ARROW INTERNATIONAL INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED AUGUST 31, 2002

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

Commission File Number 0-20212

ARROW INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

PENNSYLVANIA 23-1969991
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

2400 BERNVILLE ROAD
READING, PENNSYLVANIA 19605
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER: (610) 378-0131
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Name of Each Exchange
Title of Each Class: on Which Registered:
-------------------- --------------------
None None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, No Par Value
(Title of Class)

Name of Exchange on which registered: The Nasdaq Stock Market

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of November 1, 2002 was approximately $436,748,633.

The number of shares of Registrant's Common Stock outstanding on November
1, 2002 was 21,798,996.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on January 15, 2003, which will be filed with the
Securities and Exchange Commission within 120 days after August 31, 2002, are
incorporated by reference in Part II, Item 10, and Part III of this report.

ITEM 1. BUSINESS

CERTAIN OF THE INFORMATION CONTAINED IN THIS FORM 10-K, INCLUDING THE
DISCUSSION WHICH FOLLOWS IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" FOUND IN ITEM 7 OF THIS REPORT, CONTAIN
FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS,
CAREFULLY REVIEW THIS REPORT, INCLUDING EXHIBIT 99.1 HERETO, AS WELL AS OTHER
INFORMATION CONTAINED IN ARROW INTERNATIONAL, INC.'S PERIODIC REPORTS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC" OR "COMMISSION").

Arrow International, Inc. (together with its subsidiaries, "Arrow" or the
"Company") was incorporated as a Pennsylvania corporation in 1975. Arrow
develops, manufactures and markets a broad range of clinically advanced,
disposable catheters and related products for critical and cardiac care. The
Company's critical care products are used principally for central vascular
access in the administration of fluids, drugs, and blood products, patient
monitoring and diagnostic purposes. These products are used by
anesthesiologists, critical care specialists, surgeons, cardiologists,
nephrologists, emergency and trauma physicians and other health care providers.
Arrow's cardiac care products are used by interventional cardiologists, cardiac
surgeons, interventional radiologists and electrophysiologists for such purposes
as the diagnosis and treatment of heart and vascular disease and to provide
short-term cardiac assist following cardiac surgery, serious heart attack or
balloon angioplasty.

Arrow's critical care products, which were originally introduced in 1977,
accounted for 83.3%, 82.7% and 82.5% of net sales in fiscal 2002, 2001 and 2000,
respectively. The majority of these products are vascular access catheters and
related devices which consist principally of the following: the Arrow-Howes(TM)
Multi-Lumen Catheter, a catheter equipped with three or four channels that
enables the simultaneous administration of multiple critical care therapies
through a single puncture site; double-and single-lumen catheters, which are
designed for use in a variety of clinical procedures; percutaneous sheath
introducers, which are used as a means for inserting cardiovascular and other
catheterization devices into the vascular system during critical care
procedures; radial artery catheters, which are used for measuring arterial blood
pressure and taking blood samples; FlexTip Plus(TM) epidural catheters, which
are designed to minimize indwelling complications associated with conventional
epidural catheters; and Percutaneous Thrombolytic Devices ("PTD"), which are
designed for clearance of thrombosed hemodialysis grafts in chronic hemodialysis
patients. Many of the Company's vascular access catheters are treated with the
ARROWg+ard(TM) or ARROWg+ard Blue Plus(TM) antiseptic surface treatments to
reduce the risk of catheter related infection. ARROWg+ard Blue Plus(TM) is a
stronger, longer lasting formulation of ARROWg+ard(TM) and provides
antimicrobial treatment of the interior lumens and hubs of each catheter.

The Company's critical care product line also includes custom tubing sets
used to connect central venous catheters to blood pressure monitoring devices
and drug infusion systems, and the HemoSonic(TM) 100, a hemodynamic monitoring
device that continuously measures descending aortic blood flow using a
non-invasive esophageal ultrasound probe. In April 2002, the Company divested
its implantable constant flow drug delivery pump product business (see Item 8.
Notes to Consolidated Financial Statements - Note 19).

Arrow's cardiac care products accounted for 16.7%, 17.3% and 17.5% of net
sales in fiscal 2002, 2001 and 2000, respectively. These products include
cardiac assist products, such as intra-aortic balloon (IAB) pumps and catheters,
which are used primarily to augment temporarily the pumping capability of the
heart following cardiac surgery, serious heart attack or balloon angioplasty.
The most recent of these products is the AutoCAT(TM), the Company's advanced
automatic IAB pump which features AutoPilot(TM), a mode of operation that
automatically selects operating parameters for optimal cardiac assist. The
AutoCAT(TM) continuously monitors and selects the best signal from multiple
electrocardiogram and arterial pressure sources to automatically adjust balloon
inflation and deflation timing points. Other currently available pumps require
manual intervention on the part of the clinician to switch signal sources and
initiate balloon timing. The Company also distributes a high performance 8
French intra-aortic balloon catheter. This balloon catheter, the Ultra 8(TM), is
configured to enable it to be introduced through standard 8 French Cath Lab
sheaths used for therapeutic interventions as well as through a separate balloon
sheath. The Ultra 8(TM) provides faster inflation and deflation times than
competitive catheters and has a larger central lumen that reduces the potential
for aortic pressure waveform dampening and facilitates placement over standard
size springwire guides.

(2)

ITEM 1. BUSINESS (CONTINUED)

The Company's cardiac care product line also includes electrophysiology
products, which are used primarily to map the electrical signals which activate
the heart. The Berman(TM) Angiographic Catheter is used for pediatric cardiac
angiographic procedures and the Super Arrow-Flex(TM) sheath provides a
kink-resistant passageway for the introduction of cardiac and other catheters
into the vascular system. In addition, as further discussed below under
"Research and Product Development," the Company currently has under development
new cardiac care products, including the Arrow LionHeart(TM), a fully
implantable Left Ventricular Assist System ("LVAS") capable of taking over the
entire work load of the left ventricle, and CorAide(TM), a non-pulsatile
centrifugal flow ventricular assist device designed to be used for the treatment
of congestive heart failure.

SALES AND MARKETING

Arrow markets its products to physicians and hospitals through a
combination of direct selling, independent distributors and a group purchasing
organization. Within each hospital, marketing efforts are targeted to those
physicians, including critical care specialists, cardiologists,
anesthesiologists, interventional radiologists, electrophysiologists and
surgeons, most likely to use the Company's products. Arrow's products are
generally sold in the form of pre-sterilized procedure kits containing the
catheters and virtually all of the related medical components and accessories
needed by the clinician to prepare for and perform the intended medical
procedure. Additional sales revenue is derived from equipment provided for use
in connection with certain of the Company's disposable products.

In fiscal 2002, 2001 and 2000, 65.5%, 65.9% and 64.1%, respectively, of the
Company's net sales were to U.S. customers. In this market, approximately 78.9%
of the Company's fiscal 2002 revenue was generated by its direct sales force.
The remainder resulted from shipments to independent distributors. For the
majority of such distributors, the Company's products represent a principal
product line. Direct selling generally yields higher gross profit margins than
sales made through independent distributors. On September 3, 2002, the Company
purchased the net assets of its former New York City distributor, Stepic
Medical, from Horizon Medical Products for $12.7 million in cash and relief from
$5.5 million of accounts receivable that had been due from this distributor
subject to post-closing adjustments (see Item 8. Notes to Consolidated Financial
Statements - Note 22). With this acquisition, 84% of the Company's U.S. business
will be sold to hospitals by direct sales representatives.

Internationally, the Company sells its products through 11 direct sales
subsidiaries serving markets in Japan, Germany, the Netherlands, France, Spain,
Greece, Africa, Canada, Mexico, the Czech Republic and Slovakia. As of November
1, 2002, independent distributors in 92 additional countries sell the Company's
products in the remainder of the world.

To support growth in international sales, the Company operates a 40,000
square foot manufacturing facility in Chihuahua, Mexico and has leased 22,500
square feet of additional manufacturing space in Mexico since fiscal 2001. The
Company also operates a manufacturing and research facility in the Czech
Republic. In fiscal 2002, the Company completed construction of additional
manufacturing space at this facility which expanded the manufacturing capacity
to 88,000 square feet.

Revenues, profitability and long-lived assets attributable to significant
geographic areas are presented in Note 13 to the Company's Consolidated
Financial Statements included in Item 8.

In general, Arrow does not produce against a backlog of customer orders;
production is based primarily on the level of inventories of finished products
and projections of future customer demand with the objective of shipping from
stock upon receipt of orders. No single customer accounts for a material part of
the Company's sales. Usage of the Company's products by hospitals and physicians
has not been materially influenced by seasonal factors.

(3)

ITEM 1. BUSINESS (CONTINUED)

SALES AND MARKETING (CONTINUED)

Government and private sector initiatives to limit the growth of health
care costs, including price regulation, competitive pricing, coverage and
payment policies, and managed-care arrangements, are continuing in the United
States and in many other countries where the Company does business. As a result
of these changes, the marketplace has placed increased emphasis on the delivery
of more cost-effective medical therapies. Government programs, including
Medicare and Medicaid, private health care insurance and managed-care plans have
attempted to control costs by limiting the amount of reimbursement such third
party payors will pay to hospitals, other medical institutions and physicians
for particular products, procedures or treatments. 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. where Arrow has 80% or
greater market shares, 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 European markets as governments strive to
curtail increases in health care costs. The Company anticipates that the U.S.
Congress, state legislatures, foreign governments and the private sector will
continue to review and assess alternative health care delivery and payment
systems. The Company cannot predict what additional legislation or regulation,
if any, relating to the health care industry may be enacted in the future or
what impact the adoption of any federal, state or foreign health care reform,
private sector reform or market forces may have on its business. No assurance
can be given that any such reforms will not have a material adverse effect on
the Company's business, financial condition or results of operations.

RESEARCH AND PRODUCT DEVELOPMENT

Arrow is engaged in ongoing research and development to introduce
clinically advanced new products, to enhance the effectiveness, ease of use,
safety and reliability of its existing products and to expand the clinical
applications for which use of its products is appropriate. The principal focus
of the Company's research and development effort is to identify and analyze the
needs of physicians in critical and cardiac care medicine, and to develop
products that address these needs. The Company views ideas submitted by
physicians and other health care professionals as an important source of
potential research and development projects. The Company believes that these
end-users are often in the best position to conceive of new products and to
recommend ways to improve the performance of existing products. Most of the
Company's principal products and product improvements have resulted from
collaborative efforts with physicians, other health care professionals or other
affiliated entities. For certain proprietary ideas, the Company pays royalties
to such persons, and in many instances, incorporates such persons' names in the
tradename or trademark for the specific product. The Company also utilizes other
outside consultants, inventors and medical researchers to carry on its research
and development effort and sponsors research through medical associations and at
various universities and teaching hospitals.

Certain of the Company's strategic acquisitions and investments have
provided the basis for its introduction of significant new products. The Company
entered the field of cardiac care with the acquisition of Kontron Instruments
and supplemented this acquisition with its acquisition of the cardiac assist
divisions of Boston Scientific and C.R. Bard, Inc. The Company's acquisition of
Sometec, S.A. enabled it to introduce to the market its innovative, ultrasound
hemodynamic monitoring device.

Research and development expenses totaled $26.2 million (7.7% of net
sales), $25.2 million (7.5% of net sales) and $19.8 million (6.1% of net sales)
in fiscal 2002, 2001 and 2000, respectively. Such amounts were used to develop
new products, improve existing products and implement new technology to produce
these products.

(4)

ITEM 1. BUSINESS (CONTINUED)

RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)

In January 1994, the Company formed a cooperative relationship with
Pennsylvania State University's Hershey Medical School for the commercial
development of a fully implantable long-term LVAS. The Company's efforts are
aimed at developing a fully implantable device to provide long-term cardiac
assist for patients having insufficient left ventricular heart function. The
Arrow LionHeart(TM), the LVAS currently under development by the Company, is not
intended as a bridge-to-heart transplant, but is designed, upon receipt of
necessary regulatory approvals, to serve as a long-term cardiac assist device
for certain patients. The Arrow LionHeart(TM) has been in development by the
Company for over 9 years and has undergone extensive preclinical studies and
testing. The Company believes that its Arrow LionHeart(TM) LVAS, which is
capable of taking over the entire workload of the left ventricle, represents a
significant advance in mechanical circulatory assist technology. Because the
Arrow LionHeart(TM) is the first fully implantable "destination therapy" device,
the ability of the patient to experience an improved quality of life for an
extended period of time may be enhanced. The device has no lines or cables
protruding through the skin to power the system, thus eliminating a potential
source of infection. It is fully implanted in the body and does not replace the
heart, but assists in the pumping function of the heart's left ventricle. The
device is electrically driven by a wearable battery pack that transmits power
non-invasively through the skin to charge internal batteries and power the blood
pump. In addition, the Arrow LionHeart(TM) enables patients to experience
limited periods of untethered movement with energy supplied from rechargeable
batteries implanted as part of the device.

The first human implant of the LionHeart(TM) took place in Germany in
October 1999 as part of an ongoing European clinical investigation, sponsored by
the Company, to demonstrate the safety and performance of the LionHeart(TM) for
the purpose of obtaining a European Conformity (CE) mark.

In February 2001, the Company received U.S. Food and Drug Administration
(FDA) approval under an Investigational Device Exemption (IDE) to begin Phase I
human clinical trials in the United States of the LionHeart(TM). The Phase I
trial was initially limited to seven patients at up to five U.S. sites. In
February 2001, the Company announced the first U.S. human implant of the
LionHeart(TM) under the IDE. By August 2001, the Company had enrolled all seven
U.S. patients in the Phase I U.S. feasibility trial authorized in February under
the IDE.

In December 2001, the FDA approved the Company's request to expand this
Phase I clinical trial for an additional seven patients to be implanted with the
LionHeart(TM) in the U.S. The first of these seven additional implants was
performed in July 2002, bringing the total number of patients who have received
the LionHeart(TM) in the U.S. to eight. A total of five U.S. sites have been
approved to perform the remaining six implants under the Phase I trial and these
institutions are presently screening for appropriate patients. The Company
anticipates that a Phase II trial will follow the Phase I trial.

In June 2002, the Company announced that its European Notified Body, TUV
Product Service, had completed a preliminary review of the clinical data
supporting the Company's application for CE mark approval to sell the
LionHeart(TM) in Europe. TUV Product Service concluded that while the
LionHeart(TM) had accumulated 50% more patient months of operation than called
for in the trial protocol, the recent publishing of Randomized Evaluation of
Mechanical Assistance for the Treatment of Congestive Heart Failure (REMATCH)
trial data had established a new benchmark against which other mechanical
cardiac assist devices, such as the LionHeart(TM), should be measured. The
REMATCH data, published in November 2001 in The New England Journal of Medicine,
compared optimal medical management with Thoratec Corporation's mechanical
assist device in a randomized study of end-stage heart failure patients. TUV
Product Service's primary concern relates to the number of mechanically assisted
patients and the number of patients benefiting from mechanical assist for more
than one year under the Lionheart(TM) trial as compared to the REMATCH trial. To
address TUV Product Service's concerns, the Company extended the LionHeart(TM)
trial for an additional six months, to December 30, 2002, which is anticipated
to increase the number of LionHeart(TM) patients living more than one year with
the device.

