UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

FLOW INTERNATIONAL CORPORATION

WASHINGTON (State or other jurisdiction of incorporation or organization)		91-1104842 (I.R.S. Employer Identification No.)

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 þ No ¨.

“Indicated 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. Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ.

As of November 30, 2007, there were 38,062,586 shares of common stock outstanding.

 

 

FLOW INTERNATIONAL CORPORATION

INDEX

				Page
Part I — FINANCIAL INFORMATION
Item 1.		Condensed Consolidated Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets — October 31, 2007 and April 30, 2007			3
		Condensed Consolidated Statements of Operations — Three and Six Months Ended October 31, 2007 and 2006			4
		Condensed Consolidated Statements of Cash Flows — Six Months Ended October 31, 2007 and 2006			5
		Condensed Consolidated Statement of Shareholders’ Equity and Comprehensive Income — Six Months Ended October 31, 2007 and 2006			6
		Notes to Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			27
Part II — OTHER INFORMATION
Item 1.		Legal Proceedings			28
Item 1A.		Risk Factors			28
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3.		Defaults Upon Senior Securities			30
Item 4.		Submission of Matters to a Vote of Security Holders			30
Item 5.		Other Information			30
Item 6.		Exhibits			30
Signatures					31
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in thousands, except share amounts)

		October 31,				April 30,
		2007				2007
ASSETS:
Current Assets:
Cash and Cash Equivalents		$	26,928			$	38,146
Short-term Investments			—				750
Receivables, net			28,699				26,618
Inventories			30,988				26,635
Deferred Income Taxes			1,243				44
Other Current Assets			7,440				6,950
Total Current Assets			95,298				99,143
Property and Equipment, net			17,716				15,479
Intangible Assets, net			3,861				3,767
Goodwill			2,764				2,764
Deferred Income Taxes			256				305
Other Assets			385				682
		$	120,280			$	122,140
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities:
Notes Payable		$	1,049			$	6,366
Current Portion of Long-Term Obligations			837				822
Accounts Payable			18,166				17,545
Accrued Payroll and Related Liabilities			7,276				6,291
Taxes Payable and Other Accrued Taxes			2,644				2,066
Deferred Income Taxes			260				1,627
Deferred Revenue			4,943				3,559
Customer Deposits			4,926				6,499
Other Accrued Liabilities			13,000				12,233
Total Current Liabilities			53,101				57,008
Long-Term Obligations, net			2,459				2,779
Other Long-Term Liabilities			1,175				573
			56,735				60,360
Commitments and Contingencies (Note 14)
Shareholders’ Equity:
Series A 8% Convertible Preferred Stock—$.01 par value, 1,000,000 shares authorized, none issued			—				—
Common Stock—$.01 par value, 49,000,000 shares authorized, 37,328,946 and 37,268,037 shares issued and outstanding at October 31, 2007 and April 30, 2007, respectively			368				367
Capital in Excess of Par			137,274				139,115
Accumulated Deficit			(66,617	)			(68,747	)
Accumulated Other Comprehensive Loss:
Defined Benefit Plan Obligation, net of income tax of $67 and $67			(201	)			(201	)
Cumulative Translation Adjustment, net of income tax of $221 and $0			(7,279	)			(8,754	)
Total Shareholders’ Equity			63,545				61,780
		$	120,280			$	122,140

See Accompanying Notes to
Condensed Consolidated Financial Statements

FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		October 31,								October 31,
		2007				2006				2007				2006
Sales		$	59,174			$	54,404			$	117,840			$	107,814
Cost of Sales			34,739				30,792				69,805				61,171
Gross Margin			24,435				23,612				48,035				46,643
Expenses:
Sales and Marketing			10,983				10,563				21,440				20,160
Research and Engineering			2,145				2,339				4,425				4,633
General and Administrative			7,275				8,982				19,691				16,002
			20,403				21,884				45,556				40,795
Operating Income			4,032				1,728				2,479				5,848
Interest Income			251				153				442				382
Interest Expense			(95	)			(46	)			(177	)			(181	)
Other Income (Expense), Net			(579	)			399				(267	)			1,025
Income Before Provision for Income Taxes			3,609				2,234				2,477				7,074
Provision/Benefit for Income Taxes			(1,314	)			(492	)			196				(1,564	)
Income From Continuing Operations			2,295				1,742				2,673				5,510
Loss on Sale of Discontinued Operations, Net of Income Tax of $0			—				—				—				(726	)
Net Income		$	2,295			$	1,742			$	2,673			$	4,784
Basic Income Per Share:
Income From Continuing Operations		$	0.06			$	0.05			$	0.07			$	0.15
Loss From Discontinued Operations			—				—				—				(0.02	)
Net Income		$	0.06			$	0.05			$	0.07			$	0.13
Diluted Income Per Share:
Income From Continuing Operations		$	0.06			$	0.05			$	0.07			$	0.15
Loss From Discontinued Operations			—				—				—				(0.02	)
Net Income		$	0.06			$	0.05			$	0.07			$	0.13
Weighted Average Shares Used in Computing Basic and Diluted Income (Loss) Per Share:
Basic			37,326				37,194				37,314				37,134
Diluted			37,511				37,879				37,540				37,887

See Accompanying Notes to
Condensed Consolidated Financial Statements

FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)

		Six Months Ended
		October 31,
		2007				2006
Cash Flows from Operating Activities:
Net Income		$	2,673			$	4,784
Adjustments to Reconcile Net Income to Cash Used in Operating Activities:
Depreciation and Amortization			1,780				1,413
Unrealized Foreign Currency (Gains), net			(905	)			(1,690	)
Incentive Stock Compensation Expense			1,101				1,405
Repurchase of Warrants			629				—
Loss on Sale of Discontinued Operations			—				726
Deferred Income Taxes			(1,618	)			330
Other			892				403
Changes in Operating Assets and Liabilities:
Receivables			(1,172	)			6,180
Inventories			(3,804	)			(5,737	)
Prepaid Expenses			500				1,321
Other Operating Assets			(255	)			236
Accounts Payable			(848	)			(5,573	)
Deferred Revenue			1,216				(3,661	)
Customer Deposits			(1,788	)			(2,175	)
Other Operating Liabilities			(104	)			(1,427	)
Cash Used in Operating Activities			(1,703	)			(3,465	)
Cash Flows From Investing Activities:
Expenditures for Property and Equipment and Intangible Assets			(2,541	)			(2,561	)
Proceeds from Sale of Short-term Investments			650				—
Proceeds from Sale of Property and Equipment			219				—
Proceeds from Sale of Avure Business			—				990
Settlement on Sale of Avure Business			—				(985	)
Restricted Cash			—				(125	)
Cash Used in Investing Activities			(1,672	)			(2,681	)
Cash Flows from Financing Activities:
Repayments Under Notes Payable			(5,857	)			(1	)
Borrowings Under Notes Payable			457				—
Payments of Long-Term Obligations			(391	)			(499	)
Proceeds from Exercise of Stock Options			424				2,498
Payment for Warrant Repurchase			(3,006	)			—
Cash Provided by (Used in) Financing Activities			(8,373	)			1,998
Effect of Changes in Exchange Rates			530				610
Decrease in Cash And Cash Equivalents			(11,218	)			(3,538	)
Cash and Cash Equivalents at Beginning of Period			38,146				36,186
Cash and Cash Equivalents at End of Period		$	26,928			$	32,648
Supplemental Disclosures of Noncash Investing and Financing Activities
Operating Assets transferred to Property and Equipment		$	417			$	—
Accounts Payable incurred to acquire Property and Equipment, and Intangible Assets			1,208				871
Non-monetary exchange of assets			—				250
Issuance of compensatory common stock on executive incentive compensation plan			—				884

