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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended January 31, 2004

OR

For the transition period from              to             

Commission file number 0-12448

FLOW INTERNATIONAL CORPORATION

23500 - 64th Avenue South

Kent, Washington 98032

(253) 850-3500

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

The number of shares outstanding of common stock, as of March 8, 2004 is 15,358,759 shares.

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FLOW INTERNATIONAL CORPORATION

INDEX

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FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in thousands, except share amounts)

See Accompanying Notes to

Condensed Consolidated Financial Statements

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FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited; in thousands, except per share data)

See Accompanying Notes to

Condensed Consolidated Financial Statements

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FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)

See Accompanying Notes to

Condensed Consolidated Financial Statements

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FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(unaudited, in thousands)

See Accompanying Notes to

Condensed Consolidated Financial Statements

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FLOW INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended January 31, 2004

(unaudited)

In the opinion of the management of Flow International Corporation (the “Company”), the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and accruals necessary to fairly present the financial position, results of operations and cash flows of the Company. These interim financial statements do not include all information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, and should be read in conjunction with the April 30, 2003 consolidated financial statements included in the Company’s Annual Report filed with the Securities and Exchange Commission on Form 10-K. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company’s financial statements. Actual results may differ from these estimates under different assumptions or conditions. Operating results for the three and nine months ended January 31, 2004 may not be indicative of future results.

The Company has incurred losses during fiscal 2002, 2003 and year-to-date 2004. In February 2003, the Company announced a comprehensive two-year restructuring plan intended to return the Company to profitability through reductions in headcount, consolidation of facilities and operations, and closure or divestiture of selected operations. The Company has been able to satisfy its needs for working capital and capital expenditures, due in part to its ability to access adequate financing arrangements. The Company expects that operations will continue, with the realization of assets and discharge of liabilities in the ordinary course of business. Compliance with future debt covenants requires the Company to meet its operating projections, which include achieving certain revenues, costs, consistent operating margins, and working capital targets.

The Company believes that its existing cash and credit facilities at January 31, 2004 are adequate to fund its operations through July 31, 2004, the expiration of the Company’s credit facility. However, demand for the Company’s products and timing of cost reductions are difficult to project. The Company’s restructuring initiatives may have unanticipated effects on its business. If the Company fails to achieve its planned revenues, costs and working capital objectives, management believes it has the ability to use its existing cash to meet its current requirements and debt covenants through July 31, 2004.

If the Company is unable to comply with the amended debt covenants, and the lenders are unwilling to waive or amend the debt covenants, certain components of the long-term obligations and notes payable would become callable, and the Company would be required to seek alternative financing. There can be no assurance that alternative sources of financing will be available if required or, if available, may not be on satisfactory terms. If the Company is unable to obtain alternative financing on satisfactory terms, it could have a material adverse effect on the Company’s business, and the Company may be required to further curtail capital spending, further reduce expenses, and otherwise modify its planned operations including potentially discontinuing operations. See Note 11 for more information on Notes Payable and Long-Term Obligations.

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FLOW INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended January 31, 2004

(unaudited)

The following table summarizes accrued restructuring activity (in thousands):

Since May 2003, the Company has been executing on a plan intended to return it profitability through reductions in headcount, consolidation of facilities and operations, and closure or divestiture of selected operations. The Company incurred over $1.0 million in professional fees associated with the restructuring of its debt on July 29, 2003. The Company further evaluated the workforce and skill levels necessary to satisfy the expected future requirements of the business. As a result, the Company has implemented plans to eliminate redundant positions and realign and modify certain roles based on skill assessments. The Company has recorded restructuring charges of $3.6 million through January 31, 2004, which included $548,000 in employee severance related costs for approximately 48 individuals. The Company has provided notification to an additional 20 associates. However, as these associates are required to perform their job duties through their termination date, the Company has continued to reflect this cost in operating expenses. The fiscal 2004 reductions to-date in the global workforce were made across manufacturing, engineering as well as general and administrative functions within the Company. The Company has also recorded $788,000 of facility exit costs through the nine months ended January 31, 2004 primarily as a result of consolidation of its two Kent facilities into one facility with excess space. Of the total $3.6 million of restructuring charges recorded through January 31, 2004, $3.1 million related to Waterjet Systems and $0.5 million related to Avure Technologies.

