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 November 30, 2006





or





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





For
      the
      transition period from ____________ to ____________





Commission
      File Number 0-20212








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





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








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








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








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


YES X NO
      __





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





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.


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


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





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


Yes
      __ No X




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







Class
            
            Shares
                Outstanding at January 3, 2007Common
                Stock, No Par Value
            
            45,061,453











ARROW
      INTERNATIONAL, INC.





Form10-Q
      Index








PagePART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements (Unaudited)Consolidated
                  Balance Sheets at November 30,
                  2006and
                  August 31, 2006
            3-4Consolidated
                Statements of Income
            5Consolidated
                Statements of Cash
                Flows
            6-7Consolidated
                Statements of ComprehensiveIncome
                (Expense)
            8Notes
                to Consolidated Financial
                Statements
            9-15Item
                2.
            Management's
                Discussion and Analysis of
                FinancialCondition
                and Results of Operations
            16-24Item
                3.
            Quantitative
                and Qualitative Disclosures
                AboutMarket
                Risk
            24-25Item
                4.
            Controls
                and Procedures
            25-26PART
                II.
            OTHER
                INFORMATIONItem
                6.
            Exhibits
            26Signature
            
            
            27Exhibit
                Index
            
            28Certifications
            
            
            29-32








(2)





PART
      I   FINANCIALINFORMATION





Item
      1. FinancialStatements





ARROW
      INTERNATIONAL, INC.


CONSOLIDATED
      BALANCESHEETS





(In
      thousands)


(Unaudited)







November
                  30,2006
            
            August
                  31,2006ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            153,233
            
            $
            148,576Marketable
                securities
            
            
            19,144
            
            
            9,783Accounts
                receivable, net
            
            
            101,225
            
            
            96,937Inventories
            
            
            106,226
            
            
            102,901Prepaid
                expenses and other
            
            
            10,987
            
            
            7,808Prepaid
                income taxes
            
            
            5,970
            
            
            9,506Deferred
                income taxes
            
            
            14,587
            
            
            13,709Total
                current assets
            
            
            411,372
            
            
            389,220Property,
                plant and equipment
            
            
            372,984
            
            
            362,148Less
                accumulated depreciation
            
            
            (194,218
            )
            
            (188,295
            )178,766
            
            
            173,853Goodwill
            
            
            42,865
            
            
            42,830Intangible
                assets, net
            
            
            44,127
            
            
            45,787Other
                assets
            
            
            9,967
            
            
            9,863Prepaid
                pension costs
            
            
            35,105
            
            
            35,884Total
                other assets
            
            
            132,064
            
            
            134,364Total
                assets
            
            $
            722,202
            
            $
            697,437











See
      accompanying notes to consolidated financial statements





Continued





(3)








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




November
                  30,2006
            
            August
                  31,2006LIABILITIESCurrent
                liabilities:Current
                maturities of long-term debt
            
            $
            984
            
            $
            995Notes
                payable and lines of credit
            
            
            73,262
            
            
            70,979Cash
                overdrafts
            
            
            765
            
            
            266Accounts
                payable
            
            
            21,996
            
            
            23,316Accrued
                liabilities
            
            
            20,698
            
            
            19,925Accrued
                dividends
            
            
            7,656
            
            
            7,635Accrued
                compensation
            
            
            14,870
            
            
            14,771Accrued
                income taxes
            
            
            9,142
            
            
            200Total
                current liabilities
            
            
            149,373
            
            
            138,087Long-term
                debt
            
            
            -
            
            
            -Accrued
                postretirement and pension benefit obligations
            
            
            19,618
            
            
            19,072Deferred
                income taxes
            
            
            14,101
            
            
            14,730Commitments
                and contingencies (Note 5)SHAREHOLDERS'
                EQUITYPreferred
                stock, no par value;
              5,000,000
                shares authorized;
              none
                issued
            
            
            -
            
            
            -Common
                stock, no par value;
              100,000,000
                shares authorized;
              52,957,626
                shares issued
            
            
            45,661
            
            
            45,661Additional
                paid-in capital
            
            
            39,440
            
            
            36,137Retained
                earnings
            
            
            492,449
            
            
            485,618Treasury
                stock at cost:
              7,915,517
                and 8,051,883 shares,
              respectively
            
            
            (52,124
            )
            
            (53,022
            )Accumulated
                other comprehensiveincome
            
            
            13,684
            
            
            11,154Total
                shareholders' equity
            
            
            539,110
            
            
            525,548Total
                liabilities andshareholders'
                equity
            
            $
            722,202
            
            $
            697,437








See
      accompanying notes to consolidated financial statements





(4)





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


For
                the three months endedNovember
                30,
              2006
            
            November
                30,
              2005Net
                sales
            
            $
            122,853
            
            $
            113,644Cost
                of goods sold
            
            
            61,071
            
            
            57,487Gross
                profit
            
            
            61,782
            
            
            56,157Operating
                expenses:Research
                and development
            
            
            6,227
            
            
            6,451Selling,
                general and administrative
            
            
            33,795
            
            
            32,585Restructuring
                charge
            
            
            20
            
            
            1340,042
            
            
            39,049Operating
                income
            
            
            21,740
            
            
            17,108Other
                (income) expenses:Interest
                expense, net of amount capitalized
            
            
            549
            
            
            180Interest
                income
            
            
            (1,656
            )
            
            (609
            )Other,
                net
            
            
            212
            
            
            12Other
                (income) expenses, net
            
            
            (895
            )
            
            (417
            )Income
                before income taxes
            
            
            22,635
            
            
            17,525Provision
                for income taxes
            
            
            8,149
            
            
            5,695Net
                income
            
            $
            14,486
            
            $
            11,830Basic
                earnings per common share
            
            $
            0.32
            
            $
            0.26Diluted
                earnings per common share
            
            $
            0.32
            
            $
            0.26Cash
                dividends per common share
            
            $
            0.17
            
            $
            0.15Weighted
                average shares outstanding
              used
                in computing basic earnings
              per
                common share
            
            
            44,962,753
            
            
            44,646,397Weighted
                average shares outstanding
              used
                in computing diluted earnings
              per
                common share
            
            
            45,513,486
            
            
            45,167,726








See
      accompanying notes to consolidated financial statements





(5)







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





For
                  the three months endedNovember
                  30,
                2006
              
              November
                  30,
                2005Cash
                  flows from operating activities:Net
                  income
              
              $
              14,486
              
              $
              11,830Adjustments
                  to reconcile net income to net cash provided by
                operating
                  activities:Depreciation
              
              
              5,269
              
              
              5,037Amortization
              
              
              2,055
              
              
              1,400401(k)
                  plan stock contribution
              
              
              239
              
              
              230Deferred
                  income taxes
              
              
              (1,561
              )
              
              (40
              )Loss
                  on sale of property, plant and equipment
              
              
              74
              
              
              212Excess
                  tax benefit from exercise of stock options
              
              
              (364
              )
              
              (175
              )Stock
                  compensation charge
              
              
              901
              
              
              763Increase
                  (decrease) in provision for postretirement and pensionbenefit
                  obligation
              
              
              544
              
              
              (2,640
              )Decrease
                  (increase) in prepaid pension costs
              
              
              779
              
              
              (4,350
              )Changes
                  in operating assets and liabilitiesAccounts
                  receivable, net
              
              
              (2,008
              )
              
              (1,492
              )Inventories
              
              
              (2,442
              )
              
              (4,788
              )Prepaid
                  expenses and other
              
              
              (3,171
              )
              
              (2,808
              )Prepaid
                  income taxes
              
              
              3,536
              
              
              -Accounts
                  payable and accrued liabilities
              
              
              374
              
              
              (1,541
              )Accrued
                  compensation
              
              
              (15
              )
              
              (334
              )Accrued
                  income taxes
              
              
              9,230
              
              
              3,955Total
                  adjustments
              
              
              13,440
              
              
              (6,571
              )Net
                  cash provided by operating activities
              
              
              27,926
              
              
              5,259Cash
                  flows from investing activities:Capital
                  expenditures
              
              
              (9,619
              )
              