(5)

ITEM 1. BUSINESS (CONTINUED)

RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)

Although TUV Product Service's decision to request additional trial data
has delayed the Company's ability to sell the LionHeart (TM) in Europe, the
Company continues to train additional European implant sites, complete
improvements to the device designed to downsize both internal and external power
sources, and broaden the exposure of the LionHeart(TM) to the medical community.
In fiscal 2002, the total number of implants of the device performed in Europe
was eleven, bringing the total number of European implants to 25 and the total
number of worldwide implants to 33. Six additional European sites have been
approved to implant the LionHeart(TM) during fiscal 2002, bringing the total
number of approved European sites to ten and the total number of worldwide
approved sites to 15.

Based on the current status of the Arrow LionHeart(TM) program, the Company
believes that sufficient additional clinical trial data will be assembled from
both new and existing patients to facilitate the approvals required to CE mark
the product for European sale in the first half of calendar year 2003.

In April 2001, the Company entered into an agreement with The Cleveland
Clinic Foundation ("CCF") for the exclusive license of CCF's patents in the
field of non-pulsatile centrifugal flow ventricular assist devices for the
treatment of congestive heart failure and a related agreement for continued
research and development on the CorAide(TM) ventricular assist device that had
been a joint development effort of CCF and the National Institute of Health.

The CorAide(TM) device utilizes a unique magnetically suspended flow
pumping mechanism that uses the moving blood as its lubricating system. Arrow
considers the CorAide(TM) device to be one of the most promising continuous flow
bridge-to-transplant devices currently in development and believes it may
represent a future generation permanent ventricular assist device if human organ
systems prove to be adaptable to non-pulsatile blood flow over a long period of
time. In in vivo trials to date, the CorAide(TM) device has shown excellent
performance without the use of anticoagulant drug therapy. Moreover, its smaller
size, low power requirements and lower cost relative to other ventricular assist
devices currently under development provide a promising approach for
bridge-to-transplant patients.

The initial goal of the new joint CCF/Arrow development program is to
commence human clinical trials of the device with patients needing ventricular
support prior to receiving a donor heart. These trials should provide better
understanding of human tolerance for non-pulsatile flow devices. The development
program presently anticipates beginning human clinical trials of the device in
Europe early in calendar year 2003.

The Company believes the CorAide(TM) development program is complimentary
to its ongoing program to develop and market the Arrow LionHeart(TM) LVAS. The
first version of this device is not fully implantable and is intended to provide
support for patients waiting for heart transplantation or considered candidates
for bridging to natural recovery of ventricular function. Successful development
of the CorAide(TM) device would provide a lower cost, less invasive approach to
ventricular assist than pulsatile devices.

Since 1988, the Company has been developing the Arrow(R)-Fischell Pullback
Atherectomy Catheter (the "PAC") for the removal of atherosclerotic plaque. The
Company acquired certain patents relating to the technology underlying the PAC
in 1990. In the fourth quarter of 1998, the Company began a European
multi-center randomized study to evaluate the effectiveness of the PAC for the
removal of plaque from restenosed coronary stents. In the fourth quarter of
fiscal 2002, the Company decided to discontinue its support for this development
project as a result of changes in the market outlook for this device (see Item
8. Notes to Consolidated Financial Statements - Note 2).

(6)

ITEM 1. BUSINESS (CONTINUED)

RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)

In recent years, the Company had conducted research to determine whether
the use of microwave energy catheters for the ablation of cardiac tissue
responsible for ventricular tachycardia represented a potentially more effective
treatment for ventricular tachycardia than currently marketed radio frequency
ablation catheters. Based on the results of this research, the Company elected
to discontinue this research program during fiscal 2000. The Company then
continued to evaluate the technological feasibility of liver ablation using this
technology. In the fourth quarter of fiscal 2002, the Company decided to
discontinue its efforts to further develop the microwave ablation technology for
treating liver disease (see Item 8. Notes to Consolidated Financial Statements -
Note 2).

During fiscal 2002, the Company continued separate U.S. and European
clinical trials of its Percutaneous Thrombolytic Device for the treatment of
deep vein thrombosis. The U.S. study is a feasibility study involving three
clinical sites and a total of ten patients. The primary objective of the studies
is to determine the initial safety and feasibility of the Percutaneous
Thrombactomy Device for the treatment of iliofemoral deep vein thrombosis. As of
November 1, 2002, there have been three patients enrolled in the U.S. study and
an additional seven patients have been enrolled in the European clinical trial.

In fiscal 2002, the Company began development of the Magnaflow(R), a new
technology for magnetically guiding and facilitating the placement of enteral
nutrition catheters in patients in intensive care units. The Magnaflow(R)
catheter's embedded metallic tip is placed into a patient's esophagus and, by
means of an external permanent magnet, the device is pulled through the stomach
and into the patient's bowel where administered nutrients can best be absorbed
into the body. The Company is targeting clinical evaluations of the Magnaflow(R)
during the first half of fiscal 2003.

There can be no assurance that the FDA or any foreign government regulatory
authority will grant the Company authorization to market products under
development or, if such authorization is obtained, that such products will prove
competitive when measured against other available products.

ENGINEERING AND MANUFACTURING

Arrow has developed the core technologies that the Company believes are
necessary for it to design, develop and manufacture complex, high quality
catheter-related medical devices. This technological capability has enabled the
Company to develop internally many of the major components of its products and
reduce its unit manufacturing costs. To help further reduce manufacturing costs
and improve efficiency, the Company has increasingly automated the production of
its high-volume products and plans to continue to make significant capital
expenditures to promote efficiency and reduce operating costs.

Raw materials and purchased components essential to Arrow's business have
typically been available within the lead times required by the Company and,
consequently, procurement has not historically posed any significant problems in
the operation of the Company's business. Although the Company currently
maintains only one supplier for certain of its out-sourced components, it has
identified alternative vendors for most of these items and, therefore, does not
believe that it is dependent on any single supplier for major raw materials or
components.

(7)

ITEM 1. BUSINESS (CONTINUED)

PATENTS, TRADEMARKS, PROPRIETARY RIGHTS AND LICENSES

Arrow believes that patents and other proprietary rights are important to
its business. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. Arrow currently holds numerous U.S. patents and patent
applications, as well as several foreign patents and patent applications which
relate to aspects of the technology used in certain of the Company's products,
including its radial artery catheter, percutaneous sheath introducer,
interventional diagnostic catheter products, left ventricular assist device, and
esophageal ultrasound probe jacket. There can be no assurance that patent
applications filed by the Company will result in the issuance of patents or that
any patents owned by or licensed to the Company will provide competitive
advantages for the Company's products or will not be challenged or circumvented
by others.

In addition, Arrow is a party to several license agreements with unrelated
third parties pursuant to which it has obtained, for varying terms, the
exclusive rights to certain patents held by such third parties in consideration
for royalty payments. Many of the Company's major products, including its
Arrow-Howes(TM) Multi-Lumen Catheters and antiseptic surface treatment for
catheters, have been developed pursuant to such license agreements. The Company
has in the past granted rights in certain patents relating to its
Arrow-Howes(TM) Multi-Lumen Catheters to others in consideration for royalty
payments. The Company's U.S. patent for its Quick Flash(TM) Radial Artery
Catheter expired in November 2001 and various patents relating to the technology
underlying other of the Company's critical care and cardiac assist products
expired in fiscal 2002 or will expire in fiscal 2003. Although it is possible
that the Company will face new competition in the markets for the products to
which these patents relate, based on information currently available to it, the
Company does not presently believe that any such new competition will have a
material adverse effect on the Company's business, financial condition or
results of operations for the foreseeable future. All other existing patents
owned by or licensed to the Company relating to any of its major products expire
after fiscal 2003.

From time to time, the Company is subject to legal actions involving patent
and other intellectual property claims. The Company is currently a defendant in
two related lawsuits alleging that certain of its hemodialysis catheter products
infringe patents owned by or licensed to the plaintiffs. No trial dates have
been set in these actions. Based on information presently available to the
Company and the advice of its patent counsel, the Company believes that its
products do not infringe any valid claim of the plaintiffs' patents and that,
consequently, it has adequate legal defenses with respect to these actions.
Although the ultimate outcome 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 these actions would materially adversely affect
the Company's reported results of operations in any future period cannot be
predicted with certainty.

Arrow owns a number of registered trademarks in the United States and, in
addition, has obtained registration in many of its major foreign markets for the
trademark ARROW(R) and certain other trademarks.

(8)

ITEM 1. BUSINESS (CONTINUED)

GOVERNMENT REGULATION

As a developer, manufacturer and marketer of medical devices, the Company
is subject to extensive regulation by, among other governmental entities, the
FDA and the corresponding state, local and foreign regulatory agencies in
jurisdictions in which the Company sells its products. These regulations govern
the introduction of new medical devices, the observance of certain standards
with respect to the manufacture, testing and labeling of such devices, the
maintenance of certain records, the tracking of such devices and other matters.
Failure to comply with applicable federal, state, local or foreign laws or
regulations could subject the Company to enforcement action, including product
seizures, recalls, withdrawal of marketing clearances or approvals, and civil
and criminal penalties, any one or more of which could have a material adverse
effect on the Company. In recent years, the FDA has pursued a more rigorous
enforcement program to ensure that regulated businesses, like the Company's,
comply with applicable laws and regulations. The Company believes that it is in
substantial compliance with such governmental regulations. However, federal,
state, local and foreign laws and regulations regarding the manufacture and sale
of medical devices are subject to future changes. No assurance can be given that
such changes will not have a material adverse effect on the Company.

On occasion, the Company has received notifications, including warning
letters, from the FDA of alleged deficiencies in the Company's compliance with
FDA requirements. The Company believes that it has been able to address or
correct such deficiencies. In addition, from time to time the Company has
recalled, or issued safety alerts on, certain of its products. No such warning
letter, recall or safety alert has had a material adverse effect on the Company,
but there can be no assurance that a warning letter, recall or safety alert
would not have such an effect in the future.

In the early to mid 1990's, the review time by the FDA to clear medical
devices for commercial release lengthened and the number of marketing clearances
and approvals decreased. In response to public and congressional concern, the
FDA Modernization Act of 1997 was adopted with the intent of bringing better
definition to the clearance process for new medical products. While FDA review
times have improved since passage of the 1997 Act, there can be no assurance
that the FDA review process will not continue to delay the Company's
introduction of new products in the U.S. in the future. In addition, many
foreign countries have adopted more stringent regulatory requirements which also
have added to the delays and uncertainties associated with the release of new
products, as well as the clinical and regulatory costs of supporting such
releases. It is possible that delays in receipt of, or failure to receive, any
necessary clearance or approval for the Company's new product offerings could
have a material adverse effect on the Company's business, financial condition or
results of operations.

COMPETITION

Arrow faces substantial competition from a number of other companies in the
market for catheters and related medical devices and equipment, including
companies with greater financial and other resources. In addition, in response
to increased 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 Company believes that
its products are competing primarily on the basis of product differentiation,
product quality and cost-effectiveness, and that its comprehensive manufacturing
capability enables it to expedite the development and market introduction of new
products and to reduce manufacturing costs, thereby permitting the Company to
respond more effectively to competitive pricing in an environment where its
ability to increase prices is limited.

(9)

ITEM 1. BUSINESS (CONTINUED)

ENVIRONMENTAL COMPLIANCE

The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. In the course of its
business, the Company is involved in the handling, storing and disposal of
materials, which are classified as hazardous. In 1989, the Company was notified
that it was among the potentially responsible parties under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, for
the costs of investigating or remediating contamination at a waste recycling,
treatment and disposal facility located in Maryland. In August 2001, the Company
was invited by the Environmental Protection Agency to enter into a proposed
global consent decree for DE MINIMIS parties with the United States District
Court for the District of Maryland, which, if approved, would resolve the
Company's potential liability with respect to the facility on a DE MINIMIS
basis. The Company has indicated its interest in entering into such a DE MINIMIS
settlement, but currently has no knowledge as to when the proposed consent
decree will be presented to the court or when it may be approved.

The Company believes that its operations comply in all material respects
with applicable environmental laws and regulations. While the Company continues
to make capital and operational expenditures for protection of the environment,
it does not anticipate that these expenditures will have a material adverse
effect on its business, financial condition or results of operations.

PRODUCT LIABILITY AND INSURANCE

The design, manufacture and marketing of medical devices of the types
produced by the Company entail an inherent risk of product liability. The
Company's products are often used in surgical and intensive care settings with
seriously ill patients. While the Company believes that, based on claims made
against the Company in the past, the amount of product liability insurance
maintained by the Company has been adequate, there can be no assurance that such
insurance will be available or in an amount sufficient to satisfy claims made
against the Company in the future or that the Company will be able to obtain
insurance in the future at satisfactory rates or in adequate amounts. Product
liability claims in the future, regardless of their ultimate outcome, could
result in costly litigation and could have a material adverse effect on the
Company's business, reputation, its ability to attract and retain customers for
its products and its results of operations.

A product liability lawsuit against the Company tried before a jury in
Arkansas state court resulted in a judgment against the Company in May 2001 of
$175,000 in compensatory damages and $4.0 million in punitive damages. Notice of
appeal from that judgment to the Arkansas Supreme Court was filed and the
Company is pursuing vigorously the appeal. Based on information presently
available to the Company and the advice of its product liability counsel, the
Company believes that it is more likely than not that the Company will obtain a
reversal of this judgment and a remand for a new trial. In addition, the Company
believes that any damage award, whether punitive or compensatory, that may
ultimately be upheld in this case will be covered by its product liability
insurance policy. The Company's insurer has commenced an action seeking a
judicial declaration that it is not obligated to indemnify the Company for
punitive damages. Based on information presently available to the Company and
the opinion of its insurance litigation counsel, the Company believes that any
award of punitive damages resulting from the product liability lawsuit would be
covered by its insurance. Although the ultimate outcome 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 these actions would
materially adversely affect the Company's reported results of operations in any
future period cannot be predicted with certainty.

EMPLOYEES

As of November 1, 2002, Arrow had 3,005 full-time employees. All of the
Company's hourly-paid manufacturing employees at the Company's Reading and
Wyomissing, Pennsylvania facilities are represented by the United Steelworkers
of America AFL-CIO, Local 8467 (the "Union"). The Company and the Union are
currently operating under a three-year agreement that expires in September 2003.
The Company has never experienced an organized work stoppage or strike and
considers its relations with its employees to be good.

(10)

ITEM 1. BUSINESS (CONTINUED)

EXECUTIVE OFFICERS

The executive officers of the Company and their ages and positions as of
November 1, 2002 are listed below. All executive officers are elected or
appointed annually and serve at the discretion of the Board of Directors. There
are no family relationships among the executive officers of the Company.