See Accompanying Notes to
Condensed Consolidated Financial Statements

FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(unaudited, in thousands)

																		Accumulated
		Common Stock								Capital								Other				Total
						Par				In Excess				Accumulated				Comprehensive				Shareholders’
		Shares				Value				of Par				Deficit				Loss				Equity
Balances, April 30, 2007			37,268			$	367			$	139,115			$	(68,747	)		$	(8,955	)		$	61,780
Components of Comprehensive Income:
Net Income															2,673								2,673
Cumulative Translation Adjustment, Net of Income Tax of $288																			1,475				1,475
Total Comprehensive Income																							4,148
Cumulative effect upon adoption of FIN 48 (Note 7)															(543	)							(543	)
Exercise of Options			41				1				423												424
Repurchase of Warrants (Note 15)											(2,377	)											(2,377	)
Stock Compensation			20				0				113												113
Balances, October 31, 2007			37,329			$	368			$	137,274			$	(66,617	)		$	(7,480	)		$	63,545
Balances, April 30, 2006			36,943			$	364			$	137,192			$	(72,417	)		$	(7,999	)		$	57,140
Cumulative effect of the adoption of FAS 123R											(313	)											(313	)
Components of Comprehensive Income:
Net Income															4,784								4,784
Reclassification Adjustment for Settlement of Cash Flow Hedges, net of income tax of $0																			273				273
Cumulative Translation Adjustment, Net of Income Tax of $0																			(1,184	)			(1,184	)
Total Comprehensive Income																							3,873
Exercise of Options			151				2				1,410												1,412
Stock Compensation			131				1				1,822												1,823
Balances, October 31, 2006			37,225			$	367			$	140,111			$	(67,633	)		$	(8,910	)		$	63,935

See Accompanying Notes to
Condensed Consolidated Financial Statements

FLOW INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All tabular dollar amounts in thousands, except per share amounts)
(Unaudited)

Note 1—Basis of Presentation

     In the opinion of the management of Flow International Corporation (the “Company”), the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and accruals necessary to fairly present the financial position, results of operations and cash flows of the Company. The financial information as of April 30, 2007 is derived from the Company’s audited consolidated financial statements and notes for the fiscal year ended April 30, 2007 included in Item 8 in the fiscal 2007 Annual Report on Form 10-K (“10-K”). These interim financial statements do not include all information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, and should be read in conjunction with the Company’s fiscal 2007 Form 10-K. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company’s financial statements. Actual results may differ from these estimates. Operating results for the three and six months ended October 31, 2007 may not be indicative of future results.

Note 2—Recently Issued Accounting Pronouncements

     In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 on May 1, 2007. FASB Staff Position No. 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FSP FIN 48-1”) provides a set of conditions that must be evaluated when determining whether a tax position has been effectively settled. We contemplated the provisions of FSP FIN 48-1 upon the initial adoption of FIN 48. Additional discussion and the impact of adopting FIN 48 are included in Note 7 to the Condensed Consolidated Financial Statements.

     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 “Defining Fair Value Measurement” (FAS 157) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after December 15, 2007, which is the beginning of the Company’s fiscal year 2009. The Company is currently evaluating the impact of adopting FAS 157 on its financial statements.

     In February 2007, the FASB issued Statement of Financial Accounting Standards (“FAS 159) “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115”. FAS 159 provides entities with an option to choose to measure eligible items at fair value at specified election dates. If elected, an entity must report unrealized gains and losses on the item in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method, is irrevocable (unless a new election date occurs); and is applied only to entire instruments and not to portions of instruments. The Company is currently evaluating the potential impact of adopting FAS 159 on its financial statements, which is effective for fiscal years beginning after November 15, 2007, which is the beginning of the Company’s fiscal year 2009.

Note 3—Segment Information

     The Company has identified four reportable segments based on the manner in which internal financial information is produced and evaluated by the chief operating decision maker (the Company’s Chief Executive Officer). These segments, North America Waterjet, Asia Waterjet, Other International Waterjet (together known as Waterjet), and Applications, utilize the Company’s high pressure technology. The Waterjet operation includes cutting and cleaning operations, which are focused on providing total solutions for many industries including aerospace, automotive, semiconductor, disposable products, food, glass, job shop, metal cutting, stone, tile, surface preparation, and paper. The Applications operation provides specialty engineered robotic systems designed for material removal and separation of various materials and for factory automation. These systems are primarily used in automotive applications. Segment operating results are measured based on sales, gross margin and operating income (loss).

     Effective September 2007, the Company’s Application segment ceased the pursuit of sales of non-waterjet automation systems and will focus on increasing revenue from systems that integrate waterjet cutting technology.

     A summary of operations by reportable segment is as follows:

		North								Other								Inter-
		America				Asia				International								segment
		Waterjet				Waterjet				Waterjet				Applications				Eliminations				Total
Three Months Ended October 31, 2007
External sales		$	32,276			$	5,721			$	16,083			$	5,094			$	—			$	59,174
Inter-segment sales			14,705				259				849				233				(16,046	)			—
Gross margin **			14,567				2,654				7,182				463				(431	)			24,435
Operating income (loss) *			1,752				111				2,848				(1,110	)			431				4,032
Six Months Ended October 31, 2007
External sales		$	63,334			$	12,748			$	31,393			$	10,365			$	—			$	117,840
Inter-segment sales			31,416				854				1,735				590				(34,595	)			—
Gross margin **			27,978				5,826				13,555				1,274				(598	)			48,035
Operating income (loss) *			(1,937	)			597				4,764				(1,543	)			598				2,479
Three Months Ended October 31, 2006
External sales		$	30,079			$	8,133			$	11,943			$	4,249			$	—			$	54,404
Inter-segment sales			6,028				337				26				168				(6,559	)			—
Gross margin			13,800				4,472				4,807				533				—				23,612
Operating income (loss) *			796				388				998				(454	)			—				1,728
Six Months Ended October 31, 2006
External sales		$	61,588			$	15,489			$	22,584			$	8,153			$	—			$	107,814
Inter-segment sales			11,421				644				71				184				(12,320	)			—
Gross margin			28,132				8,938				8,796				979				(202	)			46,643
Operating income (loss) *			3,573				2,395				1,298				(1,216	)			(202	)			5,848

     A summary reconciliation of total segment operating income to total consolidated income from continuing operations before provision for income taxes is as follows:

		Three Months Ended								Six Months Ended
		October 31,								October 31,
		2007				2006				2007				2006
Operating income for reportable segments		$	4,032			$	1,728			$	2,479			$	5,848
Interest income			251				153				442				382
Interest expense			(95	)			(46	)			(177	)			(181	)
Other income (expense), net			(579	)			399				(267	)			1,025
Income before provision for income taxes		$	3,609			$	2,234			$	2,477			$	7,074

Note 4—Stock-Based Compensation Plans

     The Company maintains stock-based compensation plans described as follows:

     2005 Equity Incentive Plan (the “2005 Plan”). The 2005 Plan was adopted in September 2005 to attract and retain the most talented employees and promote the growth and success of the business by aligning long-term interests of employees with those of shareholders. The 2005 Plan provides for a pool of 2.5 million shares to be awarded, which includes the remaining 751,157 shares from the 1995 LTI Plan. The Company, at its discretion, may choose to grant the 2.5 million shares in the form of stock, stock units, stock options, stock appreciation rights, or cash awards.

