10-K

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 April 30, 2003

OR

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

For the transition period from              to             

Commission file number 0-12448

FLOW INTERNATIONAL CORPORATION

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

23500 - 64th Avenue South

Kent, Washington 98032

(253) 850-3500

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock $.01 Par Value

Preferred Stock Purchase Rights

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 the Form 10-K or any amendment to this Form 10-K.  ¨

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

The aggregate market value of the voting stock held by non affiliates of the registrant based upon the closing price reported by the National Association of Securities Dealers’ Automated Quotation System (“NASDAQ”) as of July 15, 2003 was $24,130,039. The number of shares of common stock outstanding as of July 15, 2003 was 15,358,759 shares.

Documents Incorporated By Reference

Part I:	None
Part II:	None
Part III:	The information required by these Items of Part III are incorporated by reference from the Registrant’s definitive proxy statement which involves the election of directors and which will be filed with the Commission within 120 days after the close of the fiscal year.
Item 10	Directors and Executive Officers of the Registrant
Item 11	Executive Compensation
Item 12	Security Ownership of Certain Beneficial Owners and Management
Item 13	Certain Relationships and Related Transactions
Part IV:	None

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Safe Harbor Statement

Statements made in this Form 10-K that are not historical facts are forward-looking statements that involve risks and uncertainties. Forward-looking statements typically are identified by the use of such terms as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “plan” and similar words, although some forward-looking statements are expressed differently. You should be aware that our actual results could differ materially from those contained in any forward-looking statement due to a number of factors, which include, but are not limited to the following: the special risk factors and uncertainties set forth in this document; our exposure to additional costs relating to our 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; our ability to 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. Finally, there may be other factors not mentioned above or included in our SEC filings that may cause our actual results to differ materially from those in any forward-looking statement. You should not place undue reliance on these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, future events or developments, except as required by federal securities laws.

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

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PART I

Item 1.    Business

Flow International Corporation (“Flow” or the “Company”) designs, develops, manufactures, markets, installs and services ultrahigh-pressure (“UHP”) products including both standard and specialized waterjet cutting and cleaning systems together with the Fresher Under Pressure^® food safety technology and isostatic and flexform press systems. We provide technologically-advanced, environmentally-sound solutions to the manufacturing, industrial, marine cleaning and food markets. Our UHP systems pressurize water from 40,000 to over 100,000 pounds per square inch (psi). This high pressure water is the core of our product line. Based upon a change in reporting structure at the beginning of Fiscal 2003, the Company has redefined its two reportable segments, Flow Waterjet Systems (Waterjet Systems) and Avure Technologies, replacing the two previous reportable segments of UHP Systems and Fresher Under Pressure. Avure Technologies, Inc. (“Avure”) is a wholly owned subsidiary of Flow.

Waterjet cutting is recognized as a more flexible alternative to traditional cutting methods such as lasers, saws or plasma. It is faster, has greater versatility in the types of products it can cut and eliminates the need for secondary processing operations. Utilizing pressures from 50,000 to 87,000 psi, the thin stream of water traveling at three times the speed of sound or more, can cut both metallic and nonmetallic materials for many industries, including aerospace, automotive, disposable products, food, glass, job shop, sign, metal cutting, marble, tile and other stone cutting, and paper. While our primary product line is cutting, we also manufacture a product line, utilizing 40,000 to 55,000 psi, for use in industrial cleaning, surface preparation, construction, nuclear decontamination, and petro-chemical and oil field applications. We manufacture entire systems including pumps, as well as positioning equipment and may also include assembly, “pick and place” and load/unload operations.

Our Avure segment includes the Fresher Under Pressure 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 produce and strengthen advanced materials for the aerospace, automotive and medical industries.

Flow is a Washington corporation founded in 1974, incorporated in 1980, and completed its initial public offering in March 1983. Over the past several years, we have completed a number of acquisitions which have added robotics and software capabilities, and opened new geographic markets and product technology. These acquisitions include Flow Automation; Flow Robotics; Flow Japan; Foracon Maschinen und Anlagenbau GmbH & CO.KG (“Foracon”); CIS Robotics Inc. (“CIS”), Robot Simulations Limited (“Flow Software Technologies Ltd.”), ABB Pressure Systems AB (“Avure AB”) along with a 50% economic interest in a related U.S. joint venture, Flow Autoclave Systems Inc. (“Flow Autoclave”) and Spearhead Automated Systems, Inc. (“Flow Robotic Systems”).

In September 2002, Ronald W. Tarrant retired as the Chairman and CEO, having been in that position since 1991. In January 2003, Stephen R. Light was appointed President and Chief Executive Officer. Kathryn L. Munro, a director since 1996, assumed the position of Chairman.

Products and Services

We provide UHP systems and related products and services to our target markets: aerospace, automotive, food safety, job shops, pulp and paper and surface preparation. As described above, we divide our business into two reportable segments: Flow Waterjet Systems and Avure Technologies.

Flow Waterjet Systems:

Systems -

We offer a variety of UHP products, including both waterjet cutting and cleaning systems, as well as accessories and related robotic articulation equipment. UHP pumps, as well as pumps combined with pressure

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vessels, are the core components of our technology. An intensifier pump pressurizes water to in excess of 100,000 psi and forces it through a small orifice within a nozzle, generating a high-velocity stream of water traveling in excess of 3,000 feet per second to perform the cutting process. In order to cut metallic and other hard materials, an abrasive substance, usually garnet, is added to the waterjet stream creating an abrasivejet. Abrasivejets cut without heat, cause no metallurgical changes, and leave a high-quality edge that usually requires no secondary operation. Our unique and patented direct-drive pressure-compensated pumps pressurize water to in excess of 55,000 psi utilizing triplex piston technology.

A UHP system consists of an ultrahigh-pressure intensifier or direct drive pump and one or more waterjet cutting or cleaning heads with the necessary robotics, motion control and automation systems. We have placed UHP waterjet cutting systems in our target markets worldwide. These cutting systems may also combine waterjet applications with other processes such as conventional machining, pick and place handling, inspection, assembly, and other automated processes. Our waterjet systems are also used in industrial cleaning applications such as paint removal, surface preparation, factory and industrial cleaning, ship hull preparation, oil field services and heat exchanger cleaning.

Our products enhance productivity and, we believe, are cost justified over traditional methods. Our sales are affected by worldwide economic changes. However, the flexibility of our process and the diversity of our markets enable us to absorb cyclical downturns with less impact than conventional machine tool manufacturers and we are confident that we can continue to gain market share in the machine cutting tool market.

Consumable Parts and Services -

Consumables represent parts used by the pump and cutting head during operation, such as seals, orifices and garnet. Many of these consumable or spare parts are proprietary in nature and are patent protected. We also sell various tools and accessories which incorporate UHP technology, as well as aftermarket consumable parts and service for our products.

Avure Technologies:

Fresher Under Pressure -

Avure has two primary product lines, food safety and General Press. “Fresher Under Pressure” is our proprietary UHP pump and pressure vessel technology that addresses the growing demand in the U.S. for a post packaging, terminal pasteurization-like step for the food processing industry. This technology can provide benefits to a vast array of food products including fruits, vegetables, seafood, processed meats and ready-to-eat meals. The food industry is the single largest manufacturing industry in the world, of which $850 billion is in the U.S. Recent governmental regulations regarding pathogen reduction requirements as well as consumer demand for higher quality, wholesome, more natural, convenience foods offer a high growth opportunity. Marketed as Fresher Under Pressure since 1999, our UHP technology exposes foods to pressures from 50,000 to over 100,000 psi for a short time, reducing food-borne pathogens such as Camplyobacter, E. coli, Listeria monocytogenes, salmonella and Vibro vulnificus. While conventional thermal and chemical preservation methods can ensure safety and longevity, they have a negative impact on fresh foods’ sensory qualities such as nutrition, flavor, color and texture. Avure’s technology uses UHP to destroy bacteria and other microorganisms without using high temperatures or chemical additives with minimal effects on the nutrition, taste, texture, or color of food, while simultaneously extending shelf life.

General Presses -

Our isostatic press systems are large pressure vessels, ranging from 25 to 35 feet in height and weighing between 50 and 200 tons, that use a combination of heat and pressure to produce and strengthen advanced materials for the aerospace, automotive and medical industries. Examples of customary applications include jet

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engine components, automotive parts, high performance ceramics and hip joints. Our flexform presses are used to form sheet metal for flexible and cost-effective prototyping and low volume production of structural items, panels and engine components. Our General Presses offer several advantages over other methods for forming metal and composite parts. Isostatic presses produce lighter weight, higher strength parts that have a better metal consistency, density and uniformity as compared to a forged or cast part. Flexform presses allow for cost-effective production, lower tooling costs, flexibility and shorter lead times.

Marketing and Sales

We market and sell our products worldwide through our headquarters in Kent, Washington (a suburb of Seattle) and through subsidiaries, divisions and joint ventures located in Columbus, Ohio; Wixom, Michigan; Jeffersonville, Indiana; Lafayette, Louisiana; Birmingham, England; Bretten, Germany; Burlington and Windsor, Canada; Hsinchu, Taiwan; Shanghai and Beijing, China; Incheon, Korea; Sao Paulo, Brazil; Buenos Aires, Argentina; Milan, Italy; Madrid, Spain; Yokohama, Nagoya and Tokyo, Japan and Västerås, Sweden. We sell directly to customers in North and South America, Europe, and Asia, and have distributors or agents in most other countries. No customer accounted for 10% or more of our revenues during any of the three years ended April 30, 2003.

We focus our marketing efforts on specific target industries, applications and markets. To enhance the effectiveness of sales efforts, our marketing staff and sales force gather detailed information on the applications and requirements in targeted market segments. This information is used to develop standardized and customized solutions using UHP and robotics technologies. We provide turnkey systems, including system design, specification, hardware and software integration, equipment testing and simulation, installation, start-up services, technical training and service.

Our marketing techniques employ telemarketing and the internet, to identify and qualify sales leads, thus increasing the efficiency of the direct sales staff. Responses to these activities are carefully screened to identify new areas of interest and applications in our target markets. We also attend trade shows for targeted market segments and advertise in selected industry publications.

Patents

We hold a large number of UHP technology and related systems patents. While we believe the patents we hold are valid, we do not consider our business dependent on patent protection. In addition, we have over the years developed non-patented proprietary expertise and know-how in UHP applications, and in the manufacture of these systems, which we believe allows us to remain in the technological forefront of our competitors.

We believe the patents we hold and have in process, along with the proprietary application and manufacturing know-how, act as a barrier to entry into many of the markets we serve.

Backlog

At April 30, 2003, our backlog was $36.3 million compared to the prior year-end backlog of $32.8 million. Generally, our products, exclusive of the aerospace and Avure product line of General Presses and Fresher Under Pressure products, can be shipped within a four to ten week period. These products typically have lead times of six to 18 months. The changes in our backlog are not necessarily indicative of comparable variations in sales or earnings. The April 30, 2003, backlog represented 25% of fiscal 2003 sales. The unit sales price for most of our products and services is relatively high (typically ranging from tens of thousands to millions of dollars) and individual orders can involve the delivery of several hundred thousand dollars of products or services at one time. Furthermore, some items in backlog can be shipped more quickly than others, some have higher profit margins than others, and some may be cancelled by customers.

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Competition—Flow Waterjet Systems

The major competitors for UHP waterjet cutting and cleaning systems are conventional cutting and cleaning methods. These methods include lasers, saws, knives, shears, plasma, routers, drills and abrasive blasting techniques. A UHP waterjet cutting system has many advantages over conventional cutting systems, including no generation of heat or airborne dust, easy adaptability to complex cutting programs, insensitivity to the different types of materials, faster cutting speed and the ability to produce ready to use finished edges. These factors, in addition to elimination of secondary processing in most circumstances, enhance the manufacturing productivity of our systems.

Waterjet cleaning offers many advantages over other cleaning methods, such as the ability to remove difficult coatings or deposits from a surface without damaging underlying material or adding potentially hazardous chemicals to the cleaning process. A UHP waterjet system is an environmentally-friendly answer to many difficult cleaning applications and can often be justified solely on the basis of hazardous material containment or reduction of secondary operations in the cleaning process.

The advantages of waterjet technology listed above have positioned us in the market as a leading alternative to traditional cutting and cleaning methods.

We compete with other waterjet cutting and cleaning equipment manufacturers in the United States, Europe and Asia. Our robotics technology provides a competitive advantage as the only total solution supplier of complete waterjet cutting and cleaning systems. Although independent market information is not generally available, based upon data assembled from internal and external sources, we believe we are the largest manufacturer of UHP waterjet cutting systems in the world.

Competition—Avure Technologies

Pasteurization is the primary method used to help ensure that fresh food is safe to eat. Avure’s Fresher Under Pressure represents a break-through technology which destroys harmful pathogens increasing shelf life while ensuring a safe, healthy product. There are other companies trying to develop a similar UHP processing technology. To date, these companies have had little commercial success, and we believe our patents and know- how make us the world leader in this technology. Currently our equipment is the only equipment being used in any significant commercial applications. There are also other technologies being developed for food safety, including irradiation and ultra-violet light. Of the alternative technologies, irradiation is the most developed. The primary target market for irradiation is the raw meat industry, while Avure is targeting the ready-to-eat meat market, i.e., sliced deli meats, etc., as well as the premium food market, such as fresh fruits and vegetables.

Our General Presses represent a niche segment of the industrial press market that use UHP technology for specialized applications, primarily to produce high strength and precision or low volume parts. We compete in this market against forging and casting methods of production which currently represent a significantly larger market than our technology. However, our press technology is necessary to produce high quality parts with high material density, no internal voids or cracks and beneficial isotropic properties.

Overall, we believe that Flow’s consolidated competitive position is enhanced by:

• Technically advanced, proprietary products that provide excellent reliability, low operating costs, and user-friendly features;

• A strong application-oriented, problem-solving marketing and sales approach;

• An active research and development program that allows us to maintain technological leadership;

• The ability to provide complete turnkey systems;

• A physical presence in key markets, such as in the U.S., Canada, Japan, southeast Asia and Europe;

• Strong OEM customer ties, and

• Efficient production facilities.

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Research and Engineering

We have devoted between 8% and 9% of revenues in research and engineering during each of the three years ended April 30, 2003. Research and engineering expenses were $13.5 million, $14.9 million, and $16.5 million in fiscal 2003, 2002 and 2001, respectively. We will continue a robust research and engineering program to maintain our technological leadership position through development of new products and applications, as well as enhancement of our current product lines.

Employees

As of April 30, 2003, we employed 835 full time and 18 part time personnel. We are not a party to any material collective bargaining agreements.

Foreign and Domestic Operations

See Note 18 of Notes to Consolidated Financial Statements for information regarding foreign and domestic operations.

Available Information

Our Internet website address is www.flowcorp.com. We make available at this address, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Information available on our website is not incorporated by reference in and is not deemed a part of this Form 10-K.

Item 2.    Properties

Our headquarters and primary manufacturing facilities are located in two leased facilities in Kent, Washington. We also manufacture product in Wixom, Michigan; Jeffersonville, Indiana; Columbus, Ohio; Bretten, Germany; Burlington, Canada; Hsinchu, Taiwan and Västerås, Sweden. We sell products through all of these locations, in addition to sales offices located in Lafayette, Louisiana; Birmingham, England; Milan, Italy; Madrid, Spain; Lyon, France; Yokohama, Nagoya and Tokyo, Japan; Shanghai and Beijing, China; Incheon, Korea; Sao Paulo, Brazil; Buenos Aires, Argentina and Windsor, Canada.

All of our facilities are leased with the exception of our manufacturing facility in Jeffersonville, Indiana.

We believe that our facilities are suitable for our current operations and any increase in production in the near term will not require additional space.

Effective January 1, 2003, we negotiated a new 10-year lease with the owner for our existing Kent manufacturing facility. The new lease provides a monthly cost reduction in lease expense of approximately $30,000 with an early termination option at the end of five years.

Item 3.    Legal Proceedings

We are party to various legal actions incident to the normal operation of our business, none of which is believed to be material to our financial position, results of operations and cash flows. See Notes 1 and 14 of Notes to Consolidated Financial Statements for a description of our product liability claims and product liability insurance coverage.

Item 4.    Submission of Matters to a Vote of Security Holders

None

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PART II

Item 5.    Market for the Registrant’s Common Stock and Related Stockholder Matters.

See page 10

Item 6.    Selected Financial Data.

See page 10

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

See pages 11 through 27

Item 7a.    Quantitative and Qualitative Disclosures About Market Risk.

See page 27

Item 8.    Financial Statements and Supplementary Data.

See pages 28 through 57

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

The following information relates solely to Flow International Corporation Voluntary Pension and Salary Deferral Plan (the “Pension and Salary Deferral Plan”). On June 6, 2003, the Audit Committee of Flow International Corporation approved the appointment of BDO Seidman LLP to serve as the Pension and Salary Deferral Plan’s independent public accountants for the fiscal year ended December 31, 2002, and dismissed PricewaterhouseCoopers LLP as the Pension and Salary Deferral Plan’s independent public accountants. On July 2, 2003, a Form 8-K was filed disclosing such change. Contained within such 8-K was a letter from PricewaterhouseCoopers LLP agreeing with the disclosure contained therein.

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Item 5.    Market for the Registrant’s Common Stock and Related Stockholder Matters

The principal market for Flow’s common stock is the over-the-counter market. Our stock is traded on the NASDAQ National Market under the symbol “FLOW”. The range of high and low sales prices for our common stock for the last two fiscal years is set forth in the following table.

	Fiscal Year 2003				Fiscal Year 2002
	High		Low		High		Low
First Quarter	$	10.90	$	5.05	$	13.91	$	9.55
Second Quarter		5.60		2.12		13.79		8.55
Third Quarter		3.80		2.13		12.90		9.09
Fourth Quarter		3.28		1.08		11.23		9.25

There were 995 shareholders of record as of July 15, 2003.

We have not paid dividends to common shareholders in the past. Our Board of Directors intends to retain future earnings, if any, to finance development and expansion of our business and reduce debt and does not expect to declare dividends to common shareholders in the near future.

The following table presents the number of stock options and warrants that were and were not approved by our shareholders as of April 30, 2003.

Plan category	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights	(b) Weighted-average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by shareholders	2,049,636	$	9.87	1,280,039
Equity compensation plans not approved by shareholders	—		—	—
Total	2,049,636	$	9.87	1,280,039

Item 6.    Selected Financial Data

(In thousands, except per share amounts)	Year Ended April 30,
	2003			2002			2001		2000		1999
Income Statement Data:
Revenue	$	144,115		$	176,890		$	204,854	$	193,638	$	147,648
(Loss) Income Before Cumulative Effect of Change in Accounting Principle and Discontinued Operations		(69,489	)		(6,387	)		4,917		4,653		6,893
Net (Loss) Income		(70,012	)		(5,996	)		2,509		4,656		6,722
Basic (Loss) Earnings Per Share Before Change in Accounting Principle and Discontinued Operations		(4.53	)		(0.42	)		0.33		0.32		0.47
Basic (Loss) Earnings Per Share		(4.56	)		(0.39	)		0.17		0.32		0.46
Diluted (Loss) Earnings Per Share Before Change in Accounting Principle and Discontinued Operations		(4.53	)		(0.42	)		0.32		0.32		0.46
Diluted (Loss) Earnings Per Share		(4.56	)		(0.39	)		0.17		0.31		0.45

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(In thousands)	As of April 30,
	2003		2002		2001		2000		1999
Balance Sheet Data:
Working Capital	$	49,226	$	84,532	$	91,750	$	87,552	$	79,993
Total Assets		146,264		206,476		206,944		194,639		179,152
Short-Term Debt		4,633		5,237		8,464		9,216		4,604
Long-Term Obligations		83,775		81,625		85,652		70,397		64,614
Shareholders’ Equity		5,459		70,684		66,390		64,975		64,022

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Risk Factors and Uncertainties

Our business has been adversely affected by our overall financial position.    Following our announcement of our loss for the third quarter and continued losses for the fourth quarter of fiscal 2003, we experienced some reluctance from certain customers to buy from us. We believe that this may be indicative of fears by customers that we will become unreliable in supplying our products or that our brand image will be harmed. If our customers lose confidence in our ability to supply quality products reliably, our business may be materially harmed. In addition, the willingness of suppliers to do business with us or changes in our trade terms with suppliers could negatively impact future margins and costs.

We had a substantial loss in fiscal 2002 and fiscal 2003 and may continue to incur losses in future periods.    Our net loss for the fiscal year ended April 30, 2002 and 2003 was $6.0 million and $70.0 million, respectively. As described in this section and the notes to the financial statements, we have begun to significantly restructure our operations. We believe these restructuring and cost-cutting initiatives will reduce overall spending. If our restructuring efforts fail to adequately reduce costs, or if our sales are less than we project, we may continue to incur losses in future periods. Continued economic weakness in our served markets may adversely affect our ability to meet our sales projections.

We may default on our loan covenants.    We are operating under a new credit agreement with our senior lenders and an amended note agreement with our subordinated lender. The agreement with our senior lenders expires August 1, 2004 and sets forth specific financial covenants and debt commitment levels to be attained on a quarterly basis. Our subordinated lender has amended the subordinated note agreement to mirror the covenants agreed to by the senior lenders. In the event of default, the senior and subordinated lenders (together, the “Lenders”) may limit our access to borrow funds as needed. Our ability to continue operating is dependent on the Lenders’ willingness to grant access to funds (so long as we are in compliance with our existing loan covenants). If we are unable to obtain 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 is unlikely, especially in the short term. We may be unable to achieve our projected operating results and maintain compliance with the loan covenants which would trigger an event of default with our Lenders. In an event of default, the Lenders would be in the position 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 Lenders and we would be subject to the authority of our Lenders as provided in the new credit agreement and also in the amended subordinated 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.

We may be unsuccessful in the implementation of our restructuring plan.    Our comprehensive two-year restructuring plan includes reductions in headcount, consolidation of facilities and operations, and closure or divestiture of selected operations. The plan affects roughly half of our locations and reduces the total square footage occupied by nearly half. We anticipate that headcount will be reduced by more than a quarter. We have begun consolidating the production of our shapecutting products from our European facilities to our North

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American facilities and standardizing shapecutting products between the European, North American and Asian markets. As with any restructuring, there are numerous risks that could affect the success of the restructuring, including those mentioned below.

During the period that we are restructuring and perhaps for a period thereafter, we will be subject to risks that companies are exposed to during periods of restructuring. These risks result from the uncertainties, workforce reductions, facility closings, divestitures of operations, and rapid changes that accompany restructurings. As a result, one or more of the following adverse consequences could occur to at least some degree: the hiring and/or retaining of employees may be more difficult; customer and vendor relationships may be damaged; there may be disruptions in the delivery and servicing of product; there may be manufacturing cost overruns; and competitors may try to attract customers by suggesting that we may not be able to successfully restructure.

We may be unable to retain and attract key management positions.    Given our current financial position and substantial losses, we may lose key management personnel and encounter difficulties replacing these positions. We may have to incur greater costs to attract replacement personnel.

We may be unable to satisfy our subordinated obligations through operations.    Our subordinated notes mature in two installments of $17.5 million each on April 30, 2007 and 2008. Our subordinated lender has also agreed to capitalize the semi-annual interest remittances due through April 30, 2004, which total $6.9 million. This unpaid interest accrues interest at the rate of 15% and will increase the obligation to the subordinated lender. In order to satisfy these obligations, we may be required to enter into transactions which could be highly dilutive to current shareholders.

Current Events

On January 3, 2003, Stephen R. Light assumed the role of President and CEO. Upon commencement of his employment, Mr. Light faced several challenges, including the following:

• Our debt levels were very high and not supportable and we were in default of our financial loan covenants with both our Lenders. In addition, our senior credit facility was expiring in September 2003.

• We had a market leadership position in our core ultrahigh-pressure cutting business, but the machine tool industry was in recession, and most economic forecasts anticipated it would be several quarters before business levels would show signs of recovery.

• The Avure business segment was losing money, as the General Press business was experiencing a cyclical decline in revenue and the food processing business, while making progress in proving the commercial viability of its products, continued to require further investment to generate sufficient sales volume to become profitable.

• We had more than twenty locations throughout the world, burdening us with significant overhead and diminishing our management’s focus and direction.

These factors prompted Mr. Light to meet with our Lenders to discuss strategic alternatives directed toward reducing the current debt levels and improving our operating results. Mr. Light, using the knowledge and previous efforts of his executive team, then developed a comprehensive plan aimed at improving cash flow and profitability by redefining and refocusing our strategy. This plan is comprised of three primary objectives: a) obtaining support from our Lenders to ensure continued borrowing capability, b) conducting a comprehensive financial review of our assets and obligations and c) restructuring to reduce structural expenses and resolve current operational issues within the core business.

Lender Update.    Effective April 30, 2003, we entered into a new credit agreement with our senior lenders which was signed on July 28, 2003. This senior credit facility expires August 1, 2004 and bears interest at the bank’s prime rate in effect from time to time plus 4% (currently 8.25%). The agreement sets forth specific

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financial covenants and debt commitment levels to be attained on a quarterly basis. The covenants and commitment levels are based on our management’s forecast of fiscal 2004 and the first quarter of fiscal 2005 operating results and cash flows.

On July 28, 2003, our subordinated lender has amended the subordinated note agreement, effective April 30, 2003, to mirror those covenants agreed to by the senior lenders and has agreed to capitalize required semi-annual interest payments, beginning with April 30, 2003, until April 30, 2004 which total $6.9 million. Any unpaid interest accrues further charges at the rate of 15%.

Comprehensive Financial Review.    Beginning with the third quarter of fiscal 2003, we revised our approach to receivable collection, inventory reduction and investigated other cash-generating initiatives in response to the continued declined in the economy and our highly leveraged position. We reviewed the carrying values of those assets that we expected to convert to cash in the short-term, as well as long-lived tangible and intangible assets and adjusted the carrying value of such assets to reflect their estimated current net realizable value. In addition, we conducted a review of potential liabilities. The total adjustments for the year ended April 30, 2003 are included in the Consolidated Statement of Operations. These adjustments, which are summarized below, were highly influenced by the economic environment our customers and we are facing.

• We increased our allowance for doubtful accounts by $4.1 million. This increase is based on extensive collection efforts and the results of a worldwide receivable-by-receivable review, including evaluation of the impact of current economic conditions, which have restricted customers’ ability to pay their account balances. We expect that we will negotiate discounts or assign accounts to collection agencies to accelerate cash collections.

• We evaluated our ability to convert inventories, including evaluation and demonstration units, into cash in the short term by their sale or disposition. This evaluation led to a total adjustment of $5.4 million to arrive at the estimated net realizable value of our inventories.

• We conducted a detailed review of the carrying value of our goodwill. Statement of Financial Accounting Standard No. 142 (“FAS 142”), “Goodwill and Other Intangible Assets”, requires a company to perform impairment testing when certain “triggering” events affecting a business unit have occurred. The triggering events were the expectation of sale or full or partial disposal of certain of our divisions, the continuing deterioration of the economic climate, and our operating losses. Our review resulted in impairment charges of $7.1 million during the third quarter of fiscal 2003. The impairment resulted primarily from continued weakness in the automotive industry, as well as poor performance at our European operations. Our required annual FAS 142 review as of April 30, 2003 led to no further impairment charges.

• Although our former CEO remains obligated to perform consulting services though May 2005, the remaining term of his consulting contract, we have determined that no significant future services are likely to be required of him. Therefore we accrued and charged to operations all remaining contractual fees and related benefits aggregating approximately $1.1 million.

• During the year, we sold $9.7 million of long-term notes receivable for $8.6 million. This discount of $1.1 million plus an additional accrual of $0.1 million on potential future notes available for sale are recorded in Other Expense, net.

• We have accrued an additional $1.5 million for potential losses related to several recourse/repurchase obligations on European sales. We have from time to time entered into recourse obligations with third party leasing companies. In response to continued concerns about the financial health of several customers, as well as a recent bankruptcy, we have revised our estimate of potential future exposure. Included in the $1.5 million accrual is $760,000 for the estimated loss on the repurchase and subsequent sale of a flex form press system, where we have a recourse obligation for a bankrupt customer. We

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guaranteed the customer’s obligation on this transaction and are taking possession of the unit for future resale. Subsequent to April 30, 2003, we have signed a contract to sell the system which is scheduled to be delivered in May 2004, following refurbishment.

• We had deferred $0.8 million in professional fees associated with previous ongoing strategic transactions, consisting of a planned equity offering and spin-off of Avure. We have abandoned these plans and accordingly expensed all of these fees in connection with the recent hiring of The Food Partners, LLC (“Food Partners”) to assist us in conducting a strategic analysis of Avure.

