            
            621
            
            
            216Interest
                income
            
            
            (1,908
            )
            
            (1,128
            )Other,
                net
            
            
            708
            
            
            (219
            )Other
                (income) expenses, net
            
            
            (579
            )
            
            (1,131
            )Income
                before income taxes
            
            
            22,670
            
            
            20,434Provision
                for income taxes
            
            
            8,162
            
            
            6,535Net
                income
            
            $
            14,508
            
            $
            13,899Basic
                earnings per common share
            
            $
            0.32
            
            $
            0.31Diluted
                earnings per common share
            
            $
            0.31
            
            $
            0.31Cash
                dividends per common share
            
            $
            0.21
            
            $
            0.17Weighted
                average shares outstanding
              used
                in computing basic earnings
              per
                common share
            
            
            45,168,649
            
            
            44,810,327Weighted
                average shares outstanding
              used
                in computing diluted earnings
              per
                common share
            
            
            45,691,824
            
            
            45,281,425








See
      accompanying notes to consolidated financial statements


(5)




ARROW
        INTERNATIONAL, INC.
 CONSOLIDATED
        STATEMENTS OF INCOME
 
 (In
        thousands, except share and per share amounts)
 (Unaudited)


For
                the nine months endedMay
                31,
              2007
            
            May
                31,
              2006Net
                sales
            
            $
            378,818
            
            $
            352,405Cost
                of goods sold
            
            
            187,562
            
            
            180,225Gross
                profit
            
            
            191,256
            
            
            172,180Operating
                expenses:Research
                and development
            
            
            20,384
            
            
            20,708Selling,
                general and administrative
            
            
            103,700
            
            
            97,081Special
                charges
            
            
            1,090
            
            
            -Restructuring
                charge
            
            
            714
            
            
            (126
            )125,888
            
            
            117,663Operating
                income
            
            
            65,368
            
            
            54,517Other
                (income) expenses:Interest
                expense, net of amount capitalized
            
            
            1,744
            
            
            585Interest
                income
            
            
            (5,360
            )
            
            (2,644
            )Other,
                net
            
            
            1,085
            
            
            (101
            )Other
                (income) expenses, net
            
            
            (2,531
            )
            
            (2,160
            )Income
                before income taxes
            
            
            67,899
            
            
            56,677Provision
                for income taxes
            
            
            24,444
            
            
            18,314Net
                income
            
            $
            43,455
            
            $
            38,363Basic
                earnings per common share
            
            $
            0.96
            
            $
            0.86Diluted
                earnings per common share
            
            $
            0.95
            
            $
            0.85Cash
                dividends per common share
            
            $
            0.59
            
            $
            0.49Weighted
                average shares outstanding
              used
                in computing basic earnings
              per
                common share
            
            
            45,070,743
            
            
            44,729,030Weighted
                average shares outstanding
              used
                in computing diluted earnings
              per
                common share
            
            
            45,608,472
            
            
            45,241,937








See
      accompanying notes to consolidated financial statements








(6)






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





For
                      the nine months endedMay
                      31,
                    2007
                  
                  May
                      31,
                    2006Cash
                      flows from operating activities:Net
                      income
                  
                  $
                  43,455
                  
                  $
                  38,363Adjustments
                      to reconcile net income to net cash provided byoperating
                      activities:Depreciation
                  
                  
                  15,557
                  
                  
                  15,310Amortization
                  
                  
                  5,676
                  
                  
                  4,525401(k)
                      plan stock contribution
                  
                  
                  739
                  
                  
                  698Deferred
                      income taxes
                  
                  
                  (2,257
                  )
                  
                  392Loss
                      on sale of property, plant and equipment
                  
                  
                  61
                  
                  
                  266Excess
                      tax benefit from exercise of stock options
                  
                  
                  (758
                  )
                  
                  (632
                  )Stock
                      compensation charge
                  
                  
                  2,574
                  
                  
                  2,853Increase
                      (decrease) in provision for postretirement and pensionbenefit
                      obligation
                  
                  
                  1,110
                  
                  
                  (2,271
                  )Decrease
                      (increase) in prepaid pension costs
                  
                  
                  2,690
                  
                  
                  (2,281
                  )Changes
                      in operating assets and liabilities, net of effects from
                      acquisitionsAccounts
                      receivable, net
                  
                  
                  (5,032
                  )
                  
                  1,464Inventories
                  
                  
                  (10,222
                  )
                  
                  (3,136
                  )Prepaid
                      expenses and other
                  
                  
                  (2,019
                  )
                  
                  (3,335
                  )Prepaid
                      income taxes
                  
                  
                  5,597
                  
                  
                  -Accounts
                      payable and accrued liabilities
                  
                  
                  (949
                  )
                  
                  (5,552
                  )Accrued
                      compensation
                  
                  
                  2,458
                  
                  
                  568Accrued
                      income taxes
                  
                  
                  6,756
                  
                  
                  (901
                  )Total
                      adjustments
                  
                  
                  21,981
                  
                  
                  7,968Net
                      cash provided by operating activities
                  
                  
                  65,436
                  
                  
                  46,331Cash
                      flows from investing activities:Capital
                      expenditures
                  
                  
                  (23,681
                  )
                  
                  (30,784
                  )Purchases
                      of marketable securities
                  
                  
                  (41,643
                  )
                  
                  (9,140
                  )Sales
                      and maturities of marketable securities
                  
                  
                  38,247
                  
                  
                  6,640Proceeds
                      from sale of property, plant and equipment
                  
                  
                  938
                  
                  
                  1,880(Increase)
                      decrease in intangible and other assets
                  
                  
                  (895
                  )
                  
                  (47
                  )Cash
                      paid for business acquired
                  
                  
                  -
                  
                  
                  (9,531
                  )Net
                      cash (used) in investing activities
                  
                  
                  (27,034
                  )
                  
                  (40,982
                  )Cash
                      flows from financing activities:(Decrease)
                      increase in notes payable and lines of credit
                  
                  
                  (11,119
                  )
                  
                  21,348Reduction
                      of current maturities of long-term debt
                  
                  
                  (22
                  )
                  
                  (53
                  )Increase
                      in cash overdrafts
                  
                  
                  908
                  
                  
                  511Excess
                      tax benefit from exercise of stock options
                  
                  
                  758
                  
                  
                  632Dividends
                      paid
                  
                  
                  (24,764
                  )
                  
                  (21,007
                  )Proceeds
                      from stock options exercised
                  
                  
                  6,457
                  
                  
                  3,864Net
                      cash (used in) provided by financing activities
                  
                  
                  (27,782
                  )
                  
                  5,295Effects
                      of exchange rate changes on cash and cash equivalents
                  
                  
                  978
                  
                  
                  828Net
                      change in cash and cash equivalents
                  
                  
                  11,598
                  
                  
                  11,472Cash
                      and cash equivalents at beginning of year
                  
                  
                  148,576
                  
                  
                  119,326Cash
                      and cash equivalents at end of period
                  
                  $
                  160,174
                  
                  $
                  130,798





See
      accompanying notes to consolidated financial statements


Continued


(7)




ARROW
        INTERNATIONAL, INC.
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS, continued
 (in
        thousands)
 (unaudited)
  For
                    the nine months endedMay
                    31,
                  2007
                
                May
                    31,
                  2006Business
                    acquisitions:Estimated
                    fair value of assets acquired
                
                $
                -
                
                $
                10,632Accrual
                    for additional payments owed
                
                
                -
                
                
                1,101Cash
                    paid for assets
                
                $
                -
                
                $
                9,531Cash
                    paid for business acquired:Working
                    capital
                
                $
                -
                
                $
                1,875Intangible
                    assets
                
                
                -
                
                
                8,757Accrual
                    for additional payments owned
                
                
                -
                
                
                (1,101
                )-
                
                $
                9,531





For
                  the nine months endedMay
                  31,
                2007
              