     Effective May 1, 2006, the beginning of its fiscal year 2007, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standard No. 123R (“FAS 123R”), “Share-Based Payment (Revised 2004)”. The Company elected to use the modified prospective transition method permitted by FAS 123R and therefore has not restated its financial results for prior periods. Under this transition method, the compensation cost recognized by the Company beginning in fiscal 2007 includes (a) compensation cost for all stock-based compensation awards that were granted prior to, but not vested as of May 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement of Financial Accounting Standard No. 123 (“FAS 123”), “Accounting for Stock Based Compensation”, and (b) compensation cost for all stock-based compensation awards granted subsequent to May 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123R. Compensation expense is recognized only for those options, stocks, or stock units expected to vest with forfeitures estimated at the grant date based on the Company’s historical experience and future expectations. If the actual number of forfeitures differs from those estimated by the management, additional adjustments may be required in future periods. Compensation expense is recognized on a straight-line basis over the total requisite service period of each award, and recorded in operating expenses on the Condensed Consolidated Statement of Operations.

     Stock Options

     The Company grants common stock options to employees and directors of the Company with service and/or performance conditions. The compensation cost of the stock options are based on their fair value at the grant date and recognized ratably over the service period. All options become exercisable upon a change in control of the Company unless the surviving company assumes the outstanding options or substitutes similar awards for the outstanding awards of the 2005 Plan. Options are generally granted with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. The maximum term of options is 10 years from the date of grant.

     The following tables summarize the stock option activities for the six months ended October 31, 2007:

						Weighted-								Weighted-
						Average				Aggregate				Average
		Number of				Exercise				Intrinsic				Remaining
		Options				Price				Value				Contractual Term (Years)
Outstanding at April 30, 2007			1,063,404			$	8.99			$	2,819,601				3.61
Granted during the period			200,000				11.40
Exercised during the period			(41,200	)			10.27
Expired or forfeited during the period			(149,850	)			10.54
Outstanding at October 31, 2007			1,072,354			$	9.17			$	1,034,711				4.46
Exercisable at October 31, 2007			872,354			$	8.66			$	1,034,711				3.25
Vested or expected to vest at October 31, 2007			872,354				8.66				1,034,711				3.25

		Six Months Ended October 31,
		2007				2006
Weighted average grant-date fair value of stock options granted		$	6.90			$	4.76
Total intrinsic value of options exercised		$	105			$	674
Total fair value of options vested		$	—			$	55
Cash received from exercise of share options		$	424			$	1,412
Tax benefit realized from stock options exercised		$	—			$	—

     For the six months ended October 31, 2007, the Company recognized compensation expense related to stock options of $0, net of a reversal of $101,000 related to prior year stock options whose performance criteria were not met. $106,000 or $0.00 per basic and diluted share was recognized in the prior year comparative period. As of October 31, 2007, total unrecognized compensation cost related to nonvested stock options was $1.3 million.

     For the six months ended October 31, 2007 and 2006, the weighted-average fair values at the date of grant for options granted were estimated using the Black-Scholes option-pricing model, based on the following assumptions: (i) no expected dividend yields; (ii) expected volatility rates of 62.02% and 61.90% based on historical volatility of our stock price; and (iii) expected lives of six and two years based on historical experience. The risk-free interest rate applied was 4.98% and 4.97%, respectively, based on U.S Treasury constant maturity interest rate whose term is consistent with the expected life of the Company’s stock options.

     Service-Based Stock Awards

     The Company grants common stock or stock units to employees and directors of the Company with service conditions. The compensation cost of the common stock or stock units are based on their fair value at the grant date and recognized ratably over the service period.

     The following table summarizes the service-based stock award activities for the six months ended October 31, 2007:

		Six Months Ended October 31, 2007
						Weighted-
						Average
		Number of				Grant-date Fair
		Shares				Value
Nonvested at April 30, 2007			72,533			$	9.33
Granted during the period			16,000				12.72
Forfeited during the period			(5,600	)			12.99
Vested during the period			(26,434	)			6.81
Nonvested at October 31, 2007			56,499			$	10.94

     For the six months ended October 31, 2007 and 2006, the Company recognized compensation expense related to service-based stock awards of $312,000 and $317,000, respectively. As of October 31, 2007, total unrecognized compensation cost related to such awards of $699,000 is expected to be recognized over a weighted average period of 2.21 years.

      Performance-Based Stock Awards

     In fiscal 2006 and 2007, the Company adopted Long-Term Incentive Plans (the “LTIPs”) under which the executive officers are to receive stock awards based on the Company’s performance measures over three-year performance periods. These plans were adopted annually with different performance targets. Awards will vary based on the degree to which the Company’s performance meets or exceeds predetermined thresholds at the end of the performance period. No payout will occur unless the Company exceeds certain minimum threshold performance objectives. Compensation expense is based upon current performance projections for the three-year period and the percentage of the requisite service that has been rendered. Compensation cost for the unvested portion of the LTIP awards is based on their grant-date fair value. The LTIPs permit employees to elect to net-settle a portion of the award paid in stock to meet the employee’s share of minimum withholding requirements, which the Company accounted for as a liability prior to adopting FAS 123R. FAS 123R allows such awards with net-settlement features for the employee’s share of minimum withholding requirements to be accounted for as equity, as such, a cumulative effect of $377,000 was recognized upon adoption of FAS 123R to record the amounts previously recorded as liabilities in capital in excess of par.

     The following table summarizes the LTIPs activities for the six months ended October 31, 2007:

		Six Months ended October 31, 2007
						Weighted-
						Average
		Number of				Grant-date Fair
		Shares				Value
Nonvested at April 30, 2007			181,500			$	10.71
Granted during the period			—				—
Forfeited during the period			(38,000	)			10.51
Vested during the period			—				—
Nonvested at October 31, 2007			143,500			$	10.76

     For the six months ended October 31, 2007 and 2006, the Company recognized compensation expense related to LTIPs of $0 and $390,000, respectively. The amount recorded in fiscal 2007 was subsequently reversed in the fourth quarter of fiscal 2007 because the performance objectives were no longer deemed probable.

     Under an annual incentive plan adopted in fiscal 2007, the Company granted executives and certain employees’ annual bonuses in the form of cash and/or common stock of the Company. Awards were based on the Company’s performance and individual goals and were usually granted following the conclusion of the Company’s fiscal year end. The shares of the common stock to be issued were not known at the grant date and the amount of the stock was equivalent to a fixed monetary amount. These awards were recorded as liability awards under FAS 123R in the prior fiscal year. For the six months ended October 31, 2006, the Company recognized compensation expense related to the annual incentive plan of $232,000.

Note 5—Restructuring

     The restructuring reserve balance included in Other Accrued Liabilities is comprised of facility exit costs for all segments which consist of long-term lease commitments, net of expected sublease income for restructuring initiatives completed in fiscal 2006 and prior fiscal years.