              (5,725
              )Purchases
                  of marketable securities
              
              
              (17,193
              )
              
              -Sales
                  of marketable securities
              
              
              7,832
              
              
              -Proceeds
                  from sale of property, plant and equipment
              
              
              171
              
              
              -(Increase)
                  in intangible and other assets
              
              
              (493
              )
              
              (210
              )Net
                  cash (used) in investing activities
              
              
              (19,302
              )
              
              (5,935
              )Cash
                  flows from financing activities:(Decrease)
                  increase in notes payable and lines of credit
              
              
              (594
              )
              
              1,867Reduction
                  of current maturities of long-term debt
              
              
              (11
              )
              
              (31
              )Increase
                  in cash overdrafts
              
              
              499
              
              
              1,258Excess
                  tax benefit from exercise of stock options
              
              
              364
              
              
              175Dividends
                  paid
              
              
              (7,635
              )
              
              (6,693
              )Proceeds
                  from stock options exercised
              
              
              2,698
              
              
              1,138Net
                  cash (used in) financing activities
              
              
              (4,679
              )
              
              (2,286
              )Effects
                  of exchange rate changes on cash and cash equivalents
              
              
              712
              
              
              (829
              )Net
                  change in cash and cash equivalents
              
              
              4,657
              
              
              (3,791
              )Cash
                  and cash equivalents at beginning of year
              
              
              148,576
              
              
              119,326Cash
                  and cash equivalents at end of period
              
              $
              153,233
              
              $
              115,535





See
      accompanying notes to consolidated financial statements


Continued





(6)








ARROW
        INTERNATIONAL, INC.
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS, continued
 (in
        thousands)
 (unaudited)




For
                the three months endedNovember
                30, 2006
            
            November
                30,2005Supplemental
                schedule of noncash investing and financing activities:Dividends
                declared but not paid
            
            $
            7,656
            
            $
            6,702(Decrease)
                in property, plant and
              equipment
                in accounts payable
            
            $
            (1,660
            )
            $
            (47
            )








See
      accompanying notes to consolidated financial statements



















(7)










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


For
                the three months endedNovember
                30,
              2006
            
            November
                30,
              2005Net
                income
            
            $
            14,486
            
            $
            11,830Other
                comprehensive income (expense):Foreign
                currency translation adjustments
            
            
            2,530
            
            
            (2,178
            )Other
                comprehensive income (expense)
            
            
            2,530
            
            
            (2,178
            )Total
                comprehensive income
            
            $
            17,016
            
            $
            9,652








See
      accompanying notes to consolidated financial statements















(8)
 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 of Arrow International, Inc. (the “Company”)
      for the interim periods presented. Results for the interim periods are not
      necessarily indicative of results for the entire year. Such statements are
      presented in accordance with the requirements of Form 10-Q and do not include
      all disclosures normally required by generally accepted accounting principles
      or
      those normally made on Form 10-K. These statements should be read in conjunction
      with the consolidated financial statements and notes thereto contained in the
      Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2006,
      as amended.





Note
      2 -
      Accounting Policies:





The
      Company has disclosed in Note 1 to its consolidated financial statements
      included in its Annual Report on Form 10-K for the fiscal year ended August
      31,
      2006 those accounting policies that it considers to be significant in
      determining its results of operations and financial position. There have been
      no
      material changes to the accounting policies previously identified and described
      in the Company’s 2006 Form 10-K. The accounting principles utilized by the
      Company in preparing its consolidated financial statements conform to generally
      accepted accounting principles in the United States of America.





The
      preparation of these consolidated financial statements requires the Company’s
      management to make estimates and assumptions that affect the reported amounts
      of
      assets, liabilities, revenues and expenses, as well as the disclosure of
      contingent assets and liabilities at the date of its financial statements.
      The
      Company bases its estimates on historical experience, actuarial valuations
      and
      various other factors that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying value of assets and liabilities that are not readily apparent
      from
      other sources. Some of those judgments can be subjective and complex and,
      consequently, actual results may differ from these estimates under different
      assumptions or conditions. While for any given estimate or assumption made
      by
      the Company’s management there may be other estimates or assumptions that are
      reasonable, the Company believes that, given the current facts and
      circumstances, it is unlikely that applying any such other reasonable estimate
      or assumption would materially impact the financial statements.





Note
      3 -
      Stock Option Plans:





The
      Company has adopted and its shareholders have approved four stock plans, the
      1992 Stock Incentive Plan (the “1992 Plan”), which was adopted on April 1, 1992,
      the Directors’ Stock Incentive Plan, as amended (the “Directors Plan”), which
      was approved by the Company’s shareholders on January 17, 1996, with amendments
      thereto approved by the Company’s shareholders on January 19, 2000, the 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, and the 2006 Directors
      Stock Incentive Plan (the “2006 Directors Plan”), which was approved by the
      Company’s shareholders on January 18, 2006. The 1992 Plan, which expired in
      accordance with its terms in 2002, and the 1999 Plan authorize the granting
      of
      stock options, stock appreciation rights and restricted stock. The Directors
      Plan, which had authorized the granting of a maximum of 300,000 non-qualified
      stock options, expired in accordance with its terms on January 17, 2006. The
      2006 Directors Plan authorizes the granting of a maximum of 500,000 shares
      of
      the Company’s common stock (subject to adjustment in the event of any stock
      dividend, stock split, recapitalization, reorganization or similar event) in
      the
      form of non-qualified stock options and/or restricted stock. Under the 2006
      Directors Plan, members of the Board of Directors of the Company and its
      subsidiaries are eligible to participate if they are not also employees or
      consultants of the Company or its subsidiaries, and do not serve on the Board
      of
      Directors as representatives of the interest of shareholders who have made
      an
      investment in the Company. The 2006 Directors Plan provides for an initial
      grant
      of options to purchase 10,000 shares of common stock upon each eligible
      director's initial election or appointment to the Board of Directors and,
      thereafter, the grant of such number of additional options to purchase shares
      of
      common stock and/or shares of restricted stock, in each case as the Board of
      Directors in its discretion may determine, on the date of each annual meeting
      of
      shareholders of the Company.





During
      the
      three months ended November 30, 2006 and November 30, 2005, the Company granted
      51,000 and 1,066,000 options, respectively, to key employees to purchase shares
      of the Company’s common stock pursuant to the 1999 Plan. The exercise price per
      share ranged from $32.09 to $35.32 for the options granted during the three
      months ended November 30, 2006 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 quarter 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.








(9)
 ARROW
            INTERNATIONAL, INC.


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







During
        the
        three months ended November 30, 2006, the Company did not grant any options
        pursuant to the 2006 Directors Plan, and during the three months ended November
        30, 2005, granted 10,000 options pursuant to the Directors Plan to purchase
        shares of the Company’s common stock. The exercise price was $30.92 for the
        options granted during the three months ended November 30, 2005, 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.


Stock
      option activity for the three months ended November 30, 2006 is summarized
      in
      the tables below:





For
                the three months endedNovember
                30, 2006Shares
            
            Weighted
              Average
              Exercise
              Price
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at September 1
            
            3,101,881
            
            $25.18Granted
            
            51,000
            
            $33.74Exercised
            
            (136,209)
            
            $20.80Terminated
            
            (12,450)
            
            $21.44Outstanding
                at November 30
            
            3,004,222
            
            $25.54
            
            $17,481Exercisable
                at November 30
            
            1,705,504
            
            $22.89
            
            $
                 8,758





The
      intrinsic value of the stock options exercised during the three months ended
      November 30, 2006 was $655.