• We reversed percentage of completion revenue previously recognized on three food systems (one customer) based on the customer’s failure to fulfill its obligations under the contract terms. The total revenue reversed in the third quarter was $4.3 million with an associated gross margin of $2.3 million. We received new orders for which we plan to deliver already-completed systems from inventory. Accordingly, these specific contracts do not qualify for percentage of completion accounting and the corresponding revenue will be recognized upon delivery and acceptance in a later period.

• We assessed our ability to realize our net deferred tax assets. Recognizing the magnitude of the losses generated during the fiscal year, we determined it appropriate to establish a valuation allowance for our net deferred tax assets, with the exception of our Swedish operations, amounting to $5.3 million as well discontinuing, in the near term, any future recognition of deferred tax assets resulting from losses.

• Based upon our proposed strategy to downsize and streamline our operations and convert non-core or excess assets to cash, we adjusted various other asset values and reserves to appropriately reflect their net realizable value on a prospective basis, in accordance with Statement of Financial Accounting Standard No. 144 (“FAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”. These adjustments totaled $9.1 million for the year ended April 30, 2003.

Restructuring.    On February 19, 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. We expect to invest cash of between $11 million and $13 million in the restructuring program, which will affect roughly half of our locations and will reduce the total square footage occupied by nearly half. We anticipate that headcount will be reduced by more than one quarter. We have begun consolidating the production of our shapecutting systems from our European facilities to our North American facilities and standardizing shapecutting systems between the European, North American and Asian markets. We believe that these actions will achieve significant cost savings. We anticipate being able to fund the restructuring program within our new credit facility, as well as our foreign notes payable. In addition, we expect to incur significant non-cash expenses associated with the implementation of the restructuring program. Under current accounting rules, the associated restructuring expenses will generally be recognized in the period they are incurred. To date, we have incurred cash expenses of nearly $1.0 million.

At April 30, 2003, we were considering alternative strategies for the Avure segment. As of that date, we were unsure of the ultimate disposition for Avure, but had been considering a wide range of alternatives including continuation of operations in the present form, operations on a diminished scale, suspension of operations, shutdown, or divestiture. Subsequent to year-end, we received several offers from potential buyers, however no binding offer has been accepted as of the filing date of this Form 10-K.

If a sale were consummated, we would recognize a loss on unrealized foreign currency translation adjustments included in Accumulated Other Comprehensive Income on the Consolidated Balance Sheet. The debit balance of the Avure unrealized foreign currency translation adjustments at April 30, 2003 was $4.5 million. The ultimate loss on disposal would be determined at the time of sale and would be based on the then carrying value of Avure, as well as the amount of unrealized foreign currency translation adjustments.

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Operational Data as a Percentage of Sales

	Year Ended April 30,
	2003		2002		2001
Revenue	100	%	100	%	100	%
Cost of Sales	75	%	61	%	59	%
Gross Margin	25	%	39	%	41	%
Expenses:
Marketing	25	%	18	%	16	%
Research & Engineering	9	%	8	%	8	%
General & Administrative	16	%	10	%	10	%
Impairment Charges	8	%	2	%	—	%
	58	%	38	%	34	%
Operating (Loss) Income	(33	)%	1	%	7	%
Interest Expense, net	8	%	5	%	4	%
Other Expense, net	3	%	1	%	—	%
(Loss) Income Before (Provision) Benefit for Income Taxes	(44	)%	(5	)%	3	%
(Provision) Benefit for Income Taxes	(5	)%	2	%	(1	)%
(Loss) Income Before Cumulative Effect of Change in Accounting Principle and Discontinued Operations	(49	)%	(3	)%	2	%
Cumulative Effect of Change in Accounting Principle, Net of Tax	—	%	—	%	(1	)%
Discontinued Operations, Net of Tax	—	%	—	%	—	%
Net (Loss) Income	(49	)%	(3	)%	1	%

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Segment Overview:

Dollars in thouands	Year ended April 30, 2003									Year ended April 30, 2002									Year ended April 30, 2001
	Flow Waterjet Systems			Avure Technologies			Consolidated			Flow Waterjet Systems			Avure Technologies			Consolidated			Flow Waterjet Systems			Avure Technologies			Consolidated
Revenues	$	121,833		$	22,282		$	144,115		$	127,763		$	49,127		$	176,890		$	160,039		$	44,815		$	204,854
Cost of Sales		88,259			19,815			108,074			79,029			28,790			107,819			97,973			23,405			121,378
Gross Margin		33,574			2,467			36,041			48,734			20,337			69,071			62,066			21,410			83,476
Operating Expenses		60,407			22,291			82,698			49,331			18,318			67,649			52,311			16,475			68,786
Operating (Loss) Income		(26,833	)		(19,824	)		(46,657	)		(597	)		2,019			1,422			9,755			4,935			14,690
Interest Expense, Net		(5,405	)		(5,914	)		(11,319	)		(5,262	)		(3,561	)		(8,823	)		(3,773	)		(3,275	)		(7,048	)
Other (Expense) Income, Net		(1,262	)		(3,071	)		(4,333	)		(1,869	)		(407	)		(2,276	)		185			(800	)		(615	)
(Loss) Income Before Provision for Income Taxes		(33,500	)		(28,809	)		(62,309	)		(7,728	)		(1,949	)		(9,677	)		6,167			860			7,027
(Provision) Benefit for Income Taxes		(8,375	)		1,195			(7,180	)		2,627			663			3,290			(1,851	)		(259	)		(2,110	)
(Loss) Income Before Cumulative Effect of Change in Accounting Principle and Discontinued Operations		(41,875	)		(27,614	)		(69,489	)		(5,101	)		(1,286	)		(6,387	)		4,316			601			4,917
Cumulative Effect of Change in Accounting Principle, Net of Tax		—			—			—			—			—			—			(2,652	)		—			(2,652	)
Discontinued Operations, Net of Tax		(523	)		—			(523	)		391			—			391			244			—			244
Net (Loss) Income	$	(42,398	)	$	(27,614	)	$	(70,012	)	$	(4,710	)	$	(1,286	)	$	(5,996	)	$	1,908		$	601		$	2,509
Diluted Loss Per Share	$	(2.76	)	$	(1.80	)	$	(4.56	)	$	(0.31	)	$	(0.08	)	$	(0.39	)	$	0.13		$	0.04		$	0.17

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Revenue Summary:

Dollars in thousands	Year ended April 30,						Year ended April 30,
	2003		2002		% Change		2002		2001		% Change
Segment breakdown:
Flow Waterjet Systems:
Systems	$	76,346	$	88,995	(14	)%	$	88,995	$	113,266	(21	)%
Consumable parts and services		45,487		38,768	17	%		38,768		46,773	(17	)%
Total		121,833		127,763	(5	)%		127,763		160,039	(20	)%
Avure Technologies:
Fresher Under Pressure		4,851		11,917	(59	)%		11,917		14,675	(19	)%
General Press		17,431		37,210	(53	)%		37,210		30,140	23	%
Total		22,282		49,127	(55	)%		49,127		44,815	10	%
	$	144,115	$	176,890	(19	)%	$	176,890	$	204,854	(14	)%
Geographic breakdown:
United States	$	79,450	$	95,853	(17	)%	$	95,853	$	128,340	(25	)%
Rest of Americas		15,673		13,364	17	%		13,364		14,580	(8	)%
Europe		31,326		52,757	(41	)%		52,757		43,346	22	%
Asia		17,666		14,916	18	%		14,916		18,588	(20	)%
	$	144,115	$	176,890	(19	)%	$	176,890	$	204,854	(14	)%

Results of Operations

We provide ultrahigh-pressure (“UHP”) systems and related products and services to a wide variety of industries. Waterjet cutting is recognized as a better alternative to traditional cutting methods such as lasers, saws or plasma. It is faster, has greater versatility in the types of products it can cut and eliminates the need for secondary processing operations. Based upon a change in reporting structure at the beginning of fiscal 2003, we have redefined our two reportable segments, Flow Waterjet Systems (“Waterjet Systems”) and Avure Technologies (“Avure”), replacing the two previous reportable segments of UHP Systems and Fresher Under Pressure.

Fiscal 2003 Compared to Fiscal 2002

Revenues

Flow Waterjet Systems.    The Waterjet Systems segment includes cutting and cleaning operations, which are focused on providing total solutions for the aerospace, automotive, job shop, surface preparation (cleaning) and paper industries. As a result of continued weakness in the machine tool market for the year ended April 30, 2003, Waterjet Systems revenue decreased 5% to $121.8 million from $127.8 million in the prior year. Domestically, we recorded a $3.3 million or 6% revenue decrease over the prior year period, as compared to the domestic machine cutting tool market, which recorded a year over year decline of 19%, according to the Association for Manufacturing Technology. Our shapecutting equipment business continues to outperform the broader domestic market which demonstrates the ongoing application expansion that Flow waterjets are experiencing resulting from their flexibility and superior machine performance. This decrease in domestic revenues was further exacerbated by weak demand in the domestic automotive and aerospace sectors which was offset slightly by an expansion of our cutting cell applications to non-automotive customers. For the year ended April 30, 2003, domestic Waterjet Systems revenues were $63.2 million, down 7% from $68.0 million for the prior year.

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Outside the United States, Waterjet Systems revenue growth was positively influenced by Asia, whose revenues were up 18% for the year ended April 30, 2003 to $17.7 million, compared to $14.9 million in the prior year. These increases were driven largely by sales into China. Additionally, in Korea, changes in lending policies have provided capital to small and mid-sized businesses—FLOW’s traditional customers. We typically sell our products at higher prices outside the United States due to the costs of servicing these markets. Our European operations have been negatively impacted over the past several months by the continued slowing of the overall economy and weakening customer financial stability. These marketplace conditions have resulted in a significant decrease in Waterjet Systems’ revenues in Europe as compared to the prior fiscal year posting a decrease of $4.9 million or 20% to $20.1 million compared to $25.0 million in 2002. In an effort to offset any additional future impact, we have put in place a new general manager, changed our pricing structure and accelerated payment terms.

Waterjet Systems are further comprised of System sales and Consumable Parts and Services sales. Systems are generally comprised of a pump along with the robotics or articulation used to move the cutting or cleaning head. Systems are further broken down between standard cutting systems, standard automotive systems, and special or custom designed systems used primarily in the aerospace and automotive markets. Consumables represent parts used by the pump and cutting head during operation. Systems revenues for the year ended April 30, 2003 were $76.3 million, a decrease of $12.6 million or 14%, compared to the prior fiscal year due to the impact of revenue decreases in the US and Europe. Consumables revenues, on the other hand, recorded a 17% or $6.7 million improvement to $45.5 million for the year ended April 30, 2003, compared to the prior year consumable revenue of $38.8 million. This is due to increased machine utilization by our customers which has led to higher parts consumption. Consumables revenue has also been positively impacted by the introduction of proprietary productivity enhancing kits and improved parts availability.

Avure Technologies Revenues.    Avure includes the Fresher Under Pressure technology as well as General Press operations. Fresher Under Pressure is focused on providing food safety solutions for food producers, while the General Press business manufactures systems which produce and strengthen advanced materials for the aerospace, automotive and medical industries. As expected, a portion of the decrease in Avure’s revenues resulted from reduced General Press revenues. For the year ended April 30, 2003, General Press revenues were down 53% from $37.2 million for the prior year to $17.4 million. The majority of this revenue decrease occurred in Europe and accordingly net consolidated revenues in Europe are down over the prior year. General Press revenues will vary from year to year due to the nature of their sales and production cycle. The sales cycle on one of our general presses can range from one to four years, including a manufacturing period of six to 18 months.

For the year ended April 30, 2003, revenues for Fresher Under Pressure were $4.9 million, representing a $7.1 million, or 59% decline, compared to the prior year’s revenue of $11.9 million. A portion of this decrease can be attributed to the $4.3 million reversal of percentage of completion revenue previously recognized on three food systems (one customer) based on the customer’s failure to fulfill its obligations under the contract terms. In addition, we received some orders for which we plan to deliver already-completed systems. Accordingly, these specific orders do not qualify for percentage of completion accounting and the corresponding revenue will be recognized upon delivery and acceptance in a later period. Our Fresher Under Pressure technology exposes foods to pressures from 50,000 to over 100,000 psi for a short time, reducing food-borne pathogens such as Camplyobacter, E. coli, Listeria monocytogenes, salmonella and Vibro vulnificus. While conventional thermal and chemical preservation methods can ensure safety and longevity, they have a negative impact on fresh foods’ sensory qualities such as nutrition, flavor, color and texture. Avure’s technology uses UHP to destroy bacteria and other microorganisms without using high temperatures or chemical additives with minimal effects on the nutrition, taste, texture, or color of food, while simultaneously extending shelf life.

Cost of Sales and Gross Margins.    Gross margin for the year ended April 30, 2003 amounted to $36.0 million or 25% of revenues as compared to gross margin of $69.1 million or 39% of revenues in the prior year.

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Fiscal 2003 gross margin was significantly impacted by a number of adjustments posted during our third quarter. Generally, comparison of gross margin rates will vary year to year depending on the mix of sales, which includes special system, standard system and consumables sales. Gross margin rates on our systems sales are typically less than 45% as opposed to consumables sales which are in excess of 50%. On average, standard systems carry higher margins than the custom engineered systems, which include General Presses. Waterjet Systems margins represented $33.6 million of the overall margin or 28% of Waterjet Systems revenues, while Avure margins amounted to $2.5 million or 11% of Avure revenues. Both of our business segments experienced decreased margins resulting in part from adjustments made to the carrying value of inventories to net realizable value, amounting to $6.4 million in both segments or 4% of revenues. Waterjet Systems gross margin was further depressed by weak sales in the automotive and aerospace business which resulted in underabsorption of overhead costs. In addition, the weakened European economy has led to a change in estimate on several revenue projects in which we had a financial obligation to a third party. Gross margins were negatively impacted by $1.0 million due to increased revenue reserves based on this change in estimate. Additionally, the decrease in Avure gross margins dollars resulted from the revenue reversal of three units due to the customer’s failure to fulfill contractual obligations as well as an accrual for the anticipated loss of a general press unit on which the customer defaulted. These adjustments amounted to $3.7 million or 3% of total revenues.

Marketing Expenses.    Marketing expenses increased $4.8 million or 15% to $36.2 million for the year ended April 30, 2003, as compared to the prior year marketing expenses of $31.4 million. The increase stems primarily from an increase in the allowance for doubtful accounts recorded during the year as a result of our assessment of the financial conditions of our individual customers and general marketplace conditions. The remainder of the increase is attributable to the completion of the investment in the marketing organization and infrastructure of Avure, which now has a complete sales team, and the cost of participation by Flow Waterjet Systems at the bi-annual IMTS tradeshow. Expressed as a percentage of revenue, marketing expenses were 25% and 18% for the years ended April 30, 2003 and 2002, respectively.

Research and Engineering Expenses.    Research and engineering expenses decreased $1.4 million or 9% to $13.5 million for the year ended April 30, 2003, as compared to the prior year’s research and engineering expenses of $14.9 million. This reduction is due to our focused global realignment of resources and overall cost cutting efforts. Expressed as a percentage of revenue, research and engineering expenses were 9% and 8% for the years ended April 30, 2003 and 2002, respectively.

General and Administrative Expenses.    General and administrative expenses increased $5.1 million or 30% to $22.2 million for the year ended April 30, 2003, as compared to the prior year’s general and administrative expenses of $17.1 million. These increases stemmed in part from the accrual of our former CEO’s severance, the write-off of previously deferred professional fees and recruitment and other expenses associated with the hiring of Stephen Light as the new President and CEO. Additionally, a portion of the increases was due to Avure’s executive management team being in place for the full year, and only part of the prior year, as well as additional costs associated with bank amendments. Expressed as a percentage of revenue, general and administrative expenses were 16% and 10% for the years ended April 30, 2003 and 2002, respectively.

Impairment Charges.    At January 31, 2003, we conducted a selected review of the carrying value of our goodwill. Statement of Financial Accounting Standard No. 142 (“FAS 142”), “Goodwill and Other Intangible Assets”, requires a company to perform impairment testing when certain “triggering” events affecting a business unit have taken place. The triggering events were the expectation of a sale or full or partial disposal of certain of our divisions and the continuing deterioration of the economic climate. Our review resulted in impairment charges of $7.1 million during the quarter ended January 31, 2003. The impairment resulted primarily from continued weakness in the automotive industry, as well as weakness in our European operations. With the assistance of a third party valuation firm, we prepared an analysis of the fair value of the Company’s reporting units for our required FAS 142 annual assessment. This assessment, performed as of April 30, 2003, revealed no further impairment. At April 30, 2003, we also conducted an impairment review of our long-lived assets in

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accordance with Statement of Financial Accounting Standard No. 144 (“FAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”. This review led to a $3.7 million impairment charge related primarily to the carrying value of the depreciable assets of Avure.

Operating Loss.    We recorded an operating loss of $46.7 million for the year ended April 30, 2003, as compared to operating income of $1.4 million in the prior year.

Interest and Other Expense, Net.    Fiscal 2003 net interest expense increased $2.5 million or 28% to $11.3 million compared to the prior year of $8.8 million due to a higher weighted average cost of capital and a higher average debt level throughout the first 10 months of the fiscal year. Included in Other Expense, net are realized foreign exchange transaction gains and losses as well as a $1.2 million accrual related to a discount agreed to as part of the sale of a substantial portion of our long term notes receivable to a financial institution. We retain no contingent liabilities associated with this sale.

Income Taxes.    During fiscal 2003, we assessed our ability to realize our net deferred tax assets. Recognizing the magnitude of the losses generated during the year, we determined it appropriate to establish a valuation allowance to reduce all previously recognized net deferred tax assets to a level offset by deferred tax liabilities, with the exception of our Swedish operation. The valuation allowance of $5.3 million, recorded during the third fiscal quarter, on net deferred tax assets generated in prior periods, is included in the Provision for Income Taxes in the Consolidated Statement of Operations and shown as a reduction of both Current and Long-Term Deferred Income Taxes on the Consolidated Balance Sheet. Further, we did not recognize deferred tax assets associated with any losses generated in the fourth quarter, with the exception of the Swedish operations. The United States net operating losses can be carried forward 20 years to offset United States profits in future periods.

Discontinued Operations, Net of Tax.    As of April 30, 2003, we held one of our service subsidiaries for sale and have consequently shown its results of operations under discontinued operations for all periods presented. The sale of this subsidiary was consummated May 16, 2003 and resulted in cash proceeds of $1.8 million and a gain of approximately $300,000.

The weighted average number of shares outstanding used for the calculation of basic and diluted (loss) earnings per share is 15,348,000 for fiscal 2003 and 15,234,000 for fiscal 2002.

Net Loss.    Our consolidated net loss for fiscal 2003 amounted to $70.0 million, or $4.56 basic and diluted loss per share as compared to a net loss of $6.0 million, or $0.39 basic and diluted loss per share in the prior year. Waterjet Systems reported a net loss of $42.4 million or $2.76 basic and diluted loss per share versus net loss of $4.7 million or $0.31 basic and diluted loss per share in the comparable prior year. We have used internally developed estimates to determine the allocation of costs from the consolidated operations to Avure’s results of operations. Based on these estimates, the net loss for Avure was $27.6 million or $1.80 basic and diluted loss per share for fiscal 2003 compared to a net loss of $1.3 million or $0.08 basic and diluted loss per share in the prior year.

Fiscal 2002 Compared to Fiscal 2001

Revenues

Our revenues are segregated according to our currently identified segments, Waterjet Systems and Avure, which were redefined effective in fiscal 2003. As such, prior year results have been recast to afford comparability.

Our total revenues for the year ended April 30, 2002 were $176.9 million, a decrease of $28.0 million (14%) over the prior year period. Flow Waterjet Systems revenues decreased $32.3 million (20%), due to a 25% decline in domestic revenues, impacted by the tightening economy which was further exacerbated by the events of

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September 11, 2001. This decline was offset in part by a $4.3 million (10%) growth in Avure sales. Within Avure, General Press revenues increased $7.1 million (23%) to $37.2 million in fiscal 2002. Fiscal 2002 domestic Waterjet Systems sales decreased 21% as compared to the overall United States machine cutting tool market which declined 34% for the year ended March 31, 2002, according to The Association for Manufacturing Technology (“AMT”). Consistent with historical performance, waterjet technology continues to gain market share due to its advantages over traditional cutting technologies, even in a down market. These advantages, as well as continued product development, should allow us to continue to gain market share; however, growth will be affected by the performance of the broader machine tool market.

Systems sales for Waterjet Systems in fiscal 2002 were $89.0 million, a decrease of $24.3 million (21%) over the prior year resulting from the soft economic conditions which have slowed capital spending decisions. Consumable parts and services revenues decreased $8.0 million (17%) to $38.8 million in fiscal 2002. The slowdown in the consumable sales growth reflects a decrease of machine utilization in the worldwide machine tool market, as well as success of our goal of providing lower operating costs through longer life parts.

Fiscal 2002 Avure revenues of $49.1 million included $11.9 million related to food technology or “Fresher Under Pressure”, a 19% decrease from the fiscal 2001 total of $14.7 million. This decline from fiscal 2001 revenues is the result of a reorganization of the business, including a comprehensive product evaluation and a program to focus on specific markets within the food industry, as well as from purchasing decisions being placed on hold after the events of September 11, 2001.

Consolidated European revenues of $52.8 million increased $9.4 million (22%) compared to the prior year and represented 30% of fiscal 2002 consolidated revenue. This increase was spurred by a growth in General Press sales of $15.0 million offset by declining revenues in European shapecutting sales of $7.0 million resulting from the economic softness in the European market. Sales in the remainder of the world, primarily Asia, Canada, Mexico and South America, decreased 15% to $28.3 million, the result of weak global economic conditions.

Gross Profit.    Gross profit for the year ended April 30, 2002 decreased $14.4 million (17%) as compared to the prior fiscal year. Gross profit expressed as a percentage of revenue was 39% in fiscal 2002 as compared to 41% in fiscal 2001. Systems sales, including Avure, represented 78% of fiscal 2002 revenues, slightly higher than the prior year’s 77%, and consumables sales represented 22% of fiscal 2002 revenues as compared to 23% in the prior year. The slight decrease in current year gross margin was a function of the increase, as a percentage of total revenues, of General Press systems, as compared to standard systems sales.

Operating Expenses.    Operating expenses decreased $1.1 million (2%) as compared to the prior year. Expressed as a percentage of revenues, total operating expenses increased to 38% in fiscal 2002 from 34% in fiscal 2001. Marketing expenses of $31.4 million decreased $1.4 million (4%) as compared to the prior year, but expressed as a percentage of revenues, increased to 18% from 16% in the prior year. The current year expense decrease results from the lower commission expense associated with lower revenue levels as well as lower trade show expenses, having not incurred IMTS trade show expenses in fiscal 2002 as the show is held every other year. Research and engineering expenses in fiscal 2002 decreased $1.6 million (10%) to $14.9 million as compared to the prior year due to a global realignment of resources. As a percentage of revenues, research and engineering expenses were 8% in fiscal 2002 which is comparable to fiscal 2001. General and administrative expenses of $17.1 million decreased $2.4 million (12%) for the year as compared to the prior year. A portion of the decrease stems for worldwide staffing reductions as we continue to realign our resources while the remaining $1.6 million of the decrease stems from the adoption of Statement of Financial Accounting Standards No. 142 (“FAS 142”), “Goodwill and Other Intangible Assets”, in May 2001, which discontinued the amortization of goodwill. Expressed as a percentage of revenues however, general and administrative expenses were 10% for both fiscal years. Another component of FAS 142 requires that we conduct a periodic evaluation of the carrying value of our goodwill balances. From this review, we identified and expensed $4.3 million of asset impairment in our automotive divisions which have been highly impacted from recent economic events. This amount is reflected in the Impairment Charges caption on our Consolidated Statement of Operations.

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Operating Income.    Operating income can vary significantly for domestic and foreign operations, but is primarily the result of product mix variations and volume from year to year. The domestic machine tool market extended its weakness into fiscal 2002 and the U.S. dollar continued to gain strength over the European currencies.

Interest and Other Expense, Net.    Net interest expense of $8.8 million increased $1.8 million (25%) in fiscal 2002 compared to fiscal 2001. The increase in interest expense is due to higher average debt levels associated with the additional financing related to the development of the Fresher Under Pressure program, as well as higher weighted average cost of capital year over year. Average debt outstanding increased $4.3 million (5%) during fiscal 2002 compared to the prior year. This increase in debt was related to funding of the business development of Fresher Under Pressure. During fiscal 2002, other expense, net, totaled $2.3 million compared to other expense, net, of $613,000 in fiscal 2001. This increase is comprised primarily of the write-down of two investments to their market value at April 30, 2002 which amounted to $1.3 million.

Income Taxes.    The fiscal 2002 income tax benefit was computed using a rate of 34% as compared to 30% in the previous year. The current year tax rate is a blended rate of the various tax jurisdictions in which we conduct business. In fiscal 2001, the income tax rate was lower than the statutory rates primarily due to lower foreign tax rates and benefits from the foreign sales corporation. We regularly evaluate the likelihood of utilizing our deferred tax assets and adjust the valuation allowance thereon based on an evaluation of both positive and negative evidence related to these deferred tax assets.

The weighted average number of shares outstanding used for the calculation of Basic and Diluted (loss) earnings per share is 15,234,000 for fiscal 2002 and 14,828,000 and 15,109,000, respectively, for fiscal 2001.

Cumulative Effect of Change in Accounting Principle, net of Tax.    The effect of the adoption of SAB101, Revenue Recognition in Financial Statements, during fiscal 2001 is shown as a cumulative effect of change in accounting principle, net of tax.

Net Loss.    Our consolidated net loss for fiscal 2002 amounted to $6.0 million, or $0.39 basic and diluted loss per share as compared to net income of $2.5 million, or $0.17 basic and diluted earnings per share in the prior year. Waterjet Systems reported a net loss of $4.7 million or $0.31 basic and diluted loss per share versus net income of $1.9 million or $0.13 basic and diluted earnings per share in the prior year. We have used internally developed estimates to determine the allocation of costs from the consolidated operations to Avure’s results of operations. Based on these estimates, the net loss for Avure was $1.3 million or $0.08 basic and diluted loss per share for fiscal 2003 compared to net income of $0.6 million or $0.04 basic and diluted earnings per share in the prior year.

Liquidity and Capital Resources

We generated $8.4 million in cash from operations during fiscal 2003 as compared to $6.9 million in fiscal 2002. We generated cash of $33.9 million as the result of our reduction in operating assets, primarily from the collection of receivables which generated $24.0 million in cash.

Net receivables are comprised of trade accounts and unbilled revenues. At April 30, 2003, our net receivables balance decreased $28.2 million or 45% from the April 30, 2002 level of $62.8 million. In response to the continued weak global economy, we conducted quarterly reviews of our worldwide Trade Receivables to assess collectibility. Based on these reviews, we increased the Allowance for Doubtful Accounts by $4.1 million during the year ended April 30, 2003. We have implemented a strategy to quickly convert receivables to cash and made a concerted effort to collect aged accounts. We have also implemented procedures to prevent accounts from extending beyond their due dates. This has led to a $7.9 million reduction in trade receivables from $39.0 million at April 30, 2002 to $31.1 million at April 30, 2003, a 20% decrease. The majority of the decrease in net

22

receivables stemmed from Unbilled Revenues of $24.7 million at April 30, 2002 compared to $8.5 million at April 30, 2003, a $16.2 million or 66% decrease. This decrease is the result of weak demand for our General Presses. Receivables can be negatively impacted 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. A significant portion of unbilled receivables relates to equipment and systems accounted for on a percentage of completion basis. 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.

In prior years, we had provided long-term financing to our food system customers. During the third quarter of fiscal 2003, in order to accelerate our cash receipts, we sold, without any recourse obligation, $9.7 million of the notes receivable and received $8.6 million in cash. This discount of $1.1 million plus an additional accrual of $0.1 million on potential future notes available for sale are recorded in Other Expense, net, on the Consolidated Statement of Operations for the year ended April 30, 2003.

Inventories at April 30, 2003 decreased $7.3 million or 15% to $40.9 million from the April 30, 2002 level of $48.2 million due to our strategy to convert inventories to cash in the short term by their sale or disposition. Inventory reserve adjustments approximated $2.6 million.

Our future cash commitments include our restructuring plan which currently calls for a cash investment of between $11 million and $13 million over an 18-month period. We anticipate funding these amounts within our existing credit facilities. In addition, in July 2000, we committed $5 million to fund the construction of a new manufacturing facility for our Taiwanese operations. As of April 30, 2003, we have a remaining commitment of $4.0 million, which will be funded over the next six months, through two unsecured lines of credit from Taiwanese banks. We anticipate converting the line of credit to a permanent loan upon completion of the building and are exploring the potential of a sale and leaseback arrangement.