     The following table summarizes accrued restructuring activity, all incurred as facility exit costs:

		North				Other
		America Waterjet				International Waterjet				Applications				Consolidated
Balance, April 30, 2007		$	31			$	136			$	320			$	487
Cash payments			(18	)			(8	)			(242	)			(268	)
Other			—				38				—				38
Balance, October 31, 2007		$	13			$	166			$	78			$	257

Note 6—Other Income (Expense), Net

     The Company’s subsidiaries have adopted the local currency of the country in which they operate as the functional currency. All assets and liabilities of these foreign subsidiaries are translated at period-end rates. Income and expense accounts of the foreign subsidiaries are translated at the average rates in effect during the period. Assets and liabilities (including inter-company accounts that are transactional in nature) of the Company which are denominated in currencies other than the functional currency of the entity are translated based on current exchange rates and gains or losses are included in the Condensed Consolidated Statement of Operations.

     The following table shows the detail of Other Income (Expense), Net, in the accompanying Condensed Consolidated Statements of Operations:

		Three Months								Six Months
		Ended October 31,								Ended October 31,
		2007				2006				2007				2006
Realized Foreign Exchange Losses, Net		$	(423	)		$	(382	)		$	(481	)		$	(343	)
Unrealized Foreign Exchange Gains, Net			528				848				905				1,690
Premium on Repurchase of Warrants			(629	)			—				(629	)			—
Hedging Costs			—				(46	)			—				(206	)
Other			(55	)			(21	)			(62	)			(116	)
		$	(579	)		$	399			$	(267	)		$	1,025

     The Company repurchased 403,300 warrants from certain funds managed or advised by Third Point LLC for an aggregate purchase price of $3 million. The cash paid in excess of the fair market value of those warrants on the repurchase date of $629,000 was recorded as an Other Expense in the current fiscal quarter. See Note 15 for a detailed discussion of this transaction.

     There was no expense related to hedging costs for the three and six months ended October 31, 2007. For the six months ended October 31, 2006, the Company recorded an expense of $206,000 related to hedging costs recorded during the first and second quarters of fiscal 2007. The Company uses derivative instruments to manage exposures to foreign currency risks and records the hedge transactions in accordance with Statement of Financial Accounting Standards No. 133 (“FAS 133”), “Accounting for Derivative Instruments and Hedging Activities”.

Note 7—Income Taxes

     The Company adopted the provisions of FIN 48 effective May 1, 2007 and has analyzed its filing positions in all of the federal, state, and international jurisdictions where it or its wholly-owned subsidiaries are required to file income tax returns for all open tax years in these jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. Furthermore, no open tax years are currently under audit, and as of October 31, 2007, no significant adjustments have been proposed relative to the Company’s tax positions.

     The adoption of FIN 48 resulted in a $543,000 increase in the Company’s liability for unrecognized tax benefits, which was accounted for as a reduction to the May 1, 2007 retained earnings balance. As of May 1, 2007, the balance of unrecognized tax benefits was $2.3 million, which, if recognized, would reduce the Company’s effective tax rate. On August 14, 2007, Germany’s President signed the Corporate Tax Reform Act 2008, which among other changes, reduced the statutory corporate income tax and trade tax rates in Germany. Under U. S. GAAP, the Company is required to remeasure its unrecognized tax benefits, based on the provisions of the enacted tax law in the period that includes the enactment date. Therefore, as of October 31, 2007, the Company’s unrecognized tax benefits were reduced to $2 million. In accordance with FIN 48, the Company has recognized immaterial interest related to unrecognized tax benefits as a component of interest expense. The Company does not expect that unrecognized tax benefits will significantly change within the next twelve months.

     For the three and six months ended October 31, 2007, the foreign tax provision consists of current and deferred tax expense. The United States tax provision consists primarily of state taxes and accrued foreign withholding taxes. During the first quarter of fiscal 2008, after concluding that its German operations had achieved sustainable profitability, the Company reversed its valuation allowance against deferred tax assets in this jurisdiction, which resulted in a $1,160,000 tax benefit, or $.03 per basic and dilutive income per share, as a reduction in the deferred tax asset valuation allowance.

     The Company continues to provide a full valuation allowance against its net operating losses and other net deferred tax assets, arising in certain tax jurisdictions, mainly the United States and Canada, because the realization of such assets is not more likely than not. For the three and six months ended October 31, 2007, the valuation allowance decreased by $0.4 million and $0.9 million, respectively. The change is mainly attributable to an increase in net operating losses in the United States and Canada, and the reversal of the valuation allowance in Germany. The domestic net operating losses can be carried forward 20 years to offset domestic profits in future periods and expire between fiscal 2022 and fiscal 2026 if not used. Most of the foreign net operating losses can be carried forward indefinitely, with certain amounts expiring between fiscal 2014 and 2017. The Company provided a full valuation allowance against the deferred tax assets associated with the losses recorded during fiscal 2007.

     The Company is permanently deferring undistributed earnings in its foreign subsidiaries with the exception of its subsidiaries in Taiwan, Japan, and Switzerland. During the first two quarters of fiscal 2008, the Company repatriated $6.1 million, net of tax of $885,000 from two foreign subsidiaries and the Company plans to continue repatriating additional funds from these foreign subsidiaries in the future. There was no repatriation of earnings in the comparative prior period.

Note 8—Discontinued Operations

     On October 31, 2005, the Company completed the sale of certain of its non-core businesses as a result of the strategy to divest itself of operations that did not rely upon its core ultra-high-pressure water pump business (the “Avure Business”). The consideration included cash of $6 million (less a working capital adjustment of $951,000) which was received on November 1, 2005, and a promissory note of $8 million payable 90 days after closing at a simple interest rate of 10% per annum. In addition, the Company received a promissory note of $2 million payable at 3 years after closing at a simple interest rate of 6% per annum. The $2 million promissory note was reduced by 50% of the pension balance of the International Press segment as of October 31, 2005 or $687,500.

     The purchaser of the Avure Business (the “Purchaser”) subsequently claimed that it was entitled to a further working capital adjustment of $1.4 million, which claim the Company disputed. The Company and the Purchaser agreed to resolve this claim in accordance with the arbitration procedure agreed on at the time of sale. The Company and the Purchaser also agreed that the Purchaser would have a limited right to prepay, at a 12.5% discount, the balance of the promissory note due 3 years after closing. The prepay right expired on January 31, 2007. The Company received a partial payment of $990,000 in the second quarter of fiscal 2007.

     On August 16, 2006, the Company received notice from the arbitrator to whom the dispute had been referred regarding the resolution of its outstanding dispute with the Purchaser. Although the Company did not agree with all the findings of the arbitrator, the decision by the arbitrator constituted a final resolution of all disputes between the Purchaser and the Company regarding the calculation of net working capital. The adjustment amounted to $1,026,000 (including interest and arbitration fees), of which $300,000 was previously accrued as a liability. The net amount of $726,000 was recorded as Loss on Sale from Discontinued Operations in the first quarter of fiscal 2007. The Company delivered payment to the Purchaser on August 21, 2006.

     As of October 31, 2007, the promissory note balance of $311,000, which includes interest of $95,000, is included in Other Current Assets.

Note 9—Basic and Diluted Income per Share

     Basic income per share represents income available to common shareholders divided by the weighted average number of shares outstanding during the period. Diluted income per share represents income available to common shareholders divided by the weighted average number of shares outstanding including the potentially dilutive impact of stock options and warrants, where appropriate. Potential common share equivalents of stock options and warrants are computed by the treasury stock method and are included in the denominator for computation of earnings per share if such equivalents are dilutive.