              May
                  31,
                2006Supplemental
                  schedule of noncash investing and financing activities:Dividends
                  declared but not paid
              
              $
              9,503
              
              $
              7,623(Decrease)
                  in property, plant and
                equipment
                  in accounts payable
              
              $
              (2,644
              )
              $
              (240
              )Intangible
                  assets acquired by
                issuing
                  treasury stock
              
              $
              725
              
              $
              -










See
      accompanying notes to consolidated financial statements


(8)


ARROW
        INTERNATIONAL, INC.
 CONSOLIDATEDSTATEMENTS
        OF COMPREHENSIVE INCOME
        (EXPENSE)
 (in
        thousands)
 (unaudited)




For
                the three months endedMay
                31,
              2007
            
            May
                31,
              2006Net
                income
            
            $
            14,508
            
            $
            13,899Other
                comprehensive income (expense):Foreign
                currency translation adjustments
            
            
            1,524
            
            
            3,236Other
                comprehensive income (expense)
            
            
            1,524
            
            
            3,236Total
                comprehensive income
            
            $
            16,032
            
            $
            17,135












For
                the nine months endedMay
                31,
              2007
            
            May
                31,
              2006Net
                income
            
            $
            43,455
            
            $
            38,363Other
                comprehensive income (expense):Foreign
                currency translation adjustments
            
            
            2,707
            
            
            3,087Other
                comprehensive income (expense)
            
            
            2,707
            
            
            3,087Total
                comprehensive income
            
            $
            46,162
            
            $
            41,450








See
      accompanying notes to consolidated financial statements











(9)




ARROW
        INTERNATIONAL, INC.
 
 Notesto
        Consolidated Financial Statements
 (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 (the “2006 Form 10-K”).





Note
      2 -
      Accounting Policies:





The
      Company has disclosed in Note 1 to its consolidated financial statements
      included in the 2006 Form 10-K 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 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 -
      Special Charges:





During
      the three and nine months ended May 31, 2007, the Company incurred special
      charges of $789 and $1,090, respectively, for expenses primarily related to
      its
      previously announced decision to review strategic alternatives aimed at
      enhancing shareholder value. The Company anticipates additional charges in
      the
      fourth quarter of fiscal 2007 related to the strategic alternatives review
      process and severance costs for former executives.





Note
      4 -
      Stock Option Plans:





During
      the three months ended May 31, 2007 and May 31, 2006, the Company did not grant
      any options to 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 nine months ended May 31, 2007 and May 31, 2006, the Company granted 51,000
      and 1,073,500 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 nine months
      ended May 31, 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 nine 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 May 31, 2007 and May 31, 2006, the Company did not grant
      any options 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. During the
      nine months ended May 31, 2007, the Company did not grant any options to its
      directors to purchase shares of the Company’s common stock. During the nine
      months ended May 31, 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
      nine months ended May 31, 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 nine month periods ended May 31, 2007 is
      summarized in the tables below:





For
                the three months endedMay
                31, 2007Shares
            
            Weighted
              Average
              Exercise
              Price
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at March 1
            
            2,943,519
            
            $25.62Granted
            
            -
            
            -Exercised
            
            (110,892)
            
            $21.03Terminated
            
            (13,825)
            
            $29.49Outstanding
                at May 31
            
            2,818,802
            
            $25.74
            
            $
                16,492Exercisable
                at May 31
            
            1,635,634
            
            $23.25
            
            $   8,507





The
      intrinsic value of the stock options exercised during the three months ended
      May
      31, 2007 was $553.





For
                the nine months endedMay
                31, 2007Shares
            
            Weighted
              Average
              Exercise
              Price
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at September 1
            
            3,101,881
            
            $25.18Granted
            
            51,000
            
            $33.74Exercised
            
            (306,754)
            
            $21.05Terminated
            
            (27,325)
            
            $29.87Outstanding
                at May 31
            
            2,818,802
            
            $25.74
            
            $
                16,492Exercisable
                at May 31
            
            1,635,634
            
            $23.25
            
            $   8,507





The
      intrinsic value of the stock options exercised during the nine months ended
      May
      31, 2007 was $1,511.


(11)




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


As
      of May
      31, 2007, there was $6,641 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 four years. The total fair value of shares underlying stock options
      which vested during the three months ended May 31, 2007 and 2006 was $40 and
      $110, respectively. The total fair value of shares underlying stock options
      which vested during the nine months ended May 31, 2007 and 2006 was $3,754
      and
      $2,250, respectively.





The
      per
      share weighted average value of stock options granted in the first nine 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 assumptions:





May
                31,
              2007
            
            May
                31,
              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
      5 -
      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. 157, “Fair Value Measurements” in September 2006. This statement
      establishes a framework for measuring fair value in generally accepted
      accounting principles and expands disclosures about fair value measurements.
      This statement applies under other accounting pronouncements that require or
      permit fair value measurements; however, this statement does not require any
      new
      fair value measurements. The provisions of SFAS No. 157 will be effective for
      fiscal years beginning after November 15, 2007 and for interim periods within
      those fiscal years. The Company does not expect that the adoption of this
      statement will have a material impact 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 $25,562 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.





Note
      6 -
      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.


(12)




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


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.





On
      June
      15, 2007, a judgment was awarded to the Company and The Johns Hopkins University
      in their patent infringement lawsuit against Datascope Corp. of Montvale, New
      Jersey in the United States District Court in Baltimore, Maryland. Johns Hopkins
      and the Company had brought suit against Datascope for infringing patents
      relating to the Arrow-TrerotolaTM Percutaneous Thrombolytic Device (PTD®), which
      is used to mechanically declot native arterio-venous fistulae and synthetic
      hemodialysis grafts. The Baltimore jury found that the Datascope ProLumen device
      infringed three patents relating to the PTD that are owned by Johns Hopkins
      and
      licensed by the Company, and upheld their validity. The Company manufactures
      and
      sells the PTD, which was invented by Dr. Scott Trerotola while working at Johns
      Hopkins University. The jury also awarded damages amounting to an 18% royalty
      on
      Datascope’s sales of the infringing device. On June 28 and 29, 2007, Datascope
      filed post-trial motions to vacate the jury’s verdict, which appeal is scheduled
      to be reviewed by the court on July 25, 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
      7 -
      Inventories:





Inventories
      are summarized as follows:




May
                31, 2007
            
            August
                31, 2006Finished
                goods
            
            $
            49,086
            
            $
            39,528Semi-finished
                goods / work-in-process
            
            
            36,300
            
            
            34,178Raw
                materials
            
            
            28,568
            
            
            29,195$
            113,954
            
            $
            102,901





Note
      8 -
      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
              May
                31, 2007
            
            Quarter
                ended
              May
                31, 2006Critical
              Care
            
            Cardiac
              Care
            
            Critical
              Care
            
            Cardiac
              CareSales
                to external
              customers
            
            $
                111,500
            
            $
                19,000
            
            $
                104,200
            
            $
                18,100





Nine
                months ended
              May
                31, 2007
            
            Nine
                months ended
              May
                31, 2006Critical
              Care
            
            Cardiac
              Care
            
            Critical
              Care
            
            Cardiac
              CareSales
                to external
              customers
            
            $
                323,800
            
            $
                55,000
            
            $
                300,500
            
            $
                51,900





The
      following tables provide quarterly information about geographic
      areas:





Quarter
                ended
              May
                31, 2007United
                States
            
            Europe
            
            Asia
                and International
            
            ConsolidatedSales
                to
              unaffiliated
              customers
            
            $
                77,300
            
            $
                30,000
            
            $
                23,200
            
            $
                130,500





Quarter
                ended
              May
                31, 2006United
                States
            
            Europe
            
            Asia
                and International
            
            ConsolidatedSales
                to
              unaffiliated
              customers
            