Our credit agreements are our primary source of external funding. On July 28, 2003, we entered into a new credit agreement with our senior lenders, effective April 30, 2003. This new senior credit facility expires August 1, 2004 and bears interest at the bank’s prime rate in effect from time to time plus 4% (8.25% at April 30, 2003). As of April 30, 2003, giving effect to our new agreement with our senior lenders, we are in compliance with all amended covenants. We also amended, as of April 30, 2003, our subordinated note agreement to coincide with the new credit agreement with our senior lenders. Prior to signing these agreements, we were in default of our debt covenants. The subordinated lenders have also capitalized the semi-annual interest remittances due from April 30, 2003 through April 30, 2004, which total $6.9 million. This capitalized interest accrues at the rate of 15%. Since April 30, 2003, each of the above-described agreements has been amended with an effective date of April 30, 2003. Concurrent with the signing of the credit agreement and the note amendment, described above, we paid a total of $2.5 million towards reduction of amounts owing. See Notes 9 and 19 of Notes to Consolidated Financial Statements.

The Company has incurred losses during fiscal 2002 and 2003. 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. We have been able to satisfy our needs 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 April 30, 2003 are adequate to fund our operations through April 30, 2004. If we fail to achieve our planned revenues, costs and working capital objectives, management believes it has the ability to curtail capital expenditures and reduce costs to levels that will be sufficient to enable us to meet our cash requirements and debt covenants through April 30, 2004.

23

However, demand for our products and timing of cost reductions are difficult to project. Our restructuring initiatives may have unanticipated effects on our business.

If we are unable to comply with the amended debt covenants, 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. Alternative sources of financing may not 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.

The following table provides a summary of our contractual obligations as of April 30, 2003, by due date:

	Payments Due by Period
	Less than 1 year		1-3 years		4-5 years		After 5 years		Total
Long-term debt and notes payable	$	4,633	$	56,423	$	35,000	$	—	$	96,056
Operating leases		4,262		7,685		6,143		4,880		22,970
Total contractual cash obligations	$	8,895	$	64,108	$	41,143	$	4,880	$	119,026

Long-term debt obligations, notes payable and lease commitments are expected to be met from working capital provided by operations and, as necessary, by other borrowings.

Our capital spending plans currently provide for outlays of approximately $6.7 million in fiscal 2004, primarily related to our Taiwan facility. It is expected that funds necessary for these expenditures will be generated internally and through available credit facilities.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us 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 our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, refer to Note 1 of Notes to Consolidated Financial Statements.

Revenue Recognition

For standard systems and consumable and services sales, we recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements”. SAB 101 requires that revenue can only be recognized when it is realized or realizable and earned. Revenue generally is realized or realizable and earned when all four of the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criterion (4) is based on our judgments regarding the collectibility of those amounts. Should changes in conditions cause us to determine this criterion is not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

24

For non-standard and long lead time systems, including the Avure segment, we recognize revenues using the percentage of completion method in accordance with Statement of Position 81-1 (“SOP 81-1”), “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” We use the cost to cost method, measuring the costs incurred on a project at a specified date, as compared to the estimated total cost of the project. Percentage of completion requires management to estimate costs to complete. Accordingly, modifications to estimates will impact percentage of completion revenues and associated gross margins. If, however, the time from order to install is less than three months, revenue is recognized under SAB 101. Revenues from equipment on lease are recognized as rental income in the period earned. Shipping revenues and expenses are recorded in revenue and costs of goods sold, respectively.

Product Warranty Reserve

Our products are generally covered by a warranty up to 12 months. We accrue a reserve for estimated warranty costs at the time revenue is recognized. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase resulting in decreased gross profit.

Valuation of Accounts Receivable

We use estimates in determining our allowance for bad debts that are based on our historical collection experience, current trends, credit policy and a percentage of our accounts receivable by aging category. In determining these percentages, we review historical write-offs in our receivables. We have had a low rate of write-offs until the present recession. In determining the appropriate reserve percentages, we also review current trends in the credit quality of our customers, as well as changes in our internal credit policies.

Valuation of Obsolete/Excess Inventory

We currently record a reserve for obsolete or excess inventory for parts and equipment that are no longer used due to design changes to our products or lack of customer demand. We regularly monitor our inventory levels and, if we identify an excess condition based on our usage and our financial policies, we record a corresponding reserve. If our estimate for obsolete or excess inventory is understated, gross margins would be reduced.

Valuation of Deferred Tax Assets

We review our deferred tax assets regularly to determine their realizability. When evidence exists that it is more likely than not that we will be unable to realize a deferred tax asset, we set up a valuation allowance against the asset based on our estimate of the amount which will likely not be realizable. Future utilization of deferred tax assets could result in future income.

Impairment of Patents, Other Intangibles and Goodwill

We evaluate patents, other intangibles and acquired businesses for potential impairment indicators as of our fiscal year-end and when certain triggering events occur. Our judgments regarding the existence of impairment indicators are based on expected operational performance of our operating and acquired businesses, market conditions, legal factors, and future plans. Future events could cause us to conclude that impairment indicators exist and that any patents, other intangibles and goodwill associated with these businesses is impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. Expected future operational performance is based on estimates and management’s judgment. Many factors will ultimately influence the accuracy of these estimates.

25

Legal Contingencies

At any time, we may be involved in certain legal proceedings. As of April 30, 2003, we have accrued our estimate of the probable costs for the resolution of these claims. This estimate has been developed in consultation with outside legal counsel and is based upon an analysis of potential outcomes, assuming a combination of litigation and settlement strategies. We do not believe these proceedings will have a material adverse effect on our 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 our assumptions, or the effectiveness of our strategies, related to these proceedings.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 143 (“FAS 143”), “Accounting for Asset Retirement Obligations” provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. We will be required to adopt this statement May 1, 2003, and we do not expect a material impact on our financial position, results of operations or cash flows.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by the guarantor about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the disclosure requirements are effective for financial statements ending after December 15, 2002 and have been incorporated into these financial statements and accompanying footnotes. Adoption of FIN 45 did not have a material impact on the Company’s financial position, results of operations or cash flows as the Company does not have a significant amount of guarantees.

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, (“FIN 46”) which requires extensive disclosures (including certain disclosures that are applicable to these financial statements) and will require companies to evaluate variable interest entities to determine whether to apply the consolidation provisions of FIN 46 to those entities. Companies must apply FIN 46 to entities with which they are involved if the entity’s equity has specified characteristics. If it is reasonably possible that a company will have a significant variable interest in a variable interest entity at the date FIN 46’s consolidation requirements become effective, the company must disclose the nature, purpose, size and activities of the variable interest entity and the consolidated enterprise s maximum exposure to loss resulting from its involvement with the variable interest entity in all financial statements issued after January 31, 2003 (including December 31, 2002 financial statements) regardless of when the variable interest entity was created. We have recorded no impact from the adoption of FIN 46.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“FAS 148”), “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FAS 123”. The statement amends the transition and disclosure provisions of Statement of Financial Accounting Standards No. 123 (“FAS 123”), “Accounting for Stock-Based Compensation”. Specifically, FAS 148 provides more transition alternatives for companies that wish to adopt the fair-value based provisions of FAS 123 and increases the disclosure required of companies that continue to account for their stock-based compensation under the intrinsic-value method prescribed under APB No. 25, “Accounting for Stock Issued to Employees”. The disclosure and transition provisions of FAS 148 are effective for interim periods beginning after December 15, 2002 and have been incorporated into the financial statements and accompanying footnotes.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (“FAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. FAS 149 amends and

26

clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS 133. The new guidance amends FAS 133 for decisions made: (a) as part of the Derivatives Implementation Group process that effectively required amendments to FAS 133, (b) in connection with other FASB projects dealing with financial instruments, and (c) regarding implementation issues raised in relation to the application of the definition of a derivative, particularly regarding the meaning of an “underlying” and the characteristics of a derivative that contains financing components. The amendments set forth in FAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. FAS 149 is generally effective for contracts entered into or modified after June 30, 2003 (with a few exceptions) and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. We do not expect the provisions of SFAS 149 to have a material impact on our financial position or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“FAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. We do not expect the provisions of FAS 150 to have a material impact on our financial position or results of operations.

Item 7a.    Quantitative and Qualitative Disclosures About Market Risk:

Market risk exists in our financial instruments related to an increase in interest rates, adverse changes in foreign exchange rates relative to the U.S. dollar, as well as financial risk management and derivatives. These exposures are related to our daily operations.

Interest Rate Exposure—Interest Rate Exposure—At April 30, 2003, we had $96.1 million in interest bearing debt. Of this amount, $35.0 million was fixed rate debt with an interest rate of 15% per annum. In addition the capitalized interest payments due our subordinated lender are accruing at a rate of 15% per annum. The majority of the remaining debt of $61.1 million was variable at a rate of prime + 4% or 8.25% at April 30, 2003. See Note 9 to the Consolidated Financial Statements for additional contractual information on our debt obligations. Market risk is estimated as the potential for interest rates to increase 10% on the variable rate debt. A 10% increase in interest rates would result in an approximate additional annual charge to our pretax profits and cash flow of $485,000. At April 30, 2003, we had no derivative instruments to offset the risk of interest rate changes. We may choose to use derivative instruments, such as interest rate swaps, to manage the risk associated with interest rate changes.

Foreign Currency Exchange Rate Risk—We transact business in various foreign currencies, primarily the Canadian dollar, the Eurodollar, the Japanese yen, the New Taiwan dollar, and the Swedish Krona. The assets and liabilities of our foreign operations, with functional currencies other than the U.S. dollar, are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. Aggregate transaction losses included in the determination of net loss amounted to $2.1 million for the year ended April 30, 2003. Based on our overall currency rate exposure at April 30, 2003, a near-term 10% appreciation or depreciation of the U.S. dollar would not have a significant effect on our financial position, results of operations and cash flows over the next fiscal year. At April 30, 2003, we had two forward exchange contracts to offset the risk of foreign currency exchange rate changes. We may continue to use derivative instruments, such as forward exchange rate contracts, to manage the risk associated with foreign currency exchange rate changes.

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Item 8.    Financial Statements and Supplementary Data

The following consolidated financial statements are filed as a part of this report:

Index to Consolidated Financial Statements	Page in This Report
Report of Independent Auditors	29
Consolidated Balance Sheets at April 30, 2003 and 2002	30
Consolidated Statements of Operations for each of the three years in the period ended April 30, 2003	31
Consolidated Statements of Cash Flows for each of the three years in the period ended April 30, 2003	32
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for each of the three years in the period ended April 30, 2003	33
Notes to Consolidated Financial Statements	34
Financial Statement Schedule
Schedule VIII Valuation and Qualifying Accounts	57

All other schedules are omitted because they are not applicable or the disclosures are made in the footnotes to the consolidated financial statements.

28

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of

Flow International Corporation

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows, and of shareholders’ equity and comprehensive loss present fairly, in all material respects, the financial position of Flow International Corporation (“the Company”) and its subsidiaries at April 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2003, 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 accompanying index 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 the financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and the 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.

/s/    PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

July 28, 2003

29

FLOW INTERNATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	April 30,
	2003			2002
ASSETS:
Current Assets:
Cash and Cash Equivalents	$	15,045		$	7,120
Receivables, net		34,600			62,774
Inventories, net		40,883			48,164
Deferred Income Taxes		957			1,980
Assets of Discontinued Operations		1,191			—
Other Current Assets		7,464			11,608
Total Current Assets		100,140			131,646
Property and Equipment, net		12,987			16,996
Equipment Held for Lease, net		—			5,968
Intangible Assets, net		11,866			13,182
Goodwill		10,141			16,332
Deferred Income Taxes		—			5,115
Other Assets		11,130			17,237
	$	146,264		$	206,476
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities:
Notes Payable	$	4,610		$	374
Current Portion of Long-Term Obligations		23			4,863
Accounts Payable		12,250			12,868
Accrued Payroll and Related Liabilities		4,512			4,844
Other Accrued Taxes		58			2,530
Deferred Revenue		4,803			3,613
Other Accrued Liabilities		24,658			18,022
Total Current Liabilities		50,914			47,114
Long-Term Obligations, net of Current Portion		83,775			81,625
Other Long-Term Liabilities		3,791			4,807
		138,480			133,546
Commitments and Contingencies (Note 14)
Minority Interest		2,325			2,246
Shareholders’ Equity:
Series A 8% Convertible Preferred Stock—$.01 par value, 1,000,000 shares authorized, none issued
Common Stock—$.01 par value, 20,000,000 shares authorized, 15,358,759 shares outstanding at April 30, 2003 15,281,759 shares outstanding at April 30, 2002		154			153
Capital in Excess of Par		55,869			55,158
(Accumulated Deficit) Retained Earnings		(40,806	)		29,206
Accumulated Other Comprehensive Loss		(9,758	)		(13,833	)
Total Shareholders’ Equity		5,459			70,684
	$	146,264		$	206,476

The accompanying notes are an integral part of these consolidated financial statements.

30

FLOW INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Year Ended April 30,
	2003			2002			2001
Revenue	$	144,115		$	176,890		$	204,854
Cost of Sales		108,074			107,819			121,378
Gross Margin		36,041			69,071			83,476
Operating Expenses:
Marketing		36,180			31,404			32,846
Research and Engineering		13,501			14,889			16,500
General and Administrative		22,202			17,060			19,440
Impairment Charges		10,815			4,296			—
		82,698			67,649			68,786
Operating (Loss) Income		(46,657	)		1,422			14,690
Interest Expense, net		(11,319	)		(8,823	)		(7,048	)
Other Expense, net		(4,333	)		(2,276	)		(615	)
(Loss) Income Before Provision for Income Taxes		(62,309	)		(9,677	)		7,027
Benefit (Provision) for Income Taxes		(7,180	)		3,290			(2,110	)
(Loss) Income Before Cumulative Effect of Change in Accounting Principle and Discontinued Operations		(69,489	)		(6,387	)		4,917
Cumulative Effect of Change in Accounting Principle, Net of Tax		—			—			(2,652	)
Discontinued Operations, Net of Tax		(523	)		391			244
Net (Loss) Income	$	(70,012	)	$	(5,996	)	$	2,509
(Loss) Earnings Per Share
Basic
(Loss) Income Before Cumulative Effect of Change in Accounting Principle and Discontinued Operations	$	(4.53	)	$	(.42	)	$	.33
Cumulative Effect of Change in Accounting Principle, Net of Tax		—			—			(.18	)
Discontinued Operations, Net of Tax		(.03	)		.03			.02
Net (Loss) Income	$	(4.56	)	$	(.39	)	$	.17
Diluted
(Loss) Income Before Cumulative Effect of Change in Accounting Principle and Discontinued Operations	$	(4.53	)	$	(.42	)	$	.32
Cumulative Effect of Change in Accounting Principle, Net of Tax		—			—			(.17	)
Discontinued Operations, Net of Tax		(.03	)		.03			.02
Net (Loss) Income	$	(4.56	)	$	(.39	)	$	.17

The accompanying notes are an integral part of these consolidated financial statements.

31

FLOW INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended April 30,
	2003			2002			2001
Cash Flows from Operating Activities:
Net (Loss) Income	$	(70,012	)	$	(5,996	)	$	2,509
Adjustments to Reconcile Net (Loss) Income to Cash Provided by (Used in) Operating Activities:
Cumulative Effect of Change in Accounting Principle		—			—			2,652
Depreciation and Amortization		10,112			6,476			7,765
Deferred Income Taxes		6,138			(2,784	)		(2,106	)
Minority Interest		79			206			203
Provision for Losses on Trade Accounts Receivable		4,072			96			576
Provision for Slow Moving and Obsolete Inventory		2,554			188			371
Tax Effect of Exercised Stock Options		49			124			461
Stock Compensation		235			13			245
Impairment Charges		10,815			4,296			—
Write-Down of Assets		8,052			1,327			—
Other		958			733			—
Decrease (Increase) in Operating Assets and Liabilities:
Receivables		24,012			192			(1,284	)
Inventories		2,245			9,071			(6,624	)
Other Current Assets		2,777			(3,017	)		(2,644	)
Other Long-Term Assets		4,889			(7,104	)		(4,092	)
Accounts Payable		(618	)		(2,394	)		(406	)
Accrued Payroll and Related Liabilities		(332	)		(1,588	)		474
Deferred Revenue		1,190			(230	)		1,367
Other Accrued Liabilities and Other Accrued Taxes		2,201			9,846			2,002
Other Long-Term Liabilities		(1,016	)		(2,604	)		(7,072	)
Cash Provided by (Used in) Operating Activities		8,400			6,851			(5,603	)
Cash Flows From Investing Activities:
Expenditures For Property and Equipment		(4,671	)		(8,752	)		(5,778	)
Proceeds from Sale of Property and Equipment		2,176			—			—
Other		—			697			(1,013	)
Cash Used in Investing Activities		(2,495	)		(8,055	)		(6,791	)
Cash Flows from Financing Activities:
Borrowings (Repayments) under Credit Agreement, net		5,005			(24,791	)		16,451
Payments of Long-Term Obligations		(4,877	)		(8,654	)		(1,948	)
Borrowings on Long-Term Obligations		—			25,723			—
Proceeds from Issuance Of Warrants		—			9,277			—
Proceeds from Issuance Of Common Stock		428			1,631			2,372
Cash Provided by Financing Activities		556			3,186			16,875
Effect of Exchange Rate Changes		1,464			(1,670	)		(4,056	)
Increase in Cash And Cash Equivalents		7,925			312			425
Cash and Cash Equivalents at Beginning of Period		7,120			6,808			6,383
Cash and Cash Equivalents at End of Period	$	15,045		$	7,120		$	6,808
Supplemental Disclosures of Cash Flow Information
Cash Paid during the Year for:
Interest	$	8,161		$	9,309		$	6,906
Income Taxes		2,179			1,395			3,080

The accompanying notes are an integral part of these consolidated financial statements.

32

FLOW INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

(In thousands)

	Common Stock			Capital In Excess of Par		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
	Shares	Par Value
Balances, April 30, 2000	14,736	$	147	$	41,041	$	32,693		$	(8,906	)	$	64,975
Components of Comprehensive Loss:
Net Income							2,509						2,509
Unrealized Loss on Equity Securities Available for Sale, Net of Tax										(116	)		(116	)
Cumulative Translation Adjustment										(4,056	)		(4,056	)
Total Comprehensive Loss													(1,663	)
Exercise of Stock Options	367		4		2,368								2,372
Other					706								706
Balances, April 30, 2001	15,103		151		44,115		35,202			(13,078	)		66,390
Components of Comprehensive Loss:
Net Loss							(5,996	)					(5,996	)
Realized Gain on Equity Securities Available for Sale, Net of Tax										925			925
Unrealized Loss on Cash Flow Hedges, Net of Tax										(10	)		(10	)
Cumulative Translation Adjustment										(1,670	)		(1,670	)
Total Comprehensive Loss													(6,751	)
Exercise of Stock Options	179		2		1,629								1,631
Issuance of Stock Warrants					9,277								9,277
Other					137								137
Balances, April 30, 2002	15,282		153		55,158		29,206			(13,833	)		70,684
Components of Comprehensive Loss:
Net Loss							(70,012	)					(70,012	)
Unrealized Gain on Equity Securities Available for Sale, Net of Tax										809			809
Unrealized Gain on Cash Flow Hedges, Net of Tax										20			20
Cumulative Translation Adjustment										3,246			3,246
Total Comprehensive Loss													(65,937	)
Exercise of Stock Options	77		1		427								428
Other					284								284
Balances, April 30, 2003	15,359	$	154	$	55,869	$	(40,806	)	$	(9,758	)	$	5,459

The accompanying notes are an integral part of these consolidated financial statements.

33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

Note 1—The Company and Summary of Significant Accounting Policies:

Principles of Consolidation

The Consolidated Financial Statements include Flow International Corporation (“Flow” or the “Company”), and its wholly-owned subsidiaries, Flow Europe GmbH (“Flow Europe”), Foracon Maschinen und Anlagenbau GmbH & CO.KG (“Foracon”), Flow Asia Corporation (“Flow Asia”), Flow Automation Inc. (“Flow Automation”), Flow Japan Corporation (“Flow Japan”), Avure Techologies, Inc. (“Avure”), Flow Software Technologies Ltd. (“Flow Software”), Avure Technologies AB (“Avure AB”), formerly Flow Pressure Systems Västerås AB, Flow Holdings GmbH (SAGL) Limited Liability Company (“Flow Switzerland”), HydroDynamic Cutting Services, Spearhead Automated Systems (“Flow Robotic Systems”), Flow Latino Commercio Limitada (“Flow South America”), and a 50% owned joint venture, Flow Autoclave Systems, Inc. (“Flow Autoclave”). All significant intercompany transactions have been eliminated.

Liquidity

The Company has incurred losses during fiscal 2002 and 2003. 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 April 30, 2003 are adequate to fund its operation through April 30, 2004. If the Company fails to achieve its planned revenues, costs and working capital objectives, management believes it 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 April 30, 2004.

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 business.

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. Alternative sources of financing may not 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 curtail capital spending, further reduce expenses, and otherwise modify its planned operations including potentially discontinuing operations.

Segments and Operations

Based upon a change in reporting structure effective May 1, 2002, the Company has redefined its two reportable segments, Flow Waterjet Systems (“Waterjet Systems”) and Avure, replacing the two previous reportable segments of UHP Systems and Fresher Under Pressure^®. The Flow Waterjet Systems segment

34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

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 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 produce and strengthen advanced materials for the aerospace, automotive and medical industries. Equipment is designed, developed, and manufactured at the Company’s principal facilities in Kent, Washington, and at manufacturing facilities in Bretten, Germany; Burlington, Canada; Columbus, Ohio; Hsinchu, Taiwan; Jeffersonville, Indiana; Wixom, Michigan and Västerås, Sweden. The Company markets its products to customers worldwide through its principal offices in Kent and its support offices in Argentina, Brazil, Canada, China, Germany, Italy, Japan, Korea, Spain, Sweden, Switzerland, Taiwan, and the United Kingdom.

Revenue Recognition

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, as amended by SAB 101A and 101B (collectively “SAB 101”). SAB 101 requires that revenue can only be recognized when it is realized or realizable and earned. Revenue generally is realized or realizable and earned when all four of the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criterion (4) is based on the Company’s judgments regarding the collectibility of those amounts. Should changes in conditions cause us to determine this criterion is not met for future transactions, revenue recognized for any reporting period could be adversely affected. Under SAB 101, revenue for standard systems is recognized at the time the systems are installed. System sales are substantiated by signed customer contracts which quote a fixed price. Collectibility of accounts is reasonably assured at the time of sale. Prior to SAB 101 adoption in fiscal year 2001, the Company recognized revenue for standard systems upon shipment (Note 2). For consumables and products that do not require installation, revenues are recognized at the time of shipment.

For non-standard and long lead time systems, including the Avure segment, the Company recognizes revenues using the percentage of completion method in accordance with Statement of Position 81-1 (SOP 81-1), “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Typical lead times for non-standard systems can range from six to 18 months. The Company uses the cost to cost method, measuring the costs incurred on a project at a specified date, as compared to the estimated total cost of the project. As manufacturing costs are incurred, a corresponding amount of unbilled revenue is recorded. The balance is reclassified to trade accounts receivable when a milestone is achieved and a customer billing is issued. The balance of trade accounts receivables and unbilled revenues will therefore vary based on the timing of completion on non-standard systems as well as the timing of the related billings to the respective customers.

Revenues from equipment on lease are recognized as rental income in the period earned. Shipping revenues and expenses are recorded in revenue and costs of goods sold, respectively.

Cash Equivalents

The Company considers highly liquid short-term investments with original or remaining maturities from the date of purchase of three months or less, if any, to be cash equivalents. The Company’s cash consists of demand deposits in large financial institutions. At times, balances may exceed federally insured limits.

35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

Inventories

Inventories are stated at the lower of cost, determined by using the first-in, first-out method, or market. Costs included in inventories consist of materials, labor and manufacturing overhead, which are related to the purchase or production of inventories.

Property and Equipment

Property and equipment are stated at the lower of cost or net realizable value. Additions, leasehold improvements and major replacements are capitalized. When assets are sold, retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the statement of operations. Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets, which range from three to eleven years for machinery and equipment; three to nine years for furniture and fixtures and 19 years for buildings. Leasehold improvements are amortized over the shorter of the related lease term, or the life of the asset. Expenditures for maintenance and repairs are charged to expense as incurred.

Equipment Held for Lease

Equipment Held for Lease is stated at the lower of cost or net realizable value and represents the equipment held for lease to food producers. When assets are sold, retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the statement of operations. Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets, which is five years.

Goodwill and Intangible Assets

Effective May 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 141 (“FAS 141”), “Business Combinations” and Statement of Financial Accounting Standards No. 142 (“FAS 142”), “Goodwill and Other Intangible Assets.” FAS 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangibles in a business combination be recognized as assets separate from goodwill. In accordance with FAS 142, the Company amortizes identified intangible assets over their expected useful lives and does not amortize goodwill. At least once per year, the Company will compare the fair value of its reporting units, and, if necessary, the implied fair value of goodwill, with the corresponding carrying values. If necessary, the Company will record an impairment charge for any shortfall. The Company determines the fair value of its reporting units using a discounted cash flow model.

Intangible assets consist of acquired patents and are amortized on a straight-line basis over the shorter of fifteen years, or the estimated remaining life of the patent. The total carrying amount of intangible assets was $21,812,000 and $21,917,000 at April 30, 2003 and 2002, respectively. Accumulated amortization was $9,946,000 and $8,735,000 at April 30, 2003 and 2002, respectively.

Aggregate amortization expense for the year ended April 30, 2003 and 2002 amounted to $1,211,000 and $933,000, respectively. The estimated annual amortization expense is $1,192,000 for each year through April 30, 2007.

For the year ended April 30, 2001, if amortization expense had not been taken on goodwill, net income of $2,509,000 would have increased by $1,180,000, basic earnings per share of $.17 would have increased by $.08, and diluted earnings per share of $.17 would have increased by $.07.

36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

In accordance with FAS 142, the Company conducted its annual impairment review of goodwill at April 30, 2003, which did not result in any impairment charges. During fiscal 2003, the Company conducted an interim detailed review of the carrying value of its goodwill. FAS 142 requires a company to perform impairment testing when certain “triggering” events affecting a business unit have occurred. The triggering events were the expectation of sale or full or partial disposal of certain Flow divisions and the continuing deterioration of the economic climate. The Company’s review resulted in impairment charges of $7.1 million during the quarter ended January 31, 2003. The impairment resulted primarily from continued weakness in the automotive industry, as well as poor performance at the Company’s European operations. The fair value of those reporting units and the estimated fair value of goodwill was estimated using the expected present value of future cash flows. Total goodwill allocated to the Waterjet Systems and Avure segments was $2.7 million and $7.4 million at April 30, 2003, respectively. There have been no additions or other impairment charges taken on goodwill, aside from the charges discussed above.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standard No. 144 (“FAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amounts of assets may not be recoverable. The carrying value of long-lived assets are assessed for impairment by evaluating operating performance and future undiscounted cash flows of the underlying assets. Adjustments are made if the sum of the expected future net cash flows is less than carrying value. Accordingly, actual results could vary significantly from such estimates. The Company’s review resulted in impairment charges of $3.7 million during the quarter ended April 30, 2003 related to the Avure segment.

Fair Value of Financial Instruments

The carrying amount of all financial instruments on the balance sheet as of April 30, 2003 and 2002 approximates fair value. The carrying value of long-term obligations and notes payable approximates fair value because interest rates reflect current market conditions or are based on discounted cash flow analyses. The carrying value of the Company’s investment in common stock of WGI Heavy Minerals (“WGI”), formerly Western Garnet, is at fair value based on the current market price of the common stock at April 30, 2003 and 2002.

Concentration of Credit Risk

In countries or industries where the Company is exposed to significant credit risk, sufficient collateral, including cash deposits and/or letters of credit, is required prior to the completion of a transaction. The Company does not believe there is a material credit risk beyond that provided for in the consolidated financial statements in the ordinary course of business. The Company makes use of foreign exchange contracts to cover some transactions denominated in foreign currencies, and does not believe there is an associated material credit or financial statement risk.

Warranty Liability

Products are warranted to be free from material defects for a period of one year from the date of installation. Warranty obligations are limited to the repair or replacement of products. The Company’s warranty accrual is reviewed quarterly by management for adequacy based upon recent shipments and historical warranty experience. Credit is issued for product returns upon receipt of the returned goods, or, if material, at the time of notification and approval.

37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

Product Liability

The Company is obligated under terms of its product liability insurance contracts to pay all costs up to deductible amounts. These costs are reported in general and administrative expenses and include insurance, investigation and legal defense costs. Legal settlements, if any, are included in Other Expense, net.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recorded.