     The following table sets forth the computation of basic and diluted income from continuing operations per share for the three and six months ended October 31, 2007 and 2006:

		Three Months Ended								Six Months Ended
		October 31,								October 31,
		2007				2006				2007				2006
Numerator:
Income from continuing operations		$	2,295			$	1,742			$	2,673			$	5,510
Denominator:
Denominator for basic income (loss) per share—weighted average shares outstanding			37,326				37,194				37,314				37,134
Dilutive potential common shares from employee stock options			128				336				169				398
Dilutive potential common shares from warrants			—				275				—				281
Dilutive potential common shares from service and performance based stock awards			57				74				57				74
Denominator for diluted income—weighted average shares outstanding and assumed conversions			37,511				37,879				37,540				37,887
Basic and diluted income (loss) from continuing operations per share		$	0.06			$	0.05			$	0.07			$	0.15

     Employee stock options representing 796,860 and 520,625 shares have been excluded from the diluted weighted average share denominator for the three and six months ended October 31, 2007, respectively as their effect would be anti-dilutive. Employee stock options representing 21,250 shares were excluded from the diluted weighted average share denominator for the three and six months ended October 31, 2006 as their effect would have been anti-dilutive.

Note 10—Receivables, Net

     Receivables, Net consist of the following:

		October 31, 2007				April 30, 2007
Trade Accounts Receivable		$	28,910			$	27,573
Unbilled Revenues			3,198				1,929
			32,108				29,502
Less: Allowance for Doubtful Accounts			3,409				2,884
		$	28,699			$	26,618

Note 11—Inventories

     Inventories are stated at the lower of cost (determined by using the first-in first-out or average cost method) or market. Costs included in inventories consist of materials, labor and manufacturing overhead, which are related to the purchase or production of inventories. Write-downs, when required, are made to reduce excess inventories to their estimated net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual conditions become less favorable than the assumptions used, an additional inventory write-down may be required. Inventories at October 31, 2007 and April 30, 2007 consisted of the following:

		October 31, 2007				April 30, 2007
Raw Materials and Parts		$	20,023			$	15,610
Work in Process			3,057				2,765
Finished Goods			7,908				8,260
		$	30,988			$	26,635

Note 12—Warranty Obligations

     The Company’s estimated obligations for warranty are accrued concurrently with the revenue recognized. The Company makes provisions for its warranty obligations based upon historical costs incurred for such obligations adjusted, as necessary, for current conditions and factors. Due to the significant uncertainties and judgments involved in estimating the Company’s warranty obligations, including changing product designs and specifications, the ultimate amount incurred for warranty costs could change in the near term from the current estimate.

     Included in Other Accrued Liabilities as of October 31, 2007 is $2.8 million related to warranty obligations. The following table shows the fiscal 2008 year-to-date activity for the Company’s warranty obligations:

Accrued warranty balance as of April 30, 2007		$	2,405
Accruals for warranties			1,762
Warranty costs incurred			(1,409	)
Accrued warranty balance as of October 31, 2007		$	2,758

Note 13—Long-Term Obligations and Notes Payable

     Long-term obligations and notes payable are as follows:

		October 31, 2007				April 30, 2007
Term Loans Payable		$	3,296			$	3,601
Less Current Portion			(837	)			(822	)
		$	2,459			$	2,779
Notes Payable		$	1,049			$	6,366

     On July 19, 2007, the Company entered into a Second Amendment (the “Amendment”) to its Credit Agreement, increasing its revolving line of credit from $30 million to $45 million and permitting the use of the line of credit for the repurchase of stock. This line of credit has a maturity date of July 8, 2008 and is collateralized by a general lien on all of the Company’s assets. Certain subsidiaries guaranteed the Company’s line of credit under the Agreement. Interest rates under the Agreement are at LIBOR plus a percentage depending on the Company’s leverage ratio (“financial covenants”) or at the Bank of America’s prime rate in effect from time to time, at the Company’s option. LIBOR and prime rate at October 31, 2007 were 5.41% and 7.50%, respectively. The Company also pays an annual letter of credit fee equal to 1.25% of the amount available to be drawn under each outstanding letter of credit. The annual letter of credit fee is payable quarterly in arrears and varies depending on the Company’s leverage ratio. In addition, the Agreement includes a subjective acceleration clause which permits the lenders to demand payment in the event of a material adverse change. As of October 31, 2007, the Company had $43.1 million of domestic unused line of credit available, net of $1.9 million in outstanding letters of credit. The Company was in compliance with all financial covenants as of October 31, 2007.

     The Company also has capital leases for office equipment on which it owes outstanding principal of $171,000. This total amount is shown under Term Loans Payable as of October 31, 2007, of which $56,000 is current.

     The Company has outstanding a seven-year collateralized long-term loan, expiring in 2011, whose original principal amount was 145 million New Taiwanese Dollars, bearing interest at the current annual rate of 3.49%. The loan is collateralized by the Company’s manufacturing facility in Taiwan. The outstanding balance of US $3.1 million at October 31, 2007 is included in Term Loans Payable, of which $781,000 is current.

     The Company also has four unsecured credit facilities in Taiwan with a commitment totaling $228 million New Taiwanese Dollars (US $7 million at October 31, 2007), bearing interest at rates ranging from 2.48% to 2.51% per annum. At October 31, 2007, all the credit facilities will mature within one year and the balance outstanding under these credit facilities amounts to US $1 million, which is shown under Notes Payable.

Note 14—Commitments and Contingencies

     At any time, the Company may be involved in legal proceedings in addition to the matters described below. The Company’s policy is to routinely assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known issue and an analysis of historical experience in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” and related pronouncements. The Company records reserves related to certain legal matters for which it is probable that a loss has been incurred and the range of such loss can be estimated. With respect to other matters, management has concluded that a loss is only reasonably possible or remote and, therefore, no liability is recorded. Management discloses the facts regarding material matters assessed as reasonably possible and potential exposure, if determinable. Costs incurred with defending claims are expensed as incurred.

     Omax Corporation (“Omax”) filed suit against the Company on November 18, 2004. The case, Omax Corporation v. Flow International Corporation, United States District Court, Western Division at Seattle, Case No. CV04-2334, was filed in federal court in Seattle, Washington. The suit alleges that the Company’s products infringe Omax’s Patent Nos. 5,508,596 entitled “Motion Control with Precomputation” and 5,892,345 entitled “Motion Control for Quality in Jet Cutting.” The suit also seeks to have the Company’s Patent No. 6,766,216 entitled “Method and System for Automated Software Control of Waterjet Orientation Parameters” declared invalid, unenforceable and not infringed. The Company has brought claims against Omax alleging certain of their products infringe its Patent No. 6,766,216. Omax manufactures waterjet equipment that competes with the Company’s equipment. Both Omax’s and the Company’s patents are directed at the software that controls operation of the waterjet equipment. Although the Omax suit seeks damages of over $100 million, the Company believes Omax’s claims are without merit, and the Company intends not only to contest Omax’s allegations of infringement but also to vigorously pursue its claims against Omax with regard to its own patent. The outcome of this case is uncertain, and an unfavorable outcome is reasonably possible. The Company has not provided any loss accrual related to the Omax lawsuit as of October 31, 2007. The Company has spent, and expects to continue to spend, considerable amounts on this case except as discussed in Note 16.

     In litigation arising out of a June 2002 incident at a Crucible Metals’ (“Crucible”) facility, the Company’s excess insurance carrier had notified the Company in December 2006 that it was contesting its obligation to provide coverage for the property damage. The Company believed the carrier’s position was without merit and commenced a declaratory judgment action seeking a determination that the carrier is obligated to provide a full defense of the Company which was previously disclosed in the Company’s Annual Report on Form 10-K for the year ended April 30, 2007. The carrier agreed to provide the Company a defense in the second quarter of fiscal 2008.