            $
                73,500
            
            $
                24,600
            
            $
                24,200
            
            $
                122,300





The
      following tables provide year-to-date information about geographic
      areas:





Nine
                months ended
              May
                31, 2007United
                States
            
            Europe
            
            Asia
                and International
            
            ConsolidatedSales
                to
              unaffiliated
              customers
            
            $
                225,800
            
            $
                83,100
            
            $
                69,900
            
            $
                378,800





Nine
                months ended
              May
                31, 2006United
                States
            
            Europe
            
            Asia
                and International
            
            ConsolidatedSales
                to
              unaffiliated
              customers
            
            $
                215,500
            
            $
                67,400
            
            $
                69,500
            
            $
                352,400





Note
      9 -
      Business Acquisitions:





On
      April
      3, 2006, the Company purchased certain assets of one of its distributors in
      the
      United Kingdom (UK) and Ireland, Kimal PLC, for a total purchase price of
      approximately $10,618. Kimal had been one of the Company’s flagship distributors
      in Europe for more than 27 years and continues to distribute the Company’s
      products in the Middle East region. The asset purchase agreement includes the
      purchase of customer lists, distributorship rights, as well as the inventory
      and
      specified contracts associated with Kimal’s sale of the Company’s products in
      the UK and Ireland. In the third quarter of fiscal 2006,


(14)


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




the
      Company began selling directly in the UK through its subsidiary, Arrow
      International UK Limited, and selling in Ireland through a distributor
      previously utilized by Kimal. As of May 31, 2007, pursuant to the asset purchase
      agreement, the Company had paid in cash the entire $10,618 purchase price.
      The
      purchase price for this acquisition did not exceed the estimated fair value
      of
      the net assets acquired and, therefore, no goodwill has been recorded by the
      Company. Intangible assets acquired of $8,776, consisting of customer lists
      and
      distributorship rights, are being amortized over five years based on the
      anticipated period over which the Company expects to benefit from the
      transaction. Included in the third quarter of fiscal 2006 was a $996 charge
      to
      cost of goods sold, or $672 against net income, for the step-up of inventory
      purchased from Kimal. The results of operations of this business are included
      in
      the Company’s consolidated financial statements from the date of acquisition.
      The purchase price for this acquisition was allocated as follows:





Inventories
            
            $
            1,842Intangible
                assets
            
            
            8,776Total
                purchase price
            
            $
            10,618





Pro
      forma
      amounts are not presented as the acquisitions described above did not have
      any
      material effect on the Company’s results of operations or financial condition
      for any of the years presented.





Note
      10 -
      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
      May 31, 2007 and May 31, 2006, the Company’s total estimated product warranty
      obligation was $889 and $665, 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 nine months
      ended
      May 31, 2007 and May 31, 2006 is as follows:






For
                the three months endedMay
                31,
              2007
            
            May
                31,
              2006Balance
                as of March 1
            
            $
            800
            
            $
            574Additional
                warranties issued
            
            
            432
            
            
            404Expirations
                / Expenditures
            
            
            (343
            )
            
            (313
            )Balance
                as of May 31
            
            $
            889
            
            $
            665









For
                the nine months endedMay
                31,
              2007
            
            May
                31,
              2006Balance
                as of September 1
            
            $
            719
            
            $
            660Additional
                warranties issued
            
            
            1,162
            
            
            962Expirations
                / Expenditures
            
            
            (992
            )
            
            (957
            )Balance
                as of May 31
            
            $
            889
            
            $
            665





Note
      11 -
      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.


(15)






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





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.





The
      following summarizes the components of the net periodic benefit costs for the
      three and nine months ended May
      31,
      2007 and
      2006:





Pension
                Benefits
            
            Other
                BenefitsFor
                the three months ended
            
            For
                the three months endedMay
                31,
              2007
            
            May
                31,
              2006
            
            May
                31,
              2007
            
            May
                31,
              2006Service
                cost
            
            $
            1,241
            
            $
            1,276
            
            $
            151
            
            $
            151Interest
                cost
            
            
            1,593
            
            
            1,436
            
            
            331
            
            
            289Expected
                return on plan
              assets
            
            
            (2,232
            )
            
            (2,128
            )
            
            -
            
            
            -Amortization
                of prior
              service
                costs
            
            
            340
            
            
            290
            
            
            (3
            )
            
            (2
            )Amortization
                of transition
              obligation
                (asset)
            
            
            (4
            )
            
            (22
            )
            
            12
            
            
            13Amortization
                of net
              actuarial
                loss (gain)
            
            
            205
            
            
            514
            
            
            127
            
            
            154Net
                periodic cost
            
            $
            1,143
            
            $
            1,366
            
            $
            618
            
            $
            605





Pension
                Benefits
            
            Other
                BenefitsFor
                the nine months ended
            
            For
                the nine months endedMay
                31,
              2007
            
            May
                31,
              2006
            
            May
                31,
              2007
            
            May
                31,
              2006Service
                cost
            
            $
            3,822
            
            $
            3,609
            
            $
            450
            
            $
            450Interest
                cost
            
            
            4,947
            
            
            4,263
            
            
            1,002
            
            
            863Expected
                return on plan
              assets
            
            
            (6,949
            )
            
            (6,225
            )
            
            -
            
            
            -Amortization
                of prior
              service
                costs
            
            
            1,028
            
            
            859
            
            
            (9
            )
            
            (8
            )Amortization
                of transition
              obligation
                (asset)
            
            
            (12
            )
            
            (70
            )
            
            37
            
            
            36Amortization
                of net
              actuarial
                loss (gain)
            
            
            612
            
            
            1,659
            
            
            374
            
            
            473Net
                periodic cost
            
            $
            3,448
            
            $
            4,095
            
            $
            1,854
            
            $
            1,814





(16)




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


Note
      12 -
      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 nine months 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:


Actual
                Costs ExpensedEstimate
                of
              Total
              Expected
              Restructuring
              Charges
            
            As
                of
              August
                31,
              2006
            
            For
                the Six
              Months
              Ended
              February
                28,
              2007
            
            For
                the
              Three
              Months
              Ended
              May31,
              2007
            
            Total
                to Date
            
            Costs
              expensedbut
              not
                yet paid
              as
                of May31,
              2007Severance
                and relatedexpenses
            
            $
            868
            
            $
            618
            
            $
            47
            
            $
            39
            
            $
            704
            
            $
            337Lease
                termination costs
            
            
            607
            
            
            581
            
            
            -
            
            
            -
            
            
            581
            
            
            290Property,
                plant andequipment
                carryingcost
                and costs ofdisposal
            
            
            120
            
            
            59
            
            
            4
            
            
            1
            
            
            64
            
            
            -Other,
                includingequipment
                andinventory
                movingcosts,
                employeerelocation
                costs, andexternal
                consultingfees
            
            
            413
            
            
            299
            
            
            35
            
            
            53
            
            
            387
            
            
            -Total
                restructuringcharges
            
            $
            2,008
            
            $
            1,557
            
            $
            86
            
            $
            93
            
            $
            1,736
            
            $
            627





(17)




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





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 35 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
                of
              Total
              Expected
              Restructuring
              Charges
            
            For
                the Six
              Months
              Ended
              February28,
              2007
            
            For
                the
              Three
              Months
              Ended
              May31,
              2007
            
            Total
                to Date
            
            Costs
              expensed
                but
              not
                yet paid
              as
                of
                May31,
              2007Severance
                and relatedexpenses
            
            $
            848
            
            $
            197
            
            $
            305
            
            $
            502
            
            $
            478Lease
                termination costsProperty,
                plant andequipment
                carryingcost
                and costs ofdisposal
            
            
            200
            
            
            -
            
            
            -
            
            
            -
            
            
            -Other,
                includingequipment
                andinventory
                movingcosts,
                employeerelocation
                costs, andexternal
                consultingfees
            