Mr. Miller has served as Chief Executive Officer and a Director of the
Company since it was founded in 1975, and as Chairman of the Board of the
Company since January 1999. He served as President from 1975 to January 1999.
Mr. Miller also served as President and a director of Arrow Precision Products,
Inc. ("Precision"), a corporation controlled by principal shareholders of the
Company, until Precision's dissolution on May 1, 2002. During fiscal 2002, Mr.
Miller devoted none of his time to Precision. On October 28, 2002, Mr. Miller
retired as a director of Carpenter Technology Corporation, a manufacturer of
specialty steel.

Mr. Anderson has served as Vice Chairman of the Board and General Manager
of the Company's Critical Care Division since January 2002, with responsibility
for worldwide sales, marketing, research and development of the Company's
critical care products. Mr. Anderson has served as a director of Arrow since
January 1998 and, prior to his employment by the Company, served as President
and Chief Executive Officer of ABC School Supply, Inc., a producer of materials
and equipment for public and private schools, from May 1997 to December 2001.
Mr. Anderson served as Principal with the New England Consulting Group, a
general management and marketing consulting company, from May 1996 to May 1997,
as Vice President, General Manager, Retail Consumer Products of James River
Corporation, a multinational company engaged in the development, manufacture and
marketing of paper-based consumer products ("James River"), from August 1994 to
March 1996, and as Vice President, Marketing, Consumer Brands of James River
from May 1992 to August 1994, and in various capacities with Nestle Foods
Corporation, the latest as Vice President, Division General Manager,
Confections, from 1984 to May 1992. Prior thereto, Mr. Anderson served in
several marketing capacities with Procter & Gamble.

Mr. Fleck has served as President of the Company since January 1999. From
June 1994 to January 1999, he served as Vice President - Research and
Manufacturing of the Company. From 1986 to June 1994, Mr. Fleck served as Vice
President - Research and Engineering of the Company. From 1975 to 1986, Mr.
Fleck served as Engineering Manager of the Company.

(11)

ITEM 1. BUSINESS (CONTINUED)

EXECUTIVE OFFICERS (CONTINUED)

Mr. Frankhouser has served as Executive Vice President - Global Business
Development of the Company since January 2002, with responsibility for worldwide
evaluation and acquisition of new business opportunities. From January 1999 to
January 2002, Mr. Frankhouser served as Executive Vice President of the Company,
with responsibility for worldwide sales and marketing. He served as Vice
President-Marketing of the Company from 1986 until January 1999. From 1980 to
1986, Mr. Frankhouser served as Manager of Marketing of the Company.

Mr. Hirt has served as Vice President - Finance, Chief Financial Officer
and Treasurer of the Company since August 1998. Prior to joining the Company,
from 1980 to 1998, Mr. Hirt served in various capacities with Pharmacia &
Upjohn, Inc., the latest as Vice President, Accounting and Reporting.

Mr. Holleran has served as Secretary and a director of the Company since
its founding in 1975 and, until September 1997, also served as a Vice President.
From July 1996, Mr. Holleran served as President and Chief Executive Officer of
Precision Medical Products, Inc. ("PMP"), a former subsidiary of Precision,
which manufactures and markets certain non-catheter medical products and was
sold on August 29, 1997 to certain employees of Precision, including Mr.
Holleran. He is now the Chairman of PMP. From February 1986 to September 1997,
Mr. Holleran was also Vice President, Chief Operating Officer and a director of
Precision. From 1991 to 1996, Mr. Holleran served as President of Endovations,
Inc., a subsidiary of Precision that manufactured and marketed certain
gastroenterological medical products, until the sale in June 1996 of a portion
of the Endovations business to the Company and the remainder to an unrelated
third party.

Mr. Botterbusch has served as Vice President and General Manager of the
Company's Cardiac Assist Division since March 2001. From January 1999 to March
2001, Mr. Botterbusch served as Vice President, Research and Engineering of the
Company. He served as Manager, Product Development, Research and Engineering
from 1993 to January 1999, as Group Leader, Research and Development from 1987
to 1993 and, from 1985, when he joined the Company, to 1987, as a Project
Engineer of the Company.

Mr. Nickel has served as Vice President-Regulatory Affairs and Quality
Assurance of the Company since 1991. From 1986 to 1991, Mr. Nickel served as
Director of Regulatory Affairs and Quality Assurance of the Company.

Mr. Hurley has served as Controller of the Company since April 1998. Prior
to joining the Company, from 1990 to 1998, he served in various capacities with
Rhone-Poulenc Rorer, the latest as a Director of Finance.

ITEM 2. PROPERTIES

The Company's corporate headquarters and principal research center are
located in a 165,000 square foot facility in Reading, Pennsylvania. This
facility, which also includes manufacturing space, is located on 126 acres.

Other major properties owned by the Company include a 165,000 square foot
manufacturing and warehousing facility in Asheboro, North Carolina; a 145,000
square foot manufacturing facility in Wyomissing, Pennsylvania; a 40,000 square
foot manufacturing facility in Chihuahua, Mexico; a 49,000 square foot
manufacturing and warehouse facility in Mount Holly, New Jersey; and an 88,000
square foot manufacturing and research facility in the Czech Republic.

In addition, the Company leases a 55,000 square foot manufacturing facility
in Everett, Massachusetts, a 7,700 square foot sales office and distribution
center in Woburn, Massachusetts, and a 22,500 square foot manufacturing facility
in Camargo, Mexico. The Company also leases sales offices and warehouse space in
Canada, France, Germany, Japan, South Africa, the Netherlands, Spain and Greece,
sales office space in Mexico and warehouse space in California.

The Company considers all of its facilities to be in good condition and
adequate to meet the present and reasonably foreseeable needs of the Company.
The Company believes that it will be able to renew all leases on commercially
reasonable terms as they become due, or, if it is unable to renew them, that
suitable replacement space would be available on commercially reasonable terms.

(12)

ITEM 3. LEGAL PROCEEDINGS

The Company is a party to certain legal actions, including product
liability matters, arising in the ordinary course of its business. The Company
is also subject to legal actions involving patent and other intellectual
property claims. Based upon information presently available to the Company, the
Company believes it has adequate legal defenses or insurance coverage for these
actions and, except as set forth under Item 1 - Business - Patents, Trademarks,
Regulatory Rights and Licenses and - Product Liability and Insurance, that the
ultimate outcome of these actions would not have a material adverse effect on
the Company's business, financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 2002 through the solicitations of proxies or otherwise.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The Company's common stock has traded publicly on The Nasdaq Stock Market
under the symbol "ARRO" since June 9, 1992, the date that its common stock was
initially offered to the public. The table below sets forth the high and low
sale prices of the Company's common stock as reported by the Nasdaq Stock Market
and the quarterly dividends per share declared by the Company during the last
eight fiscal quarters:

As of November 1, 2002, there were approximately 559 registered
shareholders of the Company's common stock.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data for the years ended
August 31, 2002, 2001, 2000, 1999 and 1998 have been derived from the Company's
audited consolidated financial statements. The consolidated financial statements
of the Company as of August 31, 2002 and 2001 and for each of the three years in
the period ended August 31, 2002, together with the notes thereto and the
related report of PricewaterhouseCoopers LLP, independent accountants, are
included in Item 8 of this report. The following data should be read in
conjunction with the Company's audited consolidated financial statements, the
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are included in Items 7 and 8 of this report.

(13)

ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)

(14)

ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)

Certain prior period amounts in the table above have been reclassified to
conform to the fiscal 2002 presentation (see Item 8. Notes to Consolidated
Financial Statements - Note 1).

* See Item 8. Notes to Consolidated Financial Statements - Note 2 for a
description of the special charges recorded in fiscal 2002 and 2000. In the
second quarter of fiscal 1999, the Company recorded a non-cash pre-tax
special charge of $4,139 ($2,670 after tax or $0.12 per basic and diluted
common share) related to the purchase of in-process IAB pump research and
development as part of the Company's acquisition of the assets of the
cardiac assist division of C.R. Bard, Inc. In accordance with Financial
Accounting Standard (FAS) No. 2 "Accounting for Research and Development
Costs" and Financial Accounting Standard Board (FASB) Interpretation (FIN)
No. 4, "Applicability of FAS No. 2 to Business Combinations Accounted for
by the Purchase Method", these costs were charged to expense at the
consummation of the acquisition. In accordance with FAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
consistent with the Company's accounting policy for marketable equity
securities, in the fourth quarter of fiscal 1999, the Company determined
that the decline in the fair value of its investment in Cardiac Pathways
Corporation was other than temporary. Accordingly, the Company established
a new basis in the investment of $440, equivalent to its fair market value.
As a result, the Company realized a special charge of $8,680 before tax,
$5,598 after tax or $0.24 per basic and diluted common share. In the fourth
quarter of fiscal 1998, in accordance with FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", the Company recorded a non-cash pre-tax special charge of $36,249
($31,960 after tax or $1.38 per basic and diluted common share) to write
down to fair value certain goodwill and intangible assets.

(15)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF FACTORS, INCLUDING
MATERIAL RISKS, UNCERTAINTIES AND CONTINGENCIES, WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, SEE EXHIBIT 99.1 TO THIS REPORT
AND THE COMPANY'S PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE
COMMISSION.

RESULTS OF OPERATIONS

The following table presents for the three years ended August 31, 2002
Consolidated Statements of Income expressed as a percentage of net sales and the
period-to-period percentage changes in the dollar amounts of the respective line
items.

* Not a meaningful comparison

(16)

FISCAL 2002 COMPARED TO FISCAL 2001

Net sales increased by $6.8 million, or 2.0%, to $340.8 million in fiscal 2002
from $334.0 million in fiscal 2001. Net sales represent gross sales invoiced to
customers, less certain related charges, including discounts, returns, rebates,
and other allowances. Revenue from sales is recognized at the time products are
shipped and title is passed to the customer. Sales of critical care products
increased 2.9% to $284.0 million from $276.1 million in fiscal 2001, due
primarily to increased sales of central venous and special catheters. Sales were
adversely impacted by a $1.8 million charge for increased rebate reserves
related to the Company's acquisition of the net assets of its former New York
City distributor, Stepic Medical, on September 3, 2002, as further described
above in Item 1. Business - Sales and Marketing. Sales of cardiac care products
decreased 1.9% to $56.8 million from $57.9 million in fiscal 2001, due primarily
to decreased sales of IAB pump and diagnostic products. International sales
increased by $3.5 million, and represented 34.5% of net sales in fiscal 2002,
compared to 34.1% in the prior year, despite the offsetting negative impact of
the strength of the U.S. dollar relative to currencies in countries where the
Company operates direct sales subsidiaries, which reduced sales by $2.1 million
for fiscal 2002 when compared to the prior fiscal year.

As discussed in Item 8. Notes to Consolidated Financial Statements - Note 19, on
April 1, 2002, the Company completed the sale of substantially all of the assets
of its implantable drug infusion pump business pursuant to an asset purchase
agreement dated as of March 1, 2002. As a result of this sale, the Company
reported no sales of implantable drug infusion pump products from April 1, 2002
through August 31, 2002, compared to $3.2 million of such sales in the same five
month period of fiscal 2001.

Gross profit decreased 2.5% to $171.1 million in fiscal 2002 from $175.5 million
in fiscal 2001. As a percentage of net sales, gross profit decreased to 50.2% in
fiscal 2002 compared to 52.5% in fiscal 2001. These decreases were primarily the
result of increased manufacturing variances caused by manufacturing of products
at a rate below the actual sales rate in order to bring inventories more in line
with requirements following manufacturing shifts to expanded international
plants, a less profitable product sales mix and pricing pressures. Gross profit
also decreased, as discussed above, due to a $1.8 million charge against sales
related to the Company's acquisition of its former New York City distributor to
reflect an increase in the reserve for dealer rebates as a result of obtaining
additional information regarding the distributor's rebates (see Item 8. Notes to
Consolidated Financial Statements - Notes 2 and 22). The Company anticipates
that its gross profit in the first two quarters of fiscal 2003 will continue to
be affected by manufacturing variances associated with past inventory reductions
as well as by sales of inventory purchased from Stepic Medical at reduced dealer
margins.

The Japanese Ministry of Health and Welfare adopted new reimbursement pricing
for central venous catheters effective as of April 1, 2002. The impact of this
reduced pricing on the Company's earnings for fiscal 2002 was not material and
the Company does not anticipate that it will have a material impact on its
future earnings.

In addition, effective as of March 1, 2002, the Company entered into an
agreement with a group purchasing organization resulting in reduced pricing to
the hospitals participating in this organization. The impact of the reduced
pricing under this arrangement on the Company's earnings in fiscal 2002 was not
material. The Company presently anticipates that the effect of these pricing
concessions on its future earnings will be more than offset by increased sales
volumes under this arrangement.

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.
where Arrow has 80% or greater market shares, 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 European markets as
governments strive to curtail increases in health care costs.

Research, development and engineering expenses in fiscal 2002 increased by 4.0%
to $26.2 million from $25.2 million in fiscal 2001. As a percentage of net
sales, these expenses increased to 7.7% in fiscal 2002, compared to 7.5% in
fiscal 2001. This increase was primarily a result of increased research and
development spending on the Arrow LionHeart(TM), the Company's Left Ventricular
Assist System, and CorAide(TM), the Company's joint research and development
program with The Cleveland Clinic Foundation ("CCF"), which was offset in part
by less research and development spending on the Company's implantable drug
infusion pump business due to its divestiture of this business on April 1, 2002
(see Item 8. Notes to Consolidated Financial Statements - Note 19). For further

(17)

FISCAL 2002 COMPARED TO FISCAL 2001 (CONTINUED)

information regarding the Company's research and product development projects,
see Item 1. Business - Research and Product Development.

Selling, general and administrative expenses were $78.4 million during fiscal
2002 compared to $78.5 million in the previous year, and were 23.0% of net sales
in fiscal 2002 compared to 23.5% in fiscal 2001. This decrease was due primarily
to several offsetting factors, including: decreased legal expenses relating to
patent litigation matters, although the Company continued to incur legal costs
in connection with a patent dispute relating to certain of its hemodialysis
catheter products (see Item 1. Business - Patents, Trademarks, Proprietary
Rights and Licenses); reduced goodwill amortization expense of $3.0 million
related to the Company's adoption in the first quarter of fiscal 2002 of SFAS
142 (see Item 8. Notes to Consolidated Financial Statements - Note 16); less
selling, general and administrative expenses related to the Company's
implantable drug infusion pump business, which was sold in April 2002 (see Item
8. Notes to Consoldated Financial Statements - Note 19); and increased expenses
related to the Company's defined benefit pension plans (see Item 8. Notes to
Consolidated Financial Statements - Note 12). In addition, during fiscal 2002,
the Company recorded a $2.1 million charge for additional product liability
insurance to maintain deductibles at existing levels for five years for claims
incurred but not reported occurring prior to September 1, 2002 and for
additional reserves for product liability claims and workers' compensation
exposures.