Stock
      options outstanding at November 30, 2006 are summarized in the table
      below:





Range
                of
              Exercise
                Prices
            
            Number
              Outstanding
            
            Weighted
              Average
              Remaining
                Contractual Life
            
            Weighted
              Average
              Exercise
              Price
            
            Number
                Exercisable
            
            Weighted
              Average
              Remaining
                Contractual Life
            
            Weighted
              Average
              Exercise
              Price$12.56
                - $17.50
            
            179,190
            
            2.43
            
            $14.93
            
            179,190
            
            2.43
            
            $14.93$17.51
                - $21.47
            
            609,695
            
            4.80
            
            $19.14
            
            574,495
            
            4.78
            
            $19.06$21.48
                - $26.42
            
            943,237
            
            6.81
            
            $25.38
            
            688,019
            
            6.81
            
            $25.40$26.43
                - $30.92
            
            1,174,100
            
            8.79
            
            $30.01
            
            259,800
            
            8.72
            
            $30.07$30.93
                - $35.32
            
            98,000
            
            9.36
            
            $32.81
            
            4,000
            
            8.50
            
            $32.953,004,222
            
            
            
            
            
            1,705,504





As
      of
      November 30, 2006, there was $8,314 of total unrecognized cost related to
      nonvested share-based compensation arrangements granted under the Company’s
      stock incentive plans. This cost is expected to be recognized over a weighted
      average period of six years. The total fair value of shares underlying stock
      options which vested during the three months ended November 30, 2006 and 2005
      was $3,190 and $1,632, respectively.





(10)
 ARROW
            INTERNATIONAL, INC.


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





The
      per
      share weighted average value of stock options granted in the first three months
      of fiscal 2007 and 2006 was $7.64 and $7.35, respectively. The fair value was
      estimated as of the grant date using the Black-Scholes option pricing model
      with
      the following average assumption:





November
                30,2006
            
            November
                30,
              2005Risk-free
                interest rate
            
            4.86%
                - 4.99%
            
            3.71%
                - 4.30%Dividend
                yield
            
            2.10%
                - 2.31%
            
            2.13%Volatility
                factor
            
            19.25%
                - 19.61%
            
            23.59%
                - 23.77%Expected
                lives
            
            6
                years
            
            6
                years





Note
      4 -
      New Accounting Standards:





The
      FASB
      issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes-an
      interpretation of SFAS No. 109” (“FIN 48”), in July 2006. The intent of FIN 48
      is to clarify the accounting for uncertainty in income taxes recognized in
      an
      entity’s financial statements in accordance with SFAS No. 109. This
      interpretation imposes a recognition threshold and measurement attribute for
      financial statement disclosure of tax positions taken or expected to be taken
      on
      a tax return. This interpretation is effective for fiscal years beginning after
      December 15, 2006. The Company is currently evaluating the requirements of
      FIN
      48 and has not yet determined the impact that the adoption of this statement
      will have on its consolidated financial statements.





The
      FASB
      issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
      Other Postretirement Plans-an amendment of SFAS No. 87, 88, 106 and 132(R)”, in
      September 2006. This statement requires that an employer recognize the
      overfunded or underfunded status of a defined benefit postretirement plan as
      an
      asset or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur through
      comprehensive income. This statement also requires an employer to measure the
      funded status of a plan as of the date of its year-end. The provisions of SFAS
      No. 158 will be effective for fiscal years ending after December 15, 2006.
      The
      Company currently estimates that the adoption of this statement will result
      in a
      charge of approximately $25,961 to other comprehensive expense as of August
      31,
      2007.





Certain
      prior period information has been reclassified for comparative
      purposes.





Note
      5 -
      Commitments and Contingencies:





The
      Company is a party to certain legal actions, including product liability and
      employment matters, arising in the ordinary course of its business. From time
      to
      time, the Company is subject to legal actions involving patent and other
      intellectual property claims.





The
      Company had been a defendant in a lawsuit in the United States District Court
      in
      the Southern District of New York, in which the plaintiffs, Thierry Pourchez
      and
      Bard Access Systems Inc., alleged that the Company’s Cannon-Cath Ô split-tip
      hemodialysis catheters, which were acquired as part of the Company’s acquisition
      in November 2002 of specified assets of Diatek, Inc., infringed a patent owned
      by or licensed to the plaintiffs. In November 2003, this lawsuit was stayed
      pending the U.S. Patent and Trademark Office’s ruling on its re-examination of
      the patent at issue. In September 2005, the Court dismissed this lawsuit because
      the U.S. Patent and Trademark Office had not yet concluded its re-examination
      of
      the patent at issue. The plaintiffs may seek reinstatement of this lawsuit
      when
      the re-examination is concluded, which is expected to occur during the 2007
      calendar year, although the Company cannot presently predict the precise timing.
      Based on information presently available to the Company, the Company believes
      that its products do not infringe any valid claim of the plaintiffs’ patent and
      that, consequently, it has meritorious legal defenses with respect to this
      action in the event it were to be reinstated.





The
      Company is currently a plaintiff in two related patent infringement lawsuits
      in
      the United States District Court in Baltimore, Maryland against Datascope Corp.
      of Montvale, New Jersey. The Company manufactures and sells the Arrow-TrerotolaTM
Percutaneous Thrombolytic Device (PTD®), which is used to mechanically declot
      native arterio-venous fistulae and synthetic hemodialysis grafts. The PTD was
      invented by Dr. Scott Trerotola while working at Johns Hopkins University.
      Johns
      Hopkins University, the owner of three patents covering the PTD, is also a
      plaintiff, and the Company is the exclusive licensee of the Trerotola patents.
      The Company has alleged that Datascope infringes these three patents. A trial
      is
      currently scheduled for June 2007.





(11)
 ARROW
            INTERNATIONAL, INC.


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





The
      Company also commenced a patent infringement lawsuit in the United States
      District Court in Boston, Massachusetts against Spire Corporation of Bedford,
      Massachusetts.  The Company is the owner of United States Patent No.
      6,872,198, which covers a method of inserting a double-Y-shaped multi-lumen
      catheter.  The Company has alleged that the use of Spire's Pourchez RetrOTM
High Flow Kink-Resistant Catheter infringes this patent.  This case is
      currently nearing the end of the discovery phase, and a trial is
      anticipated  during
      the
      2007 calendar year, although the Company cannot presently predict the precise
      timing.





Although
      the ultimate outcome of any of these actions is not expected to have a material
      adverse effect on the Company’s business or financial condition, whether an
      adverse outcome in any of these actions would materially adversely affect the
      Company’s reported results of operations in any future period cannot be
      predicted with certainty.





Note
      6 -
      Inventories:





Inventories
      are summarized as follows:


November
                  30, 2006
              
              August
                  31, 2006Finished
                  goods
              
              $
              40,103
              
              $
              39,528Semi-finished
                  goods / work-in-process
              
              
              37,842
              
              
              34,178Raw
                  materials
              
              
              28,281
              
              
              29,195$
              106,226
              
              $
              102,901





Note
      7 -
      Segment Reporting:





SFAS
      No.
      131, “Disclosures about Segments of an Enterprise and Related Information”,
      requires the reporting of certain financial information for each operating
      segment. The Company has one operating segment as defined in this standard,
      based on the fact that its various business components do not possess the
      defined characteristics meeting the standard’s definition of operating segments.
      For instance, the Company’s current management structure is designed to operate
      the business as a whole, with no divisional responsibilities. In addition,
      over
      90% of the Company’s net sales are generated from catheter and catheter-related
      products. Therefore, the Company continues to operate as a single operating
      segment. The Company operates in three main geographic regions and information
      about its product and geographic areas is presented below.





The
      following table provides quarterly information about the Company’s sales by
      product category:





Quarter
                ended
              November
                30, 2006
            
            Quarter
                ended
              November
                30, 2005Critical
              Care
            
            Cardiac
              Care
            
            Critical
              Care
            
            Cardiac
              CareSales
                to externalcustomers
            
            $
            104,300
            
            $
            18,600
            
            $
            96,900
            
            $
            16,700





The
      following table provides quarterly information about geographic
      areas:





Quarter
                ended
              November
                30, 2006United
                States
            
            Europe
            
            Asia
                and
              International
            
            ConsolidatedSales
                tounaffiliatedcustomers
            
            $
            73,500
            
            $
            25,900
            
            $
            23,500
            
            $
            122,900





Quarter
                ended
              November
                30, 2005United
                States
            
            Europe
            
            Asia
                and
              International
            
            ConsolidatedSales
                tounaffiliatedcustomers
            
            $
            70,000
            
            $
            19,600
            
            $
            24,000
            
            $
            113,600





(12)
 ARROW
            INTERNATIONAL, INC.