Minority Interest in Joint Venture

The Company consolidates the operating results of its joint venture, which it controls, and includes income or expense associated with the minority interest in its joint venture as part of Other Expense, net in the accompanying Consolidated Statements of Operations.

Foreign Currency Translation

The Company’s subsidiaries have adopted the local currency of the country in which they operate as the functional currency. All assets and liabilities of these foreign subsidiaries are translated at year-end rates. Income and expense accounts of the foreign subsidiaries are translated at the average rates in effect during the year. Adjustments resulting from the translation of Flow Asia, Flow Automation, Flow Europe, Foracon, Flow Japan, Flow South America, and Avure AB financial statements are recorded in the Accumulated Other Comprehensive Loss account in the Shareholders’ Equity section of the accompanying Consolidated Balance Sheets.

For the years ended April 30, 2003, 2002 and 2001, a net foreign exchange (loss) gain of $(2.1) million, $222,000, and $675,000, respectively, is included in Other Expense, net, in the accompanying Consolidated Statements of Operations.

Basic and Diluted (Loss) Earnings Per Share

Basic (loss) earnings per share represents net (loss) income available to common shareholders divided by the weighted average number of shares outstanding during the period. Diluted (loss) earnings per share represents net (loss) income available to common shareholders divided by the weighted average number of shares outstanding including the potentially dilutive impact of stock options, where appropriate. Common stock options are converted using the treasury stock method.

38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

The following table sets forth the computation of basic and diluted (loss) earnings per share for the years ended April 30, 2003, 2002 and 2001:

	Year Ended April 30,
	2003			2002			2001
Numerator:
Net (loss) income	$	(70,012	)	$	(5,996	)	$	2,509
Denominator:
Denominator for basic (loss) earnings per share—weighted average shares		15,348			15,234			14,828
Dilutive potential common shares from employee stock options		—			—			281
Dilutive potential common shares from warrants		—			—			—
Denominator for diluted (loss) earnings per share—weighted average shares and assumed conversions		15,348			15,234			15,109
Basic (loss) earnings per share	$	(4.56	)	$	(.39	)	$	.17
Diluted (loss) earnings per share	$	(4.56	)	$	(.39	)	$	.17

24,000 and 262,000 of potentially dilutive common shares from employee stock options and 860,000 and 789,000 of potentially dilutive shares from warrants have been excluded from the diluted weighted average share denominator for fiscal 2003 and 2002, respectively, as their effect would be anti-dilutive.

Stock-Based Compensation

At April 30, 2003, the Company has three stock-based employee compensation plans, which are described more fully in Note 11. The Company accounts for those plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. No stock-based employee compensation cost is reflected in the Company’s net (loss) income to the extent options granted under those plans have an exercise price equal to the market value of the underlying common stock on the date of grant. Awards under the Company’s plans vest over two years. Therefore, the cost related to stock-based employee compensation included in the determination of net (loss) income for the three years ended April 30, 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective of Financial Accounting Standards No. 123 (“FAS 123”), “Accounting for Stock Based Compensation”. The following table illustrates the effect on net (loss) income and (loss) earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period:

	Year Ended April 30:
	2003			2002			2001
Net (loss) income, as reported	$	(70,012	)	$	(5,996	)	$	2,509
Add: Stock compensation included in net (loss) income, net of tax related effects		61			9			162
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax related effects		(320	)		(1,969	)		(2,492	)
Pro forma net (loss) income	$	(70,271	)	$	(7,956	)	$	179
(Loss) earnings per share—basic:
As reported	$	(4.56	)	$	(0.39	)	$	0.17
Pro forma	$	(4.58	)	$	(0.52	)	$	0.01
(Loss) earnings per share—diluted:
As reported	$	(4.56	)	$	(0.39	)	$	0.17
Pro forma	$	(4.58	)	$	(0.52	)	$	0.01

39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates that are susceptible to significant change in the near term are the percentage of completion estimates and the adequacy of the allowance for obsolete inventory, warranty obligations, doubtful accounts receivable and deferred tax assets.

Reclassifications

Certain fiscal 2002 and 2001 amounts have been reclassified to conform with the 2003 presentation. These reclassifications had no effect on previously reported net income or cash flows.

Recently Issued Accounting Pronouncements

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (“FAS 143”), “Accounting for Asset Retirement Obligations.” FAS 143 provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. Under FAS 143, legal obligations associated with the retirement of long-lived assets are to be recognized at their fair value in the period in which they are incurred if a reasonable estimate of fair value can be made. The fair value of the asset retirement costs is capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the assets’ useful life. Any subsequent changes to the fair value of the liability due to passage of time or changes in the amount or timing of estimated cash flows is recognized as an accretion expense. The Company will be required to adopt this statement May 1, 2003 and does not expect a material impact on its financial condition, results of operations or cash flows.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by the guarantor about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the disclosure requirements are effective for financial statements ending after December 15, 2002 and have been incorporated into these financial statements and accompanying footnotes. Adoption of FIN 45 did not have a material impact on the Company’s financial position, results of operations or cash flows as the Company does not have a significant amount of guarantees.

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, (“FIN 46”) which requires extensive disclosures (including certain disclosures that are applicable to these financial statements) and will require companies to evaluate variable interest entities to determine whether to apply the consolidation provisions of FIN 46 to those entities. Companies must apply FIN 46 to entities with which they are involved if the entity’s equity has specified characteristics. If it is reasonably possible that a company will have a significant variable interest in a variable interest entity at the date FIN 46’s consolidation requirements become effective, the company must disclose the nature, purpose, size and activities of the variable interest entity and the consolidated enterprise maximum exposure to loss resulting

40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

from its involvement with the variable interest entity in all financial statements issued after January 31, 2003 (including December 31, 2002 financial statements) regardless of when the variable interest entity was created. The Company has recorded no impact from the adoption of FIN 46.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“FAS 148”), “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FAS 123”. The statement amends the transition and disclosure provisions of Statement of Financial Accounting Standards No. 123 (“FAS 123”), “Accounting for Stock-Based Compensation”. Specifically, FAS 148 provides more transition alternatives for companies that wish to adopt the fair-value based provisions of FAS 123 and increases the disclosure required of companies that continue to account for their stock-based compensation under the intrinsic-value method prescribed under APB No. 25, “Accounting for Stock Issued to Employees”. The disclosure and transition provisions of FAS 148 are effective for interim periods beginning after December 15, 2002 and have been incorporated into the financial statements and accompanying footnotes.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (“FAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. FAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS 133. The new guidance amends FAS 133 for decisions made: (a) as part of the Derivatives Implementation Group process that effectively required amendments to FAS 133, (b) in connection with other FASB projects dealing with financial instruments, and (c) regarding implementation issues raised in relation to the application of the definition of a derivative, particularly regarding the meaning of an “underlying” and the characteristics of a derivative that contains financing components. The amendments set forth in FAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. FAS 149 is generally effective for contracts entered into or modified after June 30, 2003 (with a few exceptions) and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The Company does not expect the provisions of SFAS 149 to have a material impact on its financial position or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“FAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. The Company does not expect the provisions of FAS 150 to have a material impact on its financial position or results of operations.

Note 2—SAB 101 “Revenue Recognition” Implementation:

During the third quarter of fiscal 2001, the Company adopted SAB 101 which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Under SAB 101, revenue recognition is delayed until after installation of the Company’s standard UHP systems. Prior to SAB 101 adoption, the Company recognized revenue for standard systems upon shipment. Standard systems sales represent over one third of the Company’s consolidated revenues. The remaining consolidated revenue represents either consumable parts sales for which revenue is recognized upon shipment, or special systems for which revenue is recognized under the percentage of completion, measured by the cost-to-cost method. The effect of this change in policy is quantified as a Cumulative Effect of Change in Accounting Principle, net of tax of $1.1 million, in the fiscal year ended April 30, 2001.

41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

Note 3—Warranty Obligations:

The Company’s 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 2003 activity for the Company’s warranty accrual:

Accrued warranty balance as of April 30, 2002	$	552
Accruals for warranties on fiscal 2003 sales		1,262
Accruals related to pre-existing warranties (including changes in estimates)		495
Warranty labor and materials provided in fiscal 2003		(1,236	)
Accrued warranty balance as of April 30, 2003	$	1,073

Note 4—Derivative Financial Instruments:

Effective May 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (“FAS 133”), “Accounting for Derivative Instruments and Hedging Activities”, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

The Company uses derivative instruments to manage exposures to foreign currency risks. The Company’s objective for holding derivatives is to minimize foreign currency fluctuation risks using the most effective methods to eliminate or reduce the impacts of these exposures. The Company does not enter into speculative hedges. Counterparties to the Company’s derivative financial instruments are credit worthy major financial institutions. The Company has not experienced any losses due to counterparty default.

Certain forecasted transactions and assets are exposed to foreign currency risk. The Company monitors its foreign currency exposures regularly to maximize the overall effectiveness of its foreign currency hedge positions. The currency hedged is the Swedish Krona. As of April 30, 2003, the Company has $16,000 of pre-tax unrealized gains on foreign currency cash flow hedges. The financial impact of these hedges is expected to be realized into earnings over the next twelve months when the associated transactions are recorded as revenue. The actual amounts realized will vary based on future changes in foreign currency rates. The fair value of the forward exchange contracts is estimated by obtaining market rates from selected financial institutions.

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

The total notional amount of the forward exchange contracts at April 30, 2003 is $1.3 million and these expire at various times through May 2003.

Hedged Currency	Amount	Exchange Rate	Exchange Rate— 10% change	Difference
European Euro (EUR)	775	9.1356	10.0492	SEK	708
U.S. Dollar (USD)	442	8.2296	9.0526		363
				SEK	1,071

The total notional amount of the forward exchange contracts at April 30, 2002 was $12.3 million and these expire at various times through April 2003.

Hedged Currency	Amount	Exchange Rate	Exchange Rate— 10% change	Difference
European Euro (EUR)	1,653	9.235	10.1585	SEK	1,527
British Pound (GBP)	1,780	14.912	16.4032		2,654
U.S. Dollar (USD)	8,201	10.218	11.2398		8,380
				SEK	12,561

Hedge ineffectiveness, determined in accordance with FAS 133, had no impact on earnings for the years ended April 30, 2003 and 2002. No fair value hedges or cash flow hedges were derecognized or discontinued for the years ended April 30, 2003 and 2002.

Derivative gains and losses included in Other Comprehensive Loss (OCL) are reclassified into earnings each period as the related transactions are recognized into earnings. During the years ended April 30, 2003 and 2002, the amount transferred from OCL to Other Income (Expense), net, was not significant.

Note 5—Related Party Transactions:

In August 1992, the Company entered into a stock purchase agreement with Phenix and contributed cash and certain equipment valued at cost. This investment was accounted for under the cost method. At April 30, 2002, the Company wrote off its entire $484,000 investment as Phenix was in bankruptcy and the Company believed its investment was not recoverable. This write-down was included in Other Income (Expense), net.

The Company owns 369,791 shares or 2.7% of WGI for which it paid $1.5 million. WGI is publicly traded on the Toronto stock exchange. The Company classifies this investment as available-for-sale under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. This investment was made to secure a long-term relationship with the Company’s supplier of its high quality garnet. Garnet is sold by the Company as a consumable used in abrasivejet cutting. Currently, the Company’s President and Chief Executive Officer is a member of the board of directors of WGI.

As of April 30, 2003 and 2002, the value of the WGI investment is as follows:

	April 30, 2003		April 30, 2002
Aggregate Fair Value	$	1,858	$	657
Unrealized Gain, Net of Tax		809		—
Tax Component		392		—

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

In fiscal 2002, the Company recorded a pre-tax charge of $843,000 related to the other than temporary impairment of the investment in Western Garnet as the stock price had decreased decreased and remained below cost for a period exceeding six months.

Note 6—Receivables:

Receivables consist of the following:

	April 30,
	2003		2002
Trade Accounts Receivable	$	31,107	$	39,042
Unbilled Revenues		8,512		24,694
		39,619		63,736
Less Allowance for Doubtful Accounts		5,019		962
	$	34,600	$	62,774

Unbilled revenues do not contain any amounts which are expected to be collected after one year.

Note 7—Inventories:

Inventories consist of the following:

	April 30,
	2003		2002
Raw Materials and Parts	$	22,658	$	26,986
Work in Process		10,859		9,163
Finished Goods		11,702		13,807
		45,219		49,956
Less Provision for Slow-Moving and Obsolete Inventories		4,336		1,792
	$	40,883	$	48,164

Note 8—Property and Equipment, and Equipment Held for Lease:

Property and Equipment are as follows:

	April 30,
	2003		2002
Land and Buildings	$	300	$	300
Machinery and Equipment		32,150		30,598
Furniture and Fixtures		3,799		3,630
Leasehold Improvements		7,883		7,735
Construction in Progress		2,987		3,535
		47,119		45,798
Less Accumulated Depreciation and Amortization		34,132		28,802
	$	12,987	$	16,996

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

For the years ended April 30, 2003, 2002 and 2001, the Company capitalized interest of $115,000, $184,000 and $385,000, respectively.

Equipment Held for Lease is as follows:

	April 30,
	2003		2002
Equipment Held for Lease	$	—	$	7,365
Less Accumulated Depreciation and Amortization		—		1,397
	$	—	$	5,968

In accordance with FAS 144, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amounts of assets may not be recoverable. The carrying value of long-lived assets are assessed for impairment by evaluating future operating performance and expected future undiscounted cash flows of the underlying assets. Adjustments are made if the estimated fair value is less than carrying value. Accordingly, actual results could vary significantly from such estimates. The Company’s review resulted in impairment charges of $3.7 million during the quarter ended April 30, 2003 related to the Avure segment.

Note 9—Long-Term Obligations, Notes Payable and Liquidity:

Long-term obligations are as follows:

	April 30,
	2003		2002
Credit Agreement	$	56,423	$	56,418
Subordinated Debt		35,000		35,000
Private Debt Placement		—		4,286
Term Loans Payable		23		592
		91,446		96,296
Less Original Issue Discount on Subordinated Debt		7,648		8,557
Less Current Portion		—		6,114
	$	83,798	$	81,625
Current notes payable for Avure AB	$	4,610	$	374

At April 30, 2003, the Company was in violation of its financial covenants with both the then existing Credit Agreement and Subordinated Debt Agreement.

On July 28, 2003, the Company signed a new Credit Agreement (“Credit Agreement”), effective April 30, 2003. The Credit Agreement provides for a revolving line of credit of up to $62.0 million, versus a previous commitment of $73 million, with several financial institutions, which expires August 1, 2004. The amount that can be borrowed is limited based on certain debt covenant restrictions and reduces to $51.0 million prior to August 1, 2004. The Company makes use of its credit facility to fund its operations during the course of the year. In fiscal 2003, the Company borrowed an aggregate of $53.2 million on the credit facility while repaying $52.0 million. Interest rates under the Credit Agreement are at the bank’s prime rate in effect from time to time plus 4%. Prime at April 30, 2003 was 4.25%. The Company pays a quarterly commitment fee of ¼ of 1% (25 basis

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

points) of the total commitment. The Company also pays an annual letter of credit fee equal to 5% of the amount available to be drawn under each outstanding letter of credit. The annual letter of credit fee is payable quarterly in arrears. As of April 30, 2003, the Company had $3.6 million of domestic unused line of credit, subject to covenant restrictions. For recent developments on the Credit Agreement, see Note 19.

In May 2001, the Company signed a $35 million subordinated debt agreement with The John Hancock Life Insurance Company (“Hancock”). The agreement as previously amended requires semi-annual interest only payments at 15% and two equal principal payments due on April 30, 2007, and April 30, 2008. In addition, the Company issued 859,523 warrants to purchase Flow common stock at $.01 per share to Hancock. The warrants have been valued at $9.3 million and have been recorded as an original issue discount to the carrying value of the Long-Term Obligations in the accompanying Consolidated Balance Sheets. The warrants are amortized over the term of the debt. The warrants are fully vested and expire on April 30, 2008. The unamortized discount balance is $7.6 million and $8.6 million at April 30, 2003 and 2002, respectively. As of April 30, 2003, Hancock has agreed to capitalize required semi-annual interest payments of beginning with April 30, 2003, until April 30, 2004, which total $6.9 million. This capitalized interest accrues at the rate of 15%. For recent developments on the Hancock Agreement, see Note 19.

The Private Debt Placement is a 10-year note with seven equal principal payments beginning in September 1999. The Company pays interest semi-annually at a fixed rate of 7.7%. During fiscal 2002, the Company elected to prepay $4,286,000 in addition to its regularly scheduled payment. At April 30, 2003, the Private Debt Placement has been paid off.

The Credit Agreement and Subordinated Debt Agreement are collateralized by a general lien on all of the Company’s assets. The Company is required to comply with certain covenants relating to the Credit Agreement, and Subordinated Debt Placement, including restrictions on dividends and transactions with affiliates, limitations on additional indebtedness, capital expenditures, research and engineering expenses, and maintenance of EBITDA ratios. In connection with the recent amendments to these agreements, the Company is in compliance with all covenants.

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 amended future debt covenants for the Credit Agreement and the Subordinated Debt Agreement requires the Company to meet its operating projections, which include achieving certain revenues and consistent operating margins. If the Company is unable to comply with the amended debt covenants, and the Company’s lenders are unwilling to waive or amend the debt covenants, amounts owed under the Company’s Credit Agreement and Subordinated Debt Agreement and notes payable would become current, and the Company would be required to seek alternative financing. Alternative sources of financing may not be available if required or, if available, may not be on terms satisfactory to the Company. 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 curtail capital spending, further reduce expenses and otherwise modify its planned operations.

The Company’s principal bank has issued a $1.0 million standby letter of credit to the Company’s German bank, to secure a credit facility for use by Flow Europe of EUR 1.0 million ($1.1 million). At April 30, 2003, Flow Europe had unused EUR 0.45 million ($0.5 million) remaining.

The Company has access to two unsecured credit facilities in Taiwan to fund the construction of a new manufacturing facility. The total availability under these facilities is 120 million New Taiwanese Dollars ($3.4 million) and the facilities bear interest of 2%. The credit facilities mature in one to three months and can be extended for 30 days, as needed. At April 30, 2003, there are no amounts outstanding.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

Current Notes Payable include a $6.1 million (50 million Swedish Krona) Avure AB line of credit which is collateralized by trade accounts receivable and inventory, at an interest rate of Swedish prime (3.5% at April 30, 2003) plus 0.75%. As of April 30, 2003, Avure AB has approximately $1.5 million available under this credit facility.

Principal payments under long-term obligations for the next five years and thereafter are as follows: $23,000 in 2004, $56,423,000 in 2005, $0 in 2006 and $17,500,000 in 2007 and 2008.

Note 10—Income Taxes:

The components of consolidated (loss) income before income taxes and the provision (benefit) for income taxes are as follows:

	Year Ended April 30,
	2003			2002			2001
(Loss) Income Before (Benefit) Provision for Income Taxes:
Domestic	$	(35,323	)	$	(10,185	)	$	2,017
Foreign		(26,986	)		508			5,010
Total	$	(62,309	)	$	(9,677	)	$	7,027

The provision (benefit) for income taxes comprises:

	Year Ended April 30,
	2003		2002			2001
Current:
Domestic	$	—	$	(2,155	)	$	1,050
State and Local		68		139			339
Foreign		974		1,510			2,827
Total		1,042		(506	)		4,216
Deferred		6,138		(2,784	)		(2,106	)
Total	$	7,180	$	(3,290	)	$	2,110

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

Net deferred tax assets (liabilities) comprise the following:

	April 30, 2003			April 30, 2002
Current:
Accounts receivable allowances	$	297		$	129
Inventory capitalization		288			232
Obsolete inventory		718			413
Vacation accrual		226			275
Net operating loss carryover		957			—
Business tax credits		271			271
Foreign tax credits		—			75
AMT credits		—			168
All other		—			492
Subtotal		2,757			2,055
Valuation allowance		(1,800	)		(75	)
Total Current Deferred Taxes		957			1,980
Long-term:
Fixed assets		1,727			568
Net operating loss carryover		22,118			5,010
Goodwill		733			410
State and foreign taxes		(491	)		(566	)
AMT credits		564			396
Unrealized loss		287			287
All other		1,321			(450	)
Subtotal		26,259			5,655
Valuation allowance		(26,259	)		(540	)
Total Long-Term Deferred Taxes		—			5,115
Total Net Deferred Tax Assets	$	957		$	7,095

A reconciliation of income taxes at the federal statutory rate to the provision (benefit) for income taxes is as follows:

	Year Ended April 30,
	2003		2002		2001
Income taxes at federal statutory rate	(34.0	)%	(34.0	)%	34.0	%
Extra territorial income exclusion	(0.3	)	(1.8	)	(3.0	)
Foreign tax rate differences	1.2		(1.5	)	(4.4	)
Change in valuation allowances	44.0		(0.9	)	(1.7	)
State and local tax rate differences	0.1		1.0		3.1
Original issue discount amortization	0.5		2.2		—
Non deductible meals	0.1		0.9		1.5
Other	(0.1	)	0.1		0.5
Income tax (benefit) provision	11.5	%	(34.0	)%	30.0	%

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

As of April 30, 2003, the Company had approximately $27.1 million of domestic net operating loss carryforwards to offset certain earnings for federal income tax purposes. These net operating loss carryforwards expire in fiscal 2023. Net operating loss carryforwards in foreign jurisdictions amount to $38.3 million and do not expire.

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 both deferred tax assets and liabilities. As a result, the total valuation allowance against deferred tax assets was increased by $27.4 million in fiscal 2003.

Provision has not been made for U.S. income taxes or foreign withholding taxes on $19.6 million of undistributed earnings of foreign subsidiaries. Those earnings have been and will continue to be reinvested. These earnings could become subject to additional tax if they were remitted as dividends, if foreign earnings were loaned to the Company or a U.S. affiliate, or if the Company should sell its stock in the subsidiaries.

Note 11—Stock Options:

The Company has stock options outstanding under various option plans described as follows:

1987 Stock Option Plan for Nonemployee Directors (the “1987 Nonemployee Directors Plan”).    Approved by the Company’s shareholders in September 1987, the 1987 Nonemployee Directors Plan, as subsequently amended, provided for the automatic grant of nonqualified options for 10,000 shares of Company common stock to a nonemployee director when initially elected or appointed, and the issuance of 10,000 options annually thereafter during the term of directorship. There are no further options being granted under this plan.

1991 Stock Option Plan (the “1991 SO Plan”).    The 1991 SO Plan was adopted in October 1991 and amended in August 1993. Incentive and nonqualified stock options up to 700,000 shares may be issued under this plan.

1995 Long-Term Incentive Plan (the “1995 LTI Plan”).    The 1995 LTI Plan was adopted in August 1995. In fiscal 2000, the 1995 LTI Plan was amended to increase the number of shares available for grant to 3,350,000 shares.

All options become exercisable upon a change in control of the Company. Options have a two-year vesting schedule, and are generally granted with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. The maximum term of options is 10 years from the date of grant. During late fiscal 1999 and early fiscal 2000, the Board of Directors of the Company approved options for 272,171 shares which were priced at fair market value on the dates of Board approval, subject however to shareholder approval of a planned increase in the shares available under the 1995 LTI Plan. The grant date for these options occurred at the August 1999 shareholder meeting. Based upon the difference in fair market value between the Board of Directors approval date and grant date, compensation expense of $93,000, $13,000 and $245,000 was recorded during fiscal 2003, 2002 and 2001, respectively.

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

The following chart summarizes the status of the options at April 30, 2003, which expire at various times through 2012:

	1987 Nonemployee Directors Plan		1991 SO Plan and 1995 LTI Plan		Total
Number of options outstanding		559,000		1,941,682		2,500,682
Number of options vested		559,000		1,490,636		2,049,636
Average exercise price per share of options outstanding	$	10.00	$	9.03	$	9.26

The weighted-average fair values at the date of grant for options granted in fiscal 2003, 2002 and 2001 were estimated using the Black-Scholes option-pricing model, based on the following assumptions: (i) no expected dividend yields for fiscal years 2003, 2002 and 2001; (ii) expected volatility rates of 58.9%, 48.6% and 47.0% for fiscal 2003, 2002 and 2001, respectively; and (iii) expected lives of six years for fiscal 2003, 2002 and 2001. The risk-free interest rate applied to fiscal 2003, 2002 and 2001 was 3.7%, 4.8% and 5.6%, respectively.

The following table summarizes information about stock options outstanding at April 30, 2003:

Range of Exercise Prices	Number Outstanding at April 30, 2003	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable at April 30, 2003	Weighted- Average Exercise Price
$2.69   - $7.99	377,590	7.02 years	$	4.54	121,116	$	6.36
$8.00   - $10.00	834,502	5.02 years		8.98	763,930		9.00
$10.01 - $12.25	1,288,590	6.68 years		10.82	1,164,590		10.81
Total:	2,500,682	6.18 years	$	9.26	2,049,636	$	9.87

The following table rolls forward the stock option activity for the years ended April 30:

	2003				2002				2001
	Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
Outstanding—beginning of year	3,262,185		$	9.62	2,926,326		$	9.40	2,856,083		$	8.75
Granted during the year:	263,140			3.68	530,645			10.08	595,690			10.94
Exercised during the year:	(77,000	)		5.38	(178,682	)		7.51	(366,847	)		6.47
Forfeited during the year:	(947,643	)		9.27	(16,104	)		9.26	(158,600	)		10.08
Outstanding, end of year	2,500,682		$	9.26	3,262,185		$	9.62	2,926,326		$	9.40
Exercisable, end of year	2,049,636		$	9.87	2,306,845		$	9.38	1,924,236		$	8.85
Weighted Average fair value of options granted during each period:			$	2.14			$	5.29			$	5.77

Note 12—Voluntary Pension and Salary Deferral Plan:

The Company has a 401(k) savings plan in which employees may contribute a percentage of their compensation. At its discretion, the Company may make contributions based on employee contributions and

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

length of employee service. In October 2002, the Company discontinued its discretionary match to employees. Company contributions and expenses under the plan for the years ended April 30, 2003, 2002, and 2001 were $452,000, $869,000, and $826,000, respectively.

Note 13—Preferred Share Rights Purchase Plan:

The Board of Directors of the Company has adopted a Preferred Share Rights Purchase Plan under which a Preferred Share Purchase Right (a “Right”) is attached to each share of Company common stock. The Rights will be exercisable only if a person or group acquires 10% or more of the Company’s common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 10% or more of the common stock. Each Right entitles shareholders to buy one one-hundredth of a share of Series B Junior Participating Preferred Stock (the “Series B Preferred Shares”) of the Company at a price of $45. If the Company is acquired in a merger or other business combination transaction, each Right will entitle its holder to purchase a number of the acquiring company’s common shares having a value equal to twice the exercise price of the Right. If a person or group acquires 10% or more of the Company’s outstanding common stock, each Right will entitle its holder (other than such person or members of such group) to receive, upon exercise, a number of the Company’s common shares having a value equal to two times the exercise price of the Right. Following the acquisition by a person or group of 10% or more of the Company’s common stock and prior to an acquisition of 50% or more of such common stock, the Board of Directors may exchange each Right (other than Rights owned by such person or group) for one share of common stock or for one one-hundredth of a Series B Preferred Share. Prior to the acquisition by a person or group of 10% of the Company’s common stock, the Rights are redeemable, at the option of the Board, for $.0001 per Right. The Rights expire on September 1, 2009. The Rights do not have voting or dividend rights, and until they become exercisable, have no dilutive effect on the earnings of the Company.

Note 14—Commitments and Contingencies:

The Company rents certain facilities and equipment under agreements treated for financial reporting purposes as operating leases. The majority of leases currently in effect are renewable for periods of two to five years. Rent expense under these leases was approximately $6.1 million, $4.8 million and $4.8 million for the years ended April 30, 2003, 2002 and 2001, respectively.

Future minimum rents payable under operating leases for years ending April 30 are as follows:

Year Ending April 30,
2004	$	4,262
2005		4,059
2006		3,626
2007		3,293
2008		2,850
Thereafter		4,880
	$	22,970

The Company has been subject to product liability claims primarily through Spider, its former subsidiary that was sold in September 1997. To minimize the financial impact of product liability risks and adverse judgments, product liability insurance has been purchased in amounts and under terms considered acceptable to management.

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

At any point in time covered by these financial statements, there are outstanding product liability claims against the Company, and incidents are known to management that may result in future claims. Management, in conjunction with internal legal counsel, as well as external counsel, periodically evaluates the merit of all claims, including product liability claims, as well as considering unasserted claims. The Company aggressively defends itself when warranted and applies the accounting and disclosure criteria of FAS 5, “Accounting for Contingencies” when evaluating its exposure to all claims. The Company does not believe the effects of any claims will materially affect the financial position, results of operations or cash flows of the Company.