Net periodic pension cost is recorded in operating expenses in amounts
determined by the Company's actuaries and is based on management's estimates of
expected interest rates, expected rates of return on plan assets and expected
compensation increases. These estimates reflect management's best judgements in
the current circumstances. Actual results may differ from the estimates.
Interest rates assumptions are based on market rates at the beginning of the
Company's fiscal year. Expected rates of return on plan assets are based in part
on the Company's historical asset portfolio performance over the prior ten year
period and also the estimated rate of return on plan assets in the future. The
Company's rate of compensation increase assumption is based on its historical
compensation percentage increases as well as its expected rate increases in
future periods.

As discussed in Note 19 of Notes to Consolidated Financial Statements in Item 8
of this report, during fiscal 2002, the Company recorded an estimated loss of
$1.2 million ($0.8 million after tax, or $0.04 per basic and diluted common
share) on the sale of its implantable drug infusion pump business. As discussed
in Note 18 of Notes to Consolidated Financial Statements in Item 8 of this
report, the Company also recorded a gain of $1.7 million on the sale of
securities available for sale. The net impact of these transactions was not
material to the Company's results of operations for fiscal 2002.

The Company recorded special charges in the fourth quarter of fiscal 2002
amounting to a total of $8.0 million ($5.4 million after tax, or $0.25 and $0.24
per basic and diluted common share, respectively) relating to the matters
described below. Intangible assets in the aggregate amount of $4.7 million ($3.2
million after tax, or $0.15 and $0.14 per basic and diluted common share,
respectively) were written off relating to purchased technologies the Company
has decided not to support for (1) Pullback Atherectomy Catheterization (PAC)
($2.6 million, $1.8 million after tax, or $0.08 per basic and diluted common
share), (2) IAB pumping software ($1.5 million, $1.0 million after tax, or $0.05
and $0.04 per basic and diluted common share, respectively), and (3) microwave
ablation technology ($0.6 million, $0.4 million after tax, or $0.02 per basic
and diluted common share). As discussed above in Item 1. Business - Research and
Product Development, the Company's special charge relating to the PAC resulted
from its discontinuation of support for this development project due to changes
in the market outlook for this device. The special charge relating to the IAB
pumping software resulted from the Company's decision to evaluate a new pump
which will not utilize this software. As discussed above in Item 1. Business -
Research and Product Development, the special charge relating to microwave
ablation resulted from the Company's decision to discontinue its efforts to
further develop this technology for treating liver ablation. Also included in
the special charge is the write-off of an investment of $2.0 million ($1.3
million after tax, or $0.06 per basic and diluted common share) in a developer
and manufacturer of systems to measure certain cardiac functions due to the
developer's uncertain access to future financing and unfavorable financial
condition. Finally, as discussed above in Item 1. Business - Research and
Product Development, due to delay in CE mark approval for the Arrow
LionHeart(TM), the Company's fully implantable LVAS in Europe, the Company
incurred $1.3 million ($0.9 million after tax, or $0.04 per basic and diluted
common share) of manufacturing variances related to systems being produced for
market introduction.

(18)

FISCAL 2002 COMPARED TO FISCAL 2001 (CONTINUED)

Principally due to the above factors, operating income decreased 18.4% to $58.6
million in fiscal 2002 from $71.8 million in fiscal 2001.

Other expenses (income), net, decreased to $0.8 million of expense in fiscal
2002 from $2.3 million in fiscal 2001, principally due to lower interest expense
on the Company's revolving credit facility. Other expenses (income) net,
consists principally of interest expense and foreign exchange gains and losses
associated with the Company's direct sales subsidiaries. Aggregate foreign
exchange losses were $0.2 million and $0.4 million in fiscal 2002 and 2001,
respectively. Gains relating to foreign currency contracts were $0.1 million in
fiscal 2002 and $0.4 million in fiscal 2001.

As a result of the factors discussed above, income before income taxes decreased
in fiscal 2002 by 16.8% to $57.8 million from $69.5 million in fiscal 2001. The
Company's effective income tax rate decreased to 32.5% from 33.0% in fiscal
2001, principally as a result of the Company's adoption of SFAS 142 and the
elimination of nondeductible goodwill (see Item 8. Notes to Consolidated
Financial Statements - Note 16) in the first quarter of fiscal 2002 and
anticipated research and development tax credits currently under audit.

Net income in fiscal 2002 decreased 16.1% to $39.0 million from $46.5 million in
fiscal 2001. As a percentage of net sales, net income represented 11.4% in
fiscal 2002 compared to 13.9% in fiscal 2001. As a result of the Company's
adoption of SFAS 142 and the discontinuation of amortization of goodwill, net
income in fiscal 2002 increased by $2.1 million after tax from fiscal 2001
($0.10 and $0.09 per basic and diluted common share, respectively).

Basic earnings per common share were $1.78 in fiscal 2002, down 16.0%, or $0.34
per share, from $2.12 in fiscal 2001. Diluted earnings per common share were
$1.76 in fiscal 2002, down 16.2%, or $0.34 per share, from $2.10 in fiscal 2001.
Weighted average shares of common stock outstanding used in computing basic
earnings per common share decreased to 21,912,928 in fiscal 2002 from 21,995,394
in fiscal 2001. Weighted average shares of common stock outstanding used in
computing diluted earnings per common share decreased to 22,105,541 in fiscal
2002 from 22,120,367 in fiscal 2001. These decreases were primarily a result of
the Company's share repurchase program, which, as discussed below, remains in
effect, partially offset by the Company's issuance during fiscal 2002 of 10,000
shares from treasury to CCF as an additional royalty for CCF's completion of
certain research and development milestones under the Company's license
agreement with CCF (see Item 1. Business - Research and Development).

FISCAL 2001 COMPARED TO FISCAL 2000

Net sales increased by $8.3 million, or 2.6%, to $334.0 million in fiscal 2001
from $325.7 million in fiscal 2000. Sales of critical care products increased
2.8% to $276.1 million from $268.7 million in fiscal 2000, due primarily to
increased shipments of central venous and special catheters. Sales of cardiac
care products increased 1.6% to $57.9 million from $57.0 million in fiscal 2000,
due primarily to increased shipments of IAB pump products. International sales
decreased by $3.0 million, and represented 34.1% of net sales in fiscal 2001,
compared to 35.9% in the prior year, principally as a result of the increased
strength of the U.S. dollar, which reduced sales by $7.3 million for fiscal 2001
when compared to the prior fiscal year.

For the fiscal year ended August 31, 2001, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10 which requires that freight expense be
classified in the Company's income statement as a cost of sales. Previously, the
Company had accounted for freight charges as primarily a reduction of net sales
and in some cases as marketing expense.

Gross profit increased 3.5% to $175.5 million in fiscal 2001 from $169.6 million
in fiscal 2000 due primarily to increased sales volume. As a percentage of net
sales, gross profit was 52.5% in fiscal 2001 compared to 52.1% in fiscal 2000,
due primarily to more efficient manufacturing during the periods in which the
inventory sold was produced and higher margins on special catheters.

(19)

FISCAL 2001 COMPARED TO FISCAL 2000 (CONTINUED)

Research, development and engineering expenses in fiscal 2001 increased by 27.5%
to $25.2 million from $19.8 million in fiscal 2000. As a percentage of net
sales, these expenses increased to 7.5% in fiscal 2001, compared to 6.1% in
fiscal 2000, due primarily to $5.6 million of incremental research and
development spending on the Arrow LionHeart(TM) LVAS and CorAide(TM), the
Company's joint research and development program with CCF. See Item 1. Business
- - Research and Product Development.

Selling, general and administrative expenses increased by 4.8% to $78.5 million
during fiscal 2001 from $74.9 million in the previous year, and were 23.5% of
net sales in fiscal 2001 compared to 23.0% in fiscal 2000. The increase was due
primarily to increased legal expenses relating to patent litigation matters.

In the first quarter of fiscal 2000, the Company recorded a non-cash pre-tax
special charge of $3.3 million ($2.2 million after-tax or $.10 per basic and
diluted common share) related primarily to a write-down for the in-process
research and development acquired in connection with the Company's acquisition
of Sometec, S.A. (see Notes 2 and 3 of Notes to Consolidated Financial
Statements in Item 8 of this report). The technology acquired is a compact
monitoring device that measures and monitors the descending aortic blood flow
during anesthesia and intensive care. The device provides real-time aortic blood
flow (a measurement of cardiac output) by using both pulsed Doppler for
measuring blood velocity and M-mode ultrasound to accurately measure the aortic
diameter. The monitoring system consists of four main components: the main
console (monitor), a transesophageal probe, a disposable jacket and an
articulated probe holder. The monitor provides the physician with a continuous
display of a patient's hemodynamic profile, including aortic blood flow, heart
rate, stroke volume, peak velocity, acceleration, left ventricular ejection time
and systemic vascular resistance. To facilitate use of this device, a disposable
jacket, containing an acoustic gel, is placed over the probe utilizing a special
vacuum mounting tool supplied with the jacket. The Company believes that the
speed and ease of use of this new noninvasive measurement technique has the
potential of establishing cardiac output as a frequently used physician tool
with value similar to blood pressure, EKG and pulse oximetry measurements. In
accordance with SFAS No. 2, "Accounting for Research and Development Costs" and
FIN No. 4, "Applicability of SFAS No. 2 to Business Combinations Accounted for
by the Purchase Method", these costs related to the special charge were charged
to expense at the date of consummation of the acquisition. The value assigned to
purchase Sometec in-process technology was based on a valuation prepared by an
independent third-party appraisal company. Each of the technologies under
development at the date of acquisition was reviewed for technological
feasibility, stage of completeness at the acquisition date, and scheduled
release dates of products employing the technology to determine whether the
technology was complete or under development. At the acquisition date, the
research and development project was estimated to be 75% complete. Incomplete
development efforts at the time of acquisition included improved portability,
software development and development of the disposable sheath. The valuation was
based on the estimated cash flows resulting from commercially viable products
discounted to present value using a risk-adjusted after-tax discount rate of
22%. The research and development costs from these projects have commenced. Some
cash inflows from these projects have commenced. However, while the Company
believes these projects will be completed as planned, the Company cannot assure
that they will be completed on schedule or, once completed, that the new
products resulting from these projects will be successfully introduced into the
marketplace. The Company does not anticipate material adverse changes from
historical pricing, margins and expense levels as a result of the introduction
of the new technologies related to the projects.

Principally due to the above factors, operating income increased 0.2% to $71.8
million in fiscal 2001 from $71.6 million in fiscal 2000.

Other expenses (income), net, increased to $2.3 million of expense in fiscal
2001 from $2.1 million of expense in fiscal 2000. Other expenses (income), net,
consists principally of interest expense and foreign exchange gains and losses
associated with the Company's direct sales subsidiaries. Aggregate foreign
exchange losses in fiscal 2001 were $0.4 million and in fiscal 2000 aggregate
foreign exchange gains were $0.1 million, including gains relating to foreign
currency contracts of $0.4 million in fiscal 2001 and losses of less than $0.1
million in fiscal 2000.

(20)

FISCAL 2001 COMPARED TO FISCAL 2000 (CONTINUED)

As a result of the factors discussed above, income before income taxes was $69.5
million for both fiscal 2001 and 2000. In fiscal 2001, the Company reduced its
annual effective tax rate to 33.0% from 33.5% in fiscal 2000 due to anticipated
research and development tax credits.

Net income in fiscal 2001 increased by 0.8% to $46.5 million from $46.2 million
in fiscal 2000. As a percentage of net sales, net income represented 13.9% in
fiscal 2001 compared to 14.2% in the previous year.

Basic earnings per common share were $2.12 and diluted earnings per common share
were $2.10 in fiscal 2001. Basic earnings per common share increased 2.9% in
fiscal 2001, or $.06 per share, from $2.06 per common share in fiscal 2000.
Diluted earnings per common share increased 2.4% in fiscal 2001, or $.05 per
share, from $2.05 per share in the prior year primarily as a result of the above
factors. Weighted average shares of common stock outstanding used in computing
basic earnings per common share decreased to 21,995,394 in fiscal 2001 from
22,450,581 in the prior year. Weighted average shares of common stock
outstanding used in computing diluted earnings per common share decreased to
22,120,367 in fiscal 2001 from 22,518,928 in the prior year. These decreases are
a result of the Company's share repurchase program, which remains in effect,
partially offset by the Company's issuance during fiscal 2001 of 25,000 shares
from treasury to CCF for the rights granted to the Company by CCF under the
Company's license agreement with CCF (see Item 1. Business - Research and
Product Development).

LIQUIDITY AND CAPITAL RESOURCES

Arrow's primary source of funds continues to be cash generated from operations,
as shown in the Company's Consolidated Statement of Cash Flows included in Item
8 of this report. For fiscal 2002, net cash provided by operations was $77.8
million, an increase of $36.0 million, or 86.1% from the prior year, due
primarily to increased collections of accounts receivable, decreased inventory
levels and less cash used for prepaid expenses. Accounts receivable, measured in
days sales outstanding during the period, decreased to 80 days at August 31,
2002 from 86 days at August 31, 2001, due to improved collection efforts of the
Company.

The parent company of one of the Company's major U.S. distributors had been
experiencing declining net sales and significant net losses. This parent company
recently completed a major recapitalization and, in May 2002, it reported first
quarter earnings and a substantial reduction in debt related to its
recapitalization. The Company had accounts receivable due from this distributor
in the amount of $5.5 million as of August 31, 2002. As discussed above in Item
1. Business - Sales and Marketing, on September 3, 2002, the Company purchased
the net assets of this distributor in consideration for $12.7 million in cash
and forgiveness of the entire accounts receivable balance due from this
distributor, subject to post-closing adjustments (see also Item 8. Notes to
Consolidated Financial Statements - Note 22).

Inventories decreased $8.5 million in fiscal 2002 compared to an $11.6 million
increase in fiscal 2001 due to an inventory reduction program adopted by the
Company in fiscal 2002 as well as to the sale of inventory of $5.7 million
included as part of the Company's sale of substantially all of the assets of its
implantable drug infusion pump business on April 1, 2002 (see Item 8. Notes to
Consolidated Financial Statements - Note 19). Prepaid expenses increased $0.6
million in fiscal 2002 due primarily to an increase in prepaid pension costs
offset by a decrease in prepaid taxes.

Net cash used in the Company's investing activities decreased to $5.5 million in
fiscal 2002 from $27.4 million in fiscal 2001, due primarily to the Company's
receipt of proceeds from its sale of securities available for sale and from its
sale of its implantable drug infusion pump business in fiscal 2002 (see Item 8.
Notes to Consolidated Financial Statements - Notes 18 and 19).

In fiscal 2001, the Company's Board of Directors approved spending of up to
$10.0 million for the construction of additional manufacturing capacity,
including related equipment, at its existing manufacturing and research facility
in the Czech Republic. Construction of the additional space at this facility was
completed in December 2001. As of August 31, 2002, the Company had spent $8.8
million on this construction, including $5.3 million in fiscal 2002, and
anticipates spending up to the authorized amount to bring such additional
manufacturing capacity on-line, which entails the purchase of related equipment.