            
            410
            
            
            -
            
            
            33
            
            
            33
            
            
            33Total
                restructuringcharges
            
            $
            1,458
            
            $
            197
            
            $
            338
            
            $
            535
            
            $
            510





Note
      13 -
      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 nine months ended May 31, 2007 and 2006:






For
                the three
              months
                ended
              May
                31, 2007
            
            For
                the three
              months
                ended
              May
                31, 2006Net
                income
            
            $
            14,508
            
            $
            13,899Weighted
                average common shares outstanding
            
            
            45,168,649
            
            
            44,810,327Incremental
                common shares issuable: stock optionsand
                awards
            
            
            523,175
            
            
            471,098Weighted
                average common shares outstandingassuming
                dilution
            
            
            45,691,824
            
            
            45,281,425Basic
                earnings per common share
            
            $
            0.32
            
            $
            0.31Diluted
                earnings per common share
            
            $
            0.31
            
            $
            0.31





(18)




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






For
                the
              nine
                months ended
              May
                31, 2007
            
            For
                the
              nine
                months ended
              May
                31, 2006Net
                income
            
            $
            43,455
            
            $
            38,363Weighted
                average common shares outstanding
            
            
            45,070,743
            
            
            44,729,030Incremental
                common shares issuable: stock optionsand
                awards
            
            
            537,729
            
            
            512,907Weighted
                average common shares outstandingassuming
                dilution
            
            
            45,608,472
            
            
            45,241,937Basic
                earnings per common share
            
            $
            0.96
            
            $
            0.86Diluted
                earnings per common share
            
            $
            0.95
            
            $
            0.85





Stock
      options outstanding to purchase 26,000 and 20,000 shares of common stock for
      the
      three months ended May 31, 2007 and 2006, respectively, and 19,619 and 173,806
      shares for the nine months ended May 31, 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.






(19)




Item2.
              Management's
                  Discussion and Analysis of Financial Condition and Resultsof
                  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 nine months
        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. In March 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
        nine months 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.
 
 **Changes
        in Company Management**
 
 On
        May
        31, 2007, Carl G. Anderson, Jr. was terminated as President and Chief Executive
        Officer of the Company and removed as Chairman of the Board of Directors
        of the
        Company. The Board of Directors of the Company stated that they had lost
        confidence in Mr. Anderson’s ability to lead the Company.
  (20)
 ARROW
            INTERNATIONAL, INC.
  Effective
        May 31, 2007, Philip B. Fleck was appointed interim president and Chief
        Executive Officer. Mr. Fleck is 63 years old. Mr. Fleck was employed by the
        Company from 1975 until his retirement in 2005. Mr. Fleck served as President
        and Chief Operating Officer of the Company from January 1999 until January
        2005,
        as Vice President of Research and Manufacturing of the Company from 1994
        to
        January 1999, as Vice President of Research and Engineering of the Company
        from
        1986 to 1994, and as an engineering manager with the Company from 1975 to
        1986.
 
 On
        May
        31, 2007, R. James Macaleer was elected non-executive Chairman of the Board
        of
        Directors of the Company. Mr. Macaleer is also the lead director of the Company
        and the chair of the Board’s Compensation and Human Resources Committee. In
        addition, John H. Broadbent, Jr. was elected Vice Chairman of the Board of
        Directors of the Company. Mr. Broadbent is also chair of the Board’s Audit
        Committee.
 
 On
        May
        31, 2007, James T. Hatlan was terminated as Senior Vice President of the
        Company.
 
 **Exploration
        of Strategic Alternatives**
 
 On
        May 9,
        2007, the Company announced that its Board of Directors formed a special
        committee of the Board (the “Special Committee”) comprised of independent
        directors, who are John H. Broadbent, T. Jerome Holleran, R. James Macaleer,
        Marlin Miller, Jr. and Raymond Neag, to explore potential strategic alternatives
        aimed at enhancing shareholder value. Mr. Miller serves as Chairman of the
        Special Committee, which has hired the investment banking firm of Lazard
        Frères
& Co LLC (“Lazard”) to provide financial advisory services and Dechert LLP
        to provide legal services to it in connection with its review.
 
 There
        can
        be no assurance regarding the timing of, or whether the Board will elect
        to
        pursue, any of the strategic alternatives it may consider, or that any such
        alternatives will result in changes to the Company’s plans or will be
        consummated. The Company does not intend to provide updates or make any further
        comment until the outcome of the process is determined or until there are
        significant developments. **** See
        Part
        II, Item 1A. Risk Factors.
 
 **Results
        of Operations**
 
 **Three
        Months Ended May 31, 2007 Compared to Three Months Ended May 31,
        2006**
 
 *Net
        Sales*
 Net
        sales
        for the three months ended May 31, 2007 increased by $8.2 million, or 6.7%,
        to
        $130.5 million from $122.3 million in the same period of last year due primarily
        to an increase in critical care and cardiac care product sales, increased
        sales
        of $0.6 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
        third 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 $1.3 million. The following is a summary of the Company’s sales by
        product platform:
 
 Sales
                  by Product Platform
                ($
                  in millions)
              Quarter
                  endedMay
                  31,
                2007
              
              May
                  31,
                2006Central
                  Venous Catheters
              $
              66.9
              
              $
              63.2Specialty
                  Catheters
              
              42.7
              
              
              39.2Non-Arrow
                  distributed products
              
              1.9
              
              
              1.8Subtotal
                  Critical Care
              
              111.5
              
              
              104.2Cardiac
                  Care
              
              19.0
              
              
              18.1Total
              $
              130.5
              
              $
              122.3
 
 Sales
        of
        critical care products increased by 7.0% to $111.5 million in the third quarter
        of fiscal 2007 from $104.2 million in the comparable prior year period due
        primarily to increased sales of central venous and specialty catheters. Sales
        revenue from central venous catheters increased in the third 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 third quarter of fiscal 2007 due
        primarily to improved sales of arterial products, epidural and peripheral
        nerve
        block products. Sales of cardiac care products increased by 5.0% to $19.0
        million in the third quarter of fiscal 2007 from $18.1 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. Total Company U.S. sales
        increased by 5.2% to $77.3 million from $73.5 million in the comparable prior
        year period due primarily to increased sales of specialty and central venous
        catheters. International sales increased by 9.0% to $53.2 million in the
        third
        quarter of fiscal 2007 from $48.8 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 $0.6 million by the Company’s United
        Kingdom subsidiary, as noted above, and by $1.3 million due to the effect
        of
        foreign currency exchange rates, also as noted above. International sales
        represented 40.8% of net sales in the third quarter of fiscal 2007 compared
        to
        39.9% in the same prior year period.
  (21)
 ARROW
            INTERNATIONAL, INC.
 
 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 38% of total Company
        sales
        in the third quarter of fiscal 2007 from --39% in the comparable prior year
        period. The ARROWg+ard® conversion percentages for the U.S. market increased to
        66% in the third quarter of fiscal 2007 from 64% in the comparable prior
        year
        period. The U.S. market ARROWg+ard® conversion percentage for the third quarter
        of fiscal 2006 has been restated to correct an error in the previously reported
        percentage calculation.
 