Recoveries, if any, may be realized from indemnitors, codefendants, insurers or insurance guaranty funds. Management, based on estimates provided by the Company’s legal counsel on such claims, believes its insurance coverage is adequate.

In July 2000, the Company committed $5.0 million to fund the construction of a new manufacturing facility for its Taiwanese operations. As of April 30, 2003, the Company has a remaining commitment of $4.0 million, which will be funded over the next six months, through two unsecured lines of credit from Taiwanese banks.

At April 30, 2003, the Company had entered into a $12.9 million contract for delivery of three presses to the Chinese government. The Company has received a 15% down payment and a letter of credit for an additional 28% of the total contract value. The Company is subject to foreign currency fluctuations during the build cycle of the project. To date, the weakening US Dollar versus the Swedish Krona has resulted in a $1.0 million reduction in anticipated profit.

Note 15—Discontinued Operations:

As of April 30, 2003, the Company held one of its subsidiaries for sale in accordance with FAS 144. This subsidiary is 100% owned by the Company and is involved in the decommissioning of oil wells. The Company has segregated this subsidiary’s assets as assets of discontinued operations on the April 30, 2003 Consolidated Balance Sheet and has presented this subsidiary’s results of operations as discontinued operations, net of applicable taxes, on the Consolidated Statement of Operations for the three years ended April 30, 2003. The results of discontinued operations are shown below:

	Year Ended April 30:
	2003			2002		2001
Net sales	$	1,215		$	2,352	$	2,339
(Loss) income before tax		(523	)		592		348
Net (loss) income		(523	)		391		244

Assets of discontinued operations as of April 30, 2003 are shown below:

	April 30, 2003
Receivables, net	$	90
Inventories, net		154
Other Current Assets		3
Property and Equipment, net		649
Goodwill		276
Other Assets		19
	$	1,191

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

On May 16, 2003, the Company consummated the sale of the subsidiary and recorded a gain on the transaction of approximately $300,000.

Note 16—Restructuring:

On February 19, 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 expects to invest cash of between $11 million and $13 million in the restructuring program, which will affect roughly half of the worldwide locations and will reduce the total square footage occupied by nearly half. The Company anticipates that headcount will be reduced by more than one quarter. During the fourth quarter of fiscal 2003, the Company began the consolidation of the shapecutting systems production from our European facilities to our North American facilities as well as the standardization of shapecutting systems between the European, North American and Asian markets. In addition, the Company expects to incur significant non-cash expenses associated with the implementation of the restructuring program. In accordance with Statement of Financial Accounting Standards No. 146 (“FAS 146”), Accounting for Costs Associated with Exit or Disposal Activities, the associated restructuring expenses will generally be recognized in the period they are incurred. To date, the Company has incurred cash expenses of nearly $1.0 million.

Note 17—Selected Quarterly Financial Data (unaudited):

Fiscal 2003 Quarters	First			Second			Third			Fourth			Total
Revenue	$	40,034		$	41,801		$	30,546		$	31,734		$	144,115
Gross Margin		12,753			14,724			(467	)		9,031			36,041
Loss Before Discontinued Operations		(4,069	)		(8,865	)		(41,282	)		(15,273	)		(69,489	)
Net Loss		(3,980	)		(8,858	)		(41,619	)		(15,555	)		(70,012	)
Loss Per Share:
Basic
Loss Before Discontinued Operations		(.27	)		(.58	)		(2.69	)		(.99	)		(4.53	)
Net Loss		(.26	)		(.58	)		(2.71	)		(1.01	)		(4.56	)
Diluted
Loss Before Discontinued Operations		(.27	)		(.58	)		(2.69	)		(.99	)		(4.53	)
Net Loss		(.26	)		(.58	)		(2.71	)		(1.01	)		(4.56	)
Fiscal 2002 Quarters	First			Second			Third			Fourth			Total
Revenue	$	46,319		$	42,665		$	41,153		$	46,753		$	176,890
Gross Margin		18,757			17,156			17,171			15,987			69,071
Loss Before Discontinued Operations		471			(257	)		(456	)		(6,145	)		(6,387	)
Net Income (Loss)		420			376			(505	)		(6,287	)		(5,996	)
Loss Per Share:
Basic
Income (Loss) Before Discontinued Operations		.03			(.02	)		(.03	)		(.40	)		(.42	)
Net Income (Loss)		.03			.02			(.03	)		(.41	)		(.39	)
Diluted
Income (Loss) Before Discontinued Operations		.03			(.02	)		(.03	)		(.40	)		(.42	)
Net Income (Loss)		.03			.02			(.03	)		(.41	)		(.39	)

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

Note 18—Operating Segment and Geographical Information:

The Company has determined that its operating segments are those based upon the manner in which internal financial information is produced and evaluated by the chief operating decision makers. Additionally, certain geographical information is required regardless of how internal financial information is generated.

Based upon a change in reporting structure effective May 1, 2002, the Company has redefined its two reportable segments, Flow Waterjet Systems and Avure, replacing the two previous reportable segments of UHP Systems and Fresher Under Pressure^®. 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 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 produce and strengthen advanced materials for the aerospace, automotive and medical industries. Segment operating results are measured based on operating income (loss). Management has reclassified prior period amounts to reflect the current reporting structure.

The table below presents information about the reported net (loss) income of the Company for the years ended April 30, 2003, 2002 and 2001. Asset information by reportable segment is not reported, since the Company does not produce such information internally.

	Flow Waterjet Systems			Avure Technologies			Eliminations			Total
2003
External revenue	$	121,833		$	22,282					$	144,115
Inter-segment revenue		1,466			—		$	(1,466	)		—
Depreciation and amortization		6,157			3,955						10,112
Operating loss		(26,833	)		(19,824	)					(46,657	)
Interest expense, income tax (provision) benefit and other items of income (expense)		(15,042	)		(7,790	)					(22,832	)
Loss before discontinued operations		(41,875	)		(27,614	)					(69,489	)
Net loss	$	(42,398	)	$	(27,614	)				$	(70,012	)
2002
External revenue	$	127,763		$	49,127					$	176,890
Inter-segment revenue		809			—		$	(809	)		—
Depreciation and amortization		3,876			2,600						6,476
Operating (loss) income		(597	)		2,019						1,422
Interest expense, income tax (provision) benefit and other items of income (expense)		(4,504	)		(3,305	)					(7,809	)
Loss before discontinued operations		(5,101	)		(1,286	)					(6,387	)
Net loss	$	(4,710	)	$	(1,286	)				$	(5,996	)

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

	Flow Waterjet Systems			Avure Technologies			Eliminations			Total
2001
External revenue	$	160,039		$	44,815					$	204,854
Inter-segment revenue		1,270			—		$	(1,270	)		—
Depreciation and amortization		5,023			2,742						7,765
Operating income		9,755			4,935						14,690
Interest expense, income tax (provision) benefit and other items of income (expense)		(5,439	)		(4,334	)					(9,773	)
Income before cumulative effect of change in accounting principle and discontinued operations		4,316			601						4,917
Net income	$	1,908		$	601					$	2,509

The table below presents the Company’s operations and other financial information by geographical region:

	United States		Europe		Asia		Other Foreign		Adjustments & Eliminations			Consolidated
Fiscal 2003
Revenues:
Customers (1)	$	79,450	$	31,326	$	17,666	$	15,673	$	—		$	144,115
Inter-area (2)		12,499		600		1,166		72		(14,337	)		—
Total revenues	$	91,949	$	31,926	$	18,832	$	15,745	$	(14,337	)	$	144,115
Long-Lived Assets	$	17,455	$	24,498	$	3,172	$	999				$	46,124
Fiscal 2002
Revenues:
Customers (1)	$	95,853	$	52,757	$	14,916	$	13,364	$	—		$	176,890
Inter-area (2)		17,926		14,298		1,350		856		(34,430	)		—
Total revenues	$	113,779	$	67,055	$	16,266	$	14,220	$	(34,430	)	$	176,890
Long-Lived Assets	$	35,091	$	26,839	$	2,006	$	5,779				$	69,715
Fiscal 2001
Revenues:
Customers (1)	$	128,340	$	43,346	$	18,588	$	14,580	$	—		$	204,854
Inter-area (2)		25,861		21,908		2,388		1,102		(51,259	)		—
Total revenues	$	154,201	$	65,254	$	20,976	$	15,682	$	(51,259	)	$	204,854
Long-Lived Assets	$	32,312	$	26,161	$	1,236	$	8,598				$	68,307

(1) U.S. sales to unaffiliated customers in foreign countries were $12.5 million, $6.5 million and $6.8 million in fiscal 2003, 2002, and 2001, respectively.

(2) Inter-area sales to affiliates represent products that were transferred between geographic areas at negotiated prices, which are consistent with the terms sales to third parties, that is, at current market prices. These amounts have been eliminated in the consolidation.

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three years ended April 30, 2003

(All tabular dollar amounts in thousands, except per share and option amounts)

Note 19—Subsequent Events:

Loan Agreements

As described in Note 9, on July 28, 2003, the Company signed a new credit agreement (“Credit Agreement”). The Credit Agreement is effective as of April 30, 2003. Prior to the execution of the Credit Agreement, the Company, as previously disclosed in the Company’s Form 10-Q for the quarter ended January 31, 2003, continued to be in violation of certain of the financial covenants set forth in the Company’s Amended and Restated Credit Agreement (the “Prior Credit Agreement”). During this period, none of the senior lenders under the Prior Credit Agreement exercised any default rights provided to them under such agreement, including declaring a default or imposing default interest rates. The Credit Agreement waives those prior defaults. Concurrent with the signing of the Credit Agreement, the Company remitted $1.5 million to the Senior lenders as a paydown of debt and as a permanent reduction of the available credit to $60.5 million.

On July 28, 2003, the Company signed an amendment to its subordinated debt agreement (the “Note Amendment”) with The John Hancock Life Insurance Company (“Hancock”) and other subordinated lenders. Prior to the execution of the Note Amendment, the Company, as previously disclosed in the Company’s Form 10-Q for the quarter ended January 31, 2003, continued to be in violation of certain of the financial covenants set forth in the Company’s Subordinated Note Agreement (the “Prior Note Agreement”). During this period, Hancock exercised a default right provided to it under such agreement by imposing a default interest rate of 17% on unpaid interest. The Note Amendment provides that Hancock will capitalize the semi-annual interest remittances due through April 30, 2004, which total $6.9 million. Interest on these capitalized payments will accrue at 15%. Concurrent with the signing of the Note Amendment, the Company remitted $1.0 million as a paydown of interest.

Repurchase Obligation

During fiscal 2003, the Company was required to repurchase a previously sold industrial press from a bankrupt customer. The total obligation recorded at April 30, 2003 was $3.9 million, a non-cash increase during fiscal 2003 of approximately $2.0 million. The press is included in Other Current Assets at its estimated net realizable value and the repurchase obligation is included in Other Current Liabilities on the April 30, 2003 Consolidated Balance Sheet.

Subsequent to year-end, the Company entered into an agreement to sell this industrial press to an unrelated third party with expected delivery and installation in May 2004. The Company does not anticipate recognizing any further loss on this transaction.

Avure

At April 30, 2003, the Company was considering alternative strategies for its Avure segment. As of that date, management was unsure of the ultimate disposition for Avure, but had been considering a wide range of alternatives including continuation of operations in the present form, operations on a diminished scale, suspension of operations, shutdown, or divestiture. Subsequent to year-end, the Company received several offers from potential buyers, however no binding offer has been accepted as of the filing date of this Form 10-K.

If a sale were consummated, the Company would recognize a loss on unrealized foreign currency translation adjustments included in Accumulated Other Comprehensive Income on the Consolidated Balance Sheet. The debit balance of the Avure unrealized foreign currency translation adjustments at April 30, 2003 was $4.5 million. The ultimate loss on disposal would be determined at the time of sale and would be based on the then carrying value of Avure, as well as the amount of unrealized foreign currency translation adjustments.

The carrying value of the goodwill, intangible and long-lived assets of Avure were evaluated for impairment in accordance with FAS 142 and FAS 144 at April 30, 2003. This evaluation resulted in an impairment charge of $3.7 million which is reflected in the Consolidated Statement of Operations for the year ended April 30, 2003.

56

FLOW INTERNATIONAL CORPORATION

SCHEDULE VIII

VALUATION AND QUALIFYING ACCOUNTS

(In Thousands)

			Additions
Classification	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts			Deductions *			Balance at End of Period
Year Ended April 30:
Allowance for Doubtful Accounts
2003	$	962	$	4,978	$	146		$	(1,052	)	$	5,034
2002		866		651		(12	)		(543	)		962
2001		899		576		40			(649	)		866
Provision for Slow-Moving and Obsolete Inventories
2003	$	1,792	$	4,271	$	69		$	(1,796	)	$	4,336
2002		1,904		348		—			(460	)		1,792
2001		1,903		371		(69	)		(301	)		1,904

* Write-offs of uncollectible accounts and disposal of obsolete inventory.

57

PART III

Item 10.    Directors and Executive Officers of the Registrant.

Information regarding directors and executive officers of the registrant is incorporated herein by reference from the Company’s Proxy Statement.

Item 11.    Executive Compensation.

Information regarding executive compensation is incorporated herein by reference from the Company’s Proxy Statement.

Item 12.    Security Ownership of Certain Beneficial Owners and Management.

Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from the Company’s Proxy Statement.

Item 13.    Certain Relationships and Related Transactions.

Information regarding certain relationships and related transactions is incorporated herein by reference from the Company’s Proxy Statement.

Item 14.    Controls and Procedures

Scope of the Controls Evaluation.    Our Interim Chief Financial Officer was appointed in November 2002 and our current Chief Executive Officer was appointed in January 2003. They have had only a short time to assess our current controls and procedures, during which they have also been leading the planned restructuring of our Company and working with our Lenders.

Restatement.    As reported in our Form 10-Q/A filed March 28, 2003, we recently restated our financial results for the quarter ended October 31, 2002 (i) to reflect the reversal of revenue on a sales contract that should not have been accounted for using the Percentage of Completion accounting method, (ii) to reflect the reversal of revenue recognized using the Percentage of Completion method whereby the customer’s ability to meet its contractual obligations was uncertain, and (iii) to expense certain deferred costs associated with a financing that had been abandoned and should have been written off. We noted no acts of fraud related to the restatement.

Evaluation of disclosure controls and procedures.    Within the 90-day period prior to the filing date of this Annual Report on Form 10-K, our management, under the supervision and with the participation of our Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Interim Financial Officer believe that our disclosure controls and procedures are designed to ensure that information we are required to disclose in the reports we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

Changes in internal controls.    Other than to strengthen the controls and procedures described in the “Restatement” section above, there have been no significant changes in our internal controls or other factors that could significantly affect our internal controls subsequent to their evaluation, nor have there been any corrective actions with regard to significant deficiencies or material weaknesses.

58

PART IV

Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as a part of this report:

1. Consolidated Financial Statements.

See Item 8 of Part II for a list of the Financial Statements filed as part of this report.

2. Financial Statement Schedules.

See Item 8 of Part II for a list of the Financial Statement Schedules filed as part of this report.

3. Exhibits. See subparagraph (c) below.

(b) Reports on Form 8-K -

None.

(c) Exhibits.

Exhibit Number
3.1	Articles of Incorporation, filed with the state of Washington October 1, 1998. (Incorporated by reference to Exhibit 3.1 to the registrant’s Annual Report on Form 10-K for the year ended April 30, 1999.)
3.2	By-Laws of Flow International Corporation. (Incorporated by reference to Exhibit 3.1 to the registrant’s Annual Report on Form 10-K for the year ended April 30, 1999.)
4.1	Certificate of Designation of Series B Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 4.5 to the registrant’s Annual Report on Form 10-K for the year ended April 30, 1990.)
4.2	Amended and Restated Rights Agreement dated as of September 1, 1999, between Flow International Corporation and ChaseMellon Shareholder Services, L.L.C. (Incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K dated September 1, 1999.)
4.3	Warrant to Purchase Shares of Common Stock of Flow International Corporation. (Incorporated by reference to the registrant’s Current Report on Form 8-K dated June 12, 2001.)
10.1	Flow International Corporation 1987 Stock Option Plan for Nonemployee Directors, as amended. (Incorporated by reference to Exhibit 10.5 to the registrant’s Annual Report on Form 10-K for the year ended April 30, 1994.)
10.2	Flow International Corporation 1995 Long-Term Incentive Plan. (Incorporated by reference to Exhibit 10.2 to the registrant’s Annual Report on Form 10-K for the year ended April 30, 2000.)
10.3	Flow International Corporation Voluntary Pension and Salary Deferral Plan and Trust Agreement, as amended and restated effective January 1, 2002.*
10.4	Note Purchase Agreement dated as of April 30, 2001. (Incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K dated June 12, 2001.)
10.5	Form of Change in Control Agreement. (Incorporated by reference to Exhibit 10.17 to the registrant’s Annual Report on Form 10-K for the year ended April 30, 1996.)
10.6	First Amendment to Note Purchase Agreement dated October 31, 2001 among John Hancock Life Insurance Company, John Hancock Variable Life Insurance Company, Signature 4 Limited and Signature 5 L.P. and Flow International Corporation dated as of April 30, 2001. (Incorporated by reference to Exhibit 10.18 to the registrant’s Annual Report on Form 10-K for the year ended April 30, 2002.)

59

Exhibit Number
10.7	Second Amendment to Note Purchase Agreement dated September 13, 2002 among John Hancock Life Insurance Company, John Hancock Variable Life Insurance Company, Signature 4 Limited and Signature 5 L.P. and Flow International Corporation dated as of April 30, 2001. (Incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2002.)
10.8	Employment Agreement dated November 25, 2002 between Stephen R. Light and Flow International Corporation. (Incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2003.)
10.9	Second Amended and Restated Credit Agreement dated July 28, 2003 among Bank of America, N.A., U.S. Bank National Association, Keybank National Association, Bank of America, N.A., as agent for the lenders, and Flow International Corporation. */**
10.10	Third Amendment to Note Purchase Agreement dated July 28, 2003 among John Hancock Life Insurance Company, John Hancock Variable Life Insurance Company, Signature 4 Limited and Signature 5 L.P. and Flow International Corporation. */**
10.11	Lease dated January 30, 2003 between Flow International and Property Reserve, Inc.*
21.1	Subsidiaries of the Registrant.*
23.1	Consent of Independent Auditors.*
31.1	Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification Pursuant to the 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Certification Pursuant to the 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* Filed herewith.

** Confidential Treatment requested for portions of this Exhibit.

60

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.

	FLOW INTERNATIONAL CORPORATION
July 29, 2003
	/s/    STEPHEN R. LIGHT
	Stephen R. Light
	President and Chief Executive Officer

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 on this 29th day of July, 2003.

Signature	Title
/s/    STEPHEN R. LIGHT         Stephen R. Light	President and Chief Executive Officer (Principal Executive Officer)
/s/    STEPHEN D. REICHENBACH         Stephen D. Reichenbach	Chief Financial Officer (Principal Financial Officer & Principal Accounting Officer)
/s/    KATHRYN L. MUNRO         Kathryn L. Munro	Chairman
/s/    RICHARD P. FOX         Richard P. Fox	Director
/s/    RONALD D. BARBARO         Ronald D. Barbaro	Director
/s/    DANIEL J. EVANS         Daniel J. Evans	Director
/s/    ARLEN I. PRENTICE         Arlen I. Prentice	Director
/s/    J. MICHAEL RIBAUDO         J. Michael Ribaudo	Director
/s/    KENNETH M. ROBERTS         Kenneth M. Roberts	Director
/s/    SANDRA F. ROREM         Sandra F. Rorem	Director

EX-10.3

                                                                    EXHIBIT 10.3

                         FLOW INTERNATIONAL CORPORATION
                   VOLUNTARY PENSION AND SALARY DEFERRAL PLAN
                               AND TRUST AGREEMENT
  (Amended and Restated Effective January 1, 2002 (and Certain Earlier Dates))



                         FLOW INTERNATIONAL CORPORATION
                   VOLUNTARY PENSION AND SALARY DEFERRAL PLAN
                               AND TRUST AGREEMENT
  (Amended and Restated Effective January 1, 2002 (and Certain Earlier Dates))
                                Table of Contents

                                                                             
   ARTICLE I - DEFINITIONS                                                      1
1.01  Plan......................................................................1
1.02  Employer..................................................................1
1.03  Trustee...................................................................1
1.04  Plan Administrator........................................................1
1.05  Advisory Committee........................................................1
1.06  Employee..................................................................1
1.07  Highly Compensated Employee...............................................1
1.08  Participant...............................................................1
1.09  Beneficiary...............................................................1
1.10  COMPENSATION DEFINITIONS..................................................1
1.11  Account...................................................................2
1.12  Account Balance or Accrued Benefit........................................2
1.13  Nonforfeitable or Vested..................................................3
1.14  Plan Year.................................................................3
1.15  Effective Date............................................................3
1.16  Plan Entry Date...........................................................3
1.17  Accounting Date...........................................................3
1.18  Trust.....................................................................3
1.19  Trust Fund................................................................3
1.20  Nontransferable Annuity...................................................3
1.21  ERISA.....................................................................3
1.22  Code......................................................................3
1.23  Service...................................................................3
1.24  Hour of Service...........................................................3
1.25  Disability................................................................4
1.26  Service for Predecessor Employer..........................................4
1.27  Related Employer..........................................................4
1.28  Leased Employees..........................................................5
1.29  Determination of Top Heavy Status.........................................5
1.30  "Employer Stock\..........................................................6
1.31  "Employer Stock Fund\.....................................................6
1.32  PLAN MAINTAINED BY MORE THAN ONE EMPLOYER.................................6
1.33  " Protected Benefit\......................................................6

   ARTICLE II - EMPLOYEE PARTICIPANTS                                           7
2.01  ELIGIBILITY...............................................................7
2.02  YEAR OF SERVICE - PARTICIPATION...........................................7
2.03  BREAK IN SERVICE - PARTICIPATION..........................................7



                                       i




                                                                             
2.04  PARTICIPATION UPON RE-EMPLOYMENT..........................................7

   ARTICLE III  EMPLOYER CONTRIBUTIONS AND FORFEITURES                          9
3.01  AMOUNT....................................................................9
3.02  DETERMINATION OF CONTRIBUTION.............................................9
3.03  TIME OF PAYMENT OF CONTRIBUTION...........................................9
3.04  CONTRIBUTION ALLOCATION...................................................9
3.05  FORFEITURE ALLOCATION.....................................................11
3.06  ACCRUAL OF BENEFIT........................................................11
3.07  LIMITATIONS ON ALLOCATIONS TO PARTICIPANTS' ACCOUNTS......................11
3.08  ESTIMATING COMPENSATION...................................................12
3.09  DETERMINATION BASED ON ACTUAL COMPENSATION................................12
3.10  DISPOSITION OF ALLOCATED EXCESS AMOUNT....................................12
3.11  OTHER DEFINED CONTRIBUTION PLANS LIMITATION...............................12
3.12  DEFINITIONS - ARTICLE III.................................................12

   ARTICLE IV - PARTICIPANT CONTRIBUTIONS                                       14
4.01  PARTICIPANT VOLUNTARY CONTRIBUTIONS.......................................14
4.02  [Reserved]................................................................14
4.03  ROLLOVER CONTRIBUTIONS....................................................14
4.04  ROLLOVER CONTRIBUTION - FORFEITABILITY....................................14
4.05  ROLLOVER CONTRIBUTION WITHDRAWAL/DISTRIBUTION.............................14
4.06  ROLLOVER CONTRIBUTION - ACCRUED BENEFIT...................................14

   ARTICLE V - TERMINATION OF SERVICE - PARTICIPANT VESTING                     15
5.01  NORMAL RETIREMENT AGE.....................................................15
5.02  PARTICIPANT DISABILITY OR DEATH...........................................15
5.03  VESTING SCHEDULE..........................................................15
5.04  CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/RESTORATION OF
         FORFEITED ACCRUED BENEFIT..............................................15
5.05  ACCOUNTING FOR REPAID AMOUNT..............................................16
5.06  YEAR OF SERVICE - VESTING.................................................16
5.07  BREAK IN SERVICE - VESTING................................................16
5.08  INCLUDED YEARS OF SERVICE - VESTING.......................................16
5.09  FORFEITURE OCCURS.........................................................16

   ARTICLE VI - DISTRIBUTIONS                                                   18
6.01  TIMING OF DISTRIBUTION....................................................18
6.02  REQUIRED MINIMUM DISTRIBUTIONS............................................20
6.03  METHOD OF DISTRIBUTION....................................................22
6.04  ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES...............22
6.05  [Reserved]................................................................22
6.06  [Reserved]................................................................22
6.07  DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS.............................22
6.08. DEFAULTED LOAN--TIMING OF OFFSET..........................................23
6.09  [Reserved]................................................................23
6.10. DIRECT ROLLOVER OF ELIGIBLE ROLLOVER DISTRIBUTIONS........................23



                                       ii



                                                                             
   ARTICLE VII - EMPLOYER ADMINISTRATIVE PROVISIONS                             25
7.01  INFORMATION TO COMMITTEE..................................................25
7.02  NO LIABILITY..............................................................25
7.03  INDEMNITY OF COMMITTEE....................................................25
7.04  EMPLOYER DIRECTION OF INVESTMENT..........................................25
7.05  AMENDMENT TO VESTING SCHEDULE.............................................25

   ARTICLE VIII  PARTICIPANT ADMINISTRATIVE PROVISIONS                          26
8.01  BENEFICIARY DESIGNATION...................................................26
8.02  NO BENEFICIARY DESIGNATION................................................26
8.03  PERSONAL DATA TO COMMITTEE................................................26
8.04  ADDRESS FOR NOTIFICATION..................................................26
8.05  ASSIGNMENT OR ALIENATION..................................................27
8.06  NOTICE OF CHANGE IN TERMS.................................................27
8.07  LITIGATION AGAINST THE TRUST..............................................27
8.08  INFORMATION AVAILABLE.....................................................27
8.09  CLAIMS PROCEDURE FOR DENIAL OF BENEFITS...................................27
8.10  PARTICIPANT DIRECTION OF INVESTMENT.......................................27

   ARTICLE IX - ADVISORY COMMITTEE-DUTIES WITH RESPECT TO PARTICIPANTS'
      ACCOUNTS                                                                  29
9.01  MEMBERS' COMPENSATION, EXPENSES...........................................29
9.02  TERM......................................................................29
9.03  POWERS....................................................................29
9.04  GENERAL...................................................................29
9.05  FUNDING POLICY............................................................29
9.06  MANNER OF ACTION..........................................................29
9.07  AUTHORIZED REPRESENTATIVE.................................................29
9.08  INTERESTED MEMBER.........................................................29
9.09  INDIVIDUAL ACCOUNTS.......................................................30
9.10  VALUE OF PARTICIPANT'S ACCRUED BENEFIT....................................30
9.11  ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS....................30
9.12  INDIVIDUAL STATEMENT......................................................30
9.13  ACCOUNT CHARGED...........................................................31
9.14  LOST PARTICIPANTS.........................................................31
9.15  PLAN CORRECTION...........................................................31
9.16  NO RESPONSIBILITY FOR OTHERS..............................................31
9.17  NOTICE, DESIGNATION, ELECTION, CONSENT AND WAIVER.........................32

   ARTICLE X  TRUSTEE, POWERS AND DUTIES                                        33
10.01 ACCEPTANCE................................................................33
10.02 RECEIPT OF CONTRIBUTIONS..................................................33
10.03 INVESTMENT POWERS.........................................................33
10.04 RECORDS AND STATEMENTS....................................................34
10.05 FEES AND EXPENSES FROM FUND...............................................34
10.06 PARTIES TO LITIGATION.....................................................34



                                       iii



                                                                             
10.07 PROFESSIONAL AGENTS.......................................................34
10.08 DISTRIBUTION OF CASH OR PROPERTY..........................................35
10.09 DISTRIBUTION DIRECTIONS...................................................35
10.10 THIRD PARTY...............................................................35
10.11 RESIGNATION...............................................................35
10.12 REMOVAL...................................................................35
10.13 INTERIM DUTIES AND SUCCESSOR TRUSTEE......................................35
10.14 VALUATION OF TRUST........................................................35
10.15 LIMITATION ON LIABILITY - IF INVESTMENT MANAGER APPOINTED.................35
10.16 INVESTMENT IN GROUP TRUST FUND............................................35
10.17 DUTIES PERTAINING TO THE EMPLOYER STOCK FUND..............................36