(21)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

Financing activities used $42.6 million of net cash in fiscal 2002, compared to
$15.3 million in fiscal 2001, primarily as a result of an increase in fiscal
2002 in the Company's repayment of borrowings under its U.S. revolving credit
facility and an increase in the Company's use of cash to purchase shares of its
common stock in the open market in connection with its share repurchase program,
partially offset by a decrease in the repayment of the Company's current portion
of its long-term debt. The Company's Board of Directors has authorized the
repurchase of up to a maximum of 2,000,000 shares under the share repurchase
program. During fiscal 2002, the Company purchased 158,500 shares of its common
stock under this program for $5.8 million. As of August 31, 2002, the Company
had repurchased a total of 1,418,800 shares under this program for approximately
$43.7 million since the program's inception in March 1999.

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. The Company has a revolving credit facility
providing a total of $65.0 million in available revolving credit for general
business purposes, of which $6.2 and $40.6 million were outstanding at August
31, 2002 and 2001, respectively. 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 and a cash flow coverage ratio of
1.25 to 1 or greater; a limitation on certain mergers, consolidations and sales
of assets by the Company or its subsidiaries; a limitation on its 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
$50.0 million. At August 31, 2002 and 2001, 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. In addition, certain subsidiaries of the
Company had revolving credit facilities totaling the U.S. dollar equivalent of
$20.7 and $20.3 million, of which $9.9 and $9.8 million were outstanding as of
August 31, 2002 and 2001, respectively. Interest rate terms for both U.S. and
foreign bank credit facilities are based on either bids provided by the lender
or the prime rate, London Interbank Offered Rates (LIBOR) or Certificate of
Deposit Rates, plus applicable margins. Certain of these borrowings, primarily
those with U.S. banks, are due on demand. Interest is payable monthly during the
revolving credit period. At August 31, 2002, the weighted average interest rate
on short-term borrowings was 2.2% per annum. Combined borrowings under these
facilities decreased $34.3 million during fiscal year 2002.

A summary of all of the Company's contractual obligations and commercial
commitments as of August 31, 2002 were as follows:

*Includes short-term indebtedness of the Company and its subsidiaries under
various revolving credit facilities, as discussed above in this Item 7.

(22)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

During fiscal 2002, 2001 and 2000, the percentage of the Company's sales
invoiced in currencies other than the U.S. dollar was 21.6%, 21.9% and 23.9%,
respectively. In addition, a small part of the Company's cost of goods sold is
denominated in foreign currencies. The Company enters into foreign currency
exchange and foreign currency option contracts, which are derivative financial
instruments, with major financial institutions to reduce the effect of these
foreign currency risks, 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. 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. Realized gains and
losses on these contracts are offset by changes in the U.S. dollar value of the
foreign 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 per
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 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. As of November 1, 2002, outstanding foreign currency
exchange contracts totaling the U.S. dollar equivalent of $10.5 million mature
at various dates through November 2002 and foreign currency option contracts
with a fair market value of less than $0.1 million mature at various dates
through February 2003. The Company expects to continue to utilize foreign
currency exchange 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 that
its risk associated with this concentration is limited due to the Company's
on-going credit review procedures.

As part of the Company's 1998 purchase of assets of the cardiac assist division
of C.R. Bard, Inc., the Company also agreed to acquire specified assets and
assume specified liabilities of the Belmont Instruments Corporation for $7.3
million based on the achievement of certain milestones. The Company paid $2.3
million in fiscal 2000 and $3.5 million in fiscal 2001 for achievement of
milestones during those periods. During fiscal 2002, the Company paid $1.0
million to Belmont for achievement of additional milestones. Included in the
fiscal 2002 payments were the third, fourth, fifth and sixth of eight quarterly
installments of $250,000 payable by the Company (which payments commenced in
April 2001), leaving $0.5 million remaining to be paid as of August 31, 2002.
The acquisition was accounted for using the purchase method of accounting. The
excess of the purchase price over the estimated fair value of the net assets
acquired was approximately $7.1 million. The results of operations of this
business are included in the Company's consolidated financial statements from
the date of acquisition.

Based upon its present plans, the Company believes that cash generated from its
operations and available credit resources will be adequate to repay current
portions of long-term debt, to finance currently planned capital expenditures
and repurchases of the Company's stock in the open market, and to meet the
currently foreseeable liquidity needs of the Company.

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

(23)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company has disclosed in Note 1 to its consolidated financial statements
included in Item 8 of this report those accounting policies that it considers to
be significant in determining its results of operations and financial position.
In all material respects, the accounting principles utilized by the Company in
preparing its consolidated financial statements are in conformity with 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.

The Company's management believes the following critical accounting policies
affect its more significant estimates and judgments used in the preparation of
the Company's consolidated financial statements.

Revenue Recognition:

Revenue is recognized by the Company at the time its products are shipped and
title has passed to its customer. The Company's net sales represent gross sales
invoiced to customers, less certain related charges, including discounts,
returns, rebates and other allowances. Such charges are recognized against
revenue on an accrual basis, at the point in which these costs are incurred.
Product returns are permitted. The accrual for product returns is based on the
Company's history of actual product returns. To date, product returns have not
been material. The Company grants sales rebates to certain distributors upon
achievement of agreed upon pricing for sales of the Company's products to
hospitals. Incurred but unpaid rebates are accrued by the Company in the period
in which they are incurred. The Company's rebate accrual is based on its history
of actual rebates paid. The Company's reserves for rebates are reviewed at each
reporting period and adjusted to reflect data available at that time. To the
extent these estimates prove inaccurate, the Company will adjust the reserves,
which will impact the amount of net product sales revenue recognized by the
Company in the period of the adjustments.

Inventory:

The Company values its inventories at the lower of cost or market. Cost is
determined by the "first-in, first-out" (FIFO) method. Inventory reserves are
recorded to writedown the value of inventory to its fair market value. The
Company uses a materials management program for identifying, redeploying and/or
destroying slow-moving, inactive or potentially obsolete inventory. A reserve is
recorded for all inventory specifically identified as slow-moving, inactive or
potentially obsolete. For certain new products, the Company manufactures
inventory in anticipation of product launch. As of August 31, 2002, the Company
had recorded $7.3 million of inventory related to its HemoSonic(TM) 100
hemodynamic monitoring device, which is significantly greater than the net sales
of this product in fiscal 2002. The Company is currently developing changes to
this product which it believes will enhance the demand for the product in the
marketplace. Accordingly, the Company has not recorded additional reserves
related to this product. The Company's inventory reserves are evaluated on an
ongoing basis and are adjusted as necessary to accurately reflect current
conditions.

(24)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)

Impairment of Goodwill:

Goodwill represents the excess of the cost over the fair value of net assets
acquired in business combinations. Currently, the Company operates as a single
reporting unit. Goodwill and other "indefinite-lived" assets are not amortized
and are subject to the impairment rules of Statement of Financial Accounting
Standards No. 142 (SFAS 142), which the Company adopted effective as of
September 1, 2001. Goodwill is tested for impairment on an annual basis or upon
the occurrence of certain circumstances or events. The Company determines the
fair market value of its reporting unit using quoted market rates and cash flow
techniques. The fair market value of the reporting unit is compared to the
carrying value of the reporting unit to determine if an impairment loss should
be calculated. If the book value of the reporting unit exceeds the fair value of
the reporting unit, an impairment loss is indicated. The loss is calculated by
comparing the fair value of the goodwill to the book value of the goodwill. If
the book value of the goodwill exceeds the fair value of goodwill, an impairment
loss is recorded. Fair value of goodwill is determined by subtracting the fair
value of the identifiable assets of a reporting unit from the fair value of the
reporting unit.

Research and Development:

Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects as well as fees paid to other entities which conduct certain
research activities on behalf of the Company. The costs of materials (whether
from the Company's normal inventory or acquired specially for research and
development activities) and equipment or facilities that are acquired or
constructed for research and development activities and that have alternative
future uses (in research and development projects or otherwise) are capitalized
as tangible assets when acquired or constructed. The cost of such materials
consumed in research and development activities and the depreciation of such
equipment or facilities used in those activities are recorded as research and
development costs. As of August 31, 2002, the Company had $8.5 million of
capitalized costs related to the Arrow Lionheart(TM), the Company's LVAS.

Product Liability:

Costs for attorney's fees and indemnification associated with injuries resulting
from the use of the Company's products are provided for in setting reserves. The
Company provides reserves for product liability by utilizing loss estimates
prepared by the primary product liability insurance carrier with adjustments, as
appropriate, based upon management's perspective on the ultimate projected claim
giving consideration to the perspective of outside counsel and other relevant
factors. The Company records a reserve regarding a particular claim when a loss
is known or considered probable and the amount can be reasonably estimated. If a
loss is not probable or a probable loss cannot be reasonably estimated, a
reserve is not recorded. The Company's primary global product liability
insurance policy is on a claims made basis with deductibles of $0.3 million and
$0.1 million for domestic and foreign product liability claims, respectively.
The policy year runs from September 1 to August 31 and has a $10.0 million
aggregate limit. The Company also has additional layers of coverage insuring up
to $35.0 million in annual aggregate losses arising from claims that exceed the
primary product liability insurance policy limits. Because deductibles were due
to increase when the Company renewed its product liability insurance policy in
September 2002, the Company elected to exercise a provision in its current
policy that maintains deductibles and limits for unreported claims occurring
prior to September 1, 2002 at existing levels for five years.

(25)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)

Employee Benefit Plans:

The Company sponsors pension, post-retirement, medical and life insurance plans
covering substantially all of its employees who meet the applicable eligibility
requirements. The Company uses several actuarial and other statistical factors
which attempt to anticipate future events in calculating its expense and
liability related to these plans. These factors include assumptions about
discount rate, expected return on plan assets and rate of future compensation
increases, as determined by the Company within specified guidelines. In
addition, the Company's actuarial consultants also utilize subjective
assumptions, such as withdrawal and mortality rates, to estimate these factors.
The actuarial assumptions used by the Company may differ materially from actual
results due to changing market and economic conditions, higher or lower
withdrawal rates or longer or shorter life spans of participants. These
differences, depending on their magnitude, could have a significant impact on
the amount of pension expense recorded by the Company in any particular period.

Income Taxes:

The Company's effective tax rate differs from the statutory rate primarily as a
result of research and development tax credits, the foreign sales corporation
deduction and the extraterritorial income tax regime. Because the Company
operates in a number of domestic and foreign tax jurisdictions, the statutory
rates within these various jurisdictions are considered in determining the
Company's overall effective tax rate. Management judgment is required to
determine the Company's consolidated provision for income tax expense, deferred
income tax balances and any valuation allowances associated with deferred tax
assets. The Company's management also considers open statutory periods, current
and anticipated audits, and the impact that any adverse adjustments would have
on the Company's current and prospective overall effective tax rate.

Deferred tax assets and liabilities are recorded when material differences exist
between the financial statement carrying amounts and the tax bases of assets or
liabilities. The Company regularly reviews its deferred tax assets for
recoverability and to date has not established valuation allowances. The Company
deems all undistributed earnings of foreign subsidiaries permanently invested
and, accordingly, has not established a tax provision for any repatriation of
retained earnings in these entities. Undistributed earnings of the Company's
foreign subsidiaries amounted to $20.2 million and $17.2 million at August 31,
2002 and 2001, respectively.

NEW ACCOUNTING STANDARDS

Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company will adopt the provisions of this
statement as of September 1, 2002.

Financial Accounting Standard No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections", was
issued in April 2002. A principal provision of this statement is the reporting
of gains and losses associated with extinguishments of debt. The Company is
studying the provisions of this statement and has not determined the impact, if
any, that this statement may have on its financial statements.

Financial Accounting Standard No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities", was issued in June 2002. This statement requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company is studying the
provisions of this statement and has not determined the impact, if any, that
this statement may have on its financial statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

Due to the global nature of its operations, the Company is subject to the
exposures that arise from foreign exchange rate fluctuations. Such exposures
arise from transactions denominated in foreign currencies, primarily from
translation of results of operations from outside the United States,
intercompany loans, and intercompany purchases of inventory. The Company is also
exposed to interest rate changes.

The Company's objective in managing its exposure to foreign currency
fluctuations is to minimize earnings and cash flow volatility associated with
foreign exchange rate changes. The Company enters into various contracts that
change in value as foreign exchange rates change to protect the value of its
existing foreign currency assets, liabilities, commitments, and anticipated
foreign currency revenues to meet these objectives. The contracts involve
Japanese yen and other foreign currencies. The gains and losses on these
contracts are offset by changes in the value of the related exposures in the
Company's income statement. It is the Company's policy to enter into foreign
currency transactions only to the extent exposures exist. The Company does not
enter into foreign currency transactions for speculative purposes.

The fair value of all the Company's foreign currency forward exchange
contracts outstanding at August 31, 2002 was less than $0.1 million. The
following analysis estimates the sensitivity of the fair value of all foreign
currency forward exchange contracts to hypothetical 10% favorable and
unfavorable changes in spot exchange rates at August 31, 2002 and 2001:

Fair Value of Foreign Currency
Forward Exchange Contracts
--------------------------
(in millions)
August 31, 2002 August 31, 2001
--------------- ---------------
10% adverse rate movement $ (0.2) $ (0.9)
At August 31st rates - -
10% favorable rate movement 0.3 0.6

In addition, the fair value of all the Company's foreign currency option
contracts outstanding at August 31, 2002 was less than $0.1 million. The
following analysis estimates the sensitivity of the fair value of all foreign
currency option contracts to hypothetical 10% favorable and unfavorable changes
in spot exchange rates at August 31, 2002 and 2001:

Fair Value of Foreign Currency
Option Contracts
----------------
(in millions)
August 31, 2002 August 31, 2001
--------------- ---------------
10% adverse rate movement $ - $ -
At August 31st rates - -
10% favorable rate movement 0.1 0.5

Any gains and losses on the fair value of forward and option contracts
would be largely offset by losses and gains on the underlying transactions or
anticipated transactions. These offsetting gains and losses are not reflected in
the above analysis.

Additional Quantitative and Qualitative disclosures about market risk
(e.g., interest rate and foreign currency exchange risk) are set forth in Note
14 of the Notes to Consolidated Financial Statements included in Item 8 of this
report.

(27)

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Report of Independent Accountants 29

Consolidated Balance Sheets at
August 31, 2002 and 2001 30, 31

Consolidated Statements of Income
for the years ended August 31, 2002,
2001 and 2000 32

Consolidated Statements of Comprehensive
Income for the years ended August 31, 2002,
2001 and 2000 33

Consolidated Statements of Cash Flows
for the years ended August 31, 2002,
2001 and 2000 34, 35

Consolidated Statements of Changes in
Shareholders' Equity for the years ended
August 31, 2002, 2001, and 2000 36 - 38

Notes to Consolidated Financial Statements 39 - 66

Schedule II - Valuation and Qualifying Accounts 67

(28)

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of Arrow International, Inc.:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 on page 28 present fairly, in all material respects, the
financial position of Arrow International, Inc. and its subsidiaries (the
"Company") at August 31, 2002 and 2001, and the results of their operations and
their cash flows for each of the three years in the period ended August 31, 2002
in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 8 on page 28 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
October 2, 2002

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ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

1. Summary of Significant Accounting Policies:

General:
Arrow International, Inc. develops, manufactures and markets a broad range of
clinically advanced, disposable catheters and related products for critical and
cardiac care medical procedures. The Company's products are used primarily by
anesthesiologists, critical care specialists, surgeons, emergency and trauma
physicians, cardiologists, interventional radiologists, electrophysiologists,
pain management specialists and other health care providers.

Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of Arrow
International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform to
the fiscal 2002 presentation.

Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased with a
maturity of 90 days or less to be cash equivalents. The Company's cash
management program utilizes zero balance accounts. The carrying amount of cash
and cash equivalents approximate fair value.

Use of Estimates:
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.

Inventory:
The Company values its inventories at the lower of cost or market. Cost is
determined by the "first-in, first-out" (FIFO) method. Inventory reserves are
recorded to writedown the value of inventory to its fair market value. The
Company uses a materials management program for identifying, redeploying and/or
destroying slow-moving, inactive or potentially obsolete inventory. A reserve is
recorded for all inventory specifically identified as slow-moving, inactive or
potentially obsolete. For certain new products, the Company manufactures
inventory in anticipation of product launch. As of August 31, 2002, the Company
had recorded $7,335 of inventory related to its HemoSonic(TM) 100 hemodynamic
monitoring device, which is significantly greater than the net sales of this
product in fiscal 2002. The

Continued

(39)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

1. Summary of Significant Accounting Policies (Continued):

Inventory (continued):
Company is currently developing changes to this product which it believes will
enhance the demand for the product in the marketplace. Accordingly, the Company
has not recorded additional reserves related to this product. The Company's
inventory reserves are evaluated on an ongoing basis and are adjusted as
necessary to accurately reflect current conditions.

Goodwill, Intangible and Other Assets:
Goodwill represents the excess of the cost over the fair value of net assets
acquired in business combinations. Currently, the Company operates as a single
reporting unit. Goodwill and other "indefinite-lived" assets are not amortized
and are subject to the impairment rules of Statement of Financial Accounting
Standards No. 142 (SFAS 142) which the Company adopted effective as of September
1, 2001. Goodwill is tested for impairment on an annual basis or upon the
occurrence of certain circumstances or events. The Company determines the fair
market value of its reporting unit using quoted market rates and cash flow
techniques. The fair market value of the reporting unit is compared to the
carrying value of the reporting unit to determine if an impairment loss should
be calculated. If the book value of the reporting unit exceeds the fair value of
the reporting unit, an impairment loss is indicated. The loss is calculated by
comparing the fair value of the goodwill to the book value of the goodwill. If
the book value of the goodwill exceeds the fair value of goodwill, an impairment
loss is recorded. Fair value of goodwill is determined by subtracting the fair
value of the identifiable assets of a reporting unit from the fair value of the
reporting unit.

"Intangible and Other Assets", net include certain assets acquired from business
acquisitions and investments and are being amortized using the straight-line
method over their estimated periods of benefits, from 5-20 years. The Company's
management reviews the carrying amount of intangible and other assets at each
balance sheet date to assess the continued recoverability based on future gross
cash flows and operating results from the related asset, future asset
utilization and changes in market conditions. In accordance with Statement of
Financial Accounting Standards No. 121 (SFAS 121) "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of", long-lived
assets and certain identifiable intangibles to be held and used or disposed of
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If an evaluation is
required and a market value is not determinable, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write down to a new basis is required.
Impairment will be recorded based on an estimate of future discounted cash
flows.

Property, Plant and Equipment:
Property, plant and equipment are stated at cost and are depreciated over the
estimated useful lives of the assets using the straight-line method ranging from
3 to 39 years. Upon retirement, sale or other disposition, the cost and
accumulated depreciation are eliminated from the accounts and any gain or loss
is included in operations.

Capitalized Interest:
Interest is capitalized as part of the historical cost of certain property,
plant and equipment constructed by the Company for its own use. The amount of
interest capitalized is based on a weighted average of the interest rates of
outstanding borrowings during the construction period.

Continued

(40)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

1. Summary of Significant Accounting Policies (Continued):

Marketable Equity Securities:
Marketable equity securities are carried at fair market value, with unrealized
holding gains and losses, net of tax, reported as accumulated other
comprehensive income (expense) within shareholders' equity. As stated in Note 17
below, during fiscal 2002, the Company sold its remaining marketable equities
available for sale. The fair market value and the unrealized holding gain on
securities held at August 31, 2001 was $3,581 and $1,692, respectively.

Financial Instruments:
The Company complies with the provisions of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 requires that all derivative financial
instruments, such as foreign exchange contracts, be recognized in the financial
statements and measured at fair value regardless of the purpose or intent for
holding them. Changes in the fair value of derivative financial instruments are
either recognized periodically in income or shareholders' equity (as a component
of comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value, cash flows or foreign currency.

The Company enters into foreign currency exchange forward contracts, which are
derivative financial instruments, with certain major financial institutions to
reduce the effect of fluctuating exchange rates, primarily on U.S. dollar cash
inflows resulting from the collection of intercompany receivables denominated in
foreign currencies. The Company classifies a portion of certain intercompany
receivables as long-term investments. The foreign exchange translation effect
related to the investment is reported as accumulated other comprehensive income
(expense) within shareholders' equity. Such transactions occur throughout the
year and are probable, but not firmly committed.

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
consolidated statements of income. Realized gains and losses on these contracts
are offset by gains and losses on the assets, liabilities and transactions being
hedged. The Company does not use financial instruments for trading or
speculative purposes. From time to time, the Company also 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. The total
premiums authorized to be paid in any fiscal year cannot exceed $1,000 per 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.

Continued

(41)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

1. Summary of Significant Accounting Policies (Continued):

Revenue Recognition:
Revenue is recognized by the Company at the time its products are shipped and
title has passed to its customer. The Company's net sales represent gross sales
invoiced to customers, less certain related charges, including discounts,
returns, rebates and other allowances. Such charges are recognized against
revenue on an accrual basis, at the point in which these costs are incurred.
Product returns are permitted. The accrual for product returns is based on the
Company's history of actual product returns. To date, product returns have not
been material. The Company grants sales rebates to certain distributors upon
achievement of agreed upon pricing for sales of the Company's products to
hospitals. Incurred but unpaid rebates are accrued by the Company in the period
in which they are incurred. The Company's rebate accrual is based on its history
of actual rebates paid. The Company's reserves for rebates are reviewed at each
reporting period and adjusted to reflect data available at that time. To the
extent these estimates prove inaccurate, the Company will adjust the reserves,
which will impact the amount of net product sales revenue recognized by the
Company in the period of the adjustments.

For the fiscal year ended August 31, 2001, the Company adopted the provisions of
Emerging Issues Task Force 00-10 which requires that freight expense be
classified in the Company's income statement as a cost of sales. Previously, the
Company had included freight charges as primarily a reduction of net sales and
in some cases as marketing expense. The effect of the adoption on the full year
financial results for 2001 and 2000 is to increase sales and cost of sales and
to reduce selling, general and administrative expense (SG&A) as follows:

FISCAL YEAR ENDED AUGUST, 31
---------------------------------------------------
2001 2000
--------------- -----------------
Net Sales $6,333 $5,374
Cost of Sales $6,700 $5,684
SG&A $ (367) $ (310)

Income Taxes:
The Company's effective tax rate differs from the statutory rate primarily as a
result of research and development tax credits, the foreign sales corporation
deduction and the extraterritorial income tax regime. Because the Company
operates in a number of domestic and foreign tax jurisdictions, the statutory
rates within these various jurisdictions are considered in determining the
Company's overall effective tax rate. Management judgment is required to
determine the Company's consolidated provision for income tax expense, deferred
income tax balances and any valuation allowances associated with deferred tax
assets. The Company's management also considers open statutory periods, current
and anticipated audits, and the impact that any adverse adjustments would have
on the Company's current and prospective overall effective tax rate.

Deferred tax assets and liabilities are recorded when material differences exist
between the financial statement carrying amounts and the tax bases of assets or
liabilities. The Company regularly reviews its deferred tax assets for
recoverability and to date has not established valuation allowances. The Company
deems all undistributed earnings of foreign subsidiaries permanently invested
and, accordingly, has not established a tax provision for any repatriation of
retained earnings in these entities. Undistributed earnings of the Company's
foreign subsidiaries amounted to $20,239 and $17,200 at August 31, 2002 and
2001, respectively.

Continued

(42)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

1. Summary of Significant Accounting Policies (Continued):

Foreign Currency Translation:
During fiscal 2002, 2001 and 2000, the Company's foreign subsidiaries used their
local currency as the functional currency. All assets and liabilities are
translated at year-end exchange rates and the adjustments are recorded within
accumulated other comprehensive income (expense) within shareholders' equity.
All income and expense accounts are translated at average rates and adjustments
from the translation are recorded in accumulated other comprehensive income
(expense) within shareholders' equity. Gains and losses resulting from
transactions of the Company and its foreign subsidiaries are included in "other
income/expense." Aggregate foreign exchange losses were $156 and $360 for the
fiscal years ended August 31, 2002 and 2001, respectively, and aggregate foreign
exchange gains were $126 for the fiscal year ended August 31, 2000.

Employee Benefit Plans:
The Company sponsors pension, post-retirement, medical and life insurance plans
covering substantially all of its employees who meet the applicable eligibility
requirements. The Company uses several actuarial and other statistical factors
which attempt to anticipate future events in calculating its expense and
liability related to these plans. These factors include assumptions about
discount rate, expected return on plan assets and rate of future compensation
increases, as determined by the Company within specified guidelines. In
addition, the Company's actuarial consultants also utilize subjective
assumptions, such as withdrawal and mortality rates, to estimate these factors.
The actuarial assumptions used by the Company may differ materially from actual
results due to changing market and economic conditions, higher or lower
withdrawal rates or longer or shorter life spans of participants. These
differences, depending on their magnitude, could have a significant impact on
the amount of pension expense recorded by the Company in any particular period.

Earnings/(Loss) Per Share:
Basic earnings/(loss) per common share is computed by dividing net income/(loss)
available to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings/(loss) per share is computed by
dividing net income/(loss) available to common shareholders by the
weighted-average number of shares that would have been outstanding if the
potentially dilutive common shares had been issued. The diluted earnings/(loss)
per share does not assume the exercise of options that would have an
antidilutive effect on earnings/(loss) per share.

Cost of Start-up Activities:
The Company expenses the cost of start-up activities and organization costs as
incurred.

Computer Software Costs:
The Company records the costs of computer software in accordance with "Statement
of Position (SOP) 98-1", "Accounting for the Costs of Computer Software
Development or Obtained for Internal Use" issued by the Accounting Standards
Executive Committee of the Institute of Certified Public Accountants (AcSec).
This statement requires that certain internal-use computer software costs to be
capitalized and amortized over the useful life of the asset. Total cost
capitalized under this policy were $3,398 and $3,383 for fiscal years ended
August 31, 2002 and 2001, respectively.

Continued

(43)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

1. Summary of Significant Accounting Policies (Continued):

Research and Development:
Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects as well as fees paid to other entities which conduct certain
research activities on behalf of the Company. The costs of materials (whether
from the Company's normal inventory or acquired specially for research and
development activities) and equipment or facilities that are acquired or
constructed for research and development activities and that have alternative
future uses (in research and development projects or otherwise) are capitalized
as tangible assets when acquired or constructed. The cost of such materials
consumed in research and development activities and the depreciation of such
equipment or facilities used in those activities are recorded as research and
development costs. As of August 31, 2002, the Company had $8,519 of capitalized
costs related to the Arrow Lionheart(TM), the Company's LVAS.

Product Liability:
Costs for attorney's fees and indemnification associated with injuries resulting
from the use of the Company's products are provided for in setting reserves. The
Company provides reserves for product liability by utilizing loss estimates
prepared by the primary product liability insurance carrier with adjustments, as
appropriate, based upon management's perspective on the ultimate projected claim
giving consideration to the perspective of outside counsel and other relevant
factors. The Company records a reserve regarding a particular claim when a loss
is known or considered probable and the amount can be reasonably estimated. If a
loss is not probable or a probable loss cannot be reasonably estimated, a
reserve is not recorded. The Company's primary global product liability
insurance policy is on a claims made basis with deductibles of $250 and $50 for
domestic and foreign product liability claims, respectively. The policy year
runs from September 1 to August 31 and has a $10,000 aggregate limit. The
Company also has additional layers of coverage insuring up to $35,000 in annual
aggregate losses arising from claims that exceed the primary product liability
insurance policy limits. Because deductibles were due to increase when the
Company renewed its product liability insurance policy in September 2002, the
Company elected to exercise a provision in its current policy that maintains
deductibles and limits for unreported claims occurring prior to September 1,
2002 at existing levels for five years.

Risks and Uncertainties:
Future results of operations involve a number of risks and uncertainties.
Factors that could affect future operating results and cause actual results to
vary materially from historical results include, but are not limited to:

o Risks Associated with International Operations
Because the Company generates significant sales outside of the U.S.
and many of its manufacturing facilities and suppliers are located
outside of the U.S., it is subject to risks generally associated with
international operations, such as: unexpected changes in regulatory
requirements; tariffs, customs, duties and other trade barriers;
difficulties in staffing and managing foreign operations; differing
labor regulations; longer payment cycles and problems in collecting
accounts receivable; risks arising from a specific country's or
region's political or economic conditions; fluctuations in currency
exchange rates; foreign exchange controls which restrict or prohibit
repatriation of funds; export and import restrictions or prohibitions;
delays from customs brokers or government agencies; differing
protection of intellectual property; and potentially adverse tax
consequences resulting from operating in multiple jurisdictions with
different tax laws. Any one or more of these risks could materially
adversely impact the success of the Company's international

Continued

(44)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

1. Summary of Significant Accounting Policies (Continued):

o Risks Associated with International Operations (continued)
operations. As the Company's revenues from international operations
increase, an increasing portion of its revenues and expenses will be
denominated in currencies other than U.S. dollars and, consequently,
changes in exchange rates could have a greater effect on the Company's
future operations. The Company cannot assure that such factors will
not have a material adverse effect on its business, financial
condition and results of operations. Laws or administrative practices
relating to regulation of medical devices, labor, taxation, foreign
exchange or other matters of countries within which the Company
operates could change.

o Potential Product Liability
The Company's business exposes it to potential product liability risks
which are inherent in the design, manufacture and marketing of
catheters and related medical devices. The Company's products are
often used in surgical and intensive care settings with seriously ill
patients. In addition, many of the medical devices manufactured and
sold by the Company are designed to be implanted in the human body for
long periods of time and component failures, manufacturing flaws,
design defects or inadequate disclosure of product-related risks with
respect to these or other products manufactured or sold by the Company
could result in an unsafe condition or injury to, or death of, the
patient. The occurrence of such a problem could result in product
liability claims and/or a recall of, or safety alert relating to, one
or more of the Company's products. The Company cannot assure that the
product liability insurance maintained by it will be available or
sufficient to satisfy all claims made against it or that it will be
able to obtain insurance in the future at satisfactory rates or in
adequate amounts. Product liability claims, safety alerts or product
recalls in the future, regardless of their ultimate outcome, could
result in costly litigation and could have a material adverse effect
on the Company's business, reputation, its ability to attract and
retain customers for its products and its results of operations. In
recent years, physicians, hospitals and other medical service
providers who are users of the Company's products have become subject
to an increasing number of lawsuits alleging medical malpractice.
Medical malpractice suits often involve large claims and substantial
defense costs.

o Stringent Government Regulation
The Company's products are subject to extensive regulation by the FDA
and, in some jurisdictions, by state, local and foreign governmental
authorities. The Company is also required to adhere to applicable
regulations setting forth current Good Manufacturing Practices, which
require that the Company manufacture its products and maintain its
records in a prescribed manner with respect to manufacturing, testing
and control activities. In addition, the Company is required to comply
with FDA requirements for labeling and promotion of its products.