 *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 11.8% to $66.2 million in the three months ended May
        31,
        2007 from $59.2 million in the same period of fiscal 2006. Gross margin
        increased to 50.7% during the three months ended May 31, 2007 from 48.5%
        in the
        comparable prior year period. The increase in gross margin was due primarily
        to
        (1) $1.0 million of higher cost of sales in the third quarter of fiscal 2006
        related to the sale of inventories of products acquired as part of the Company’s
        purchase of certain assets of Kimal in April 2006 due to the step-up in their
        cost basis required for business acquisition accounting, (2) $0.6 million
        of
        additional gross profit in the third quarter of fiscal 2007 generated in
        the
        United Kingdom as a result of direct selling in this region following the
        Company’s acquisition of Kimal, (3) lower manufacturing costs as a result of
        improved manufacturing processes, and (4) a favorable foreign exchange impact,
        but was offset in part by changes in product and geographic sales mix as
        products with lower gross margins represented a larger percentage of
        sales.
  *Research
        and Development*
 Research
        and development expenses decreased by 2.8% to $7.0 million in the three months
        ended May 31, 2007 from $7.2 million in the comparable prior year period.
        Research and development expenses in the third quarter of fiscal 2007 were
        impacted by the Company’s $0.5 million write off of its remaining investment in
        the CorAide program, the Company’s joint research and development program with
        The Cleveland Clinic Foundation, as further discussed below, offset by a
        $0.5
        million decrease in research and development spending on the CorAide program.
        As
        a percentage of net sales, these expenses were 5.4% in the third quarter
        of
        fiscal 2007 compared to 5.9% 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. The Company continues
        to
        wind down its activities and limit its expenditures in connection with this
        program while providing ongoing support for one patient 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, as well
        as the potential return from using these resources to advance other research
        and
        development related to its core product areas.
 
 As
        a
        result of this decision, the Company wrote off in the third quarter of fiscal
        2007 its remaining investment in the CorAide program of $0.5 million, which
        was
        charged to research and development expense. The write off consisted primarily
        of equipment that did not have an alternative future use and was recorded
        in
        accordance with the provisions of SFAS No. 144 “Accounting for the Impairment or
        Disposal of Long-Lived Assets.”
 
 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 third quarter of fiscal 2007.
  (22)
 ARROW
            INTERNATIONAL, INC.
 
 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.
 
 *Selling,
        General and Administrative*
 Selling,
        general and administrative expenses increased by 9.8% to $35.8 million during
        the three months ended May 31, 2007 from $32.6 million in the comparable
        prior
        year period and, as a percentage of net sales, increased to 27.4% in the
        three
        months ended May 31, 2007 from 26.7% in the comparable period of fiscal 2006.
        This increase was due primarily to increased expenses of (1) $0.9 million
        related to legal costs, including costs associated with the Company’s patent
        infringement lawsuits, (2) $0.6 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) $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, (4) $0.5
        million resulting from the weakness of the U.S. dollar relative to currencies
        of
        countries in which the Company operates direct sales subsidiaries, (5) $0.3
        million due to increased expenses related to personnel, and (6) $0.3 million
        for
        other matters that were individually not material.
 
 *Special
        Charges*
 During
        the three months ended May 31, 2007, the Company incurred special charges
        of
        $0.8 million for expenses related to its previously announced decision to
        review
        strategic alternatives aimed at enhancing shareholder value. The Company
        anticipates additional charges in the fourth quarter of fiscal 2007 related
        to
        the strategic alternatives review process and severance costs for former
        executives.
 
 *Restructuring
        Charges*
 The
        Company recorded $0.4 million of restructuring expense in the third quarter
        of
        fiscal 2007 compared to $0.1 million in the third quarter of fiscal 2006.
        The
        restructuring expenses in the third quarter of fiscal 2007 related primarily
        to
        accrued severance costs associated with the Company’s previously reported
        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 is expected to
        simplify manufacturing processes and reduce manufacturing costs for the
        intra-aortic balloon catheter. Severance payments relate to 35 employees
        primarily in manufacturing at the Everett facility. The Company expects this
        transfer to be completed during the first six months of fiscal 2008 at an
        estimated total cost of $1.5 million. The restructuring expense in the third
        quarter of fiscal 2006 related primarily to accrued severance payments
        associated with the Company’s consolidation of operations at its Winston-Salem,
        North Carolina and San Antonio, Texas facilities into other existing
        manufacturing facilities, and severance, lease termination and other costs
        associated with the relocation of its European Distribution Center from Weesp,
        Netherlands to a more centralized European location in the Limberg region
        of
        Belgium. See “-Liquidity and Capital Resources - Investing Activities -
        Multi-Year Capital Investment Plan.”
 
 *Operating
        Income*
 Principally
        due to the above factors, operating income increased in the third quarter
        of
        fiscal 2007 by 14.5% to $22.1 million from $19.3 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 $0.6 million of income in the third quarter
        of
        fiscal 2007 compared to $1.1 million of income in the same prior year period.
        This decrease was due primarily to higher interest expense related to the
        Company’s borrowings under its credit facilities and other sources of financing,
        and losses related to an unhedged foreign currency position resulting from
        a
        decision to delay the refinancing of short-term Czech Koruna-denominated
        indebtedness, offset in part by the Company earning a higher amount of interest
        in the third quarter of fiscal 2007 on its investments of cash
        balances.
  *Income
        Before Income Taxes*
 As
        a
        result of the factors discussed above, income before income taxes increased
        during the third quarter of fiscal 2007 by 11.3% to $22.7 million, or 17.4%
        of
        net sales, from $20.4 million, or 16.7% of net sales, in the comparable prior
        year period.
 
 *Effective
        Tax Rate*
 For
        the
        third quarter of fiscal 2007, the Company’s effective income tax rate increased
        to 36.0% from 32.0% in the comparable prior year period, or 400 basis points,
        due to a reduction in export-related tax deductions and the elimination of
        the
        Czech Republic tax holiday, as further discussed below, representing an increase
        of approximately 350 basis points and increased state income taxes, representing
        an increase of approximately 100 basis points. These increases were offset
        in
        part by more favorable than expected fiscal year 2006 research and development
        tax credits identified when the Company completed its analysis of these credits
        during the third quarter of fiscal 2007, representing a decrease of
        approximately 50 basis points. The Company currently anticipates its estimated
        effective tax rate for the full fiscal 2007 to be 36.0%.
  (23)
 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 2007, and the phase in of the new manufacturing deduction benefit
        from fiscal 2007 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 third 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 third quarter of fiscal 2007 increased by 4.3% to $14.5 million
        from $13.9 million in the comparable fiscal 2006 period. As a percentage
        of net
        sales, net income represented 11.1% in the three months ended May 31, 2007
        compared to 11.4% in the same period of fiscal 2007.
 
 *Per
        Share Information*
 Basic
        earnings per common share were $0.32 in the three months ended May 31, 2007,
        up
        3.2%, or $0.01 per share, from $0.31 in the comparable prior year period.
        Diluted earnings per common share were $0.31 in each of the three months
        ended
        May 31, 2007 and May 31, 2006. Weighted average shares of common stock
        outstanding used in computing basic earnings per common share increased to
        45,168,649 in the third quarter of fiscal 2007 from 44,810,327 in the comparable
        prior year period primarily as a result of additional stock option exercises
        since May 31, 2006. Weighted average shares of common stock outstanding used
        in
        computing diluted earnings per common share increased to 45,691,824 in the
        third
        quarter of fiscal 2007 from 45,281,425 in the comparable prior year period
        primarily as a result of additional stock option exercises since May 31,
        2006,
        as well as an increase in potentially dilutive shares resulting from an
        increased average share price.
 
 (24)
 ARROW
            INTERNATIONAL, INC.
 