The remaining accrued severance costs of $99,000 as of January 31, 2004 will be paid over the next quarter; and the remaining accrued facility exit costs of $419,000, which consist of long-term lease commitments, will be paid primarily over the next several years.

During the quarter the Company terminated its relationship with the Food Partners, LLC, an investment banking firm specializing in the food industry, to develop and implement value-maximizing strategic alternatives for Avure Technologies. Those alternatives included the continuation of operations in the present form, operations on a diminished scale, suspension of operations, shutdown, or a complete or partial divestiture. To date, the Company has not received an acceptable offer for the business. In response, the Company has downsized the business and is continuing the operation of Avure Technologies. Recent contract awards of food and General Press orders will consume available capacity at current manufacturing levels through December 2004. The Company continues to review the best options for this segment.

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FLOW INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended January 31, 2004

(unaudited)

At April 30, 2003, the Company reported one of its subsidiaries as a discontinued operation. This wholly owned subsidiary of the Company was involved in the decommissioning of oil wells. On May 16, 2003, the Company consummated the sale of the subsidiary’s assets, recording proceeds of $1.8 million and a gain on the sale of $650,000, and retains no future interest in the subsidiary. The Company segregated this subsidiary’s assets as assets of discontinued operations on the April 30, 2003 Consolidated Balance Sheet and presented the subsidiary’s results of operations as discontinued operations, net of applicable taxes, on the Condensed Consolidated Statement of Operations for the three and nine months ended January 31, 2004 and 2003. The subsidiary had no significant liabilities. The results of discontinued operations, for the three and nine months ended January 31, 2004 and 2003, are summarized below:

In January 2004, the Company sold its investment in marketable securities of WGI Heavy Minerals for $3.3 million and realized a gain of $2.6 million on the transaction which is reflected in Other Income, net on the Consolidated Statement of Operations for the three and nine months ended January 31, 2004. All proceeds were used to pay down outstanding borrowings and permanently reduce the available borrowing capacity of the senior credit facility. In addition, the Company relinquished its seat on the Board of Directors of WGI Heavy Minerals.

In December 2003, the Company received $1.0 million from a customer to prepay a $1.1 million long-term note receivable which the Company had previously discounted to $921,000. The difference of $79,000 was recorded as Other Income, Net.

Basic earnings (loss) per share represents net income (loss) available to common shareholders divided by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share represents net income (loss) available to common shareholders divided by the weighted average number of shares outstanding including the potentially dilutive impact of stock options and warrants, except when the effect of their inclusion would be anti-dilutive.

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FLOW INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended January 31, 2004

(unaudited)

The effect of all stock options and a total of 860,000 potentially dilutive shares from warrants have been excluded from the diluted weighted average share denominator for both the three and nine months ended January 31, 2004 and 2003, as their effect would be anti-dilutive.

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards No. 123 (“FAS 123”), “Accounting for Stock Based Compensation” to stock-based employee compensation:

To determine compensation expense under FAS 123, the Company used the following assumptions:

The Company analyzes its operations based on two reportable segments, Flow Waterjet Systems and Avure Technologies. The Flow Waterjet Systems segment includes cutting and cleaning operations, which are focused on providing total solutions for the aerospace, automotive, job shop, surface preparation and paper industries. The Avure Technologies segment includes the Fresher Under Pressure® food processing technology, as well as the isostatic and flexform press (“General Press”) operations. The Fresher Under Pressure technology provides food safety and quality enhancement solutions for food producers, while the General Press business manufactures systems which shape and strengthen advanced materials for the aerospace, automotive and medical industries. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies included in the Company’s April 30, 2003 Annual Report filed with the Securities and Exchange Commission on Form 10-K. Segment operating results are measured on income (loss) from operations.

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FLOW INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended January 31, 2004

(unaudited)

A summary of operations by reportable segment is as follows:

Inter-segment sales from Flow Waterjet Systems to Avure Technologies amounted to $315,000 and $151,000 for the three months ended January 31, 2004 and 2003, respectively, and $722,000 and $2.9 million for the nine months ended January 31, 2004 and 2003, respectively.