   ARTICLE XI - PROVISIONS RELATING TO INSURANCE & INSURANCE COMPANY            38
11.01 INSURANCE BENEFIT.........................................................38
11.02 LIMITATION ON LIFE INSURANCE PROTECTION...................................38
11.03 DEFINITIONS...............................................................38
11.04 DIVIDEND PLAN.............................................................39
11.05 INSURANCE COMPANY NOT A PARTY TO AGREEMENT................................39
11.06 INSURANCE COMPANY NOT RESPONSIBLE FOR TRUSTEE'S ACTIONS...................39
11.07 INSURANCE COMPANY RELIANCE ON TRUSTEE'S SIGNATURE.........................39
11.08 ACQUITTANCE...............................................................39
11.09 DUTIES OF INSURANCE COMPANY...............................................39

   ARTICLE XII - MISCELLANEOUS                                                  40
12.01 EVIDENCE..................................................................40
12.02 NO RESPONSIBILITY FOR EMPLOYER ACTION.....................................40
12.03 FIDUCIARIES NOT INSURERS..................................................40
12.04 WAIVER OF NOTICE..........................................................40
12.05 SUCCESSORS................................................................40
12.06 WORD USAGE................................................................40
12.07 STATE LAW.................................................................40
12.08 EMPLOYMENT NOT GUARANTEED.................................................40

   ARTICLE XIII - EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION                     41
13.01 EXCLUSIVE BENEFIT.........................................................41
13.02 AMENDMENT BY EMPLOYER.....................................................41
13.03 DISCONTINUANCE............................................................41
13.04 FULL VESTING ON TERMINATION...............................................41
13.05 MERGER/DIRECT TRANSFER....................................................41
13.06 POST TERMINATION PROCEDURE AND DISTRIBUTION...............................42
13.07 TRANSFER OF ASSETS FROM THE TRUSTEE OF THE FLOW INTERNATIONAL
         CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN..............................43

   ARTICLE XIV - PROVISIONS RELATING TO THE CODE (S)401(k) ARRANGEMENT          44
14.01 401(k) ARRANGEMENT........................................................44
14.02 DEFINITIONS...............................................................44
14.03 ANNUAL ELECTIVE DEFERRAL LIMITATION.......................................46



                                       iv



                                                                             
14.04 ACTUAL DEFERRAL PERCENTAGE (ADP) TEST.....................................46
14.05 ACTUAL CONTRIBUTION PERCENTAGE (ACP) TEST.................................47
14.06 MULTIPLE USE LIMITATION...................................................49

   APPENDIX A - ACCOUNTS TRANSFERRED FROM SPIDER STAGING CORPORATION 401(k)
      PLAN AND CERTAIN EMPLOYEES OF SPIDER STAGING CORPORATION                  50
1.01  DEFINITIONS...............................................................50
1.02  CONTINUING PARTICIPANTS...................................................50
1.03  ELIGIBILITY COMPUTATION PERIOD............................................50
1.04  CREDITING SERVICE FOR ELIGIBILITY.........................................50
1.05  VESTING CREDIT............................................................50
1.06  DISTRIBUTIONS TO VESTED PARTICIPANTS UNDER SPIDER STAGING CORPORATION
         401(k) PLAN OTHER THAN 1992 SPIDER STAGING EMPLOYEES...................50
1.07  VALUATION AND TRANSFER OF ACCOUNTS UNDER THE SPIDER STAGING
         CORPORATION 401(k) SAVINGS PLAN........................................50
1.08. PROTECTED BENEFITS........................................................50
1.09. FORFEITURES...............................................................50
1.10. SEPARATE ACCOUNTS.........................................................50
1.11. DEFAULT ON A LOAN MADE UNDER SPIDER STAGING PLAN..........................50
1.12  PARTICIPANT-DIRECTED INVESTMENT...........................................51
1.13  EFFECTIVE DATE............................................................51

   APPENDIX B - CERTAIN EMPLOYEES OF ASI ROBOTIC SYSTEMS DIVISION OF CARGILL
      DETROIT CORPORATION                                                       52
1.01  DEFINITIONS...............................................................52
1.02  CREDITING SERVICE FOR ELIGIBILITY.........................................52
1.03  PLAN ENTRY DATE...........................................................52
1.04  CREDITING SERVICE FOR VESTING.............................................52
1.13  EFFECTIVE DATE............................................................52

   APPENDIX C - CERTAIN EMPLOYEES OF FLOW AUTOMATION SYSTEMS CORPORATION        53
1.01  DEFINITIONS...............................................................53
1.02  CREDITING SERVICE FOR ELIGIBILITY.........................................53
1.03  CREDITING SERVICE FOR VESTING.............................................53
1.04  EFFECTIVE DATE............................................................53

   APPENDIX D - FORMER CIS ROBOTICS EMPLOYEES                                   54
1.01  DEFINITIONS...............................................................54
1.02  CREDITING SERVICE FOR ELIGIBILITY.........................................54
1.03  VESTING CREDIT............................................................54
1.04  TRANSFERRED ACCOUNTS......................................................54
1.05  EFFECTIVE DATE............................................................54

   APPENDIX E - CERTAIN FORMER EMPLOYEES OF  SPEARHEAD AUTOMATED SYSTEMS, INC.  55
1.01  DEFINITIONS...............................................................55
1.02  CREDITING SERVICE FOR ELIGIBILITY.........................................55
1.03  PLAN ENTRY DATE AND ELIGIBILITY...........................................55



                                        v



                                                                             
1.04  CREDITING SERVICE FOR VESTING.............................................55
1.05  EFFECTIVE DATE............................................................55

   Execution Page                                                               56



                                       vi




                         FLOW INTERNATIONAL CORPORATION
                   VOLUNTARY PENSION AND SALARY DEFERRAL PLAN
                               AND TRUST AGREEMENT

  (Amended and Restated Effective January 1, 2002 (and Certain Earlier Dates))

     Flow International Corporation (the "Employer"), a corporation organized
under the laws of the State Delaware, makes this Agreement with Security Trust
Company as Trustee.

                                   WITNESSETH

     The Flow International Corporation Voluntary Pension and Salary Deferral
Plan, originally adopted effective October 1, 1986 by Flow Systems, Inc. (now
Flow International Corporation, a Washington corporation), for the benefit of
its Employees, is hereby amended and restated by Flow International Corporation,
effective January 1, 2002 to read in its entirety as set forth in this Agreement
between the Employer and the Trustee with regard to the Trust Fund under the
Plan. The provisions of the Plan as amended and restated in this document shall
apply solely to an Employee whose employment with the Employer terminates on or
after January 1, 2002.

     The Employer intends that the Plan as so amended and restated shall
continue to be maintained exclusively for the purpose of providing benefits to
the Plan Participants and their beneficiaries and for defraying the reasonable
expenses of administering the Plan. The Employer further intends that the Plan
shall at all times be qualified under Section 401(a) of the Code and that the
Plan shall meet the special requirements of Sections 401(k) and 401(m) of the
Code and that the Trust, which also constitutes a part of the Plan, shall at all
times be a trust exempt from taxation under Section 501(a) of the Code.

     Now, therefore, in consideration of their mutual covenants, the Employer
and the Trustee agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

     1.01 "Plan" means the Flow International Corporation Voluntary Pension and
Salary Deferral Plan established and continued by the Employer in the form of
this Agreement, as it may be amended from time to time.

     1.02 "Employer" means Flow International Corporation and its successors, or
any other employer who with the written consent of Flow International
Corporation adopts this Plan. As of January 1, 2001, Flow Autoclave Systems,
Inc. has adopted this Plan with the written consent of Flow International
Corporation.

     1.03 "Trustee" means Security Trust Company or any successor in office who
in writing accepts the position of Trustee.

     1.04 "Plan Administrator" means Flow International Corporation unless Flow
International Corporation designates another person to hold the position of Plan
Administrator. In addition to his other duties, the Plan Administrator has full
responsibility for compliance with the reporting and disclosure rules under
ERISA as respects this Agreement.

     1.05 "Advisory Committee" means the Employer's Advisory Committee as from
time to time constituted.

     1.06 "Employee" means any common-law employee of the Employer.

     1.07 "Highly Compensated Employee" means an Employee who, during the Plan
Year or during the preceding Plan Year is a more than 5% owner of the Employer
(applying the constructive ownership rules of Code (S)318); or who, during the
preceding Plan Year had Compensation in excess of $80,000 (as adjusted by the
Commissioner of Internal Revenue for the relevant year).

     1.08 "Participant" is an Employee who is eligible to be and becomes a
Participant in accordance with the provisions of Section 2.01.

     1.09 "Beneficiary" is a person designated by a Participant under Article
VIII who is or may become entitled to a benefit under the Plan. A Beneficiary
who becomes entitled to a benefit under the Plan remains a Beneficiary under the
Plan until the Trustee has fully distributed his benefit to him. A Beneficiary's
right to (and the Plan Administrator's, the Advisory Committee's or Trustee's
duty to provide to the Beneficiary) information or data concerning the Plan does
not arise until he first becomes entitled to receive a benefit under the Plan.

     1.10 COMPENSATION DEFINITIONS. Any reference in this Plan to Compensation
is a reference to the definition in this Section 1.10, unless the Plan reference
specifies a modification to this definition. The Advisory Committee will take
into account only Compensation actually paid for the relevant period.

(A) General Definition of Compensation.

                                       1



     All wages, salaries, fees for professional service and other amounts
(whether or not paid in cash) for personal services actually rendered in the
course of employment with the Employer maintaining the plan, but only to the
extent includible in gross income. This definition of Compensation includes, but
is not limited to, commissions paid salespersons, compensation for services on
the basis of a percentage of profits, commissions on insurance premiums, tips,
bonuses, fringe benefits and reimbursements or other expense allowances under a
nonaccountable plan as described in Treas. Reg. (S)1.62-2(c))). This definition
of "Compensation" does not include:

     (a) Employer contributions to a plan of deferred compensation to the extent
     the contributions are not included in the gross income of the Employee for
     the taxable year in which contributed, Employer contributions on behalf of
     an Employee to a Simplified Employee Pension Plan to the extent such
     contributions are excludible from the Employee's gross income, and any
     distributions from a plan of deferred compensation, regardless of whether
     such amounts are includible in the gross income of the Employee when
     distributed.

     (b) Amounts realized from the exercise of a non-qualified stock option, or
     when restricted stock (or property) held by an Employee either becomes
     freely transferable or is no longer subject to a substantial risk or
     forfeiture.

     (c) Amounts realized from the sale, exchange or other disposition of stock
     acquired under a qualified stock option described in Part II, Subchapter D,
     Chapter 1 of the Code.

     (d) Other amounts which receive special tax benefits, such as premiums for
     group term life insurance (but only to the extent that the premiums are not
     includible in the gross income of the Employee), or contributions made by
     an Employer (whether or not under a salary reduction agreement) toward the
     purchase of an annuity contract described in Code (S)403(b) (whether or
     not the contributions are excludible from the gross income of the
     Employee).

     For purposes of this Section 1.10(a), Compensation excludes reimbursements
(even if includible in gross income or other expense allowances, fringe benefits
(cash and noncash), moving expenses, deferred compensation and welfare benefits,
and includes "Elective Contributions." Elective Contributions are amounts
excludible from the Employee's gross income under Code (S)(S)125, 132(f)(4),
402(e)(3), 402(h)(2), 403(b), 408(p) or 457, and contributed by the Employer, at
the Employee's election, to a cafeteria plan, a qualified transportation fringe
benefit plan, a 401(k) arrangement, a SARSEP, a tax-sheltered annuity, a SIMPLE
plan or a Code (S)457 plan. Notwithstanding the preceding sentence, amounts
described in (S)132(f)(4) are not Elective Contributions until Plan Years
beginning on or after January 1, 2001, unless the Advisory Committee
operationally has included such amounts effective as of an earlier Plan Year
beginning no earlier than January 1, 1998.

(B) Definition of Compensation for Allocation Purposes.

     See Section 1.10(A).

(C) Compensation Dollar Limitation.

     For any Plan Year, the Advisory Committee in allocating contributions under
Article III, shall not take into account more than $150,000 (or such larger or
smaller amount as the Commissioner of Internal Revenue may prescribe) of any
Participant's Compensation. Notwithstanding the foregoing, an Employee under a
401(k) arrangement may make elective deferrals with respect to Compensation
which exceeds the Plan Year Compensation limitation, provided such deferrals
otherwise satisfy Code (S)402(g) and other applicable limitations.

(D) Special definition for salary reduction contributions.

     See Section 1.10(A).

     1.11 "Account" means the following separate account(s) which the Advisory
Committee or the Trustee maintains for a Participant under the Plan:

       Type of Contributions                       Name of Account
       ---------------------                       ---------------
Salary Deferral Contributions        Deferral Contributions Account
Employer Matching Contributions      Regular Matching Contributions Account
Nonelective Employer Contributions   Employer Contributions Account
Participant Rollover Contributions   Rollover Contributions Account
Qualified Nonelective Contributions  Qualified Nonelective Contributions Account
Qualified Matching Contributions     Qualified Matching Contributions Account

     1.12 "Account Balance or Accrued Benefit" means the amount standing in a
Participant's Account(s) as of any date derived from both Employer contributions
and Employee contributions, if any.

                                       2



     1.13 "Nonforfeitable or Vested" means a Participant's or Beneficiary's
unconditional claim, legally enforceable against the Plan, to the Participant's
Account Balance or Accrued Benefit.

     1.14 "Plan Year" means the Plan's accounting year, a 12 consecutive month
period ending every December 31..

     1.15 "Effective Date" of this amended and restated Plan means January 1,
2002, except that, certain provisions of this amended and restated Plan have
earlier effective dates, as described below:



- --------------------------------------------------------------------------------------------------------------
                      Plan Provision                                          Effective Date
- --------------------------------------------------------------------------------------------------------------
                                                         
Section 1.07 (Highly Compensated Employee)                  Plan Years beginning after December 31, 1996
- --------------------------------------------------------------------------------------------------------------
Section 1.10(A) (General Definition of Compensation)        Limitation Years beginning after December 31, 1997
- --------------------------------------------------------------------------------------------------------------
Section 6.10(D)(1) (Eligible Rollover Distribution)         Distributions after December 31, 1998
- --------------------------------------------------------------------------------------------------------------
Section 14.02 (Definitions)                                 Plan Years beginning after December 31, 1996
- --------------------------------------------------------------------------------------------------------------
Section 14.04 (Actual Deferral Percentage (ADP) Test)       Plan Years beginning after December 31, 1996
- --------------------------------------------------------------------------------------------------------------
Section 14.05 (Actual Contribution Percentage (ACP) Test)   Plan Years beginning after December 31, 1996
- --------------------------------------------------------------------------------------------------------------


     The original effective date of the Plan was October 1, 1986.

     1.16 "Plan Entry Date" means every January 1, April 1, July 1, and October
1.

     1.17 "Accounting Date" is the last day of the Plan Year. Unless otherwise
specified in the Plan, the Advisory Committee will make all Plan allocations for
a particular Plan Year as of the Accounting Date of that Plan Year.

     1.18 "Trust" means the separate Trust created under the Plan.

     1.19 "Trust Fund" means all property of every kind held or acquired by the
Trustee under the Plan, other than incidental benefit insurance contracts. This
Plan creates a single Trust for all Employers participating under the Plan.
However, the Trustee will maintain separate records of account in order to
reflect properly each Participant's Account Balance derived from each
participating Employer.

     1.20 "Nontransferable Annuity" means an annuity which by its terms provides
that it may not be sold, assigned, discounted, pledged as collateral for a loan
or security for the performance of an obligation or for any purpose to any
person other than the insurance company. If the Trustee distributes an annuity
contract, the contract must be a Nontransferable Annuity.

     1.21 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

     1.22 "Code" means the Internal Revenue Code of 1986, as amended.

     1.23 "Service" means any period of time the Employee is in the employ of
the Employer, including any period the Employee is on an unpaid leave of absence
authorized by the Employer under a uniform, nondiscriminatory policy applicable
to all Employees if the Employee returns to work within the period specified
thereunder. "Separation from Service" means an event after which the Employee no
longer has an employment relationship with the Employer maintaining this Plan or
with a Related Employer. For purposes of eligibility to participate (Section
2.01) and determining vesting (Section 5.03), "Service" also includes service on
or before December 1, 1998, with any of the following affiliated employers:
FlowDrill Corporation; Flow Research, Inc.; and FlowMole Corporation.

     1.24 "Hour of Service" means:

     (a) Each Hour of Service for which the Employer, either directly or
     indirectly, pays an Employee, or for which the Employee is entitled to
     payment, for the performance of duties. The Advisory Committee credits
     Hours of Service under this paragraph (a) to the Employee for the
     computation period in which the Employee performs the duties, irrespective
     of when paid;

     (b) Each Hour of Service for back pay, irrespective of mitigation of
     damages, to which the Employer has agreed or for which the Employee has
     received an award. The Advisory Committee credits Hours of Service under
     this paragraph (b) to the Employee for the computation period(s) to which
     the award or the agreement pertains rather than for the computation period
     in which the award, agreement or payment is made; and

     (c) Each Hour of Service for which the Employer, either directly or
     indirectly, pays an Employee, or for which the Employee is entitled to
     payment (irrespective of whether the employment relationship is
     terminated), for reasons

                                       3



     other than for the performance of duties during a computation period, such
     as leave off absence, vacation, holiday, sick leave, illness, incapacity
     (including disability), layoff, jury duty or military duty. The Advisory
     Committee will credit no more than 501 Hours of Service under this
     paragraph (c) to an Employee on account of any single continuous period
     during which the Employee does not perform any duties (whether or not such
     period occurs during a single computation period). The Advisory Committee
     credits Hours of Service under this paragraph (c) in accordance with the
     rules of paragraphs (b) and (c) of Labor Reg. (S)2530.200b-2, which the
     Plan, by this reference, specifically incorporates in full within this
     paragraph (c).

     (d) Hour of Service also includes any Service the Plan must credit in order
     to satisfy the crediting of Service requirements of Code (S)414(u).

     The Advisory Committee will not credit an Hour of Service under more than
one of the above paragraphs. A computation period for purposes of this Section
1.24 is the Plan Year, Year of Service period, Break in Service period or other
period, as determined under the Plan provision for which the Advisory Committee
is measuring an Employee's Hours of Service. The Advisory Committee will resolve
any ambiguity with respect to the crediting of an Hour of Service in favor of
the Employee.

     Hours of Service shall be credited on the basis of actual hours for which
an Employee is paid or entitled to payment to the extent the Employer's payroll
or accounting records reflect such hours. Otherwise, Employees shall be credited
with 190 Hours of Service per month, 95 hours per semimonthly pay period, 45
hours per week or 10 hours per day, depending on the pay period applicable to
such Employee for any such pay period in which the Employee has one Hour of
Service.

     Solely for purposes of determining whether the Employee incurs a Break in
Service under any provision of this Plan, the Advisory Committee must credit
Hours of Service during an Employee's unpaid absence period (i) due to maternity
or paternity leave; or (ii) as required under the Family and Medical Leave Act.
The Advisory Committee considers an Employee on maternity or paternity leave if
the Employee's absence is due to the Employee's pregnancy, the birth of the
Employee's child, the placement with the Employee of an adopted child, or the
care of the Employee's child immediately following the child's birth or
placement. The Advisory Committee credits Hours of Service under this paragraph
on the basis of the number of Hours of Service the Employee would receive if he
were paid during the absence period or, if the Advisory Committee cannot
determine the number of Hours of Service the Employee would receive, on the
basis of 8 hours per day during the absence period. The Advisory Committee will
credit only the number (not exceeding 501) of Hours of Service necessary to
prevent an Employee's Break in Service. The Advisory Committee credits all Hours
of Service described in this paragraph to the computation period in which the
absence period begins or, if the Employee does not need these Hours of Service
to prevent a Break in Service in the computation period in which his absence
period begins, the Advisory Committee credits these Hours of Service to the
immediately following computation period.

     1.25 "Disability" means the Participant, because of a physical or mental
disability, will be unable to perform the duties of his customary position of
employment (or is unable to engage in any substantial gainful activity) for an
indefinite period which the Advisory Committee considers will be of long
continued duration. A Participant also is disabled if he incurs the permanent
loss or loss of use of a member or function of the body, or is permanently
disfigured, and incurs a Separation from Service. The Plan considers a
Participant disabled on the date the Advisory Committee determines the
Participant satisfies the definition of disability. The Advisory Committee may
require a Participant to submit to a physical examination in order to confirm
disability. The Advisory Committee will apply the provisions of this Section
1.25 in a nondiscriminatory, consistent and uniform manner.

     1.26 "Service for Predecessor Employer" If the Employer maintains the plan
of a predecessor employer, the Plan treats service of the Employee with the
predecessor employer as service with the Employer.

     1.27 "Related Employer" A related group is a controlled group of
corporations (as defined in Code (S)414(b)), trades or businesses (whether or
not incorporated) which are under common control (as defined in Code (S)414(c))
or an affiliated service group (as defined in Code (S)414(m) or in Code
(S)414(o)). If the Employer is a member of a related group, the term "Employer"
includes the related group members for purposes of crediting Hours of Service,
determining Years of Service and Breaks in Service under Articles II and V,
applying the limitations on allocations in Part 2 of Article III, applying the
top heavy rules and the minimum allocation requirements of Article III, the
definitions of Employee, Highly Compensated Employee, Compensation and Leased
Employee, and for any other purpose required by the applicable Code section or
by a Plan provision. However, only an Employer described in Section 1.02 may
contribute to the Plan and only an Employee employed by an Employer described in
Section 1.02 is eligible to participate in this Plan. For Plan allocation
purposes, "Compensation" does not include Compensation received from a related
employer that is not participating in this Plan.

                                       4



     1.28 "Leased Employees" The Plan treats a Leased Employee as an Employee of
the Employer. A Leased Employee is an individual (who otherwise is not an
Employee of the Employer) who, pursuant to a leasing agreement between the
Employer and any other person, has performed services for the Employer (or for
the Employer and any persons related to the Employer within the meaning of Code
(S)144(a)(3)) on a substantially full time basis for at least one year and who
performs such services under primary direction or control of the Employer. If a
Leased Employee is treated as an Employee by reason of this Section 1.28,
"Compensation" includes Compensation from the leasing organization which is
attributable to services performed for the Employer.

     Safe harbor plan exception. The Plan does not treat a Leased Employee as an
Employee if the leasing organization covers the employee in a safe harbor plan
and, prior to application of this safe harbor plan exception, 20% or less of the
Employer's Employees (other than Highly Compensated Employees) are Leased
Employees. A safe harbor plan is a money purchase pension plan providing
immediate participation, full and immediate vesting, and a nonintegrated
contribution formula equal to at least 10% of the employee's compensation
without regard to employment by the leasing organization on a specified date.
The safe harbor plan must determine the 10% contribution on the basis of
compensation as defined in Code (S)415(c)(3) including Elective Contributions
(as defined in Section 1.10).

     Other requirements. The Advisory Committee must apply this Section 1.28 in
a manner consistent with Code (S)(S)414(n) and 414(o) and the regulations
issued under those Code sections. If a Participant is a Leased Employee covered
by a plan maintained by the leasing organization, the Advisory Committee will
determine the allocation of Employer contributions and Participant forfeitures
on behalf of the Participant under the Employer's Plan without taking into
account the Leased Employee's allocation, if any, under the leasing
organization's plan.

     1.29 "Determination of Top Heavy Status" If this Plan is the only qualified
plan maintained by the Employer, the Plan is top heavy for a Plan Year if the
top heavy ratio as of the Determination Date exceeds 60%. The top heavy ratio is
a fraction, the numerator of which is the sum of the present value of Account
Balances of all Key Employees as of the Determination Date and the denominator
of which is a similar sum determined for all Employees. The Advisory Committee
must include in the top heavy ratio, as part of the present value of Account
Balances, any contribution not made as of the Determination Date but includible
under Code (S)416 and the applicable Treasury regulations, and distributions
made within the Determination Period. The Advisory Committee must calculate the
top heavy ratio by disregarding the Account Balance (and distributions, if any,
of the Account Balance) of any Non-Key Employee who was formerly a Key Employee,
and by disregarding the Accrued Benefit (including distributions, if any, of the
Accrued Benefit) of an individual who has not received credit for at least one
Hour of Service with the Employer during the Determination Period. The Advisory
Committee must calculate the top heavy ratio, including the extent to which it
must take into account distributions, rollovers and transfers, in accordance
with Code (S)416 and the regulations under that Code section.

     If the Employer maintains other qualified plans (including a simplified
employee pension plan), or maintained another such plan which now is terminated,
this Plan is top heavy only if it is part of the Required Aggregation Group, and
the top heavy ratio for the Required Aggregation Group and for the Permissive
Aggregation Group, if any, each exceeds 60%. The Advisory Committee will
calculate the top heavy ratio in the same manner as required by the first
paragraph of this Section 1.29, taking into account all plans within the
Aggregation Group. To the extent the Advisory Committee must take into account
distributions to a Participant, the Advisory Committee must include
distributions from a terminated plan which would have been part of the Required
Aggregation Group if it were in existence on the Determination Date. The
Advisory Committee will calculate the present value of Accrued Benefits under
defined benefit plans or simplified employee pension plans included within the
group in accordance with the terms of those plans, Code (S)416 and the
regulations under that Code section. If a Participant in a defined benefit plan
is a Non-Key Employee, the Advisory Committee will determine his Accrued Benefit
under the accrual method, if any, which is applicable uniformly to all defined
benefit plans maintained by the Employer or, if there is no uniform method, in
accordance with the slowest accrual rate permitted under the fractional rule
accrual method described in Code (S)411(b)(1)(C). To calculate the present
value of benefits from a defined benefit plan, the Advisory Committee will use
the actuarial assumptions (interest and mortality only) prescribed by the
defined benefit plan(s) to value benefits for top heavy purposes. If an
aggregated plan does not have a valuation date coinciding with the Determination
Date, the Advisory Committee must value the Accrued Benefits in the aggregated
plan as of the most recent valuation date falling within the twelve-month period
ending on the Determination Date, except as Code (S)416 and applicable Treasury
regulations require for the first and second plan year of a defined benefit
plan. The Advisory Committee will calculate the top heavy ratio with reference
to the Determination Dates that fall within the same calendar year.

     Definitions. For purposes of applying the provisions of this Section 1.29:

     (a) "Key Employee" means, as of any Determination Date, any Employee or
     former Employee (or Beneficiary of such Employee) who, at any time during
     the Determination Period: (i) has Compensation in excess of 50% of the

                                       5



     dollar amount prescribed in Code (S)415(b)(1)(A) (relating to defined
     benefit plans) and is an officer of the Employer; (ii) has Compensation in
     excess of the dollar amount prescribed in Code (S)415(c)(1)(A) (relating
     to defined contribution plans), owns a more than 1/2% interest in the
     Employer and is one of the Employees owning the ten largest interests in
     the Employer; (iii) is a more than 5% owner of the Employer; or (iv) is a
     more than 1% owner of the Employer and has Compensation of more than
     $150,000. The constructive ownership rules of Code (S)318 (or the
     principles of that section, in the case of an unincorporated Employer) will
     apply to determine ownership in the Employer. The number of officers taken
     into account under clause (i) will not exceed the greater of 3 or 10% of
     the total number (after application of the Code (S)414(q) exclusions) of
     Employees, but no more than 50 officers. The Advisory Committee will make
     the determination of who is a Key Employee in accordance with Code
     (S)416(i)(1) and the regulations under that Code section.

     (b) "Non-Key Employee" is an employee who does not meet the definition of
     Key Employee.

     (c) "Compensation" means the general definition of Compensation as
     determined under Section 3.12(b) for Code (S)415 purposes and includes
     Compensation for the entire Plan Year.

     (d) "Required Aggregation Group" means: (1) each qualified plan of the
     Employer in which at least one Key Employee participates or participated in
     at any time during the Determination Period (including terminated plans);
     and (2) any other qualified plan of the Employer which enables a plan
     described in clause (1) to meet the requirements of Code (S)401(a)(4) or
     Code (S)410.

     (e) "Permissive Aggregation Group" is the Required Aggregation Group plus
     any other qualified plans maintained by the Employer, but only if such
     group would satisfy in the aggregate the nondiscrmination requirements of
     Code (S)401(a)(4) and the coverage requirements of Code (S)410. The
     Advisory Committee will determine the Permissive Aggregation Group.

     (f) "Employer" means the Employer that adopts this Plan and any related
     employers described in Section 1.27.

     (g) "Determination Date" for any Plan Year is the Accounting Date of the
     preceding Plan Year or, in the case of the first Plan Year of the Plan, the
     Accounting Date of that Plan Year. The "Determination Period" is the 5 year
     period ending on the Determination Date.

     1.30 "Employer Stock" means common stock of Flow International Corporation.

     1.31 "Employer Stock Fund" means a pooled investment account limited to
shares of Employer Stock.

     1.32 PLAN MAINTAINED BY MORE THAN ONE EMPLOYER. If more than one employer
maintains this Plan, then for purposes of determining Service and Hours of
Service, the Advisory Committee will treat all Employers maintaining this Plan
as a single employer.