 **Nine
        Months Ended May 31, 2007 Compared to Nine Months Ended May 31,
        2006**
 
 *Net
        Sales*
 Net
        sales
        for the nine months ended May 31, 2007 increased by $26.4 million, or 7.5%,
        to
        $378.8 million from $352.4 million in the same period of last year due primarily
        to an increase in critical care and cardiac care product sales, increased
        sales
        of $3.1 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 nine
        months 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 nine months
        ended May 31, 2007 of $3.0 million. The following is a summary of the Company’s
        sales by product platform:
 
 Sales
                  by Product Platform
                ($
                  in millions)
              Nine
                  months endedMay
                  31,
                2007
              
              May
                  31,
                2006Central
                  Venous Catheters
              $
              196.6
              
              $
              182.8Specialty
                  Catheters
              
              121.7
              
              
              111.9Non-Arrow
                  distributed products
              
              5.5
              
              
              5.8Subtotal
                  Critical Care
              
              323.8
              
              
              300.5Cardiac
                  Care
              
              55.0
              
              
              51.9Total
              $
              378.8
              
              $
              352.4
 
 Sales
        of
        critical care products increased by 7.8% to $323.8 million in the first nine
        months of fiscal 2007 from $300.5 million in the comparable prior year period
        due primarily to increased sales of central venous and specialty catheters.
        Sales revenue from central venous catheters increased in the first nine months
        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 nine months 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 6.0% to $55.0 million in the first nine months of fiscal 2007 from $51.9
        million in the comparable prior year period due primarily to increased
        international sales of IAB pumps, including sales of the latest version of
        the
        AutoCatTM2 WAVE IAB pump and associated LightWAVETM catheter system. Total Company
        U.S. sales increased by 4.8% to $225.8 million in the first nine months of
        fiscal 2007 from $215.5 million in the comparable prior year period due
        primarily to increased sales of specialty and central venous catheters.
        International sales increased by 11.8% to $153.0 million in the first nine
        months of fiscal 2007 from $136.9 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 nine
        months
        of fiscal 2007 were positively impacted by increased sales of $3.1 million
        by
        the Company’s United Kingdom subsidiary, as noted above, and by $3.0 million due
        to the effect of foreign currency exchange rates, also as noted above.
        International sales represented 40.4% of net sales in the first nine months
        of
        fiscal 2007 compared to 38.8% 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 nine months 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 nine months of fiscal 2007 from 64% in the comparable prior
        year period. The U.S. market ARROWg+ard® conversion percentage for the first
        nine months of fiscal 2006 has been restated to correct an error in the
        previously reported percentage calculation.
 
 *Gross
        Profit*
 Gross
        profit increased by 11.1% to $191.3 million in the nine months ended May
        31,
        2007 from $172.2 million in the same period of fiscal 2006. Gross margin
        increased to 50.5% during the nine months ended May 31, 2007 from 48.9% in
        the
        comparable prior year period. The increase in gross margin was due primarily
        to
        (1) $3.1 million of incremental gross profit in the first nine months 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) $1.0 million of higher costs of
        sales
        in the first nine months of fiscal 2006 related to the sale of inventories
        of
        products acquired as part of the Company’s purchase of certain assets of Kimal
        in April 2006 due to the step-up in their cost basis required for business
        acquisition accounting, (3) lower manufacturing costs as a result of improved
        manufacturing processes, and (4) a favorable foreign exchange impact, but
        was
        offset in part by changes in product and geographic sales mix as products
        with
        lower gross margins represented a larger percentage of sales.
  *Research
        and Development*
 Research
        and development expenses decreased by 1.4% to $20.4 million during the nine
        months ended May 31, 2007 from $20.7 million in the comparable prior year
        period. This decrease in research and development spending was due primarily
        to
        decreased spending in the first nine months 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, although the Company’s fiscal 2007
        expenses did include a write off of its remaining investment in the CorAide
        program of $0.5 million, as further discussed above. In addition, research
        and
        development was impacted by decreased 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 nine
        months
        of fiscal 2007 compared to 5.9% in the same period of fiscal 2006.
  (25)
 ARROW
            INTERNATIONAL, INC.
 
 *Selling,
        General and Administrative*
 Selling,
        general and administrative expenses increased by 6.8% to $103.7 million during
        the nine months ended May 31, 2007 from $97.1 million in the comparable prior
        year period and, as a percentage of net sales, decreased to 27.3% in the
        first
        nine months of fiscal 2007 from 27.5% in the comparable period of fiscal
        2006.
        This increase was due primarily to increased expenses of (1) $2.3 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) $1.2 million of amortization expense related
        primarily to the intangible assets included as part of the Kimal acquisition,
        (3) $1.2 million related to an increase in the accrual for the Company’s income
        growth bonus plan for its executive officers and key management employees,
        (4)
        $1.0 million resulting from the weakness of the U.S. dollar relative to
        currencies of countries in which the Company operates direct sales subsidiaries,
        (5) $0.9 million due to increased expenses related to personnel, (6) $0.7
        million related to legal costs, including costs associated with patent
        infringement lawsuits, and (7) 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. These
        increases were offset in part by decreased expenses of (1) $0.7 million related
        to the Company’s Project Operational Excellence program, (2) $0.6 million
        related to the Company’s retired officers’ life insurance policies, and (3) $0.1
        million for other matters that were individually not material.
 
 *Special
        Charges*
 During
        the nine months ended May 31, 2007, the Company incurred special charges
        of $1.1
        million for expenses primarily related to its previously announced decision
        to
        review strategic alternatives aimed at enhancing shareholder value. The Company
        anticipates additional charges in the fourth quarter of fiscal 2007 related
        to
        this strategic alternatives review process and severance costs for former
        executives.
 
 *Restructuring
        Charges*
 The
        Company recorded $0.7 million of restructuring expense in the first nine
        months
        of fiscal 2007 compared to $0.1 million of income in the first nine months
        of
        fiscal 2006. The restructuring expenses recorded in the first nine months
        of
        fiscal 2007 related primarily to accrued severance costs associated with
        the
        Company’s decision to relocate all its intra-aortic balloon catheter
        manufacturing, as further discussed above. The restructuring income recorded
        in
        the first nine months 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 first nine months
        of
        fiscal 2007 by 20.0% to $65.4 million from $54.5 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 $2.5 million of income in the first nine months
        of fiscal 2007 compared to $2.2 million of income in the same prior year
        period.
        This decrease was due primarily to the Company earning a higher amount of
        interest in the first nine months 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, and
        foreign exchange losses, as further discussed above.
  *Income
        Before Income Taxes*
 As
        a
        result of the factors discussed above, income before income taxes increased
        during the first nine months of fiscal 2007 by 19.8% to $67.9 million, or
        17.9%
        of net sales, from $56.7 million, or 16.1% of net sales, in the comparable
        prior
        year period.
 
 *Effective
        Tax Rate*
 For
        the
        first nine months of fiscal 2007, the Company’s effective income tax rate
        increased to 36.0% from 32.3% in the comparable prior year period, or 370
        basis
        points, due to a reduction in export-related tax deductions and the elimination
        of the Czech Republic tax holiday, as further discussed above, representing
        an
        increase of approximately 320 basis points, and increased state income taxes,
        representing an increase of approximately 100 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 represented a decrease of approximately 50 basis
        points.
  (26)
 ARROW
            INTERNATIONAL, INC.
  *Net
        Income*
 Net
        income in the first nine months of fiscal 2007 increased by 13.3% to $43.5
        million from $38.4 million in the comparable fiscal 2006 period. As a percentage
        of net sales, net income represented 11.5% in the nine months ended May 31,
        2007
        compared to 10.9% in the same period of fiscal 2006.
 
 *Per
        Share Information*
 Basic
        earnings per common share were $0.96 in the nine months ended May 31, 2007,
        up
        11.6%, or $0.10 per share, from $0.86 in the comparable prior year period.
        Diluted earnings per common share were $0.95 in the nine months ended May
        31,
        2007, up 11.8%, or $0.10 per share, from $0.85 in the comparable prior year
        period. Weighted average shares of common stock outstanding used in computing
        basic earnings per common share increased to 45,070,743 in the first nine
        months
        of fiscal 2007 from 44,729,030 in the comparable prior year period primarily
        as
        a result of additional stock option exercises since May 31, 2006. Weighted
        average shares of common stock outstanding used in computing diluted earnings
        per common share increased to 45,608,472 in first nine months of fiscal 2007
        from 45,241,937 in the comparable prior year period primarily as a result
        of
        additional stock option exercises since May 31, 2006, as well as an increase
        in
        potentially dilutive shares resulting from an increased average share
        price.
 