Receivables consist of the following:

Inventories consist of the following:

Due to a recent history of losses and uncertainty of future earnings, the Company has provided a full valuation allowance against its domestic net operating losses and certain foreign net operating losses. Further, the Company has also placed a valuation allowance against certain other deferred tax assets based on the expected reversal of such deferred tax assets and liabilities. The domestic net operating losses can be carried forward 20 years to offset domestic profits in future periods.

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FLOW INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended January 31, 2004

(unaudited)

The Company is in compliance with all covenants of its senior credit agreement (the “Credit Agreement”) at January 31, 2004. The $41.4 million balance outstanding is shown under Current Portion of Long-Term Debt, as the maturity date of August 1, 2004 is less than one year from the January 31, 2004 balance sheet date. The maximum authorized borrowing at January 31, 2004 is $48.2 million. At April 30, 2004, the maximum authorized borrowing will be $46.2 million. The interest rates in effect under the Credit Agreement for the three months ended January 31, 2004 are at the senior lenders’ prime rate as adjusted from time to time (4.00% at January 31, 2004) plus 4%. At January 31, 2004, the Company has $2.0 million in outstanding letters of credit.

As of January 31, 2004, the balance under the Hancock subordinated debt was $39.3 million, of which $4.3 million represents deferred and capitalized interest. The Company is in compliance with all covenants under the Note Amendment as of January 31, 2004. Assuming no modification to the Hancock subordinated debt agreement, the deferral and capitalization of interest at 15% is expected to continue through April 30, 2004. The agreement calls for two equal principal payments due on April 30, 2007 and April 30, 2008.

The Company has two unsecured credit facilities in Taiwan totaling 120 million New Taiwanese Dollars (US$3.6 million at January 31, 2004), bearing interest at rates ranging from 1.65% to 1.875% per annum. The credit facilities mature in April 2004 and November 2004 and can be extended for successive 30 day periods, as needed. At January 31, 2004, the balance outstanding on these credit facilities amounts to US$3.5 million. The Company has also obtained a secured long-term loan in the amount of 179 million New Taiwanese Dollars (US$5.4 million at January 31, 2004) at an annual rate of 2.58% to finance its recently completed manufacturing facility which may reduce the two unsecured facilities when funded.

The Company has an unsecured credit facility in Sweden totaling 50 million Swedish Krona (US$6.8 million at January 31, 2004), bearing interest at the rate of 4.25% per annum. At January 31, 2004, the balance outstanding amounts to US$4.4 million and this facility expires in December 2004.

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

The following table shows the fiscal 2004 year-to-date activity for the Company’s warranty accrual:

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FLOW INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended January 31, 2004

(unaudited)

At any time, the Company may be involved in certain legal proceedings. As of January 31, 2004, the Company has accrued its estimate of the probable costs for the resolution of these claims. This estimate has been developed in consultation with legal counsel and is based upon an analysis of potential outcomes, assuming a combination of litigation and settlement strategies. The Company does not believe these proceedings will have a material adverse effect on its consolidated financial position. However, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by changes in the Company’s assumptions, or the effectiveness of its strategies, related to these proceedings.

The Company has been notified by the pension plan administrator of its Swedish pension plan that it is required to fund a portion of its accrued but unfunded pension obligation of $2.9 million based on the financial performance of the Company. The Company will be required to fund $400,000 in June 2004 and again in August 2004.

Certain fiscal 2003 amounts have been reclassified to conform to the fiscal 2004 presentation. Such reclassifications had no impact on net loss, shareholders’ (deficit) equity or cash flows.

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FLOW INTERNATIONAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

SAFE HARBOR STATEMENT:

Statements made in this quarterly report on Form 10-Q that are not historical facts are forward-looking statements that involve risks and uncertainties. Forward-looking statements typically are identified by the use of such terms as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “plan,” “potential,” “continue” or similar words, although some forward-looking statements are expressed differently. We caution investors that forward-looking statements are only predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements. You should be aware that our actual results could differ materially from those contained in any forward-looking statement due to a number of factors, which include, but are not limited to the following: the special risk factors and uncertainties set forth below; the anticipation a new long term credit facility will be in place prior to the filing of our annual report on Form 10-K for the period ended April 30, 2004; our belief that the existing cash and credit facilities at January 31, 2004 are adequate to fund our operations through July 31, 2004 and that if the Company fails to achieve its planned revenues, costs and working capital objectives, management has the ability to curtail capital expenditures and reduce costs to levels that will be sufficient to enable the Company to meet its cash requirements and debt covenants through July 31, 2004; our exposure to additional costs relating to our Restructuring Plan, including the disposition or discontinuation, if necessary, of our Avure Technologies business or the risk that we will not achieve significant cost savings as a result of the Restructuring Plan; risks related to a potential failure to realize anticipated benefits in connection with the liquidation of inventories and other assets of operations or product lines to be discontinued; the belief that timing issues associated with payment of accounts receivable will not impact our short term liquidity requirements; our ability to curtail capital expenditures, control costs and expenses; relations with and performance of suppliers; our ability to successfully develop and sell products in the competitive markets that we serve; access to capital; maintaining satisfactory relationships with our lending partners; political and trade relations; the overall level of consumer spending on capital equipment; global economic conditions and additional threatened terrorist attacks and responses thereto, including war. Additional information on these and other factors that could affect our financial results is set forth below and in our Form 10-K for the year ended April 30, 2003. We assume no obligation to update any forward-looking statements as a result of new information, future events or developments, except as required by federal securities laws.

All references to fiscal years are references to our fiscal year end of April 30.

Changes in Financial Condition

We generated $13.2 million of cash from operating activities during the nine months ended January 31, 2004 compared to a use of cash of $9.5 million for the nine months ended January 31, 2003. The improvement in cash flow resulted primarily from our efforts aimed at reducing working capital to paydown debt, which have targeted receivables and inventory reductions, as well as increasing customer advances.

Net receivables are comprised of trade accounts and unbilled revenues. At January 31, 2004, the net receivables balance decreased $2.5 million or 7% from April 30, 2003. The decrease in net receivables stemmed from the reduction in trade receivables from $31.1 million at April 30, 2003 to $26.0 million at January 31, 2004, a $5.1 million or 16% decrease. This decrease is the result our continued focus on collections and credit practices. The decrease in trade receivables was offset by a $2.8 million or 33%

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FLOW INTERNATIONAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

increase in unbilled revenues from $8.5 million at April 30, 2003 to $11.3 million at January 31, 2004 on stronger General Press and food systems percentage of completion revenue. A significant portion of unbilled receivables relates to equipment and systems accounted for on a percentage of completion basis. Unbilled revenues fluctuate due to the scheduling of production and achievement of certain billing milestones. The increase in Unbilled Revenues is consistent with our expectations based on the factors above. Receivables can be negatively affected by the traditionally longer payment cycle outside the United States and the timing of billings and payments on large special system orders. We do not believe these timing issues will present a material adverse impact on our short-term liquidity requirements. Because of the lead-time to build and deliver such equipment, ultimate collection of such accounts can be subject to changing customer business and economic conditions.

Inventories, net at January 31, 2004 decreased $11.6 million or 28% from April 30, 2003 due to our strategy to convert inventories to cash in the short term by their sale or disposition as well as implementation of initiatives targeted at increasing inventory turns. Gross inventories decreased $12.9 million or 28% offset by a reduction of $1.3 million or 30% in the obsolescence reserve as we scrapped some obsolete parts and returned surplus parts to vendors.

Customer advances have more than doubled to $12.4 million at January 31, 2004, a $7.2 million increase over the April 30, 2003 balance of $5.2 million. We have been working with our customers on our terms of sale which require a substantial portion of any system to be paid prior to its shipment and have seen acceptance from our customers.

Liquidity and Capital Resources

A substantial portion of our cash is held by subsidiaries outside the United States and such amounts are not part of the senior lenders’ collateral base. In most cases, the repatriation of offshore cash balances would trigger tax liabilities. If balances were repatriated to the United States, they would be used by the senior lenders to pay down the credit facility.

Our senior credit agreement (“Credit Agreement”) is our primary source of external funding. At January 31, 2004, the balance outstanding on the Credit Agreement is $41.4 million against a maximum borrowing of $48.2 million. Our available credit at January 31, 2004 is $4.8 million which includes $2.0 million in outstanding letters of credit.