     In June 2007, the Company received a claim seeking the return of amounts paid by Collins and Aikman Corporation, a customer, as preference payments. The Company intends to vigorously contest this claim; however, the ultimate outcome or likelihood of this specific claim cannot be determined at this time and an unfavorable outcome is reasonably possible.

     Other Legal Proceedings—For matters other than Omax and Collins and Aikman described above, the Company does not believe these proceedings will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

     Other Commitments—Effective February 2, 2007 (the “Effective Date”), the Company and Stephen R. Light, the Company’s former President and Chief Executive Officer (the “former Executive”) entered into an Employment Agreement (the “Agreement”). The Agreement, entered into in connection with the former Executive’s retirement, amended and restated the employment agreement entered into by and between the Company and Mr. Light dated November 25, 2002, as amended on September 21, 2005.

     The Agreement provided for a Period of Employment (“the Period of Employment”) that began on the Effective Date and ended on July 16, 2007. Subject to the terms and conditions of the Agreement, the former Executive is entitled to the following payments and benefits. For the period beginning on the Effective Date and ending on April 30, 2008, the Company will pay the former Executive a base salary at the rate of $550,000 per year. The former Executive is also eligible to receive a bonus under the Company’s annual incentive plan for fiscal year 2007, fiscal year 2008 and fiscal 2009 to the extent that he was employed by the Company during fiscal year 2008. The former Executive ceased to participate in the Company’s Long Term Incentive Plans commencing on the Effective Date. The former Executive is entitled to a cash severance payment payable in January 2008 of $4,475,250 (less applicable tax withholdings). The Agreement also provides for other benefits, such as a monthly financial planning allowance, a monthly cash allowance in lieu of provision of other perquisites, vacation accrual, and eligibility to participate in life insurance, health insurance, 401(k) and similar benefit plans of the Company.

     The Company incurred $2.9 million in the first fiscal quarter of 2008 related to this Agreement. The total cost of $5.7 million associated with this Agreement, of which $2.8 million was recognized in the fourth quarter of fiscal 2007, has been fully recognized as of October 31, 2007. $5.7 million related to this Agreement is included in Other Current Liabilities as of October 31, 2007 and is expected to be paid out within the current fiscal year.

Note 15—Warrant Repurchase

     On October 25, 2007, in a privately negotiated transaction, the Company purchased from certain funds managed or advised by Third Point LLC (collectively, “Third Point”) outstanding warrants that gave Third Point the right until March of 2010 to purchase 403,300 of the Company’s common stock at an exercise price of $4.07 per share (the “Warrants”). Third Point purchased the Warrants, together with shares of commons stock, in the Company’s March 2005 Private Investment Public Equity transaction (the “PIPE Transaction”). The Warrants were repurchased from Third Point in connection with the Company’s previously announced program to repurchase up to $45 million of the Company’s securities. The Warrants were repurchased at a price of $7.43 per Warrant for an aggregate purchase price of $3 million. In accordance with FASB Technical Bulletin (“FTB”) No. 85-6, the total fair value of the repurchased warrants of $2.4 million was accounted for as the cost of the warrants and was included as a reduction to capital in excess of par within the Company’s total stockholders’ equity at October 31, 2007. The cash paid in excess of the fair market value of those warrants of $629,000 was charged against income as Other Expense during the current fiscal quarter. The total fair value of the warrants was estimated using the Black-Scholes pricing model, based on the following assumptions: (i) no expected dividend yields; (ii) expected volatility rate of 60%; and (iii) an expected life of 28 months based on the remaining contractual life of the Warrants. The risk-free interest rate applied was 4.12% based on U.S Treasury constant maturity interest rate whose term is consistent with the expected life of the Company’s stock options.

     Third Point was the last holder of warrants issued in the PIPE Transaction; all other warrants had been converted. Under the terms of the PIPE Transaction, the Company was obligated to file and keep effective a registration statement on Form S-1 for the resale of the shares issued in the PIPE Transaction as well as the shares issuable upon exercise of the Warrants until February 22, 2011. Failure to keep the registration statement continuously effective would have resulted in penalties of approximately $250,000 per month. With the repurchase of the Warrants, the Company will now no longer be obligated to keep the registration statement effective.

Note 16 — Subsequent Events

     On December 4, 2007, the Company entered into an Option Agreement (the “Option Agreement”) with Omax Corporation (“Omax”). Omax is a leading provider of precision-engineered, computer-controlled, two-axis abrasivejet systems for use in the general machine shop environment.

     Under the Option Agreement, Omax agreed to an Exclusivity Period (defined below) during which the Company and Omax intend to complete negotiations and to agree on the acquisition of 100% of the outstanding capital stock of Omax by the Company, under the terms and conditions set forth in the Option Agreement, including the negotiation of mutually acceptable definitive agreements and the approval of the shareholders of Omax (the “Proposed Acquisition”). The Company paid into escrow $6 million on signing the Option Agreement (“Option Escrow”).

     The Option Agreement provides that the Company shall pay an additional $3 million into the Option Escrow on the termination of the Hart-Scott-Rodino (“HSR”) waiting period and execution of the definitive agreements relating to the Proposed Acquisition.

     The Option Agreement establishes that the Definitive Agreements will provide for the following payments by the Company, subject to indemnification escrows as described below:

	•		At Closing, $66,000,000 plus the funds in the Option Escrow to be paid in cash, minus amounts to be paid by the Company at Closing in satisfaction of certain litigation fees of Omax, if any, and less amounts to be placed into an employee retention pool, described below;
	•		At Closing, 3.75 million shares of Company common stock, or if the Closing Share Price (defined as the average daily closing price of the Company common stock during the ten trading day period prior to Closing) is less than $9.00, such greater number as is necessary so that the total value of the shares delivered is $33.75 million (the Company may pay cash for any additional shares otherwise payable pursuant this paragraph, based on the number of additional shares (in excess of 3,750,000) which would otherwise be payable times the Closing Share Price); and
	•		Two years after Closing, up to 1,733,334 additional shares of common stock based on the Average Share Price (defined as the average closing price for the six months ending twenty four months after Closing). Shares will be paid on a straight line interpolation, with no shares being delivered if the Average Share Price is $13 or less, and 1,733,334 shares being delivered if the Average Share Price is $15 or more; provided that if the Closing Share Price is less than $9.00, the $13 and $15 prices will be reduced by the difference between $9.00 and the Closing Share Price. The Company may elect to pay the consideration required in this paragraph in cash based upon the Average Share Price times the number of shares which would otherwise be issued.
	•		The cash consideration at Closing is subject to adjustment based on Omax Net Working Capital at Closing. The consideration will be adjusted upward or downward on a dollar-for-dollar basis if the Net Working Capital is below $7 million or above $9 million.

     The Option Agreement provides that in the event that the Proposed Acquisition does not close or is otherwise terminated, the funds in the Option Escrow will be released and Omax may retain such amounts. However, that in the event Omax thereafter obtains a judgment against the Company in the litigation matter Omax Corporation v Flow International Corporation (the “Litigation”) or the Company agrees to pay Omax an amount to settle the Litigation, the Company will receive a credit against any such judgment and/or settlement in an amount equal to 50% of the $6 million payment and 100% of the $3 million payment.