 **Liquidity
        and Capital Resources**
 
 *Operating
        Activities*
 *Cash
        from Operations.* Arrow’s
        primary source of funds continues to be cash generated from operations. For
        the
        nine months ended May 31, 2007, net cash provided by operations was $65.4
        million, an increase of $19.1 million from the comparable prior year period,
        due
        primarily to an increase in net income and changes in certain working capital
        and other accounts, including accrued income taxes, prepaid income taxes,
        prepaid pension costs, accrued post-retirement and pension benefit obligation,
        inventories, and accounts receivable, all as described below.
 
 *Accrued
        Income Taxes.* Accrued
        income taxes increased $-6.0 million in the first nine months of fiscal 2007
        compared to a $1.5 million decrease 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 “Nine Months
        Ended May 31, 2007 Compared to Nine Months Ended May 31, 2006 - Effective
        Tax
        Rate”, and the timing of estimated income tax payments.
 
 *Prepaid
        Income Taxes.* Prepaid
        income taxes decreased $5.6 million in the first nine 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 nine months of fiscal
        2007 in
        connection with the Japanese tax assessment, as further discussed below.
 
 *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. During the first nine months
        of
        fiscal 2007, the Company received refund payments totaling $5.6 million from
        the
        Japanese Government in settlement of this tax matter.
 
 *Prepaid
        Pension Costs.* Prepaid
        pension costs decreased $2.7 million in the first nine months of fiscal 2007
        compared to a $2.3 million increase in the first nine months of fiscal 2006,
        primarily as a result of payments of $8.8 million made in the first nine
        months
        of fiscal 2006 to fund the Company’s post-retirement and pension benefit
        obligation.
 
 *Accrued
        Post-Retirement and Pension Benefit Obligation.* Accrued
        post-retirement and pension benefit obligation increased $1.1 million in
        the
        first nine months of fiscal 2007 compared to a $2.3 million decrease in the
        first nine months of fiscal 2006 primarily as a result of payments in the
        first
        nine months of fiscal 2006 to fund the Company’s post-retirement and pension
        benefit obligation, as described above.
 
 *Inventories.* Inventories increased $11.1 million in the first nine months of fiscal 2007
        compared to a $6.4 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,
        including additional inventory in anticipation of adding a new Western U.S.
        distribution center, and (2) increased work-in-process inventory resulting
        from
        the conversion of raw material inventory during the first nine months 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,
        as a
        result of improved manufacturing processes.
 
 *Accounts
        Receivable.* Accounts
        receivable, measured in days sales outstanding during the period, increased
        to
        75 days at May 31, 2007 from 73 days at August 31, 2006.
 
 As
        of May
        31, 2007, the Company had an accounts receivable balance from its Italian
        customers of $12.8 million, of which approximately 71% is related to Italian
        Government-backed hospital customers. As of May 31, 2007, the days sales
        outstanding in the Italian market was 318 days, which is significantly higher
        than that of the Company’s overall May 31, 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 May 31, 2007, the Company had recorded
        an
        allowance of $0.2 million to reserve for specifically identified, potentially
        uncollectible, private Italian customer balances.
  (27)
 ARROW
            INTERNATIONAL, INC.
  As
        of May
        31, 2007, the Company had an accounts receivable balance from its Greek
        customers of $7.9 million, of which approximately 76% is related to Greek
        Government-backed hospital customers. As of May 31, 2007, the Company’s days
        sales outstanding in the Greek market was 595 days, which is significantly
        higher than the Company’s overall May 31, 2007 average customer days sales
        outstanding of 75 days. According to a survey conducted by the Hellenic
        Association of Scientific and Medical Equipment Suppliers, as of September
        2006,
        the average days sales outstanding for Greek Government-backed hospitals
        was
        approximately 454 days. The Company’s overall days sales outstanding in the
        Greek market at August 31, 2006 was 508 days. The Company’s payment terms in
        this market are generally 45 days. The Company believes that the Government
        of
        Greece has been delaying payments to its government-backed hospitals, which
        in
        turn has resulted in the Company’s abnormally high days sales outstanding for
        its receivables from Greek customers. In fiscal 2004 and 2005, when the Company
        experienced similar delays in collecting receivables from Greek
        Government-backed hospital customers, the Greek Government implemented a
        plan to
        resume payments on its trade debt incurred prior to December 24, 2004, which
        allowed its hospitals to repay their outstanding balances to their vendors,
        including the Company. In addition, Greece passed a law requiring full payment
        of all outstanding obligations of government-backed hospitals incurred after
        December 23, 2004. Notwithstanding this law, the Company’s receivables from its
        Greek Government-backed hospital customers since December 23, 2004 has continued
        to grow. Based on the Greek Government’s past practice of ultimately repaying
        its debt, the Company presently believes that this situation will be
        satisfactorily resolved and that 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
        May 31, 2007, the Company had recorded an allowance of $0.4 million to reserve
        for both specifically identified, potentially uncollectible, private Greek
        customer balances, as well as an estimated amount for a discount on Greek
        Government-backed hospital customers’ outstanding balances.
 
 The
        Company currently evaluates all of its trade receivables on a regular basis,
        including those with its Italian and Greek customers, to ensure that each
        receivable is recorded at net realizable value.
 
 *Investing
        Activities*
 Net
        cash
        used in the Company’s investing activities decreased to $27.0 million in the
        nine months ended May 31, 2007 from $41.0 million in the comparable period
        of
        fiscal 2006, due primarily to the Company’s acquisition of certain assets of
        Kimal in the third quarter of fiscal 2006 and decreased capital expenditures
        in
        support of its multi-year capital investment plan, as further discussed
        below.
 
 *Acquisition
        of Kimal PLC.* On April
        3, 2006, the Company purchased certain assets of one of its distributors
        in the
        United Kingdom (UK) and Ireland, Kimal PLC, for a total purchase price of
        approximately $10.6 million. Kimal had been one of the Company’s flagship
        distributors in Europe for more than 27 years and continues to distribute
        the
        Company’s products in the Middle East region. The asset purchase agreement
        includes the purchase of customer lists, distributorship rights, as well
        as the
        inventory and specified contracts associated with Kimal’s sale of the Company’s
        products in the UK and Ireland. In the third quarter of fiscal 2006, the
        Company
        began selling directly in the UK through its subsidiary, Arrow International
        UK
        Limited, and selling in Ireland through a distributor previously utilized
        by
        Kimal. As of May 31, 2007, pursuant to the asset purchase agreement, the
        Company
        had paid in cash the entire $10.6 million purchase price.
 
 *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 has not
        made
        any material expenditures related to this construction during the first nine
        months 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 May
        31,
        2007, had spent a total of $11.2 million for this new equipment and expects
        to
        incur an additional $3.8 million through the end of fiscal 2008, subject
        to
        fluctuations in foreign exchange rates.
  (28)
 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 nine 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 May 31, 2007, the
        Company
        had incurred costs of $1.7 million related to this relocation, of which $1.1
        million had been paid, and expects to incur the remaining $0.3 million during
        the remainder of fiscal 2007.
 
 *Financing
        Activities*
 Financing
        activities used $27.8 million of net cash in the first nine months of fiscal
        2007 compared to providing $5.3 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 2007. Offsetting these
        uses of cash was 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 May 31, 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 $62.0 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 and 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
        May 31, 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 Company’s adoption of Statement of Financial Accounting Standards
        (SFAS) No. 158 during fiscal 2007, as further discussed under “-New Accounting
        Policies,” is not expected to have a material impact on its compliance with any
        of these 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 $30.2 million, of which $0.7 million was outstanding
        as of May 31, 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 decreased $8.3 million during the nine months ended May 31, 2007
        and
        increased $24.4 million during the nine months ended May 31, 2006, all of
        which
        was related to borrowings by the Company’s foreign subsidiaries.
 