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




Note
      8 -
      Warranty:





The
      Company’s primary warranty obligation relates to sales of its intra-aortic
      balloon pumps, for which the Company typically offers a warranty of one year
      to
      its U.S. customers and two years to its international customers. The Company
      also offers a limited lifetime warranty of five years to its customers
      purchasing the latest version of its AutoCatTM2
      WAVE intra-aortic balloon pump and associated LightWAVETM catheter
      system .
      As of
      November 30, 2006 and November 30, 2005, the Company’s total estimated product
      warranty obligation was $813 and $600, 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 months ended
      November 30, 2006 and November 30, 2005 is as follows:




For
                the three months endedNovember
                30,2006
            
            November
                30,2005Balance
                as of September 1
            
            $
            719
            
            $
            660Additional
                warranties issued
            
            
            411
            
            
            273Expirations
                / Expenditures
            
            
            (317
            )
            
            (333
            )Balance
                as of November 30
            
            $
            813
            
            $
            600





Note
      9 -
      Retirement Benefits:





Pension
      Plans:





The
      Company has three noncontributory pension plans that cover substantially all
      employees. Benefits under the plans are based upon an employee's compensation
      and years of service and, where applicable, the provisions of negotiated labor
      contracts. It is the Company's policy to make contributions to these plans
      sufficient to meet the minimum funding requirements of applicable laws and
      regulations plus such additional amounts, if any, as the Company's actuarial
      consultants advise to be appropriate. The projected unit credit method is
      utilized for determination of actuarial amounts.





Plan
      assets consist principally of U.S. government securities, short-term
      investments, other equity securities and cash equivalents.





On
      September 1, 2000, the Company established a Defined Benefit Supplemental
      Executive Retirement Plan to provide pension benefits to selected executives
      and
      retired executives/directors of the Company. The plan is unfunded and the
      benefits provided under the plan are intended to be in addition to other
      employee retirement benefits offered by the Company, including but not limited
      to tax-qualified employee retirement plans.





Postretirement
      Benefits Other Than Pensions:





The
      Company provides limited amounts of postretirement health and life insurance
      benefit plan coverage for some of its employees. The determination of the cost
      of postretirement health benefit plans is based on comprehensive hospital,
      medical, surgical and dental benefit provisions (“Other Benefits”). The
      determination of the cost of postretirement life insurance benefits is based
      on
      stated policy amounts.





(13)
 ARROW
            INTERNATIONAL, INC.


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





The
      following summarizes the components of the net periodic benefit costs for the
      three months ended November
      30, 2006 and
      2005:





Pension
                Benefits
            
            Other
                BenefitsFor
                the three months ended
            
            For
                the three months endedNovember
                30,
              2006
            
            November
                30,
              2005
            
            November
                30,
              2006
            
            November
                30,
              2005Service
                cost
            
            $
            1,185
            
            $
            1,207
            
            $
            138
            
            $
            161Interest
                cost
            
            
            1,606
            
            
            1,526
            
            
            317
            
            
            313Expected
                return on planassets
            
            
            (2,272
            )
            
            (2,146
            )
            
            -
            
            
            -Amortization
                of priorservice
                costs
            
            
            345
            
            
            290
            
            
            (3
            )
            
            (3
            )Amortization
                of transitionobligation
                (asset)
            
            
            (5
            )
            
            (19
            )
            
            12
            
            
            12Amortization
                of netactuarial
                (gain) loss
            
            
            177
            
            
            681
            
            
            110
            
            
            180Net
                periodic cost
            
            $
            1,036
            
            $
            1,539
            
            $
            574
            
            $
            663





Note
      10 -
      Restructuring Charges:





As
      part of
      its plans to rationalize its production operations and related logistics in
      Europe, in November 2004, the Company determined to move its European
      Distribution Center, previously situated in Weesp, Netherlands, to a more
      centralized European location in the Limberg region of Belgium in order to
      have
      better access to existing carrier transportation networks and allow for more
      cost-competitive expansion of its European operations in the future. The Company
      continued to implement this relocation plan in the first quarter 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:















(14)
 ARROW
            INTERNATIONAL, INC.


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





Actual
                Costs ExpensedEstimate
                ofTotalExpectedRestructuringCharges
            
            As
                ofAugust 31,2006
            
            For
                theThreeMonthsEndedNovember 30,2006
            
            Total
                to Date
            
            Costsexpensedbut
                not yetpaid as ofNovember 30,2006Severance
                and relatedexpenses
            
            $
            868
            
            $
            618
            
            $
            -
            
            $
            618
            
            $
            337Lease
                termination costs
            
            
            607
            
            
            581
            
            
            -
            
            
            581
            
            
            323Property,
                plant andequipment
                carryingcost
                and costs ofdisposal
            
            
            120
            
            
            59
            
            
            -
            
            
            59
            
            
            -Other,
                includingequipment
                andinventory
                movingcosts,
                employeerelocation
                costs, andexternal
                consultingfees
            
            
            413
            
            
            299
            
            
            20
            
            
            319
            
            
            -Total
                restructuringcharges
            
            $
            2,008
            
            $
            1,557
            
            $
            20
            
            $
            1,577
            
            $
            660





Note
      11 -
      Earnings Per Share:





The
      following is a reconciliation of weighted average common shares outstanding
      assuming dilution used in the calculation of earnings per share for the three
      months ended November 30, 2006 and 2005:









For
                the threemonths ended
              November
                30, 2006
            
            For
                the threemonths ended
              November
                30, 2005Net
                income
            
            $
            14,486
            
            $
            11,830Weighted
                average common shares outstanding
            
            
            44,963
            
            
            44,646Incremental
                common shares issuable: stock optionsand
                awards
            
            
            550
            
            
            522Weighted
                average common shares outstandingassuming
                dilution
            
            
            45,513
            
            
            45,168Basic
                earnings per common share
            
            $
            0.32
            
            $
            0.26Diluted
                earnings per common share
            
            $
            0.32
            
            $
            0.26





Stock
      options outstanding to purchase 6,857 and 457,418 shares of common stock for
      the
      three months ended November 30, 2006 and 2005, 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.





(15)
 ARROW
            INTERNATIONAL, INC.





Item
              2.
            Management'sDiscussion
                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 revenues are generated from sales of its products, less certain
      related charges, discounts, returns and other allowances. The Company’s costs
      and expenses consist of costs of goods sold; research and development expense;
      selling, general and administration expense; and other expenses (income). Costs
      of goods sold consist principally of costs relating to the manufacture and
      distribution of the Company’s products. Research and development expense
      consists principally of expenses incurred with respect to the Company’s internal
      research, development and engineering activities to introduce new products
      to
      market and enhance its existing products, payments for third-party research
      and
      development activities, and acquired in-process research and development costs
      arising from the Company’s acquisition activities. Selling, general and
      administrative expense consists principally of costs associated with the
      Company’s marketing and sales efforts and administrative operations and
      commitments, including costs incurred in connection with the Company’s efforts
      to enhance its good manufacturing practices and quality system compliance as
      part of its Project Operational Excellence program. Other expenses (income)
      consists principally of interest expense on the Company’s outstanding
      indebtedness, interest income and other items, such as foreign currency exchange
      gains and losses, which may impact the comparability of the Company’s results of
      operations between periods.





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, the Company’s research and
      development efforts are currently focused on the following five core product
      areas: central venous access, regional anesthesia, cardiac assist, dialysis
      access and hemodynamic monitoring. The Company also anticipates generating
      higher sales through selective acquisitions of new businesses, products and
      technologies that complement its existing product lines, as it has done from
      time to time in the past.





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
      quarter of fiscal 2007 the Company continued to improve its production
      technology by investing in new state-of-the-art equipment and processes in
      connection with this capital investment program. 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
      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.





(16)
 ARROW
            INTERNATIONAL, INC.