     Plan Allocations. The Advisory Committee must allocate all Employer
contributions and forfeitures to each Participant in the Plan, in accordance
with Article III and Section 9.11, without regard to which contributing Employer
employs the Participant. A Participant's Compensation includes Compensation from
all participating Employers, irrespective of which Employers are contributing to
the Plan.

     1.33 "Protected Benefit" means any accrued benefit described in Treas.
Reg.(S)1.411(d)-4, including any optional form of benefit provided under the
Plan which may not (except in accordance with such regulations) be reduced,
eliminated or made subject to Employer discretion.

                                       6



                                   ARTICLE II
                              EMPLOYEE PARTICIPANTS

     2.01 ELIGIBILITY. Each Employee (other than an Excluded Employee) becomes a
Participant in the Plan on the Plan Entry Date (if employed on that date)
coincident with or immediately following the date on which he completes one Year
of Service. Each Employee who was a participant in the Plan on the day before
the Effective Date of this restated Plan Section 2.01 continues as a Participant
in the Plan.

     Special eligibility rule for Code (S)401(k) arrangement. In lieu of the
eligibility requirements in the preceding paragraph, each Employee (other than
an Excluded Employee) becomes a participant in the Code (S)401(k) arrangement
on the Plan Entry Date (if employed on that date) immediately following the
Employee's Employment Commencement Date. If, for a Plan Year, an Employee is a
Participant solely in the 401(k) arrangement, the Employee does not share in the
allocation of any Employer contributions other than deferral contributions, as
described in Article III, nor in the allocation of any forfeitures.

     An Employee is an Excluded Employee if he is:

     (a) an individual whom the Employer does not report as a common-law
     employee of the Employer on the Employer's payroll records, even if a court
     or governmental entity determines that such individual is a common-law
     employee of the Employer;

     (b) a nonresident alien who receives no U.S. source earned income;

     (c) a Leased Employee treated as an Employee under Section 1.28; or

     (d) a member of a collective bargaining unit, unless the collective
     bargaining agreement provides otherwise. An Employee is a member of a
     collective bargaining unit if he is included in a unit of employees covered
     by an agreement which the Secretary of Labor finds to be a collective
     bargaining agreement between employee representatives and one or more
     employers if there is evidence that retirement benefits were the subject of
     good faith bargaining between such employee representatives and such
     employer or employers. The term "employee representatives" does not include
     an organization more than one half the members of which are owners,
     officers or executives of the Employer.

     If a Participant has not incurred a Separation from Service but becomes an
Excluded Employee, then during the period such a Participant is an Excluded
Employee, the Advisory Committee will limit that Participant's sharing in the
allocation of Employer contributions and Participant forfeitures, if any, under
the Plan by disregarding his Compensation paid by the Employer for services
rendered in his capacity as an Excluded Employee. However, during such period of
exclusion, the Participant, without regard to employment classification,
continues to receive credit for vesting under Article V for each included Year
of Service and the Participant's Account continues to share fully in Trust Fund
allocations under Section 9.11.

     If an Excluded Employee who is not a Participant becomes eligible to
participate in the Plan by reason of a change in employment classification, he
will participate in the Plan immediately if he has satisfied the eligibility
conditions of Section 2.01 and would have been a Participant had he not been an
Excluded Employee during his period of Service. Furthermore, the Plan takes into
account all of the Participant's included Years of Service with the Employer as
an Excluded Employee for purposes of vesting credit under Article V.

     2.02 YEAR OF SERVICE - PARTICIPATION. For purposes of an Employee's
participation in the Plan under Section 2.01, the Plan takes into account all of
his Years of Service with the Employer, except as provided in Section 2.03.
"Year of Service" means a 12 consecutive month period during which the Employee
completes not less than 1000 Hours of Service, measuring the beginning of the
first 12 month period from the Employment Commencement Date. If the Employee
does not complete 1000 Hours of Service during the 12 month period commencing
with the Employment Commencement Date, the Plan measures the second 12 month
period by reference to the Plan Year which includes the first anniversary of the
Employee's Employment Commencement Date. The Plan measures any subsequent 12
month period necessary for a determination of Year of Service for participation
by reference to succeeding Plan Years. "Employment Commencement Date" means the
date on which the Employee first performs an Hour of Service for the Employer.

     2.03 BREAK IN SERVICE - PARTICIPATION. For purposes of participation in the
Plan, the Plan does not apply any Break in Service rule.

     2.04 PARTICIPATION UPON RE-EMPLOYMENT. A Participant whose employment
terminates re-enters the Plan as a Participant on the date of his re-employment.
An Employee who satisfies the Plan's eligibility conditions but who terminates
employment prior to becoming a Participant becomes a Participant in the Plan on
the later of the Entry Date on which he would have entered the Plan had he not
terminated employment or the date of his reemployment. Any Employee

                                       7



who terminates employment prior to satisfying the Plan's eligibility conditions
becomes a Participant in accordance with the provisions of Section 2.01.

                                       8



                                   ARTICLE III
                     EMPLOYER CONTRIBUTIONS AND FORFEITURES

Part 1. Amount of Employer Contributions and Plan Allocations: Sections 3.01
through 3.06

     3.01 AMOUNT.

(A) Contribution formula.

     For each Plan Year, the Employer will contribute to the Trust the following
amounts:

     Deferral Contributions. The amount by which the Participants have elected
to reduce their Compensation for the Plan Year under their salary reduction
agreements on file with the Advisory Committee.

     Employer Matching Contributions. An amount equal to 50% of each
Participant's eligible contributions. For Participants with five or more years
of vesting service (see Article V), the matching contribution will be 75%
instead of 50%. The Employer also may contribute an additional amount, equal to
a percentage the Employer from time to time may deem advisable of each
Participant's eligible contributions. The Employer will determine the amount of
its matching contribution by disregarding Participants not entitled to an
allocation of Employer matching contributions. See Sections 3.04 and 3.06.

     Qualified nonelective contributions. The amount the Employer, in its sole
discretion, designates as qualified nonelective contributions.

     Nonelective contributions. Any additional amount the Employer may from time
to time deem advisable.

     Restrictions on contributions. The Employer will make its contribution
under the Plan, irrespective of whether it has net profits. Although, the
Employer may contribute to this Plan irrespective of whether it has net profits,
the Employer intends this Plan to be a profit sharing plan for all purposes
under the Code. The Employer will not make a contribution to the Trust for any
Plan Year to the extent the contribution would exceed the Participants' Maximum
Permissible Amounts. See Part 2 of this Article III.

     Eligible contributions. Under the matching contribution formula, a
Participant's "eligible contributions" are the deferral contributions allocated
to the Participant for the Plan Year not in excess of 6% of the Participant's
Compensation for the Plan Year. Eligible contributions do not include deferral
contributions attributable to Compensation for any period when the Participant
is not eligible to participate in the allocation of matching contributions.
Eligible contributions do not include deferral contributions that are excess
deferrals under Section 14.03. For this purpose: (a) excess deferrals relate
first to deferral contributions for the Plan Year not otherwise eligible for a
matching contribution; and (2) if the Plan Year is not a calendar year, the
excess deferrals for a Plan Year are the last deferrals made for a calendar
year.

     Notwithstanding any provision in this Article III to the contrary, the Plan
will provide contributions and Service credit with respect to qualified military
service in accordance with Code (S)414(u).

(B) Return of contributions.

     The Trustee, upon written request from the Employer, must return to the
Employer the amount of the Employer's contribution made by the Employer by
mistake of fact or the amount of the Employer's contribution disallowed as a
deduction under Code (S)404. The Trustee will not return any portion of the
Employer's contribution under the provisions of this paragraph more than one
year after:

     (a) The Employer made the contribution by mistake of fact; or

     (b) The disallowance of the contribution as a deduction, and then, only to
     the extent of the disallowance.

     The Trustee will not increase the amount of the Employer contribution
returnable under this Section 3.01 for any earnings attributable to the
contribution, but the Trustee will decrease the Employer contribution returnable
for any losses attributable to it. The Trustee may require the Employer to
furnish it whatever evidence the Trustee deems necessary to enable the Trustee
to confirm the amount the Employer has requested be returned is properly
returnable under ERISA.

     3.02 DETERMINATION OF CONTRIBUTION. The Employer, from its records,
determines the amount of any contributions to be made by it to the Trust under
the terms of the Plan.

     3.03 TIME OF PAYMENT OF CONTRIBUTION. The Employer may pay its contribution
for each Plan Year in one or more installments without interest. The Employer
must make its contribution to the Trustee within the time prescribed by the Code
or applicable federal regulations. Deferral contributions are Employer
contributions for all purposes under this Plan, except to the extent the Code or
Treasury regulations prohibit the use of these contributions to satisfy the
qualification requirements of the Code.

     3.04 CONTRIBUTION ALLOCATION.

                                       9



(A) Method of Allocation. To make allocations under the Plan, the Advisory
Committee must establish a Deferral Contributions Account, a Regular Matching
Contributions Account, a Qualified Matching Contributions Account, a Qualified
Nonelective Contributions Account and an Employer Contributions Account for each
Participant.

     Deferral Contributions. The Advisory Committee will allocate to each
Participant's Deferral Contributions Account the deferral contributions the
Employer makes to the Trust on behalf of the Participant. The Advisory Committee
will make this allocation of deferral contributions as of the date they actually
are paid to the Trust.

     Matching Contributions. The Advisory Committee will allocate matching
contributions as of the date the corresponding deferral contributions actually
are paid to the Trust. The Advisory Committee will allocate the matching
contributions to the Regular Matching Contributions Account of the Participant
on whose behalf the Employer makes that contribution.

     The Employer, at the time of contribution, must designate which portion, if
any, of its discretionary matching contribution is allocable to the Qualified
Matching Contributions Accounts of the Participants and which portion, if any,
of its discretionary matching contributions is allocable to the Regular Matching
Contributions Accounts of the Participants. The allocation of discretionary
matching contributions to a Participant's Account is in the same proportion that
each Participant's eligible contributions (as defined in Section 3.01) bears to
the total eligible contributions of all Participants, taking into account only
the eligible contributions subject to the matching contribution formula.

     Qualified nonelective contributions. If the Employer, at the time of
contribution, designates a contribution to be a qualified nonelective
contribution for the Plan Year, the Advisory Committee will allocate that
qualified nonelective contribution to the Qualified Nonelective Contributions
Account of each Participant eligible for an allocation of qualified nonelective
contributions. The Advisory Committee will make the allocation to each eligible
Participant's Account in the same ratio that the Participant's Compensation for
the Plan Year bears to the total Compensation of all Participants for the Plan
Year. For purposes of allocating the qualified nonelective contributions, the
term "Participant" means any Participant who satisfies the conditions of Section
3.06.

     Nonelective contributions. Subject to any restoration allocation required
under Section 5.04, the Advisory Committee will allocate and credit each annual
Employer nonelective contribution, if any (and Participant forfeitures, if any),
to the Employer Contributions Account of each Participant who satisfies the
conditions of Section 3.06. The Advisory Committee will make this allocation in
the same ratio that each Participant's Compensation for the Plan Year for which
the Employer makes the contribution bears to the total Compensation of all
Participants for the Plan Year.

(B) Top Heavy Minimum Allocation.

     (1) Minimum Allocation. If the Plan is top heavy in any Plan Year:

          (a) Each Non-Key Employee (as defined in Section 1.29) who is a
          Participant and is employed by the Employer on the last day of the
          Plan Year will receive a top heavy minimum allocation for that Plan
          Year; and

          (b) The top heavy minimum allocation is equal to the lesser of 3% of
          the Non-Key Employee's Compensation (as defined in Section 1.29) for
          the Plan Year or the highest contribution rate for the Plan Year made
          on behalf of any Key Employee (as defined in Section 1.29). However,
          if a defined benefit plan maintained by the Employer which benefits a
          Key Employee depends on this Plan to satisfy the antidiscrimination
          rules of Code (S)401(a)(4) or the coverage rules of Code (S)410 (or
          another plan benefiting the Key Employee so depends on such defined
          benefit plan), the top heavy minimum allocation is 3% of the Non-Key
          Employee's Compensation regardless of the contribution rate for the
          Key Employees.

     (2) Special Definitions. For purposes of this Section 3.04(B), the term
"Participant" includes any Employee otherwise eligible to participate in the
Plan but who is not a Participant because of his failure to make elective
deferrals under a Code (S)401(k) arrangement or because of his failure to make
mandatory employee contributions.

     (3) Determining Contribution Rates. In determining under Section
3.04(B)(1)(b) the highest contribution rate for any Key Employee the Plan
Administrator takes into account all Employer contributions (including deferral
contributions and including matching contributions but not including Employer
contributions to Social Security) and forfeitures allocated to the Participant's
Account for the Plan Year divided by his Compensation for the entire Plan Year.
For purposes of satisfying the Employer's top-heavy minimum allocation
requirement, the Plan Administrator disregards the elective deferrals and
matching contributions allocated to a Non-Key Employee's Account in determining
the Non-Key Employee's contribution rate. However, the Plan Administrator
operationally may include in the contribution rate of a Non-Key Employee any
matching contributions not necessary to satisfy nondiscrimination requirements
of Code (S)401(k) or Code (S)401(m). To determine a Participant's contribution
rate, the Advisory Committee must treat all qualified top heavy

                                       10



defined contribution plans maintained by the Employer (or by any related
Employers described in Section 1.27) as a single plan.

     (4) No Allocations. If, for a Plan Year, there are no allocations of
Employer contributions or forfeitures for any Key Employee, the Plan does not
require any top heavy minimum allocation for the Plan Year, unless a top heavy
minimum allocation applies because of the maintenance by the Employer of more
than one plan.

     (5) Method of Compliance. The Plan will satisfy the top heavy minimum
allocation in accordance with this Section 3.04(B)(5). The Employer will
contribute an additional amount for the Account of any Participant who is
entitled under this Section 3.04(B) to a top heavy minimum allocation, if that
Participant's contribution rate for the Plan Year, under this Plan and any other
plan aggregated under Section 1.29, is less than the top heavy minimum
allocation. The additional amount is the amount necessary to increase the
Participant's contribution rate to the top heavy minimum allocation. The
Advisory Committee will allocate the additional contribution to the Account of
the Participant on whose behalf the Employer makes the contribution.

     3.05 FORFEITURE ALLOCATION. The amount of a Participant's Account Balance
forfeited under the Plan is a Participant forfeiture. Subject to any restoration
allocation required under Sections 5.04 or 9.14 and the special forfeiture
allocation for certain excess aggregate contributions described in Section
14.05, the Advisory Committee will allocate the amount of a Participant
forfeiture in accordance with Section 3.04, to reduce the Employer matching
contribution contributions and nonelective contributions for the Plan Year in
which the forfeiture occurs. The Advisory Committee will continue to hold the
undistributed, non-vested portion of a terminated Participant's Accrued Benefit
in his Account solely for his benefit until a forfeiture occurs at the time
specified in Section 5.09, or, if applicable, until the time specified in
Section 9.14. Except as provided under Section 5.04, a Participant will not
share in the allocation of a forfeiture of any portion of his Accrued Benefit.

     Forfeiture of certain matching contributions. A Participant will forfeit
any matching contributions allocated with respect to excess deferrals, excess
contributions or excess aggregate contributions, as determined under Article
XIV. The Advisory Committee will allocate these forfeited amounts in accordance
with this Section 3.05.

     3.06 ACCRUAL OF BENEFIT. The Advisory Committee will determine the accrual
of benefit (Employer contributions and Participant forfeitures) on the basis of
the Plan Year.

(A) Compensation Taken Into Account. In allocating an Employer qualified
nonelective contribution or nonelective contribution to a Participant's Account,
the Advisory Committee, except for purposes of determining the top heavy minimum
contribution under Section 3.04(B), will take into account only the Compensation
determined for the portion of the Plan Year in which the Employee actually is a
Participant.

(B) Hours of Service Requirement. Subject to the top heavy minimum allocation
requirement of Section 3.04(B), the Advisory Committee will not allocate any
portion of an Employer contribution for a Plan Year to any Participant's Account
if the Participant does not complete a minimum of 1,000 Hours of Service during
the Plan Year, unless the Participant terminates employment during the Plan Year
because of death or disability or because of the attainment of Normal
Requirement Age in the current Plan Year or in a prior Plan Year. The 1,000
Hours of Service requirement does not apply to an allocation of deferral
contributions or matching contributions.

(C) Employment Requirement. A Participant who, during a particular Plan Year,
completes the Hours of Service requirement under Section 3.06(B) will not share
in the allocation of Employer contributions and Participant forfeitures, if any,
for that Plan Year unless he is employed by the Employer on the Accounting Date
of that Plan Year. This employment requirement does not apply if the Participant
terminates employment during the Plan Year because of death or disability or
because of attainment of Normal Retirement Age in the current Plan Year or in a
prior Plan Year. This employment requirement will not apply to an allocation of
matching contributions or deferral contributions..

(D) [Reserved.]

Part 2. Limitations on Allocations: Sections 3.07 through 3.12

     3.07 LIMITATIONS ON ALLOCATIONS TO PARTICIPANTS' ACCOUNTS. The amount of
Annual Additions which the Advisory Committee may allocate under this Plan to a
Participant's Account for a Limitation Year may not exceed the Maximum
Permissible Amount. If the amount the Employer otherwise would contribute to the
Participant's Account would cause the Annual Additions for the Limitation Year
to exceed the Maximum Permissible Amount, the Employer will reduce the amount of
its contribution so the Annual Additions for the Limitation Year will equal the
Maximum Permissible Amount. If the Annual Additions the Advisory Committee
otherwise would allocate under the Plan to a Participant's Account would for the
Limitation Year exceed the Maximum Permissible Amount, the Advisory Committee
will not allocate the Excess Amount, but will instead take any reasonable,
uniform and nondiscriminatory action the Advisory Committee determines necessary
to avoid allocation of an Excess Amount. Such actions include, but are not

                                       11



limited to, those described in this Section 3.07. If the Plan includes a 401(k)
,arrangement, the Advisory Committee may apply this Section 3.07 in a manner
which maximizes the allocation to a Participant of Employer contributions
(exclusive of the Participant's deferral contributions). Notwithstanding any
contrary Plan provision, the Advisory Committee, for the Limitation Year, may:
(1) suspend or limit a Participant's additional Employee contributions or
deferral contributions: (2) notify the Employer to reduce the Employer's future
Plan contribution(s) as necessary to avoid allocation to a Participant of an
Excess Amount; or (3) suspend or limit the allocation to a Participant of any
Employer contribution previously made to the Plan (exclusive of deferral
contributions) or of any Participant forfeiture. If an allocation of Employer
contributions previously made (excluding a Participant's deferral contributions)
or of Participant forfeitures would result in an Excess Amount to a
Participant's Account, the Advisory Committee will allocate the Excess Amount to
the remaining Participants who are eligible for an allocation of Employer
contributions for the Plan Year in which the Limitation Year ends. The Advisory
Committee will make this allocation in accordance with the Plan's allocation
method as if the Participant whose Account otherwise would receive the Excess
Amount, is not eligible for an allocation of Employer contributions. If the
Advisory Committee allocates to a Participant an Excess Amount, the Advisory
Committee must dispose of the Excess Amount in accordance with Section 3.10
(relating to certain "reasonable errors" and allocation of forfeitures) or, if
Section 3.l0 does not apply, the Advisory Committee will dispose of the Excess
Amount under Section 9.15.

     3.08 ESTIMATING COMPENSATION. Prior to the determination of the
Participant's actual Compensation for a Limitation Year, the Advisory Committee
may determine the Maximum Permissible Amount on the basis of the Participant's
estimated annual Compensation for such Limitation Year. The Advisory Committee
must make this determination on a reasonable and uniform basis for all
Participants similarly situated. The Advisory Committee must reduce any Employer
contributions (including any allocation of forfeitures) based on estimated
annual Compensation by any Excess Amounts carried over from prior Limitation
Years.

     3.09 DETERMINATION BASED ON ACTUAL COMPENSATION. As soon as is
administratively feasible after the end of the Limitation Year, the Advisory
Committee will determine the Maximum Permissible Amount for such Limitation Year
on the basis of the Participant's actual Compensation for the Limitation Year.

     3.10 DISPOSITION OF ALLOCATED EXCESS AMOUNT. If, because of a reasonable
error in estimating a Participant's actual Limitation Year Compensation, because
of the allocation of forfeitures, because of a reasonable error in determining a
Participant's deferral contributions or because of any other facts and
circumstances the Internal Revenue Service ("Revenue Service") considers to
constitute reasonable error, a Participant receives an allocation of an Excess
Amount for a Limitation Year, the Advisory Committee shall dispose of such
Excess Amount as follows:

     (1) The Advisory Committee first will return to the Participant any
     nondeductible voluntary Employee contributions and then any Participant
     deferral contributions (adjusted for earnings) to the extent necessary to
     reduce or eliminate the Excess Amount.

     (2) If, after the application of paragraph (1), an Excess Amount still
     exists, and the Plan covers the Participant at the end of the Limitation
     Year, then the Advisory Committee will use the Excess Amount(s) to reduce
     future Employer contributions (including any allocation of forfeitures)
     under the Plan for the next Limitation Year and for each succeeding
     Limitation Year, as is necessary, for the Participant. A Participant who is
     a Highly Compensated Employee may elect to limit his/her Compensation for
     allocation purposes to the extent necessary to reduce his/her allocation
     for the Limitation Year to the Maximum Permissible Amount and to eliminate
     the Excess Amount.

     (3) If, after the application of paragraph (1), an Excess Amount still
     exists, and the Plan does not cover the Participant at the end of the
     Limitation Year, then the Advisory Committee will hold the Excess Amount
     unallocated in a suspense account. The Advisory Committee will apply the
     suspense account to reduce Employer Contributions (including allocation of
     forfeitures) for all remaining Participants in the next Limitation Year,
     and in each succeeding Limitation Year if necessary. Amounts held
     unallocated in a suspense account will not share in any allocation of Trust
     Fund net income, gain or loss.

     (4) The Advisory Committee under paragraphs (2) or (3) will not distribute
     any Excess Amount(s) to Participants or to former Participants.

     3.11 OTHER DEFINED CONTRIBUTION PLANS LIMITATION. If the Advisory Committee
allocated an Excess Amount to a Participant's Account on an allocation date of
this Plan which coincides with an allocation date of another defined
contribution plan maintained by the Employer, the Advisory Committee will
attribute the total Excess Amount allocated as of such date to such other plan.

     3.12 DEFINITIONS - ARTICLE III. For purposes of Part 2 Article III, the
following terms mean:

                                       12



     (a) "Annual Addition" - The sum of the following amounts allocated to a
     Participant's Account for a Limitation Year, of (i) all Employer
     contributions (including Participant deferral contributions); (ii) all
     forfeitures; (iii) all Employee contributions; (iv) Excess Amounts
     reapplied to reduce Employer contributions under Section 3.10; (v) amounts
     allocated after March 31, 1984, to an individual medical account (as
     defined in Code (S)415(1)(2)) included as part of a defined benefit plan
     maintained by the Employer; (vi) contributions paid or accrued after
     December 31, 1985, for taxable years ending after December 31, 1985,
     attributable to post-retirement medical benefits allocated to the separate
     account of a key employee (as defined in Codes (S)419A(d)(3) under a
     welfare benefit fund (as defined in Code (S)419(e)) maintained by the
     Employer; (vii) amounts allocated under a Simplified Employee Pension Plan;
     and (viii) corrected excess contributions described in Code (S)401(k) and
     corrected excess aggregate contributions described in Code (S)401(m).
     Excess deferrals described in Code (S)402(g) that the Advisory Committee
     corrects by distribution by April 15 of the following calendar year are not
     Annual Additions.

     (b) "Compensation" - Compensation as determined under the general
     definition in Section 1.10(A).

     (c) "Maximum Permissible Amount" - The lesser of (i) $30,000 (or, if
     greater, the $30,000 amount as adjusted under Code (S)415(d)), or (ii) 25%
     of the Participant's Compensation for the Limitation Year. If there is a
     short Limitation Year because of a change in Limitation Year, the Advisory
     Committee will multiply the $30,000 limitation (or larger limitation) by
     the following fraction:

                  Number of months in the short Limitation Year
                                       12

     The 25% limitation does not apply to any contribution for medical benefits
     within the meaning of Code (S)401(h) or Code (S)419A(f)(2) which
     otherwise is an Annual Addition.

     (d) "Employer" - The Employer that adopts this Plan and any related
     employers described in Section 1.27. Solely for purposes of applying the
     limitations of Part 2 of this Article III, the Advisory Committee will
     determine related employers described in Section 1.27 by modifying Code
     (S)(S)414(b) and (c) in accordance with Code (S)415(h).

     (e) "Excess Amount" - The excess of the Participant's Annual Additions for
     the Limitation Year over the Maximum Permissible Amount.

     (f) "Limitation Year" - The Plan Year. If the Employer amends the
     Limitation Year to a different 12 consecutive month period, the new
     Limitation Year must begin on a date within the Limitation Year for which
     the Employer makes the amendment, creating a short Limitation Year.

     (g) "Defined contribution plan" - A retirement plan which provides for an
     individual account for each participant and for benefits based solely on
     the amount contributed to the participant's account, and any income,
     expenses, gains and losses, and any forfeitures of accounts of other
     participants which the plan may allocate to such participant's account. The
     Advisory Committee must treat all defined contribution plans (whether or
     not terminated) maintained by the Employer as a single plan. For purposes
     of the limitations of Part 2 of this Article III , the Advisory Committee
     will treat employee contributions made to a defined benefit plan maintained
     by the Employer as a separate defined contribution plan. The Advisory
     Committee also will treat as a defined contribution plan an individual
     medical account (as defined in Code (S)415(1)(2)) included as part of a
     defined benefit plan maintained by the Employer and, for taxable years
     ending after December 31, 1985, a welfare benefit fund under Code (S)
     419(e) maintained by the Employer to the extent there are post-retirement
     medical benefits allocated to the separate account of a key employee (as
     defined in Code (S)419A(d)(3)).

     (h) "Defined benefit plan" - A retirement plan which does not provide for
     individual accounts for Employer contributions. The Advisory Committee must
     treat all defined benefit plans (whether or not terminated) maintained by
     the Employer as a single plan.

                                       13



                                   ARTICLE IV
                            PARTICIPANT CONTRIBUTIONS

     4.01 PARTICIPANT VOLUNTARY CONTRIBUTIONS. The Plan does not permit nor
require Participant voluntary contributions.

     4.02 [Reserved]

     4.03 ROLLOVER CONTRIBUTIONS. A "rollover contribution" is an amount of cash
or property which the Code permits an eligible Employee or Participant to
transfer directly or indirectly to this Plan from another qualified plan. The
Employer operationally and on a nondiscriminatory basis, may elect to permit or
not to permit rollover contributions to this Plan or may elect to limit an
eligible Employee's right or a Participant's right to make a rollover
contribution. If the Employer permits rollover contributions, any Participant
(or as applicable, any eligible Employee) with the Employer's written consent
and after filing with the Trustee the form prescribed by the Advisory Committee,
may make a rollover contribution to the Trust. Before accepting a rollover
contribution, the Trustee may require a Participant (or eligible Employee) to
furnish satisfactory evidence that the proposed transfer is in fact a "rollover
contribution" which the Code permits an employee to make to a qualified plan. A
rollover contribution is not an Annual Addition under Part 2 of Article III.

     If an eligible Employee makes a rollover contribution to the Trust prior to
satisfying the Plan's eligibility conditions, the Plan Administrator and Trustee
must treat the Employee as a limited Participant (as described in Revenue Ruling
96-48 or in any successor ruling). A limited Participant does not share in the
Plan's allocation of Employer contributions nor Participant forfeitures and may
not make deferral contributions until he/she actually becomes a Participant in
the Plan. If a limited Participant has a Separation from Service prior to
becoming a Participant in the Plan. the Trustee will distribute his/her rollover
contributions Account to him/her in accordance with Article VI as if it were an
Employer contributions Account.

     4.04 ROLLOVER CONTRIBUTION - FORFEITABILITY. A Participant's Account
Balance is, at all times, 100% Vested to the extent the value of his Account
Balance is derived from his rollover contributions to the Trust for his own
benefit.

     4.05 ROLLOVER CONTRIBUTION WITHDRAWAL/DISTRIBUTION. A Participant, by
giving prior written notice to the Trustee, may withdraw all or any part of the
value of his Account Balance derived from his Participant rollover
contributions. A Participant may not exercise his right to withdraw the value of
his Account Balance derived from his rollover contributions more than once
during any Plan Year. The Trustee, following a Participant's Separation from
Service, will distribute to the Participant his/her Rollover Contributions
Account in accordance with Article VI in the same manner as the Trustee
distributes the Participant's Employer Contributions Account.