 (29)
  
 *Contractual
        Obligations*
 A
        summary
        of all of the Company’s contractual obligations and commercial commitments as of
        May 31, 2007 is as follows:
 
 Payments
                  due
                or
                Commitment
                  Expiration
                by
                  PeriodContractual
                  Obligations and
                Commercial
                  Commitments
              
              Total
              
              Less
                than
                1
                  year
              
              1
                  -
                  3
                years
              
              3
                  -
                  5
                years
              
              More
                than
                  5
                years(in
                  Millions)Current
                  maturities of long-term debt
              
              $
              1.0
              
              $
              1.0
              
              $
              -
              
              $
              -
              
              $
              -Operating
                  leases
              
              
              20.6
              
              
              4.6
              
              
              5.8
              
              
              3.1
              
              
              7.1Purchase
                  obligations (1)
              
              
              37.1
              
              
              37.1
              
              
              -
              
              
              -
              
              
              -Other
                  long-term obligations
              
              
              0.3
              
              
              -
              
              
              0.1
              
              
              0.1
              
              
              0.1Lines
                  of credit (2)
              
              
              62.7
              
              
              62.7
              
              
              -
              
              
              -
              
              
              -Standby
                  letters of credit
              
              
              2.2
              
              
              2.2
              
              
              -
              
              
              -
              
              
              -Total
                  cash contractual obligations and commercial commitments
              
              $
              123.9
              
              $
              107.6
              
              $
              5.9
              
              $
              3.2
              
              $
              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, and
        to
        meet the currently foreseeable liquidity needs of the Company.
 
 **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.
  (30)
 ARROW
            INTERNATIONAL, INC.
 
 The
        FASB
        issued SFAS No. 157, “Fair Value Measurements” in September 2006. This statement
        establishes a framework for measuring fair value in generally accepted
        accounting principles and expands disclosures about fair value measurements.
        This statement applies under other accounting pronouncements that require
        or
        permit fair value measurements; however, this statement does not require
        any new
        fair value measurements. The provisions of SFAS No. 157 will be effective
        for
        fiscal years beginning after November 15, 2007 and for interim periods within
        those fiscal years. The Company does not expect that the adoption of this
        statement will have a material impact 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 $25.6 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, in Part
        II Item
        1A of this report, and in the Company’s 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; (10) dependence on the continued service of key members
        of the Company’s management ;
        and
        (11) risks relating to the Company’s recent decision to explore strategic
        alternatives, including its incurrence of significant fees and expenses in
        connection with this process, which could materially affect its results of
        operations, diversion of its management's attention from normal operations
        to
        attend to this process, which could adversely impact its ability to operate
        its
        business, and whether any strategic alternative pursued by the Company could
        be
        successfully implemented, or if implemented, would increase shareholder
        value.
  (31)
 ARROW
            INTERNATIONAL, INC.
  Item3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
 
 During
        the nine month periods ended May 31, 2007 and 2006, the percentage of the
        Company’s sales invoiced in currencies other than U.S. dollars was 29.1% and
        27.2%, 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 May 31, 2007, outstanding foreign currency forward contracts
        totaling the U.S. dollar equivalent of $40.1 million mature at various dates
        through November 2007. As of May 31, 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.
 
 At
        May
        31, 2007, the Company had foreign currency forward contracts to sell foreign
        currencies which mature at various dates through August 2007. The following
        table identifies foreign currency forward contracts to sell foreign currencies
        at May 31, 2007 and August 31, 2006:
 
 May
                  31, 2007
              
              August
                  31, 2006Notional
                Amounts
              
              Fair
                  Market
                Value
              
              Notional
                Amounts
              
              Fair
                  Market
                ValueForeign
                  currency: (U.S. Dollar Equivalents)Japanese
                  yen
              
              $
              -
              
              $
              -
              
              $
              2,177
              
              $
              2,146Canadian
                  dollar
              
              
              1,851
              
              
              1,872
              
              
              1,437
              
              
              1,448Euro
              
              
              10,147
              
              
              10,132
              
              
              7,694
              
              
              7,694Mexican
                  peso
              
              
              922
              
              
              928
              
              
              913
              
              
              909African
                  rand
              
              
              1,005
              
              
              977
              
              
              1,827
              
              
              1,793British
                  pound
              
              
              -
              
              
              -
              
              
              3,989
              
              
              4,007$
              13,925
              
              $
              13,909
              
              $
              18,037
              
              $
              17,997
 
 (32)
 ARROW
            INTERNATIONAL, INC.
 
 At
        May
        31, 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
        May 31,
        2007 and August 31, 2006:
 
 May
                  31, 2007
              
              August
                  31, 2006Notional
                Amounts
              
              Fair
                  Market
                Value
              
              Notional
                Amounts
              
              Fair
                  Market
                ValueForeign
                  currency: (U.S. Dollar Equivalents)Czech
                  koruna
              
              $
              26,131
              
              $
              26,403
              
              $
              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 nine months ended May
        31,
        2007 and 2006, the Company did not recognize any time value or intrinsic
        value
        losses against cost of sales. At May 31, 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 May 31,
        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 nine months of both
        fiscal
        2007 and 2006, the Company recorded less than $0.1 million of interest expense
        in connection with these swap agreements.
 
 Item4.
              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 May 31, 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.
 
 **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 May 31, 2007 that have materially
        affected, or are reasonably likely to materially affect, the Company’s internal
        control over financial reporting.
 
 PARTII  OTHER
        INFORMATION
 
 Item1A.
        Risk Factors
 
 The
        following is an additional risk factor that updates the risk factors previously
        disclosed 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.
 
 Risks
        Associated with Exploration of Strategic Alternatives
 
 On
        May 9,
        2007, the Company announced that its Board of Directors had engaged Lazard
        Freres & Co LLC (“Lazard”) as its financial advisor in connection with its
        exploration and evaluation of strategic alternatives aimed at enhancing
        shareholder value. In the course of evaluating these alternatives, the Company,
        through the Special Committee of the Board, will incur significant fees and
        expenses, which could materially affect its results of operations. In addition,
        management's time and attention could be diverted from the Company's normal
        operations to respond to the Special Committee's requests or instructions
        regarding any strategic alternatives, which could adversely impact its ability
        to operate its business. There can be no assurance that the engagement of
        Lazard
        will result in a strategic alternative pursued or effected by the Company,
        the
        Company will be able to successfully implement any strategic alternative
        that it
        determines to pursue, or whether any such strategic alternative would result
        in
        increasing shareholder value.
  (33)
 ARROW
            INTERNATIONAL, INC.
  Item6.
        Exhibits
 
 (a)
        Exhibits
 
 See
        Exhibit Index on page 36 for a list of the Exhibits filed as part of this
        report.
           
 (34)
 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: July
                9, 2007
              By:
              /s/ Frederick
                J. HirtFrederick J. Hirt
                Chief Financial Officer and
                Senior
                  Vice President of Finance
                (Principal
                  Financial Officer and
                Chief
                  Accounting Officer)
  
 (35)
 ARROW
            INTERNATIONAL, INC.
  EXHIBITINDEX
 
 Exhibit
                  Number
              
              Description
                  of Exhibit
              
              Method
                  of Filing10.1
              
              Seventh
                  Amendment to Loan Agreement, dated March 14, 2007, among Wachovia
                  Bank,
                  National Association (f/k/a First Union National Bank), Wachovia
                  Bank,
                  National Association, London Branch (f/k/a/ First Union National
                  Bank,
                  London Branch), and Arrow International, Inc., Arrow Medical Products,
                  Ltd., Arrow Deutschland, GmbH, Arrow Iberia, S.A., Arrow Internacional
                  de
                  Mexico S.A. de C.V., Arrow Hellas Commerical A.E., Arrow Nederland,
                  B.V.,
                  Arrow International CR, A.S., Arrow Italy S.R.L. and Arrow International
                  U.K. Ltd.
              
              Filed
                herewith31.1
              
              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
    (36)