The balance outstanding at January 31, 2004 is shown under Current Portion of Long-Term Debt, as the August 1, 2004 maturity date of the Credit Agreement is less than one year from the January 31, 2004 balance sheet date. We have begun initial discussions with certain of the senior lenders and other outside parties regarding a new long-term credit facility. There can be no assurance that the new long-term credit facility will be available or, if available, may not be on satisfactory terms. If we are unable to obtain alternative financing on satisfactory terms, it could have a material adverse effect on our business, and we may be required to further curtail capital spending, further reduce expenses and otherwise modify our planned operations including potentially discontinuing operations.

We believe that the success of obtaining long-term financing is contingent on modifying our subordinated debt agreement. We are currently in discussion with our subordinated lenders regarding a potential modification of the agreement. Such modification could include a partial cash payment and conversion of some or all of the remaining debt to equity securities. We may also satisfy the partial or complete paydown of the subordinated debt through cash raised via an equity offering. The timing of finalization of a new long-term credit facility and modification of our subordinated debt agreement is uncertain. The completion of these agreements is dependent on concurrence by all parties and is not completely within our control. If we are unable to obtain a new long-term credit facility before our existing facility and modification of our subordinated debt agreement expires on August 1, 2004, our senior and subordinated lenders (together, the “Lenders”) may pursue any number of plans to reduce the outstanding debt, including, in certain circumstances, a liquidation of some or all of our assets.

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FLOW INTERNATIONAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our future cash commitments include our Restructuring Plan which currently calls for cash expenditures of between $11 million and $13 million prior to February 2005. We have funded and anticipate funding the remaining restructuring commitments within our existing credit facilities as well as with our cash on hand. We committed $5 million to fund the construction of a new manufacturing facility for our Taiwanese operations in July 2000. As of January 31, 2004, we have spent $5.2 million and have completed the construction of the facility, which was financed via two unsecured lines of credit with Taiwanese banks. We have also obtained secured long-term credit facilities and expect to draw on this facility in the fourth quarter of fiscal 2004 which may reduce the two unsecured facilities.

We have incurred losses during the last two fiscal years ended April 30, 2003 as well as for the three and nine months ended January 31, 2004. In February 2003, we announced a comprehensive two-year restructuring plan intended to return the Company to profitability through reductions in headcount, consolidation of facilities and operations, and closure or divestiture of selected operations (the “Restructuring Plan”). We have been able to satisfy our need for working capital and capital expenditures, due in part to our ability to access adequate financing arrangements. We expect that operations will continue, with the realization of assets and discharge of liabilities in the ordinary course of business. Compliance with future debt covenants requires us to meet our operating projections, which include achieving certain revenues, costs, consistent operating margins, and working capital targets.

We believe that our existing cash and credit facilities at January 31, 2004 are adequate to fund our operations through July 31, 2004, the expiration of our current credit facility. However, demand for our products and the timing of cost reductions are difficult to project. In addition, our restructuring initiatives may have unanticipated effects on our business. If we fail to achieve our planned revenues, costs and working capital objectives, management believes that we have the ability to use our existing cash to meet our current requirements and debt covenants through July 31, 2004.

If we are unable to comply with the amended debt covenants of the Credit Agreement, and our lenders are unwilling to waive or amend the debt covenants, certain components of our long-term obligations and notes payable would become callable, and we would be required to seek alternative financing. There can be no assurance that alternative sources of financing will be available if required or, if available, may not be on satisfactory terms. If we are unable to obtain alternative financing on satisfactory terms, it could have a material adverse effect on our business, and we may be required to curtail capital spending, further reduce expenses, and otherwise modify our planned operations including potentially discontinuing operations. There can be no assurance that we will be able to secure new financing to replace the Credit Agreement. Our Lenders may pursue any number of plans to extend the credit facility for a defined period of time, reduce the outstanding debt, including, in certain circumstances, a liquidation of some or all of our assets.

Off-Balance Sheet Arrangements

We do not have any special purpose entities or off-balance sheet financing arrangements.

Critical Accounting Policies and Judgments and New Accounting Pronouncements

There are no material changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended April 30, 2003 aside from the adoption of EITF 00-21, “Revenue Arrangements with Multiple Deliverables”, in the quarter ended October 31, 2003. The adoption of EITF 00-21 allowed us to recognize an additional $952,000 of revenue and $512,000 of cost of sales, all of which would have been deferred until installation under prior accounting guidance. There were no other new accounting pronouncements issued which we believe are currently or will be applicable to the Company.