     The Option Agreement further sets forth that the Definitive Agreements will:

•

provide for two separate indemnification escrows in an aggregate amount of $13.2 million to be funded at Closing from the cash consideration. $7 million will be subject to a General Escrow that will end July 31, 2009, to indemnify the Company for losses from breaches of representations and warranties to the extent that such breach or breaches, individually or in the aggregate, result in claims in excess of $1,000,000. $6.2 million will be subject to a

			Special Escrow that will end two years after Closing, to indemnify the Company for losses with respect to certain potential liabilities identified during the course of due diligence. The amount to be placed in the Special Escrow is subject to reduction under conditions to be specified in the Definitive Agreements. The General and Special Escrows will be funded proportionally from the cash payments (including the funds in the Option Escrow) and the shares of common stock delivered at Closing;
	•		provide that at Closing the Company will place into escrow a portion of the cash consideration as a retention pool for key Omax employees that will provide such employees the equivalent of three months’ salary, to be allocated upon the six month anniversary of Closing;
	•		include mutually acceptable executive officer agreements for Drs. John B. Cheung, John H. Olsen and Mr. James M. O’Connor to become executives of the Company and provide that as soon as is commercially reasonable following Closing, the Company will expand its Board of Directors and elect Dr. Cheung to the vacancy thereby created; and
	•		provide that Omax stock options that are currently outstanding and unvested shall vest immediately prior to Closing and shall be exercised or terminated at Closing, or otherwise treated in a manner mutually acceptable to the parties.

     The negotiation and execution of the Definitive Agreements are subject to the completion of due diligence activities (certain of which will be provided after execution of the Definitive Agreements), and the closing of the acquisition will be subject to standard closing conditions, including HSR approval of the merger.

     Under the Option Agreement, Omax has agreed that to a period of exclusivity that ends on the earlier of (i) the mutual consent of the parties that all discussions related to the Proposed Acquisition have terminated, (ii) 180 days following the receipt of a definitive final response from federal regulatory authorities concerning the HSR filing, (iii) 60 days following the receipt of a definitive final response from federal regulatory authorities concerning the HSR filing (should the parties not have entered into the Definitive Agreements by such date), or (iv) December 5, 2008 (the “Exclusivity Period”). During the Exclusivity Period, Omax will not, without the advance written consent of the Company, (1) solicit, initiate discussions, engage in or encourage discussions or negotiations with, or enter into any agreement, including any non-disclosure agreement, with, any party relating to or in connection with (a) the possible acquisition of Omax, (b) the possible acquisition of any material portion of the Company’s capital stock or assets, including the claims in the Litigation, or (c) any other transaction outside of the ordinary course of business that could materially impair the value of Omax’s assets post-Closing (collectively, a “Restricted Transaction”), or (2) disclose any non-public information relating to Omax or its subsidiaries or afford access to the properties, books or records of Omax or its subsidiaries to, any person concerning a Restricted Transaction.

     If the acquisition is consummated, the litigation with Omax referred to in Note 14 will be terminated without any additional payments in settlement by either party.

FLOW INTERNATIONAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SAFE HARBOR STATEMENT:

     Statements made in this quarterly report on Form 10-Q that are not historical facts are forward-looking statements that involve risks and uncertainties. Forward-looking statements typically are identified by the use of such terms as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “plan” and similar words, although some forward-looking statements are expressed differently. You should be aware that our actual results could differ materially from those contained in any forward-looking statement due to a number of factors, which include, but are not limited to the following: the special risk factors and uncertainties set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended April 30, 2007; our expectation of improved Aerospace revenue levels because of increased orders for large systems; our expectation of improved operating leverage in future quarters as a result of initiatives streamline the organizational structure of our Company; our expectation that the extended credit line will provide us with liquidity that could be used to make acquisitions, fund the repurchase of shares, or pay dividends; our belief that the financial covenants in our credit facilities are achievable based on current financial forecasts and our belief that our existing cash, cash from operations, and credit facilities at October 31, 2007 are adequate to fund our operations for the next twelve months; our plan to continue capital spending on information technology and facilities and our expectation that the necessary funds will be generated internally; our intent to contest Omax’s allegations and our belief that we will continue to spend considerable amounts on this contest; our belief that waterjets are experiencing growing acceptance in the marketplace because of their flexibility and superior machine performance; our continuing to invest in marketing and new direct sales and technical services staff adding new personnel to service potential and existing customers along with the increasing adoption of waterjet technology to drive revenue growth over the next few years; our belief that the improvements made in the Asia Waterjet management team will return the segment to growth; our plan to continue to repatriate earnings in the future; our belief that for matters other than Omax and Collins and Aikman, these proceedings will not have a material adverse effect on our consolidated financial position, results of operations or cash flows; our expectation that unrecognized tax benefits will not change significantly within the next twelve months.

     Additional information on these and other factors that could affect our financial results is set forth below. Finally, there may be other factors not mentioned above or included in our SEC filings that may cause our actual results to differ materially from those in any forward-looking statement. You should not place undue reliance on these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, future events or developments, except as required by federal securities laws.

Results of Operations

(Tabular amounts in thousands)

     Sales. Our sales by segment for the periods noted below is summarized as follows:

		Three Months Ended October 31,																Six Months Ended October 31,
		2007				2006				Difference				%				2007				2006				Difference				%
Sales
North America Waterjet		$	32,276			$	30,079			$	2,197				7	%		$	63,334			$	61,588			$	1,746				3	%
Asia Waterjet			5,721				8,133				(2,412	)			(30	)%			12,748				15,489				(2,741	)			(18	)%
Other International Waterjet			16,083				11,943				4,140				35	%			31,393				22,584				8,809				39	%
Applications			5,094				4,249				845				20	%			10,365				8,153				2,212				27	%
Total		$	59,174			$	54,404			$	4,770				9	%		$	117,840			$	107,814			$	10,026				9	%

     The North America, Asia and Other International Waterjet segments primarily represent sales of our standard cutting and cleaning systems throughout the world, as well as sales of our custom designed systems to the Aerospace industry. For the three and six months ended October 31, 2007, revenue from our three Waterjet segments increased $3.9 million or 8%, and $7.8 million or 8% when compared to the prior year same periods. Our waterjets are experiencing growing acceptance in

the marketplace because of their flexibility and superior machine performance. We continue to invest in marketing to build market awareness for our products and we continue to add new direct sales and technical services staff to service new and existing customers. We expect that these investments along with the increasing adoption of waterjet technology to drive revenue growth over the next few years.

     Excluding sales to the Aerospace industry, sales were up $6.1 million or 14%, and 15.4 million or 18% for the three and six months ended October 31, 2007 over the prior year same periods on strength in standard systems sales driven by the increased adoption of waterjet technology and the positive market reception to the 87k high pressure pump. Sales to the Aerospace industry were down $2.2 million or 38%, and $7.6 million or 54% when compared to the prior year same periods. Sales to the Aerospace industry fluctuate quarter over quarter for various reasons such as the timing of the contract awards, timing of the project design and manufacturing schedule and finally shipment to the customers. We expect improved revenue levels in the second half of the fiscal year on increased orders for large systems.

     For the three and six months ended October 31, 2007, our revenue in the Asia Waterjet segment decreased $2.4 million or 30%, and $2.7 million or 18% from the prior year respective periods. The lower level of sales was due to a slowdown in sales to the semiconductor industry and the continued impact of the Asia investigations completed in the third and fourth fiscal quarters of 2007. We expect the improvements made in the Asia Waterjet management team to return the segment to growth.