The
      Company faces substantial competition from a number of other companies in the
      market for catheters and related medical devices and equipment, ranging from
      small start-up enterprises to companies that are larger than Arrow with greater
      financial and other resources. In addition, in response to concern about the
      rising costs of health care, U.S. hospitals and physicians are placing
      increasing emphasis on cost-effectiveness in the selection of products to
      perform medical procedures. The increased emphasis on health care cost
      containment has resulted in reduced growth in demand for certain of the
      Company’s products in markets in the U.S. in which Arrow has a leading market
      share, and protecting that market share has affected the Company’s pricing in
      some instances. The Company also continues to face pricing pressures in certain
      product lines in both European and Japanese markets as governments strive to
      curtail increases in health care costs. Despite these pressures, the Company
      has
      been able to retain its position as a leader in the central venous catheter
      market, primarily through concerted efforts to establish and maintain high
      customer loyalty and a strong, recognizable brand name among hospitals and
      physicians. The Company believes that its comprehensive manufacturing
      capability, which as described above has been recently expanded, enables it
      to
      expedite the development and market introduction of new products and to achieve
      manufacturing efficiencies, thereby helping to ensure a more effective response
      to competitive pricing in an environment where its ability to increase prices
      is
      limited.





**Results
      of Operations**





**Three
      Months Ended November 30, 2006 Compared to Three Months Ended November 30,
      2005**





*Net
      Sales*


Net
      sales
      for the three months ended November 30, 2006 increased by $9.3 million, or
      8.2%,
      to $122.9 million from $113.6 million in the same period of last year due
      primarily to an increase in critical care and cardiac care product sales and
      a
      favorable foreign exchange impact during the first 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 $0.7 million. The
      following is a summary of the Company’s sales by product platform:




Sales
                by Product Platform
              ($
                in millions)
            
            Quarter
                endedNovember
                30,2006
            
            November
                30,2005Central
                Venous Catheters
            
            $
            63.2
            
            $
            58.7Specialty
                Catheters
            
            
            39.3
            
            
            36.1Non-Arrow
                distributed products
            
            
            1.8
            
            
            2.1Subtotal
                Critical Care
            
            
            104.3
            
            
            96.9Cardiac
                Care
            
            
            18.6
            
            
            16.7Total
            
            $
            122.9
            
            $
            113.6







Sales
      of
      critical care products increased by 7.6% to $104.3 million in the first quarter
      of fiscal 2007 from $96.9 million in the comparable prior year period due
      primarily to increased sales of central venous and specialty catheters. Sales
      of
      central venous catheters increased in the first quarter of fiscal 2007 due
      to a
      continued increase in the number of hospitals that are purchasing the Company’s
      procedure kits featuring its ARROWg+ard® antiseptic surface treatments and
      safety devices. Sales of specialty catheters increased in the first quarter
      of
      fiscal 2007 due to improved sales of arterial products, peripheral nerve block
      products and epidural products. Sales of cardiac care products increased by
      11.4% to $18.6 million in the first quarter of fiscal 2007 from $16.7 million
      in
      the comparable prior year period due to increased 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 5.0% to $73.5 million from $70.0 million in the comparable prior
      year period due primarily to increased sales of specialty and central venous
      catheters. International sales increased by 13.3% to $49.4 million in the first
      quarter of fiscal 2007 from $43.6 million in the comparable prior year period
      principally as a result of increased sales of central venous, specialty
      catheters and IAB pumps. International sales in the quarter were positively
      impacted by incremental sales of $1.3 million by the Company’s United Kingdom
      subsidiary following the Company’s acquisition of certain assets of its former
      United Kingdom distributor, Kimal PLC (“Kimal”), in April 2006, and by $0.7
      million due to the effect of foreign currency exchange rates, as noted above.
      International sales represented 40.2% of net sales in the first quarter of
      fiscal 2007 compared to 38.4% 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 first quarter of fiscal 2007 from 38% in the comparable prior year period
      due
      primarily to decreased shipments to the Company’s Chinese distributor during the
      first quarter of fiscal 2007. The ARROWg+ard® conversion percentages for the
      U.S. market were 66% in each of the first quarters of fiscal 2007 and fiscal
      2006.





The
      safety
      device procedure kits conversion percentages, which are the number of units
      sold
      with the Company’s procedure kits featuring its safety devices as a percentage
      of the total number of units sold of the Company’s products that could
      potentially include safety device procedure kits, were 9% of total Company
      sales
      in each of the first quarters of fiscal 2007 and fiscal 2006. The safety device
      procedure kit conversion percentages for the U.S. market were 18% in each of
      the
      first quarters of fiscal 2007 and fiscal 2006.





(17)
 ARROW
            INTERNATIONAL, INC.








During
      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, the Company began selling its new Maximal Barrier central venous access
      kit, which includes a full body drape, a catheter treated with the Company’s
      latest ARROWg+ard® antimicrobial technology, and other accessories . Sales
      of
      this product have increased steadily since its inception in January 2006. The
      Company plans to continue expanding its marketing program in support of this
      new
      product, and anticipates increased sales of this kit in the future on the basis
      of its benefits to patients and healthcare workers alike.





*NEO♥Care
      Product Recall*


As
      previously reported, on December 3, 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 during
      the second quarter of fiscal 2007 and 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 10.0% to $61.8 million in the three months ended November
      30, 2006 from $56.2 million in the same period of fiscal 2006. Gross margin
      increased to 50.3% during the three months ended November 30, 2006 from 49.4%
      in
      the comparable prior year period. The increase in gross margin was due primarily
      to (1) higher gross margins in the first quarter of fiscal 2007 resulting from
      the incremental sales generated in the United Kingdom region following the
      Company’s purchase of certain assets of Kimal PLC in April 2006, (2) lower
      manufacturing costs as a result of improved manufacturing processes, and (3)
      a
      favorable foreign exchange impact, which were offset in part by an unfavorable
      sales mix.




*Research
      and Development*


Research
      and development expenses decreased by 4.6% to $6.2 million during the three
      months ended November 30, 2006 from $6.5 million in the comparable prior year
      period. This decrease in research and development spending was due primarily
      to
      decreased consulting fees related to the temporarily suspended NEO♥Care product
      line, as well as decreased spending in the first three 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, the Company’s joint research and
      development program with The Cleveland Clinic Foundation. As a percentage of
      net
      sales, these expenses were 5.0% in the first quarter of fiscal 2007 compared
      to
      5.7% in the same period of fiscal 2006.





*HemoSonic.* During
      the
      first quarter of fiscal 2007, the Company continued to support its
      HemoSonic TM cardiac
      output monitoring system that continuously measures descending aortic blood
      flow
      using a non-invasive esophageal ultrasound probe. The Company’s sales of this
      product in the first quarter of fiscal 2007 were outside of the U.S. The Company
      is continuing its development of a second generation version of the device
      that
      will have a more extensive feature set, which the Company believes will be
      more
      user-friendly and better able to meet the needs of a broader range of
      clinicians.





*CorAide
      LVAS.* During
      the third quarter of fiscal 2006, the researchers conducting the previously
      reported European clinical trial of the CorAideTM left ventricular assist system,
      or LVAS, identified the need for several modifications to the CorAideTM 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 first quarter of fiscal 2007.





The
      Company views the CorAideTM LVAS as a long-term development program. The current
      version of the CorAide TM 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. The Company
      believes 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 3.7% to $33.8 million during
      the three months ended November 30, 2006 from $32.6 million in the comparable
      prior year period and, as a percentage of net sales, decreased to 27.5% in
      the
      first quarter of fiscal 2007 from 28.7% in the comparable period of fiscal
      2006.
      This increase was due primarily to increased expenses of (1) $0.8 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) $0.7 million of amortization expense related
      primarily to the intangible assets included as part of the Kimal acquisition,
      (3) increased international costs, including $0.2 million resulting from the
      weakness of the U.S. dollar relative to currencies of countries in which the
      Company operates direct sales subsidiaries, and $0.3 million due to increased
      expenses related to personnel, (4) $0.2 million related to an increase in the
      accrual for the Company’s sales commission plan due to better sales performance
      against Company objectives during the first quarter of fiscal 2007, and (5)
      $0.3
      million for other matters that were individually not material. These increases
      were offset in part by decreased expenses of (1) $0.4 million related to the
      Company’s previously reported Project Operational Excellence, (2) $0.3 million
      related to the Company’s corporate marketing programs, and (3) $0.6 million
      related to the Company’s cost of providing medical insurance to its employees,
      for which the Company is self-insured, due primarily to a decrease in the number
      of large claims.