Risks and Uncertainties

This Quarterly Report on Form 10-Q contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of risks and uncertainties such as those listed below and elsewhere in this report, which, among others, should be considered in evaluating our financial outlook.

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FLOW INTERNATIONAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Negotiation of New Financing. The Credit Agreement with our senior lenders expires August 1, 2004. There can be no assurance that we will be able to secure new financing to replace the Credit Agreement. Our Lenders may pursue any number of plans to reduce the outstanding debt, including, in certain circumstances, a liquidation of some or all of our assets.

Compliance with Current Financing Arrangements. The Credit Agreement sets forth specific financial covenants and debt commitment levels to be attained on a quarterly basis. We and our subordinated lender amended the $35 million subordinated Note Agreement (the “Note Agreement”) in July 2003 to mirror the covenants of the Credit Agreement. If we are unable to achieve our projected operating results, we may be unable to maintain compliance with the loan covenants and would trigger an event of default under both the Credit Agreement and the Note Agreement. In the event of default, the Lenders may limit our ability to borrow funds as needed or call the debt. Our ability to continue operating depends on the Lenders’ willingness to grant us access to additional funds available under the Credit Agreement. If we are unable to access the necessary funds, our ability to continue operations would be seriously impaired unless we are able to obtain alternative financing from another source. Given our current financial position, obtaining alternative financing upon terms agreeable to our management is unlikely, especially in the short term. In an event of default, the Lenders would be able to exercise default remedies, which include applying a default interest rate and acceleration of payment schedules for our outstanding debt. If the debt were called in such a manner, it is unlikely we would be able to pay off our debt and, as a result, we would be subject to the authority of our Lenders as provided in the Credit Agreement and the Note Agreement. Our Lenders may pursue any number of plans to reduce the outstanding debt, including, in certain circumstances, a liquidation of some or all of our assets.

Satisfaction of Subordinated Debt. The $35 million aggregate principal amount of notes issued under the Note Agreement mature in two installments of $17.5 million each on April 30, 2007 and 2008. Our subordinated lender has agreed to defer and capitalize the semi-annual interest remittances due from April 30, 2003 through April 30, 2004, which total $7.9 million, less the $1.0 million paydown that we made concurrent with the signing of the amendment to the Note Agreement in July 2003, as a component of the principal balance outstanding. This unpaid interest accrues interest at the rate of 15% and increases the obligation to the subordinated lender. In order to satisfy these obligations and to obtain favorable senior financing, we may be required to enter into transactions which could be dilutive to current shareholders such as converting the subordinated debt into equity or selling additional equity. It is likely that that we will not have sufficient cash to pay installments due on either April 30, 2007 and 2008. It is also likely that we may need to negotiate modifications to the Note Agreement that either extend the payment terms or provide for a conversion of all of part of the subordinated debt into equity securities in order to obtain a new senior credit facility by August 1, 2004. Any agreement that we reach with the subordinated lender could have a material impact on the Company, including dilution to existing shareholders.

Impact of Financial Condition on Business. Our overall financial position has impacted our terms of sale with customers. Where our standard terms of sale require deposits prior to shipment, some customers have been reluctant to remit the necessary funds. We currently cannot provide standby letters of credit with maturities extending beyond the August 1, 2004 maturity of the Credit Agreement. As a result, we may have to continue to accept less than favorable terms on customer orders.

Intellectual Property Rights. We defend our intellectual property rights because unauthorized copying and sale of our proprietary equipment and consumables represents a loss of revenue to us. From time to time we also receive notices from others claiming we infringe their intellectual property rights. The number of these claims may grow in the future, and responding to these claims may require us to stop selling or to redesign affected products, or to pay damages.

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FLOW INTERNATIONAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Foreign Exchange Risks. Our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which our products are manufactured and/or sold. Approximately 45% of our revenue is generated outside the United States.

Results of Operations

We provide ultrahigh-pressure (“UHP”) systems and related products and services to a wide variety of industries. We have two reportable segments, Flow Waterjet Systems (“Waterjet Systems”) and Avure Technologies (“Avure Technologies”).

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FLOW INTERNATIONAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Segment Overview