Negative developments in these and other areas could have a material adverse
effect on the Company's business, financial condition and results of operations.
For a discussion of other factors that could adversely affect the Company's
future operating results and cause actual results to vary materially from
historical results, see Exhibit 99.1 to this report.

Continued

(45)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

2. Special Charges:

The Company recorded special charges in the fourth quarter of fiscal 2002
amounting to a total of $8,005 ($5,403 after tax, or $0.25 and $0.24 per basic
and diluted common share, respectively) relating to the matters described below.
Intangible assets in the aggregate amount of $4,715 ($3,183 after tax, or $0.15
and $0.14 per basic and diluted common share, respectively) were written off
relating to purchased technologies the Company has decided not to support for
(1) Pullback Atherectomy Catheterization (PAC) ($2,579, $1,741 after tax, or
$0.08 per basic and diluted common share), (2) IAB pumping software ($1,532,
$1,034 after tax, or $0.05 and $0.04 per basic and diluted common share,
respectively), and (3) microwave ablation technology ($604, $408 after tax, or
$0.02 per basic and diluted common share). The Company's special charge relating
to the PAC resulted from its discontinuation of support for this development
project due to changes in the market outlook for this device. The special charge
related to the IAB pumping software resulted from the Company's decision to
evaluate a new pump which will not utilize this software. The special charge
relating to this microwave ablation resulted from the Company's decision to
discontinue its efforts to further develop this technology for treating liver
ablation. Also included in the special charge is the write-off of an investment
of $2,000 ($1,349 after tax, or $0.06 per basic and diluted common share) in a
developer and manufacturer of systems to measure certain cardiac functions due
to the developer's uncertain access to future financing and unfavorable
financial condition. Finally, due to delay in CE mark approval to sell the Arrow
LionHeart(TM), the Company's fully implantable LVAS, in Europe, the Company
incurred $1,290 ($871 after tax, or $0.04 per basic and diluted common share) of
manufacturing variances related to systems being produced for market
introduction.

In the first quarter of fiscal 2000, the Company recorded a non-cash pre-tax
special charge of $3,320 ($2,208 after-tax or $.10 per basic and diluted common
share) related primarily to a write-down for the in-process research and
development acquired in connection with the Company's acquisition of Sometec,
S.A. (see Note 3 of these Notes to Consolidated Financial Statements). The
technology acquired is a compact monitoring device that measures and monitors
the descending aortic blood flow during anesthesia and intensive care. The
device provides real-time aortic blood flow (a measurement of cardiac output) by
using both pulsed Doppler for measuring blood velocity and M-mode ultrasound to
accurately measure the aortic diameter. The monitoring system consists of four
main components: the main console (monitor), a transesophageal probe, a
disposable jacket and an articulated probe holder. The monitor provides the
physician with a continuous display of a patient's hemodynamic profile,
including aortic blood flow, heart rate, stroke volume, peak velocity,
acceleration, left ventricular ejection time and systemic vascular resistance.
To facilitate use of this device, a disposable jacket, containing an acoustic
gel, is placed over the probe utilizing a special vacuum mounting tool supplied
with the jacket. The Company believes that the speed and ease of use of this new
noninvasive measurement technique has the potential of establishing cardiac
output as a frequently used physician tool with value similar to blood pressure,
EKG and pulse oximetry measurements. In accordance with SFAS No. 2, "Accounting
for Research and Development Costs" and FIN No. 4, "Applicability of SFAS No. 2
to Business Combinations Accounted for by the Purchase Method", these costs were
charged to expense at the date of consummation of the acquisition. The value
assigned to purchase Sometec in-process technology was based on a valuation
prepared by an independent third-party appraisal company. Each of the
technologies under development at the date of acquisition was reviewed for
technological feasibility, stage of completeness at the acquisition date, and
scheduled release dates of products employing the technology to determine
whether the technology was complete or under development. At the acquisition
date, the research and development project was estimated to be 75% complete.
Incomplete development efforts at the time of acquisition included improved
portability, software development and development of the disposable sheath. The
valuation was based on the estimated cash flows resulting from commercially
viable products discounted to present value using a risk adjusted after-tax
discount rate of 22%. The research and development costs from these projects
have commenced. Some cash inflows from these projects have commenced.

Continued

(46)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

2. Special Charges (Continued):

However, while the Company believes these projects will be completed as planned,
the Company cannot assure that they will be completed on schedule or, once
completed, that the new products resulting from these projects will be
successfully introduced into the marketplace. The Company does not anticipate
material adverse changes from historical pricing, margins and expense levels as
a result of the introduction of the new technologies related to the projects.

3. Business Acquisitions:

On September 1, 1999, the Company completed the acquisition of Sometec, S.A., a
French development company that has developed a non-invasive esophageal
ultrasound probe that continuously measures descending aortic blood flow, for
$11,024, net of cash acquired. The acquisition has been accounted for using the
purchase method of accounting. The excess of the purchase price over the
estimated fair value of the net assets acquired was approximately $4,791.
Intangible assets acquired are being amortized over a period of 10 years. The
results of operations of this business are included in the Company's
consolidated financial statements from the date of acquisition.

As part of the Company's 1998 purchase of assets of the cardiac assist division
of C.R. Bard, Inc. the Company also agreed to acquire specified assets and
assume specified liabilities of the Belmont Instruments Corporation for $7,295
based on the achievement of certain milestones. The Company paid $2,250 in
fiscal 2000 and $3,545 in fiscal 2001 for achievement of milestones during these
periods. During fiscal 2002, the Company paid $1,000 to Belmont for achievement
of additional milestones. Included in the fiscal 2002 payments were the third,
fourth, fifth and sixth of eight quarterly installments of $250 payable by the
Company (which payments commenced in April 2001), leaving $500 remaining to be
paid as of August 31, 2002. The acquisition was accounted for using the purchase
method of accounting. The excess of the purchase price over the estimated fair
value of the net assets acquired was approximately $7,146. The results of
operations of this business are included in the Company's consolidated financial
statements from the date of acquisition.

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

4. Stock Option Plans:

The Company has adopted three 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
shareholders on January 19, 2000, and the 1999 Stock Incentive Plan (the "1999
Plan"), which was approved by the shareholders on June 19, 2000. The 1992 and
1999 Plans authorize the granting of stock options, stock appreciation rights
and restricted stock. The Directors Plan authorizes the granting of a maximum of
150,000 non-qualified stock options. Under the 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
Directors Plan authorizes an initial grant of an option to purchase 5,000 shares
of common stock upon each eligible director's initial election to the Board of
Directors and the grant of an additional option to purchase 1,500 shares of
common stock on the date each year when directors are elected to the Board of
Directors. The Company follows the provision of Accounting Principles Board
(APB) No. 25, "Accounting for Stock Issued to Employees", and related
interpretations, which require compensation expense for options to be

Continued

(47)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

4. Stock Option Plans (Continued):

recognized only if the market price of the underlying stock exceeds the exercise
price on the date of grant. Accordingly, the Company has not recognized
compensation expense for its options granted during the 2002, 2001 and 2000
fiscal years.

In fiscal 2002 and 2001, options to purchase 554,415 and 20,000 shares,
respectively, of the Company's common stock were granted to key employees of the
Company pursuant to the 1999 Plan. The option price per share ranged from $36.73
to $42.94 in fiscal 2002 and was $37.50 in fiscal 2001. These amounts represent
the fair market value of the common stock of the Company on the dates the
options were granted. The options expire ten years from the grant date. The
options vest ratably over five years at one year intervals from the grant date
and become exercisable at any time once vested.

On January 16, 2002, January 17, 2001 and January 19, 2000, options to purchase
12,000, 13,500 and 13,500 shares, respectively, of the Company's common stock
were granted to directors of the Company pursuant to the Directors Plan. The
option price per share for the 2002, 2001 and 2000 awards was $41.24, $36.50 and
$34.75, respectively, equal to the fair market value of the common stock of the
Company on the dates the options were granted. The options expire ten years from
the grant date. The options vest fully one year from the grant date and become
exercisable at any time once vested.

Stock option activity for the years ended August 31, 2002, 2001 and 2000 is
summarized below:

Continued

(48)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

4. Stock Option Plans (Continued):

The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation". As permitted under SFAS 123, the Company continues to
apply the existing accounting rules under APB No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made as if the fair value method in measuring compensation cost for stock
options granted subsequent to December 15, 1995 had been applied.

The per share weighted average value of stock options granted in fiscal 2002,
2001 and 2000 was $9.08, $9.35 and $10.51, respectively. The fair value was
estimated as of the grant date using the Black-Scholes option pricing model with
the following average assumption:

The pro forma effects are not representative of the effects on reported net
income for future years, as most of the stock option grants vest in cumulative
increments over a period of five years.

Continued

(49)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

5. Related Party Transactions:

During fiscal 2002 and 2001, the Company made purchases amounting to $89 and
$124, respectively, of products from Precision Medical Products, Inc. ("PMP"), a
former subsidiary of Arrow Precision Products, Inc. ("Precision"), currently
owned by certain former management employees of Precision, including T. Jerome
Holleran, who serves as PMP's Chairman and as Secretary and a Director of the
Company. Precision was related to the Company through common ownership until it
was dissolved on May 1, 2002.

In September 2001, Stepic Medical, the Company's New York City distributor,
hired as its president the Company's former Vice-President of Domestic Sales
(who had resigned from the Company in February 1999) and who is also the spouse
of the Company's current Vice-President of Domestic Critical Care Sales. At such
time, the Company changed management responsibility for this distributor so that
the Company's manager of its Critical Care Business directly oversees all
transactions between the Company and this distributor. Transactions between the
Company and this distributor were on terms and at prices that the Company
believes were customary in the marketplace. During fiscal 2002, the Company
recorded $10,372 of net sales to Stepic Medical, which included a $1,765 charge
against net sales related to the increase in the dealer rebate reserve, as
discussed in Item 7. On September 3, 2002, the Company purchased the net assets
of this distributor, as discussed in Note 22 of these Notes to Consolidated
Financial Statements. The President of Stepic Medical was not hired by the
Company. The acquisition was consummated in terms customary in the market place
and were at arms-length.

6. Rent Expense:

The Company leases certain warehouses and production facilities, office
equipment and vehicles under leases with varying terms.

Rent expense under operating leases totaled $4,467, $4,328 and $3,915 for fiscal
years ended August 31, 2002, 2001, and 2000, respectively. Following is a
schedule by year showing future minimum rentals under operating leases.

Year Ending August 31, Total
----------------------------------- ------------
2003 $ 3,912
2004 2,825
2005 1,319
2006 647
2007 422
Thereafter 971
------------
$10,096
============

7. Inventories:

Inventories are summarized as follows:
August 31
---------------------------------------
2002 2001
-------------- -------------
Finished goods $ 27,425 $ 32,336
Semi-finished goods 23,054 21,863
Work-in-process 8,478 12,890
Raw Materials 26,989 27,331
-------------- -------------
$ 85,946 $ 94,420
============== =============

Continued

(50)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

8. 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 both August 31, 2002 and 2001, the Company had
a revolving credit facility providing a total of $65,000 in available revolving
credit for general business purposes, of which $6,250 and $40,570 were
outstanding at August 31, 2002 and 2001, respectively. 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
and a cash flow coverage ratio of 1.25 to 1 or greater; a limitation on certain
mergers, consolidations and sales of assets by the Company or its subsidiaries;
a limitation on its 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 $50,000. At August 31, 2002 and 2001, 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. In
addition, certain subsidiaries of the Company had revolving credit facilities
totaling the U.S. dollar equivalent of $20,694 and $20,288, of which $9,882 and
$9,852 were outstanding as of August 31, 2002 and 2001, respectively. Interest
rate terms for both U.S. and foreign bank credit facilities are based on either
bids provided by the lender or the prime rate, London Interbank Offered Rates
(LIBOR) or Certificate of Deposit Rates, plus applicable margins. Certain of
these borrowings, primarily those with U.S. banks, are due on demand. Interest
is payable monthly during the revolving credit period. At August 31, 2002 and
2001, the weighted average interest rates on short-term borrowings were 2.2% and
4.7% per annum, respectively. Combined borrowings under these facilities
decreased $34,290 during fiscal year 2002.

9. Accrued Compensation:

The components of accrued compensation at August 31, 2002 and 2001 are as
follows:

2002 2001
-------------- -------------
Accrued vacation pay $ 3,431 $ 3,062
Accrued payroll 2,664 2,783
Other 405 712
-------------- -------------
$ 6,500 $ 6,557
============== =============

Continued

(51)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

10. Long-Term Debt:

Long-term debt consists of the following: August 31
2002 2001
----------- -------------
Industrial Development Authority Bonds, $3,500
face amount, subject to mandatory annual sinking
fund payments of $200 from December 1989 through
December 1998; and $300 from December 1999 through
December 2003; plus interest at a variable rate
ranging from 1.50% to 2.95% in 2002 and from 2.35%
to 6.00% in 2001. $ 600 $ 900
----------- -------------
Total debt $ 600 $ 900
Less current maturities 300 300
----------- -------------
$ 300 $ 600

The Industrial Development Authority Bonds are collateralized by a $611 letter
of credit and the Company's headquarters, research and development, and
manufacturing facility in Reading, PA. The Company also has a U.S. dollar
equivalent of irrevocable standby letters of credit totaling $1,475 related to
subsidiary indebtedness and workers compensation insurance coverage and foreign
performance bonds. The annual commitment fees associated with the letters of
credit were 0.70% per annum at August 31, 2002.

Following is a schedule by year showing the remaining maturities of long-term
debt:

Year Ending August 31, Total
--------------------------------- ----------------
2003 $300
2004 300
----------------
Total $600
================

Total interest costs for fiscal 2002, 2001 and 2000 were $845, $2,995 and
$3,269, respectively, of which $218, $911 and $1,210, respectively, were
capitalized.

At August 31, 2002 and 2001, the carrying amount of long-term debt approximated
fair value.

11. Income Taxes:

The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. The measurement
of deferred tax assets is reduced, if necessary, by a valuation allowance.