(18)
 ARROW
            INTERNATIONAL, INC.











*Project
      Operational Excellence*


During
      the
      first quarter of fiscal 2007, the Company continued to take additional steps
      in
      implementing its Project Operational Excellence program designed to help it
      achieve operational process excellence in four key areas: product quality,
      safety, customer service and cost. This program includes (1) as discussed below
      under “Liquidity and Capital Resources - Multi-Year Capital Investment Plan,”
restructuring the Company’s manufacturing to increase production capacity and
      better align its production facilities with the geographical markets they serve,
      (2) improving the effectiveness of the Company’s production technology by
      investing in new, state-of-the-art manufacturing equipment and processes, and
      (3) developing and implementing enhanced good manufacturing practices and
      quality systems to maintain and enhance process excellence.





In
      connection with the Company’s efforts to enhance its good manufacturing
      practices and quality system compliance, it incurred less than $0.1 million
      of
      outside consulting costs and internal out-of-pocket travel expenses in the
      first
      three months of fiscal 2007 to complete this process and does not currently
      expect ongoing costs to be material. The Company incurred $1.4 million of costs
      related to this program in fiscal 2006. All of these costs, in both fiscal
      2007
      and 2006, have been recorded as selling, general and administrative expenses.
      The Company continues to embed these new practices and procedures into its
      corporate culture as part of its ongoing commitment to high quality
      standards.





*Restructuring
      Charges*


The
      Company recorded less than $0.1 million of restructuring expense in each of
      the
      first quarters of fiscal 2007 and fiscal 2006. The restructuring expenses
      related primarily to 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 first quarter of
      fiscal 2007 by 26.9% to $21.7 million from $17.1 million in the comparable
      prior
      year period.





*Other
      Expenses (Income), Net*


Other
      expenses (income), net, which consists principally of interest expense, interest
      income and foreign exchange gains and losses associated with the Company's
      direct sales subsidiaries, was $0.9 million of income in the first quarter
      of
      fiscal 2007 compared to $0.4 million of income in the same prior year period,
      due primarily to the Company earning a higher amount of interest in the first
      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 first quarter of fiscal 2007 by 29.1% to $22.6 million from $17.5
      million in the comparable prior year period.





*Effective
      Tax Rate*


For
      the
      first quarter of fiscal 2007, the Company’s effective income tax rate increased
      to 36.0% from 32.5% in the comparable prior year period, or 350 basis points,
      due to (1) a reduction in export-related tax deductions, which resulted in
      an
      increase of approximately 200 basis points, (2) increased state income taxes,
      which resulted in an increase of approximately 100 basis points, and (3) the
      temporary non-renewal of the U.S. research and development tax credit, which
      resulted in an increase of approximately 50 basis points. In December 2006,
      legislation was enacted to extend this research and development tax credit,
      which will result in a reduction in the Company’s estimated effective tax rate
      for fiscal 2007 to 35.0%.





*U.S.
      Tax Matters*


On
      October
      22, 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 begins at 3% of the Company’s U.S. domestic
      manufacturing income for the Company's fiscal years 2006 and 2007, increasing
      to
      6% for the Company's fiscal years 2008 to 2010 and achieves its maximum rate
      of
      9% for the Company's fiscal years 2011 and beyond.  While the Company is
      not yet able to make an exact calculation of the overall effect of these
      changes, management believes that the phased out repeal of the ETI benefit
      during fiscal 2006 and 2007, and the phase in of the new manufacturing deduction
      benefit from fiscal 2006 to 2011 should not have a material adverse effect
      on
      the Company's effective tax rate, although it believes that the net effect
      will
      be less of an income tax benefit to the Company for the remainder of fiscal
      2007
      and beyond.





(19)
 ARROW
            INTERNATIONAL, INC.








*Czech
      Republic Tax Holiday*


During
      the
      first 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 by the amount of capital permanently invested in the
      Czech
      Republic by way of property, plant and equipment purchased. Because this tax
      holiday expired in fiscal 2006, the Company ceased to benefit from it in the
      first quarter of fiscal 2007.





*Net
      Income*


Net
      income
      in the first quarter of fiscal 2007 increased by 22.9% to $14.5 million from
      $11.8 million in the comparable fiscal 2006 period. As a percentage of net
      sales, net income represented 11.8% in the three months ended November 30,
      2006
      compared to 10.4% in the same period of fiscal 2006.





*Per
      Share Information*


Basic
      and
      diluted earnings per common share were $0.32 in the three months ended November
      30, 2006, up 23.1%, or $0.06 per share, from $0.26 in the comparable prior
      year
      period. Weighted average shares of common stock outstanding used in computing
      basic earnings per common share increased to 44,962,753 in the first quarter
      of
      fiscal 2007 from 44,646,397 in the comparable prior year period primarily as
      a
      result of additional stock option exercises since November 30, 2005. Weighted
      average shares of common stock outstanding used in computing diluted earnings
      per common share increased to 45,513,486 in first quarter of fiscal 2007 from
      45,167,726 in the comparable prior year period primarily as a result of
      additional stock option exercises since November 30, 2005, and 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, as
      shown
      in the Company’s consolidated statements of cash flows included in Item 1 of
      this report. For the three months ended November 30, 2006, net cash provided
      by
      operations was $27.9 million, an increase of $22.6 million from the comparable
      prior year period, due primarily to changes in certain working capital and
      other
      accounts, including prepaid pension costs, accrued income taxes, prepaid income
      taxes, accrued post-retirement and pension benefit obligation, and inventories,
      all as described below.





*Prepaid
      Pension Costs.* Prepaid
      pension costs decreased $0.8 million in the first three months of fiscal 2007
      compared to a $4.4 million increase in the first three months of fiscal 2006,
      primarily as a result of payments in the first quarter of fiscal 2006 required
      to fund the Company’s post-retirement and pension benefit obligation.





*Accrued
      Income Taxes.* Accrued
      income taxes increased $8.9 million in the first quarter of fiscal 2007 compared
      to a $3.7 million increase in the same period of fiscal 2006 due primarily
      to an
      increase in the tax provision as a result of higher pre-tax income and a higher
      effective tax rate, as discussed above, and the timing of estimated income
      tax
      payments.





*Prepaid
      Income Taxes.* Prepaid
      income taxes decreased $3.5 million in the first three months of fiscal 2007
      compared to no activity in the same period of fiscal 2006 due to a payment
      received from the Japanese Government in the first quarter of fiscal 2007 in
      connection with the Japanese tax matter, as further discussed below.





*Accrued
      Post-Retirement and Pension Benefit Obligation.* Accrued
      post-retirement and pension benefit obligation increased $0.5 million in the
      first three months of fiscal 2007 compared to a $2.7 million decrease in the
      first three months of fiscal 2006 primarily as a result of payments in the
      first
      quarter of fiscal 2006 to fund the Company’s post-retirement and pension benefit
      obligation.





*Inventories.* Inventories increased $3.3 million in the first quarter of fiscal 2007 compared
      to a $4.4 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, and
      (2)
      increased work-in-process inventory resulting from the conversion of raw
      material inventory during the first quarter of fiscal 2007 primarily related
      to
      the addition of new production lines in the Company’s Zdar, Czech Republic
      facility. This increase was offset in part by reduced inventory value due to
      lower manufacturing variances from standard costs generated during the fourth
      quarter of fiscal 2006 and first quarter of fiscal 2007, partially as a result
      of the Company’s manufacturing capital investment program and Project
      Operational Excellence.





*Accounts
      Receivable.* Accounts
      receivable, measured in days sales outstanding during the period, increased
      to
      75 days at November 30, 2006 from 73 days at August 31, 2006.





(20)
 ARROW
            INTERNATIONAL, INC.