     Revenue in the Other International Waterjet segment increased by $4.1 million or 35%, and $8.8 million or 39% for the three and six months ended October 31, 2007 compared to the prior year same periods on strong demand for our standard shapecutting systems and spare parts as well as improved aftermarket revenues which have also benefited from a stronger Euro versus the US Dollar.

     Our Applications segment represents sales of our automation and robotic waterjet cutting systems as well as non-waterjet automation systems, which are sold primarily to the North American automotive industry. For the three and six months ended October 31, 2007, revenue increased $845,000 or 20%, and $2.2 million or 27% versus the prior year same periods on increased contract awards as well as the benefit from a stronger Canadian Dollar versus US Dollar. Effective September 2007, our Application segment ceased the pursuit of non-waterjet automation systems and will focus on increasing revenue from systems that integrate waterjet cutting technology.

     Systems vs. Spares. We also analyze our Waterjet revenues by looking at system sales and consumable sales as follows:

		Three Months Ended October 31,																Six Months Ended October 31,
		2007				2006				Difference				%				2007				2006				Difference				%
Sales
Systems		$	42,386			$	39,703			$	2,683				7	%		$	85,069			$	79,048			$	6,021				8	%
Consumable parts			16,788				14,701				2,087				14	%			32,771				28,766				4,005				14	%
Total		$	59,174			$	54,404			$	4,770				9	%		$	117,840			$	107,814			$	10,026				9	%

     Total systems sales increased $2.7 million or 7%, and $6 million or 8% for the three and six months ended October 31, 2007. Excluding sales to the Aerospace industry and in the Applications segment, system sales increased 15% and 20% respectively for the three and six months ended October 31, 2007. The increase in systems sales is due to the growing acceptance of our waterjets in the market place and the impact of new product development and enhancements recently introduced. Consumables revenues recorded an increase of $2.1 million or 14%, and $4 million or 14% for the three and six months ended October 31, 2007. Increases in consumable parts sales resulted from a growing number of systems in service and improved parts availability as well as the use of Flowparts.com and Floweuropeparts.com, our easy-to-use internet order entry systems. Flowparts.com has been deployed in the U.S. for two years and Floweuropeparts.com was launched in Europe in July 2006.

     Gross Margins. Our gross margin by segment for the periods noted below is summarized as follows:

		Three Months Ended October 31,																Six Months Ended October 31,
		2007				2006				Difference				%				2007				2006				Difference				%
Gross Margin
North America Waterjet		$	14,136			$	13,800			$	336				2	%		$	27,380			$	27,930			$	(550	)			(2	)%
Asia Waterjet			2,654				4,472				(1,818	)			(41	)%			5,826				8,938				(3,112	)			(35	)%
Other International Waterjet			7,182				4,807				2,375				49	%			13,555				8,796				4,759				54	%
Applications			463				533				(70	)			(13	)%			1,274				979				295				30	%
Total		$	24,435			$	23,612			$	823				3	%		$	48,035			$	46,643			$	1,392				3	%

     Our gross margin as a percent of sales by segment for the periods noted below is summarized as follows:

		Three Months Ended October 31,								Six Months Ended October 31,
		2007				2006				2007				2006
Gross Margin Percentage
North America Waterjet			44	%			46	%			43	%			45	%
Asia Waterjet			46	%			55	%			46	%			58	%
Other International Waterjet			45	%			40	%			43	%			39	%
Applications			9	%			13	%			12	%			12	%
Total			41	%			43	%			41	%			43	%

     Gross margin for the three and six months ended October 31, 2007 amounted to $24.4 million or 41%, and $48 million or 41% of sales as compared to gross margin of $23.6 million or 43%, and $46.6 million or 43% of sales in the prior year same periods. Margins in North America declined slightly from the prior year same periods due to a higher mix of systems sales versus consumable sales, higher material prices and warranty expense, and lower average margins on special systems. Margins in Asia declined due to product mix, including lower sales to the semiconductor industry. Generally, comparison of gross margin rates will vary period over period depending on the mix of sales, which includes special systems, standard systems and consumables. The gross margin improvement in our Other International Waterjet is attributable to improved product mix, and the stronger Euro versus the US Dollar. Gross margin rates on our systems sales are typically less than 45% as opposed to consumables sales which are in excess of 50%. On average, standard systems which are included in the North America, Asia and Other International Waterjet segments carry higher margins than the custom engineered automation systems, which are included in the Applications segment. Our Applications segment recorded a $70,000 or 13% decrease in gross margin for the three months ended October 31, 2007 mainly as a result of inventory write-downs of $399,000 and severance costs of $234,000 incurred related to the cessation of the pursuit of non-waterjet automation systems. For the six month period, this segment recorded a $295,000 or 30% increase in gross margin due to improved pricing and contract management as well as the benefit from a stronger Canadian Dollar versus US Dollar.

     Effective August 1, 2007, we updated our intercompany transfer pricing policy. The changes in gross margins globally are partially attributable to the new intercompany transfer pricing. The intercompany transfer pricing changes have no effect on our consolidated operating results.

     Sales and Marketing Expenses. Our sales and marketing expenses by segment for the periods noted below are summarized as follows:

		Three Months Ended October 31,																Six Months Ended October 31,
		2007				2006				Difference				%				2007				2006				Difference				%
Sales and Marketing
North America Waterjet		$	5,819			$	6,059			$	(240	)			(4	)%		$	11,440			$	11,191			$	249				2	%
Asia Waterjet			1,090				1,291				(201	)			(16	)%			2,360				2,510				(150	)			(6	)%
Other International Waterjet			3,248				2,783				465				17	%			6,350				5,434				916				17	%
Applications			826				430				396				92	%			1,290				1,025				265				26	%
Total		$	10,983			$	10,563			$	420				4	%		$	21,440			$	20,160			$	1,280				6	%

     Sales and marketing expenses increased $420,000 or 4%, and $1.3 million or 6% for the three and six months ended October 31, 2007, as compared to the prior year same periods. The expense decrease in North America waterjet is mainly attributable to a lower volume of customer support costs from lower aerospace sales while the expense decrease in Asia International waterjet is primarily due to lower commissions related to lower sales in the region. Higher costs in Other International segments were due to investment in staff and the impact of a stronger Euro versus US Dollar. Applications costs were higher during the three and six months ended October 31, 2007 when compared to the prior year same periods due to bad debt reserves of $343,000 taken during the current period. Expressed as a percentage of revenue, sales and marketing expenses were 19% and 18% for the three and six months ended October 31, 2007, compared to 19% for the three and six months ended October 31, 2006.

     Research and Engineering Expenses. Our research and engineering expenses by segment for the periods noted below are summarized as follows:

		Three Months Ended October 31,																Six Months Ended October 31,
		2007				2006				Difference				%				2007				2006				Difference				%
Research and Engineering
North America Waterjet		$	1,795			$	2,004			$	(209	)			(10	)%		$	3,764			$	3,883			$	(119	)			(3	)%
Asia Waterjet			143				195				(52	)			(27	)%			244				414				(170	)			(41	)%
Other International Waterjet			122				91				31				34	%			242				210				32				15	%
Applications			85				49				36				73	%			175				126				49				39	%
Total		$	2,145			$	2,339			$	(194	)			(8	)%		$	4,425			$	4,633			$	(208	)			(4	)%