Continued

(52)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

11. Income Taxes (Continued):

The provision (benefit) for income taxes consists of:

Research and development tax credits were $450, $443 and $0 in fiscal 2002, 2001
and 2000, respectively.

The following deferred taxes and balance sheet classifications are recorded as
of August 31, 2002 and 2001:

Deferred tax assets (liabilities): 2002 2001
------------- ------------

Accounts receivable $ 746 $ 13
Inventories 3,783 1,544
Marketable securities 0 (1,104)
Capital loss carryforward 1,994 3,251
Property, plant and equipment (6,588) (6,974)
Intangible assets 9,968 8,299
Accrued liabilities (4,804) (4,217)
Accrued compensation 924 853
Postretirement benefits other than pensions 3,509 4,113
------------- ------------
$ 9,532 $ 5,778
============== ============

Balance Sheet classification:
Current deferred tax assets $ 5,377 $ 2,850
Non-current deferred tax assets 4,155 2,928
------------- ------------
$ 9,532 $ 5,778
============== ============

Continued

(53)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

11. Income Taxes (Continued):

The Company has capital loss carryforwards related to marketable securities
sales of $5,202 at August 31, 2002 that expire on August 31, 2006. Management
considers projected future taxable income and tax planning strategies in
assessing the need for valuation allowances that reduce deferred tax assets.
Based upon historical taxable income and tax planning strategies that may be
implemented in the future, management believes it is more likely than not that
the Company will realize the benefits of these capital loss carryforwards as of
August 31, 2002.

The Company recorded the impact of changes in deferred tax assets associated
with the intercompany profits in the ending inventory of foreign subsidiaries as
a component of cost of sales through May, 2002 in accordance with Accounting
Research Bulletin No. 51 ("ARB 51"). In order to record all income tax expense
or benefit in the income tax provision, beginning in June, 2002, the impact of
these changes are classified as a component of deferred income tax expense.

The following is a reconciliation of the statutory federal income tax rate to
the Company's effective tax rate expressed as a percentage of income from
operations before income taxes:

12. 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.

Continued

(54)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

12. Retirement Benefits (Continued):

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. The accumulated benefit obligation
for this pension plan, whose accumulated benefit obligations exceed plan assets,
was $3,948 and $3,513 at August 31, 2002 and 2001, respectively.

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
postretirement benefit cost for postretirement health benefit plans is based on
comprehensive hospital, medical, surgical, and dental benefit provisions ("Other
Benefits"). The determination of postretirement benefit cost for postretirement
life insurance benefits is based on stated policy amounts.

The following summarizes the Company's benefit obligations, changes in plan
assets and funded status:

(55)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

12. Retirement Benefits (Continued):

The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with plan assets in excess of accumulated
benefit obligations were $60,269, $51,062 and $58,811 for 2002, respectively,
and $53,984, $46,510 and $64,768 for 2001, respectively.

Continued

(56)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

12. Retirement Benefits (Continued):

The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $4,100, $3,948 and $0 for 2002, respectively, and
$3,632, $3,513 and $0 for 2001, respectively.

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care costs trend rates would have the following effects:

1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest
cost components $ 65 $ (49)
Effect on postretirement benefit obligation $ 767 $ (699)

Continued

(57)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

12. Retirement Benefits (Continued):

Savings Plan:

The Company has a defined contribution savings plan that covers substantially
all of its eligible U.S. employees. The purpose of the plan is generally to
provide additional financial security to employees during retirement.
Participants in the savings plan may elect to contribute, on a before-tax basis,
a certain percent of their annual earnings with the Company matching a portion
of these contributions. Expense under the plan related to the Company's matching
contribution was $1,064, $1,117 and $1,042 for fiscal 2002, 2001 and 2000,
respectively.

In fiscal 2001, this plan was amended to, among other things, permit the Company
to begin contributing to each eligible participant's 401(k) plan account an
additional amount equal to 1% of each participant's monthly compensation in the
form of vested shares of Arrow common stock. This stock contribution program
resulted in additional expense to the Company of $718 and $176 for fiscal 2002
and 2001, respectively.

13. Segment Reporting:

The Company operates as a single reportable segment. The Company operates in
four main geographic regions, therefore, information about products and
geographic areas is presented below.

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

Continued

(58)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

14. Financial Instruments:

During fiscal 2002 and 2001, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 21.6% and 21.9%, respectively. In
addition, a small part of the Company's cost of goods sold is denominated in
foreign currencies. The Company enters into foreign currency forward exchange
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. Such transactions
occur throughout the year and are probable, but not firmly committed. 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
consolidated statements of income. Realized gains and losses on these contracts
are offset by the changes in the U.S. dollar value of the foreign denominated
assets, liabilities and transactions being hedged. The Company does not use
financial instruments for trading or speculative purposes. The Company expects
to continue to utilize foreign currency exchange 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 risk associated with
this concentration is limited due to the Company's on-going credit review
procedures.

At August 31, 2002, the Company had foreign currency forward exchange contracts
to sell foreign currencies which mature at various dates through November 2002.
The following table identifies forward exchange contracts to sell foreign
currencies at August 31, 2002 and 2001 as follows:

Continued

(59)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

14. Financial Instruments (Continued):

At August 31, 2002, the Company also had foreign currency forward exchange
contracts to buy foreign currencies which mature at various dates through
September 2002. The following table identifies forward exchange contracts to buy
foreign currencies at August 31, 2002 and August 31, 2001 as follows:

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. The total premiums authorized to be
paid in any fiscal year cannot exceed $1,000 pursuant to the terms of the
Foreign Currency Management Policy Statement as 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. During fiscal 2002
and 2001, the Company recognized a time value loss of $46 and $404,
respectively, against net sales offset by the recognition of intrinsic value
gains of $536 and $403, respectively. At August 31, 2002 and 2001, the Company
had an unrealized holding loss of $286 and an unrealized holding gain of $114
respectively, related to these foreign currency option contracts. The Company
has the following foreign currency option contracts at August 31, 2002, which
mature at various dates through February 2003:

Continued

(60)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

15. Contingencies:

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

The Company is currently a defendant in two related lawsuits alleging that
certain of its hemodialysis catheter products infringe patents owned by or
licensed to the plaintiffs. No trial dates have been set in these actions. Based
on information presently available to the Company and the advice of its patent
counsel, the Company believes that its products do not infringe any valid claim
of the plaintiffs' patents and that, consequently, it has adequate legal
defenses with respect to these actions.

A product liability lawsuit against the Company tried before a jury in Arkansas
state court resulted in a judgment against the Company in May 2001 of $175 in
compensatory damages and $4,000 in punitive damages. Notice of appeal from that
judgment to the Arkansas Supreme Court was filed and the Company is pursuing
vigorously the appeal. Based on information presently available to the Company
and the advice of its product liability counsel, the Company believes that it is
more likely than not that the Company will obtain a reversal of this judgment
and a remand for a new trial. In addition, the Company believes that any damage
award, whether punitive or compensatory, that may ultimately be upheld in this
case will be covered by its product liability insurance policy. The Company's
insurer has commenced an action seeking a judicial declaration that it is not
obligated to indemnify the Company for punitive damages. Based on information
presently available to the Company and the opinion of its insurance litigation
counsel, the Company believes that any award of punitive damages resulting from
the product liability lawsuit would be covered by its insurance.

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.

16. Adoption of SFAS 142:

SFAS 142 addresses how intangible assets should be accounted for in financial
statements upon their acquisition and how goodwill and other intangible assets
should be accounted for after they have been initially recognized in the
financial statements.

As stated in Note 1 above, the Company adopted the provisions of SFAS 142
effective as of September 1, 2001. In accordance with the statement, the Company
no longer amortizes goodwill. In addition, any goodwill or intangible assets
determined to have an indefinite life that are acquired in a future purchase
business combination will not be amortized but will be evaluated for impairment.
In accordance with the provisions of SFAS 142, the Company completed step one of
the impairment test of the goodwill that existed on the Company's balance sheet
at the date of its adoption of SFAS 142. Based on the completion of step one,
the Company's goodwill is not considered to be impaired.

Continued

(61)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

16. Adoption of SFAS 142 (continued):

The impact of the adoption of SFAS 142 on the Company's financial statements was
to decrease goodwill amortization by $3,021 for fiscal 2002. This resulted in an
increase in net income of $2,084 after tax, and basic and diluted earnings per
share of $0.10 and $0.09, respectively, at August 31, 2002.

The following tables reflect consolidated results adjusted as though the
Company's adoption of SFAS 142 occurred as of September 1, 1999.

Amortization expense of intangibles for fiscal 2002 was $3,112. Estimated
intangible amortization expense for each of the next five succeeding fiscal
years is as follows:

Fiscal year ending August 31 Amount
---------------------------- ------
2003 $ 2,706
2004 2,682
2005 2,631
2006 2,608
2007 2,608

17. New Accounting Standards:

Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company will adopt the provisions of this
statement as of September 1, 2002.

Continued

(62)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

17. New Accounting Standards (continued):

Financial Accounting Standard No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections", was
issued in April 2002. A principal provision of this statement is the reporting
of gains and losses associated with extinguishments of debt. The Company is
studying the provisions of this statement and has not determined the impact, if
any, that this statement may have on its financial statements.

Financial Accounting Standard No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities", was issued in June 2002. This statement requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company is studying the
provisions of this statement and has not determined the impact, if any, that
this statement may have on its financial statements.

18. Sale of Securities:

Proceeds from the Company's sale of marketable securities of a medical device
company available for sale were $2,540 for fiscal 2002. Gains on the sale of
these securities in fiscal 2002 amounted to $1,703, and were included in
selling, general and administrative expenses in the Company's consolidated
statements of income.

19. Sale of Implantable Drug Infusion Pump Business:

On April 1, 2002, the Company completed the sale of substantially all of the
assets of its implantable drug infusion pump business for a sales price of
$13,000 in cash pursuant to an asset purchase agreement dated as of March 1,
2002. An estimated loss on the sale was recorded in the second quarter of fiscal
2002, during which period the Company's Board of Directors authorized the
transaction. The transaction was accounted for as a sale of a non-integrated
portion of a reporting unit, as defined by SFAS 142. After further adjustments
to the estimated loss were made in the third and fourth quarters of fiscal 2002,
the loss before tax on the transaction was $1,226 (after taxes, such loss was
$828, or $0.04 per basic and diluted common share), and was included in selling,
general and administrative expenses in the Company's consolidated statements of
income.

Continued

(63)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

20. Summary of Quarterly Results (unaudited):

Quarterly financial results for the year ended August 31, 2002 are as follows:

See Item 7. of this report for management's discussion and analysis of the
Company's financial condition and results of operations.

* In the fourth quarter of fiscal 2002, the Company recorded a special charge
(see Note 2 - "Special Charges" above).

Continued

(64)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

20. Summary of Quarterly Results (unaudited) (continued):

Quarterly financial results for the year ended August 31, 2001 are as follows:

See Item 7. of this report for management's discussion and analysis of the
Company's financial condition and results of operations.

As a result of the adoption of EITF 00-10, net sales increased by $1,216,
$1,783, $1,878 and $1,456 for the 1st, 2nd, 3rd and 4th quarters of fiscal 2001.
Cost of sales increased by $1,273, $1,863, $1,976 and $1,588 and selling,
general, and administrative expenses decreased by $57, $80, $98 and $132 over
the same four quarters of fiscal 2001, respectively.

Continued

(65)

ARROW INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

21. Earnings per Share:

The following is a reconciliation of weighted average common shares outstanding
to weighted average common shares outstanding assuming dilution used in the
calculation of earnings per share for the fiscal years ended August 31, 2002,
2001 and 2000:

(1) Issuable primarily under stock option plans.

22. Subsequent Events (unaudited):

As reported above in Item 1. Business - Sales and Marketing, on September 3,
2002, the Company purchased the net assets of its former New York City
distributor, Stepic Medical, from Horizon Medical Products for $12,716 in cash
and relief from $5,539 of accounts receivable that had been due from this
distributor, subject to post closing adjustments. Stepic Medical had been the
Company's distributor in the greater New York City area and parts of Connecticut
and New Jersey since 1977.

Although the Company's product line had been Stepic Medical's major business
prior to the purchase of its net assets by the Company, Stepic Medical had also
distributed the Horizon Medical Products product line and other complementary
critical care products. As of September 4, 2002, Horizon Medical Products
initiated its own direct distribution of its products.

On November 15, 2002, the Company agreed to purchase for approximately $10,000 a
company in the business of the development, manufacture and sale of chronic
hemodialysis catheters. The products acquired in the transaction are expected to
complement the Company's existing hemodialysis product line. The transaction is
expected to close later in November 2002.

(66)

(1) Deductions represent write-offs of accounts receivable and scrap
inventory.

(67)

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors and nominees for directors of the Company,
as well as certain other information required by this item, will be included in
the Company's Proxy Statement to be issued in connection with its 2003 Annual
Meeting of Shareholders (the "Proxy Statement"), and is incorporated herein by
reference. The information regarding executive officers required by this item is
contained herein in Item 1 under the caption "Executive Officers".

PART III

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation of Arrow's directors and
executive officers will be included in the Proxy Statement and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

Information regarding beneficial ownership of the Company's common stock by
certain beneficial owners and by management of the Company will be included in
the Proxy Statement and is incorporated herein by reference.

The following table sets forth certain information regarding the Company's
equity compensation plans as of August 31, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions with
management of the Company will be included in the Proxy Statement and is
incorporated herein by reference.

(68)

ITEM 14. CONTROLS AND PROCEDURES

Based on their evaluation as of a date within 90 days of the filing of this Form
10-K, the Company's Chief Executive Officer and its Chief Financial Officer 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
Commission's rules and forms. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there were no
corrective actions taken.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:

(a) (1) The financial statements listed in the Index to Consolidated
Financial Statements under Item 8 of this report are filed as part of this
report.

(a) (2) Financial Statement Schedule II of the Company is filed as part of
this report.

Other statements and schedules are not presented because they are either
not required or the information required by statements or schedules is presented
elsewhere.

(a) (3) See Exhibit Index on pages 73 through 79 hereof for a list of the
Exhibits filed or incorporated by reference as part of this report.

(b) Reports on Form 8-K:

None

(69)

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

By: /s/ Frederick J. Hirt
--------------------------------------
Frederick J. Hirt
Chief Financial Officer,
Vice President-Finance and Treasurer
Dated: November 22, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

(70)

CERTIFICATIONS

I, Marlin Miller, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Arrow International,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 22, 2002 /s/ Marlin Miller, Jr
---------------------
Marlin Miller, Jr.
Chairman and
Chief Executive Officer
(Principal Executive Officer)

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CERTIFICATIONS

I, Frederick J. Hirt, certify that:

1. I have reviewed this annual report on Form 10-K of Arrow International,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 22, 2002 /s/ Frederick J. Hirt
-----------------------------
Frederick J. Hirt
Chief Financial Officer,
Vice President/Finance and Treasurer
(Principal Financial Officer)

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