As
      of
      November 30, 2006, the Company had an accounts receivable balance from its
      Italian customers of $10.9 million, of which approximately 74% is related to
      Italian Government-backed hospital customers. The Company increased its direct
      sales in this region following its acquisition of AB Medica in September 2004
      by
      taking over the sales formerly conducted by this former distributor. As of
      November 30, 2006, the days sales outstanding was 291 days, which is
      significantly higher than that of the Company’s overall November 30, 2006
      average customer days sales outstanding of 75 days. However, according to
      information provided by Italy’s National Health Service as of March 19, 2005,
      the average days sales outstanding for medical equipment supply companies in
      the
      Italian market ranges from approximately 300 to 330 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 November 30, 2006,
      the Company had recorded an allowance of $0.1 million to reserve for
      specifically identified, potentially uncollectible, private Italian customer
      balances.





The
      Company currently evaluates all of its trade receivables on a regular basis,
      including those with its Italian customers, to ensure that each receivable
      is
      recorded at net realizable value.





*Japanese
      Tax Assessment.* In
      March
      2004, the Company made a payment of $10.0 million to settle a tax assessment
      related to an ongoing Japanese Government tax audit of the Company’s transfer
      pricing with its Japanese subsidiary. In order to recover a majority of this
      Japanese tax assessment, the Company initiated competent authority proceedings
      with the Internal Revenue Service in the U.S. In the fourth quarter of fiscal
      2006, the competent authority proceedings were completed and the Company
      recorded a favorable tax credit of $3.7 million to reflect relief from a tax
      assessment related to transfer pricing between the U.S. and the Company’s
      Japanese subsidiary for its fiscal years 1998 through 2004. During the first
      quarter of fiscal 2007, the Company received a $3.5 million refund from the
      Japanese Government in partial settlement of this tax matter.





*Investing
      Activities*


Net
      cash
      used in the Company’s investing activities increased to $19.3 million in the
      three months ended November 30, 2006 from $5.9 million in the comparable period
      of fiscal 2006, due primarily to incremental purchases of marketable securities
      in the first quarter of fiscal 2007 and increased capital expenditures in
      support of its multi-year capital investment plan, as discussed
      below.





*Multi-Year
      Capital Investment Plan.* In
      April
      2004 the Company’s Board of Directors authorized the initiation of a multi-year
      capital investment plan to increase its worldwide manufacturing capacity and
      rationalize its production operations. This plan was initiated to improve
      customer service, support projections for future growth and to integrate
      operations acquired in recent years, and included the construction or
      acquisition of additional manufacturing facilities in Zdar, Czech Republic
      and
      Chihuahua, Mexico, which was commenced in the first quarter of fiscal 2005
      and
      completed during fiscal 2006. During the second quarter of fiscal 2006,
      production of multi-lumen central venous catheters began at the new Chihuahua
      facility and, in August 2006, production began at the Company’s new Zdar
      facility. As of August 31, 2006, the Company had incurred a total of $29.3
      million related to the construction of these new facilities, but did not make
      any additional expenditures related to this construction during the first
      quarter 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 November
      30, 2006, had spent a total of $7.3 million for this new equipment and expects
      to incur an additional $7.7 million through the end of fiscal 2008, subject
      to
      fluctuations in foreign exchange rates.





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 three 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 November 30, 2006, the
      Company had incurred costs of $1.6 million related to this relocation, of which
      $0.9 million had been paid, and expects to incur the remaining $0.4 million
      during the remainder of fiscal 2007.





*Financing
      Activities*


Financing
      activities used $4.7 million of net cash in the first three months of fiscal
      2007 compared to using $2.3 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 2006. Cash used by financing activities, however,
      was reduced by an increase in proceeds from stock option exercises.





*Credit
      Facilities.* To
      provide additional liquidity and flexibility in funding its operations, the
      Company from time to time also borrows amounts under credit facilities and
      other
      external sources of financing. At November 30, 2006, the Company had a revolving
      credit facility providing a total of $90.0 million in available revolving credit
      for general business purposes, of which $70.9 million was outstanding, all
      of
      which is owed by its foreign subsidiaries. Under this credit facility, the
      Company is required to comply with the following financial covenants: maintain
      a
      ratio of total liabilities to tangible net worth (total assets less total
      liabilities and intangible assets) of no more than 1.5 to 1; a limitation on
      certain mergers, consolidations and sales of assets by the Company or its
      subsidiaries; a limitation on the Company’s and its subsidiaries’ incurrence of
      liens; and a requirement that the lender approve the incurrence of additional
      indebtedness unrelated to the revolving credit facility when the aggregate
      principal amount of such new additional indebtedness exceeds $75.0 million.
      At
      November 30, 2006, 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 currently anticipates that the adoption
      of Statement of Financial Accounting Standards (SFAS) No. 158 during fiscal
      2007
      will not have a material impact on its compliance with any of these debt
      covenants. The Company is currently considering refinancing with longer term
      fixed rate debt some of its borrowings under this credit facility.





(21)
 ARROW
            INTERNATIONAL, INC.











Certain
      subsidiaries of the Company had other revolving credit facilities totaling
      the
      U.S. dollar equivalent of $31.7 million, of which $2.4 million was outstanding
      as of November 30, 2006.





Interest
      rate terms for both U.S. and foreign bank credit facilities are based on either
      bids provided by the lender, London Interbank Offered Rates (LIBOR) or Tokyo
      Interbank Offered Rates (TIBOR), plus applicable margins. Interest is payable
      monthly during the revolving credit period. Combined borrowings under these
      facilities increased $2.3 million and $0.6 million during the three months
      ended
      November 30, 2006 and November 30, 2005, respectively, all of which was related
      to foreign borrowings.





*Contractual
      Obligations*


A
      summary
      of all of the Company’s contractual obligations and commercial commitments as of
      November 30, 2006 were 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
            
            
            21.1
            
            
            4.5
            
            
            5.9
            
            
            3.6
            
            
            7.1Purchase
                obligations (1)
            
            
            31.5
            
            
            31.5
            
            
            -
            
            
            -
            
            
            -Other
                long-term obligations
            
            
            0.6
            
            
            0.1
            
            
            0.1
            
            
            0.1
            
            
            0.3Lines
                of credit (2)
            
            
            73.3
            
            
            73.3
            
            
            -
            
            
            -
            
            
            -Standby
                letters of credit
            
            
            2.3
            
            
            2.3
            
            
            -
            
            
            -
            
            
            -Total
                cash contractual obligations and commercial commitments
            
            $
            129.8
            
            $
            112.7
            
            $
            6.0
            
            $
            3.7
            
            $
            7.4





(1)
      Includes open purchase orders primarily relating to the purchase of raw
      materials, equipment and certain consulting and information system
      services.





(2)
      Includes short-term indebtedness of the Company and its subsidiaries under
      various revolving credit facilities, as discussed above.





*Inflation
      and Seasonality*


During
      the
      periods discussed above, the overall effects of inflation and seasonality on
      the
      Company’s business were not significant.





*Outlook*


Based
      upon
      its present plans, the Company believes that cash generated from its operations
      and available credit resources, including its ability to extend maturities
      of
      borrowings outstanding under its lines of credit in the ordinary course
      consistent with past practice, will be adequate to repay current portions of
      long-term debt, to finance currently planned capital expenditures, including
      those remaining pursuant to the Company’s multi-year capital investment plan, as
      discussed above, and to meet the currently foreseeable liquidity needs of the
      Company.





(22)
 ARROW
            INTERNATIONAL, INC.








**Critical
      Accounting Policies and Estimates**





The
      Company has disclosed in Note 1 to its consolidated financial statements in
      its
      Annual Report on Form 10-K for the fiscal year ended August 31, 2006 those
      accounting policies that it considers to be significant in determining its
      results of operations and financial position. There have been no material
      changes to the critical accounting policies previously identified and described
      in the Company’s 2006 Form 10-K. The accounting principles utilized by the
      Company in preparing its consolidated financial statements conform to generally
      accepted accounting principles in the United States of America.





The
      preparation of these consolidated financial statements requires the Company’s
      management to make estimates and assumptions that affect the reported amounts
      of
      assets, liabilities, revenues and expenses, as well as the disclosure of
      contingent assets and liabilities at the date of its financial statements.
      The
      Company bases its estimates on historical experience, actuarial valuations
      and
      various other factors that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying value of assets and liabilities that are not readily apparent
      from
      other sources. Some of those judgments can be subjective and complex and,
      consequently, actual results may differ from these estimates under different
      assumptions or conditions. While for any given estimate or assumption made
      by
      the Company’s management there may be other estimates or assumptions that are
      reasonable, the Company believes that, given the current facts and
      circumstances, it is unlikely that applying any such other reasonable estimate
      or assumption would materially impact the financial statements.





**New
      Accounting Standards**





The
      FASB
      issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes-an
      interpretation of SFAS No. 109” (“FIN 48”), in July 2006. The intent of FIN 48
      is to clarify the accounting for uncertainty in income taxes recognized in
      an
      entity’s financial statements in accordance with SFAS No. 109. This
      interpretation imposes a recognition threshold and measurement attribute for
      financial statement disclosure of tax positions taken or expected to be taken
      on
      a tax return. This interpretation is effective for fiscal years beginning after
      December 15, 2006. The Company is currently evaluating the requirements of
      FIN
      48 and has not yet determined the impact that the adoption of this statement
      will have on its consolidated financial statements.





The
      FASB
      issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
      Other Postretirement Plans-an amendment of SFAS No. 87, 88, 106 and 132(R)”, in
      September 2006. This statement requires that an employer recognize the
      overfunded or underfunded status of a defined benefit postretirement plan as
      an
      asset or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur through
      comprehensive income. This statement also requires an employer to measure the
      funded status of a plan as of the date of its year-end. The provisions of SFAS
      No. 158 will be effective for fiscal years ending after December 15, 2006.
      The
      Company currently estimates that the adoption of this statement will result
      in a
      charge of approximately $26.0 million to other comprehensive expense as of
      August 31, 2007.





**Cautionary
      Statement Under The Private Securities Litigation Reform Act of
      1995**





Certain
      statements contained in this report or in other written or oral statements
      made
      from time to time by the Company may contain forward-looking statements within
      the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
      the
      Securities Act of 1934 (the “Exchange Act”). Such statements may use words such
      as “anticipate,” “estimate,” “expect,” “plan,” “believe,” “may,” “intend” and
      similar words or terms. Although the Company believes that the expectations
      in
      such forward-looking statements are reasonable, the Company cannot assure you
      that such expectations will prove to have been correct. The forward-looking
      statements are based upon a number of assumptions and estimates that, while
      presented with specificity and considered reasonable by the Company, are
      inherently subject to significant business, economic and competitive risks,
      uncertainties and contingencies which are beyond the control of the Company,
      and
      upon assumptions with respect to future business decisions which are subject
      to
      change. Accordingly, the forward-looking statements are only an estimate, and
      actual results will vary from the forward-looking statements, and these
      variations may be material. The Company is not obligated to update any
      forward-looking statement, but investors are urged to consult any further
      disclosures the Company makes in its filings with the Securities and Exchange
      Commission (the “SEC”). Consequently, the inclusion of the forward-looking
      statements should not be regarded as a representation by the Company of results
      that actually will be achieved. Forward-looking statements are necessarily
      speculative in nature, and it is usually the case that one or more of the
      assumptions in the forward-looking statements do not materialize. Investors
      are
      cautioned not to place undue reliance on the forward-looking statements. The
      Company cautions investors that the factors set forth below, which are described
      in further detail in Item 1A. Risk Factors in the Company’s Annual Report on
      Form 10-K for the fiscal year ended August 31, 2006, as amended, and in its
      other filings with the SEC, could cause the Company’s results to differ
      materially from those stated in the forward-looking statements. These factors
      include: (1) stringent regulation of the Company’s products by the U.S. Food and
      Drug Administration and, in some jurisdictions, by state, local and foreign
      governmental authorities; (2) the highly competitive market for medical devices
      and the rapid pace of product development and technological change in this
      market; (3) pressures imposed by the health care industry to reduce the cost
      or
      usage of medical products and services, as well as pressures on pricing
      resulting from consolidation within the medical device industry; (4) dependence
      on patents and proprietary rights to protect the Company’s trade secrets and
      technology, and the need for litigation to enforce or defend these rights;
      (5)
      risks associated with the Company’s international operations; (6) potential
      product liability risks inherent in the design, manufacture and marketing of
      medical devices; (7) risks relating to interruptions in the supply of or
      increases in the price of essential raw materials or components; (8) dependence
      upon strong relationships with physicians for research, development, marketing
      and sale of many of the Company’s products; (9) risks associated with the
      Company’s use of derivative financial instruments; and (10) dependence on the
      continued service of key members of the Company’s management.





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 ARROW
            INTERNATIONAL, INC.











Item
      3.  Quantitativeand
      Qualitative Disclosures About Market
      Risk





During
      the
      three month periods ended November 30, 2006 and 2005, the percentage of the
      Company’s sales invoiced in currencies other than U.S. dollars was 28.8% and
      26.5%, 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 November 30, 2006, outstanding foreign currency forward
      contracts totaling the U.S. dollar equivalent of $37.4 million mature at various
      dates through October 2007. As of November 30, 2006, 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.





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 ARROW
            INTERNATIONAL, INC.








At
      November 30, 2006, the Company had foreign currency forward contracts to sell
      foreign currencies which mature at various dates through February 2007. The
      following table identifies foreign currency forward contracts to sell foreign
      currencies at November 30, 2006 and August 31, 2006:


November
                  30, 2006
              
              August
                  31, 2006Notional
                Amounts
              
              Fair
                  Market
                Value
              
              Notional
                Amounts
              
              Fair
                  Market
                ValueForeign
                  currency: (U.S. Dollar Equivalents)Japanese
                  yen
              
              $
              1,282
              
              $
              1,302
              
              $
              2,177
              
              $
              2,146Canadian
                  dollar
              
              
              1,333
              
              
              1,314
              
              
              1,437
              
              
              1,448Euro
              
              
              9,070
              
              
              9,135
              
              
              7,694
              
              
              7,694Mexican
                  peso
              
              
              902
              
              
              906
              
              
              913
              
              
              909African
                  rand
              
              
              525
              
              
              556
              
              
              1,827
              
              
              1,793British
                  pound
              
              
              4,730
              
              
              4,913
              
              
              3,989
              
              
              4,007$
              17,842
              
              $
              18,126
              
              $
              18,037
              
              $
              17,997





At
      November 30, 2006, the Company also had foreign currency forward contracts
      to
      buy foreign currencies which mature at various dates through October 2007.
      The
      following table identifies forward exchange contracts to buy foreign currencies
      at November 30, 2006 and August 31, 2006:




November
                30, 2006
            
            August
                31, 2006Notional
              Amounts
            
            Fair
                Market
              Value
            
            Notional
              Amounts
            
            Fair
                Market
              ValueForeign
                currency: (U.S. Dollar Equivalents)Czech
                koruna
            
            $
            19,538
            
            $
            20,444
            
            $
            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 three months ended November
      30, 2006 and 2005, the Company did not recognize any time value or intrinsic
      value losses against cost of sales. At November 30, 2006, 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
      November 30, 2006 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 quarter of both fiscal
      2007 and 2006, the Company recorded less than $0.1 million of interest expense
      in connection with these swap agreements.





Item
      4. Controlsand 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 November 30, 2006. 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.





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 ARROW
            INTERNATIONAL, INC.








**Changes
      in Internal Control Over Financial Reporting**





There
      have
      been no changes in the Company’s internal control over financial reporting that
      occurred during the three months ended November 30, 2006 that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.





PART
      II OTHERINFORMATION




Item
              6.
            Exhibits





(a)
            Exhibits
              
              See Exhibit Index on page 28 for
                a list of
                the Exhibits filed as part of this
                report.




























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            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: January
              8, 2007
            By:
            /s/ Frederick
              J. HirtFrederick
              J. HirtChief
                Financial Officer and
              Senior
                Vice President of Finance
              (Principal
                Financial Officer and
              Chief
                Accounting Officer)








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 ARROW
            INTERNATIONAL, INC.








EXHIBITINDEX





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










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