     4.06 ROLLOVER CONTRIBUTION - ACCRUED BENEFIT. The Advisory Committee must
maintain a separate Rollover Contributions Account(s) in the name of each
Participant to reflect the Participant's rollover contributions, as adjusted for
earnings, gains and losses. A Participant's Account Balance derived from his
rollover contributions as of any applicable date is the balance of his separate
Rollover Contributions Account(s). The assets in a Participant's (or eligible
Employee's) Rollover Contributions Account shall be subject to the Participant's
(or eligible Employee's) direction of investment in accordance with Section
8.10.

                                       14



                                    ARTICLE V
                  TERMINATION OF SERVICE - PARTICIPANT VESTING

     5.01 NORMAL RETIREMENT AGE. A Participant's Normal Retirement Age is 65
years of age. A Participant who remains in the employ of the Employer after
attaining Normal Retirement Age will continue to participate in Employer
contributions. A Participant's Account Balance derived from Employer
contributions is 100% Vested upon and after his attaining Normal Retirement Age
(if employed by the Employer on or after that date).

     5.02 PARTICIPANT DISABILITY OR DEATH. If a Participant's employment with
the Employer terminates as a result of death or disability, the Participant's
Account Balance derived from Employer contributions will be 100% Vested.

     5.03 VESTING SCHEDULE. A Participant has a 100% Vested interest at all
times in his Deferral Contributions Account, Qualified Matching Contributions
Account, and Qualified Nonelective Contributions Account . Except as provided in
Sections 5.01 and 5.02, for each Year of Service, a Participant's Vested
percentage of his Regular Matching Contributions Account and Employer
Contributions Account equals the percentage in the following vesting schedule:

                       Percent of
Years of Service         Vested
with the Employer   Account Balance
- -----------------   ---------------
   Less than 1            None
        1                   20%
        2                   40%
        3                   60%
        4                   80%
    5 or more              100%

     5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/RESTORATION OF
FORFEITED ACCRUED BENEFIT. If pursuant to Article VI, a partially-vested
Participant receives a cash-out distribution before he incurs a Forfeiture Break
in Service (as defined in Section 5.08), the cash-out distribution will result
in an immediate forfeiture of the nonvested portion of the Participant's Account
Balance derived from Employer contributions. See Section 5.09. A
partially-vested Participant is a Participant whose Vested Percentage determined
under Section 5.03 is less than 100%. A cash-out distribution is a distribution
of the entire present value of the Participant's Vested Account Balance.

(A) Restoration and Conditions upon Restoration. A partially-vested Participant
who is re-employed by the Employer after receiving a cash-out distribution of
the Vested percentage of his Account Balance may repay the Trustee the amount of
the cash-out distribution attributable to Employer contributions, unless the
Participant no longer has a right to restoration under the requirements of this
Section 5.04. If a partially-vested Participant makes the cash-out distribution
repayment, the Advisory Committee, subject to the conditions of this paragraph
(A), must restore his Account Balance attributable to Employer contributions to
the same dollar amount as the dollar amount of his Account Balance on the
Accounting Date, or other valuation date, immediately preceding the cash-out
distribution date, unadjusted for any gains or losses occurring subsequent to
that Accounting Date, or other valuation date. Restoration of the Participant's
Account Balance shall include restoration of all Code (S)411(d)(6) protected
benefits with respect to that restored Account Balance, in accordance with
applicable Treasury regulations. The Advisory Committee shall not restore a
re-employed Participant's Account Balance under this paragraph if:

     (1) 5 years have elapsed since the Participant's first re-employment date
     following the cash-out distribution; or

     (2) The Participant incurred a Forfeiture Break in Service (as defined in
     Section 5.08). This condition also applies if the Participant makes
     repayment within the Plan Year in which he incurs the Forfeiture Break in
     Service and that Forfeiture Break in Service would result in a complete
     forfeiture of the amount the Advisory Committee otherwise would restore.

(B) Time and Method of Restoration. If neither of the two conditions preventing
restoration of the Participant's Account Balance applies, the Advisory Committee
will restore the Participant's Account Balance as of the Plan Year Accounting
Date coincident with or immediately following the repayment. To restore the
Participant's Account Balance, the Advisory Committee, to the extent necessary,
will allocate to the Participant's Account:

     (1) First, the amount, if any, of Participant forfeitures the Advisory
     Committee would otherwise allocate under Section 3.05;

     (2) Second, the amount, if any, of the Trust Fund net income or gain for
     the Plan Year; and

                                       15



     (3) Third, the Employer contribution for the Plan Year to the extent made
     under a discretionary formula.

     To the extent the amounts described in clauses (1), (2) and (3) are
insufficient to enable the Advisory Committee to make the required restoration,
the Employer must contribute, without regard to any requirement or condition of
Section 3.01, the additional amount as is necessary to enable the Advisory
Committee to make the required restoration. If, for a particular Plan Year, the
Advisory Committee must restore the Account Balance of more than one re-employed
Participant, then the Advisory Committee will make the restoration allocation(s)
to each such Participant's Account in the same proportion that a Participant's
restored amount for the Plan Year bears to the restored amount for the Plan Year
of all re-employed Participants. The Advisory Committee will not take into
account the allocation under this Section 5.04 in applying the limitation on
allocations under Part 2 of Article III.

(C) 0% Vested Participant. The deemed cash-out rule applies to a 0% vested
Participant. A 0% vested Participant is a Participant whose Account Balance
derived from Employer contributions is entirely forfeitable at the time of his
Separation from Service. Under the deemed cash-out rule, the Advisory Committee
will treat the 0% vested Participant as having received a cash-out distribution
on the date of the Participant's Separation from Service or, if the
Participant's Account is entitled to an allocation of Employer contributions for
the Plan Year in which he separates from Service, on the last day of that Plan
Year. For purposes of applying the restoration provisions of this Section 5.04,
the Advisory Committee will treat the 0% vested Participant as repaying his
cash-out "distribution" on the first date of his re-employment with the
Employer.

     5.05 ACCOUNTING FOR REPAID AMOUNT. Until the Advisory Committee restores
the Participant's Account Balance, as described in Section 5.04, the Trustee
will invest the cash-out amount the Participant has repaid in the same manner
that salary deferral contributions for such Participant would be invested.
Unless the repayment qualifies as a rollover contribution, the Advisory
Committee will direct the Trustee to repay to the Participant as soon as is
administratively practicable the full amount of the Participant's repayment
(with earnings or losses as determined under a weighting method similar to that
described under Section 9.11) if the Advisory Committee determines either of the
conditions of Section 5.04(A) prevents restoration as of the applicable
Accounting Date, notwithstanding the Participant's repayments.

     5.06 YEAR OF SERVICE - VESTING. For purposes of vesting under Section 5.03,
Year of Service means the following:

     (a) Vesting Service from May 1, 1986 to April 30, 1988: any Plan Year
     (based on the prior plan year, which was the 12 consecutive month period
     ending every April 30) during which the Employee completes not less than
     1,000 Hours of Service with the Employer, including Plan Years prior to the
     Effective Date of the Plan.

     (b) Vesting Service from May 1, 1988 to December 31, 1989: There shall be
     special vesting computation periods of May 1, 1988 to April 30, 1989 and
     January 1, 1989 to December 31, 1989. A Participant who is credited with at
     least 1,000 hours of service in any such computation period shall be
     credited with a year of Vesting Service for such period. Any employee who
     is credited with at least 1,000 hours of service in both computation
     periods shall be credited with two years of Vesting Service for such
     periods.

     (c) Vesting Service from and after January 1, 1990: any Plan Year (based on
     the Plan Year, which is the 12 consecutive month period ending every
     December 31) during which the Employee completes not less than 1,000 Hours
     of Service with the Employer.

     5.07 BREAK IN SERVICE - VESTING. For purposes of this Article V, a
Participant shall incur a "Break in Service" if, during any Plan Year, he does
not complete more than 500 Hours of Service with the Employer.

     5.08 INCLUDED YEARS OF SERVICE - VESTING. For purposes of determining
"Years of Service" under Section 5.06, the Plan takes into account all Years of
Service an Employee completes with the Employer, except any Year of Service
before the Plan Year in which the Participant attained the age of 18. For the
sole purpose of determining a Participant's Vested percentage of his Account
Balance derived from Employer contributions which accrued for his benefit prior
to a Forfeiture Break in Service, the Plan disregards any Year of Service after
the Participant first incurs a Forfeiture Break in Service. The Participant
incurs a Forfeiture Break in Service when he incurs 5 consecutive Breaks in
Service.

     5.09 FORFEITURE OCCURS. A Participant's forfeiture, if any, of his Account
Balance derived from Employer contributions occurs under the Plan on the earlier
of:

     (a) The last day of the Plan Year in which the Participant first incurs a
     Forfeiture Break in Service; or,

     (b) The date the Participant receives a cash-out distribution.

     The Advisory Committee determines the percentage of a Participant's Account
Balance forfeiture, if any, under this Section 5.09 solely by reference to the
vesting schedule of Section 5.03. A Participant will not forfeit any portion of

                                       16



his Account Balance for any other reason or cause except as expressly provided
by this Section 5.09 or as provided under Section 9.14.

                                       17



                                   ARTICLE VI
                                  DISTRIBUTIONS

     6.01 TIMING OF DISTRIBUTION. The Advisory Committee will direct the Trustee
to commence distribution of a Participant's Vested Account Balance in accordance
with this Section 6.01 upon the Participant's Separation from Service for any
reason, or if the Participant exercises an in-Service distribution right under
the Plan. For purposes of this Article VI, with respect to distributions from a
Participant's Deferral Contributions Account or Qualified Nonelective
Contributions Account on account of a Separation from Service, "Separation from
Service" means as the Advisory Committee determines under applicable Internal
Revenue Service guidance.

(A) Distribution upon Separation from Service (Other Than Death).

     For a Participant who incurs a Separation from Service for a reason other
than death, the Advisory Committee will direct the Trustee to commence
distribution of the Participant's Account Balance, as follows:

     (1) Participant's Vested Account Balance Not Exceeding $5,000. Upon the
Participant's Separation from Service for any reason other than death, the
Advisory Committee (without any requirement of Participant consent) will direct
the Trustee to distribute the Participant's Vested Account Balance (determined
in accordance with Section 6.01(A)(6)) not exceeding $5,000 in a lump sum as
soon as administratively practicable in the first two calendar months following
the Participant's Separation from Service with the Employer, but in no event
later than the 60th day following the close of the Plan Year in which the later
of the following events occur: (a) the Participant attains Normal Retirement
Age; or (b) the Participant Separates from Service.

     (2) Participant's Vested Account Balance Exceeds $5,000. Upon Separation
from Service for any reason other than death, a Participant whose Vested Account
Balance (determined in accordance with Section 6.01(A)(6)) exceeds $5,000 may
elect to commence distribution of his Vested Account Balance no earlier than as
soon as is administratively practicable in the first two calendar months
following the Participant's Separation from Service. The Advisory Committee,
subject to the Participant's election to postpone distribution under this
Section 6.01(A)(2) and the consent requirements of Section 6.01(A)(5), will
direct the Trustee to commence distribution of the Participant's Vested Account
Balance as elected by the Participant. Any election under this Section
6.01(A)(2) is subject to the requirements of Section 6.02.

     A Participant eligible to make an election under this Section 6.01(A)(2)
may elect to postpone distribution to any specified date, but not beyond the
later of the date the Participant attains age 62 or Normal Retirement Age. The
Plan Administrator will reapply the notice and consent requirements of Section
6.01(A)(4) and Section 6.01(A)(5) to any distribution postponed under this
Section 6.01(A)(2).

     In the absence of a Participant's consent and distribution election (as
described in Section 6.01(A)(5)) or in the absence of the Participant's election
to postpone distribution prior to his annuity starting date, the Advisory
Committee will treat the Participant as having elected to postpone his
distribution until the 60th day following the close of the Plan Year in which
the latest of the following events occurs: (a) the Participant attains Normal
Retirement Age; (b) the Participant attains age 62; or (c) the Participant's
Separation from Service. At the applicable date, the Advisory Committee then
will direct the Trustee to distribute the Participant's Vested Account balance
in a lump sum.

     (3) [Reserved.]

     (4) Distribution notice/annuity starting date. At least 30 days and not
more than 90 days prior to the Participant's annuity starting date, the Advisory
Committee must provide a written notice (or a summary notice as permitted under
Treasury regulations) to a Participant who is eligible to make an election under
Section 6.01(A)(2) ("distribution notice"). The distribution notice must explain
the optional forms of benefit in the Plan, including the material features and
relative values of those options, and the Participant's right to postpone
distribution until the applicable date described in Section 6.01(A)(2). For all
purposes of this Article VI, the term "annuity starting date" means the first
day of the first period for which the Plan pays an amount as an annuity or in
any other form but in no event is the "annuity starting date" earlier than a
Participant's Separation from Service.

     (5) Consent requirements/Participant distribution election. A Participant
must consent, in writing, following receipt of the distribution notice, to any
distribution under this Section 6.01, if at the time of the distribution to the
Participant, the Participant's Vested Account Balance exceeds $5,000 and the
Participant has not attained the later of Normal Retirement Age or age 62.
Accounts which are distributable prior to the foregoing applicable age are
"immediately distributable." The Participant may reconsider his distribution
election at any time prior to the annuity starting date and elect to commence
distribution as of any other date permitted under the Plan. A Participant may
elect to receive distribution at any administratively practicable time which is
earlier than 30 days following the Participant's receipt of the distribution
notice, by waiving in writing the balance of the 30 days. The consent
requirements of this Section 6.01(A)(5) do not apply with respect to defaulted
loans described in Section 10.03(B).

                                       18



     (6) Determination of Vested Account Balance. For purposes of the consent
requirements under this Article VI, the Plan Administrator determines a
Participant's Vested Account Balance as of the most recent valuation date
immediately prior to the distribution date, and takes into account the
Participant's entire Account, including deferral contributions. The Advisory
Committee in determining the Participant's Vested Account Balance at the
relevant time, will disregard a Participant's Vested Account Balance existing on
any prior date, except as the Code otherwise may require.

     (7) Consent to cash-out/forfeiture. If a Participant is partially-Vested in
his Account Balance, a Participant's election under Section 6.01(A)(2) to
receive distribution prior to the Participant's incurring a Forfeiture Break in
Service. must be in the form of a cash-out distribution as defined in Section
5.04.

(B) Distribution upon Death. In the event of the Participant's Separation from
Service on account of death, the Advisory Committee will direct the Trustee, in
accordance with this Section 6.01(B) and subject to Section 6.02(D), to
distribute to the Participant's Beneficiary the Participant's Vested Account
Balance remaining in the Trust at the time of the Participant's death.

     The Advisory Committee, subject to the requirements Section 6.02(D) or to a
Beneficiary's written election (if authorized by the next paragraph of this
Section 6.01(B)), must direct the Trustee to distribute or commence distribution
of the deceased Participant's Vested Account Balance as soon as administratively
practicable following the Participant's death or, if later, on the date on which
the Advisory Committee receives notification of or otherwise confirms the
Participant's death. If the Participant's Vested Account Balance determined in
accordance with Section 6.01(A)(6) does not exceed $5,000, the Trustee will
distribute the balance in a lump sum. If the Participant's Vested Account
Balance exceeds $5,000, the Trustee will distribute the balance subject to
Section 6.02(D).

     If the Participant's death benefit is payable in full to the Participant's
surviving spouse, the surviving spouse may elect distribution at any time or in
any form (other than the joint and survivor annuity) this Article VI would
permit for a Participant to elect upon a Separation from Service.

(C) In Service-Distributions.

     (1) Deferral Contributions Account and Qualified Nonelective Contributions
Account. The Participant, until he retires, has a continuing election to receive
a distribution from his Deferral Contributions Account and Qualified Nonelective
Contributions Account if: he has attained age 59 1/2; or, in the case of his
Deferral Contributions Account, he satisfies the conditions for a hardship, as
described in paragraph (4). A hardship distribution option may not apply to the
Participants Qualified Nonelective Contributions Accounts, except as provided in
paragraph (5). If the Employer sells substantially all of the assets (within the
meaning of Code (S)409(d)(2)) used in a trade or business or sells a subsidiary
(within the meaning of Code (S)409(d)(3)), a Participant who continues
employment with the acquiring corporation is eligible for distribution from
these Accounts as if he has a Separation from Service. A distribution authorized
solely by reason of the prior sentence must constitute a lump sum distribution,
determined in a manner consistent with Code (S)401(k)(10) and the applicable
Treasury regulations.

     (2) Qualified Matching Contributions Account. The Participant, until he
retires, has a continuing election to receive all or any portion of his
Qualified Matching Contributions Account if he has attained age 59 1/2.

     (3) Procedure. A Participant must make any permitted in-service
distribution election under this Section 6.01(C) on a form prescribed by the
Advisory Committee at any time during the Plan Year for which his election is to
be effective. In his written election, the Participant must specify the
percentage or dollar amount of the distribution and the Participant's Plan
Account (Employer contributions or Participant contributions and type) to which
the election applies. The Trustee, as directed by the Advisory Committee, and
subject to Sections 6.01(A)(4) and 6.01(A)(5), will distribute the amount(s) a
Participant elects in a single sum, as soonas administratively practicable after
the Participant files his in-service distribution election with the Advisory
Committee. The Trustee will distribute the Participant's remaining Account
Balance in accordance with the other distribution provisions of this Plan.

     (4) Definition of hardship. For purposes of this Section 6.03(B), a
hardship distribution, must be on account of one or more of the following
immediate and heavy financial needs: (1) medical expenses described in Code (S)
213(d) incurred by the Participant, by the Participant's spouse, or by any of
the Participant's dependents (as defined in Code Section 152), or necessary for
these persons to obtain such medical care; (2) costs directly related to the
purchase (excluding mortgage payments) of a principal residence for the
Participant; (3) the payment of post-secondary education tuition and related
educational fees, for the next 12 months, for the Participant, for the
Participant's spouse, or for any of the Participant's dependents (as defined in
Code Section 152); (4) to prevent the eviction of the Participant from his
principal residence or the foreclosure on the mortgage of the Participant's
principal residence or (5) to prevent the foreclosure on the mortgage on the
Participant's land on which the Participant's principal residence (including a
mobile home) is located. The amount of a Participant's immediate and heavy
financial need may include amounts necessary to pay any Federal, State, or local
income taxes or penalties reasonably anticipated to result from the hardship
distribution.

                                       19



     (5) Distributable amount for hardship distributions. For Plan Years
beginning after December 31, 1988, a hardship distribution may not include
earnings on an Employee's elective deferrals credited after December 31, 1988.
Qualified matching contributions and qualified nonelective contributions, and
earnings on such contributions, are not subject to hardship withdrawal unless
credited by December 31, 1988.

     (6) Employee representation. No hardship distribution may be made to a
Participant unless the Participant represents, and the Advisory Committee
determines under the facts and circumstances it is reasonable to rely on that
representation, that he is not able to relieve his immediate and heavy financial
need:

     (a) Through reimbursement or compensation by insurance or otherwise;

     (b) By reasonable liquidation of the Participant's assets, to the extent
     such liquidation would not itself cause an immediate and heavy financial
     need (including those assets of the Participant's spouse or of the
     Participant's minor children, if those assets are reasonably available to
     the Participant.);

     (c) By cessation of elective deferrals or employee contributions under the
     Plan; or

     (d) By other distributions or nontaxable (at the time of the loan) loans
     from this Plan or any other qualified plan maintained by the Employer or by
     any other employer; or

     (e) By borrowing from commercial sources on reasonable commercial terms.

     (7) Designation of directed investment fund. As part of any hardship
withdrawal request, a Participant may designate the directed investment fund or
funds that his withdrawal will be charged against. If the amount invested in
such designated fund or funds is not sufficient, the withdrawal will be charged
against each other fund on a prorata basis. If no designation is made, the
withdrawal will be charged against each fund on a prorata basis.

     (8) Transferred assets. The Trustee, prior to a Participant's Normal
Retirement Age or Disability may not make any in-service distribution to the
Participant with respect to his Account Balance attributable to assets
(including post-transfer earnings on those assets) and liabilities transferred,
within the meaning of Code (S)414(1) to this Plan from a money purchase pension
plan or from a target benefit plan qualified under Code (S)401(a) (other than
any portion of those assets and liabilities attributable to Employee
contributions).

     6.02 REQUIRED MINIMUM DISTRIBUTIONS.

(A) Priority of Required Minimum Distributions. If any distribution under this
Article VI (by Plan provision or by Participant election or nonelection), would
commence later than the Participant's Required Beginning Date ("RBD"), the
Advisory Committee instead must direct the Trustee to make distribution to the
Participant on the Participant's RBD.

     (1) RBD -- more than 5% owner. A Participant's RBD is the April 1 following
the close of the calendar year in which the Participant attains age 70 1/2 if
the Participant is a more than 5% owner (as defined in Code (S)416) with
respect to the Plan Year ending in that calendar year. If a Participant is a
more than 5% owner at the close of the relevant calendar year, the Participant
may not discontinue required minimum distributions notwithstanding the
Participant's subsequent change in ownership status.

     (2) RBD -- non 5% owners. If a Participant is not a more than 5% owner, his
RBD is the April 1 following the close of the calendar year in which the
Participant incurs a Separation from Service or, if later, the April 1 following
the close of the calendar year in which the Participant attains age 70 1/2.

     (3) Form of distribution. The Trustee will make a required minimum
distribution at the Participant's RBD in a lump sum unless the Participant,
pursuant to the provisions of this Article VI, makes a valid election to receive
an alternative form of payment.

(B) [Reserved.]

(C) Minimum Distribution Requirements for Participants. The Advisory Committee
may not direct the Trustee to distribute the Participant's Vested Account
Balance, nor may the Participant elect to have the Trustee distribute his Vested
Account Balance, under a method of payment which, as of the RBD, does not
satisfy the minimum distribution requirements under Code (S)401(a)(9) and the
applicable Treasury regulations.

     (1) Calculation of Amount. The required minimum distribution for a calendar
year ("distribution calendar year") equals the Participant's Vested Account
Balance as of the latest valuation date preceding the beginning of the
distribution calendar year divided by the Participant's life expectancy or, if
applicable, the joint and last survivor expectancy of the Participant and his
designated Beneficiary (as determined under Article VIII, subject to the
requirements of Code (S)401(a)(9)). The Advisory Committee will increase the
Participant's Vested Account Balance, as determined on the relevant valuation
date, for contributions or forfeitures allocated after the valuation date and by
December 31 of the valuation calendar year, and will decrease the valuation by
distributions made after the valuation date and by December 31 of the valuation
calendar year. For purposes of this valuation, the Advisory Committee will treat
any portion of the

                                       20



minimum distribution for the first distribution calendar year made after the
close of that year as a distribution occurring in that first distribution
calendar year.

     (2) Recalculation. In computing a required minimum distribution the
Advisory Committee must use the unisex life expectancy multiples under Treas.
Reg. (S)1.72-9. The Advisory Committee, only upon the Participant's election,
will compute the minimum distribution for a distribution calendar year
subsequent to the first distribution calendar year by redetermining
("recalculation" of) the Participant's life expectancy or the Participant's and
spouse designated Beneficiary's life expectancies as elected. However, the
Advisory Committee may not redetermine the joint life and last survivor
expectancy of the Participant and a nonspouse designated Beneficiary in a manner
which takes into account any adjustment to a life expectancy other than the
Participant's life expectancy. A Participant must elect recalculation under this
Section 6.02(A) in writing and on a form the Advisory Committee prescribes, not
later than the Participant's RBD.

     (3) Minimum Distribution Incidental Benefit. If the Participant's spouse is
not his designated Beneficiary, a method of payment to the Participant (whether
by Participant election or by Advisory Committee direction) must satisfy the
minimum distribution incidental benefit ("MDIB") requirement under Code (S)
401(a)(9) for distributions made on or after the Participant's RBD and before
the Participant's death. To satisfy the MDIB requirement, the Advisory Committee
will compute the Participant's required minimum distribution by substituting the
applicable MDIB divisor for the applicable life expectancy factor, if the MDIB
divisor is a lesser number. Following the Participant's death, the Advisory
Committee will compute the minimum distribution required by Section 6.02(D)
solely on the basis of the applicable life expectancy factor and will disregard
the MDIB factor.

     (4) Payment due date. The required minimum distribution for the first
distribution calendar year is due by the Participant's RBD. The minimum
distribution for each subsequent distribution calendar year, including the
calendar year in which the Participant's RBD occurs, is due by December 31 of
that year.

     (5) Nontransferable annuity. If the Participant receives distribution in
the form of a Nontransferable Annuity Contract, the distribution satisfies this
Section 6.02(A) if the contract complies with the requirements of Code
(S)401(a)(9) and the applicable Treasury regulations.

(D) Minimum Distribution Requirements for Beneficiaries. The method of
distribution to the Participant's Beneficiary must satisfy Code (S)401(a)(9).

     (1) Death after RBD. If the Participant's death occurs after his, RBD, the
Trustee must distribute the Participant's remaining benefit to the Beneficiary
at least as rapidly as under the method in effect for the Participant,
determined without regard to the MDIB requirements of Section 6.02(C)(3).

     (2) Death prior to RBD. If the Participant's death occurs prior to his RBD,
the method of payment to the Beneficiary must provide for completion of payment
to the Beneficiary over a period not exceeding: (a) 5 years after the date of
the Participant's death; or (b) if the Beneficiary is a designated Beneficiary,
the designated Beneficiary's life expectancy. A designated Beneficiary is a
Beneficiary designated by the Participant or determined under Section 8.02. The
Advisory Committee may not direct payment of the Participant's Vested Account
Balance over a period described in clause (b) unless the Trustee will commence
payment to the designated Beneficiary no later than the December 31 following
the close of the calendar year in which the Participant's death occurred or, if
later, and the designated Beneficiary is the Participant's surviving spouse,
December 31 of the calendar year in which the Participant would have attained
age 70 1/2. If the Trustee will make distribution in accordance with clause (b),
the minimum distribution for a calendar year equals the Participant's Vested
Account Balance as of the latest valuation date preceding the beginning of the
distribution calendar year divided by the designated Beneficiary's life
expectancy. The Advisory Committee must use the unisex life expectancy multiples
under Treas. Reg. (S)1.72-9 for purposes of applying this Section 6.02(D).

     (3) Recalculation. The Advisory Committee, only upon the Participant's
election (under Section 6.02(C)(2)) or the Participant's surviving spouse
designated Beneficiary election, will recalculate the life expectancy of the
Participant's surviving spouse not more frequently than annually. However, the
Advisory Committee may not recalculate the life expectancy of a nonspouse
designated Beneficiary after the Trustee commences payment to the designated
Beneficiary. The Advisory Committee will apply this Section 6.02(D) by treating
any amount paid to the Participant's child, which becomes payable to the
Participant's surviving spouse upon the child's attaining the age of majority,
as paid to the Participant's surviving spouse. A surviving spouse designated
Beneficiary must elect recalculation under this Section 6.02(D)(3) in writing
and on a form the Advisory Committee prescribes no later than the last day of
the spouse's first distribution year.

     (4) Beneficiary election. If the Participant under Section 6.01(B) had not
elected the payment method or payment term, the Participant's Beneficiary must
elect the method of distribution no later than the date specified above upon
which the Trustee must commence distribution to the Beneficiary. If the
Beneficiary fails to elect timely a distribution

                                       21



method, the Plan Administrator must commence distribution within the time
required for a Participant who dies without a designated Beneficiary.

     (E) Model Amendment. This Plan incorporates the IRS model amendment set
forth in IRS Announcement 2001-82 (July 18, 2001), set forth below:

     "With respect to distributions under the Plan made on or after January 1,
     2002, for calendar years beginning on or after January 1, 2001, the Plan
     will apply the minimum distribution requirements of section 401(a)(9) of
     the Internal Revenue Code in accordance with the regulations under section
     401(a)(9) that were proposed on January 17, 2001, (the "2001 Proposed
     Regulations"), notwithstanding any provision of the Plan to the contrary.
     If the total amount of required minimum distributions made to a Participant
     for 2001 prior to January 1, 2002, are equal to or greater than the amount
     of required minimum distributions determined under the 2001 Proposed
     Regulations, then no additional distributions are required for such
     Participant for 2001 on or after such date. If the total amount of required
     minimum distributions made to a Participant for 2001 prior to January 1,
     2002, are less than the amount determined under the 2001 Proposed
     Regulations, then the amount of required minimum distributions for 2001 on
     or after such date will be determined so that the total amount of required
     minimum distributions for 2001 is the amount determined under the 2001
     Proposed Regulations. This amendment shall continue in effect until the
     last calendar year beginning before the effective date of final regulations
     under section 401(a)(9) or such other date as may be published by the
     Internal Revenue Service."

     6.03 METHOD OF DISTRIBUTION. A Participant or Beneficiary may elect
distribution only by payment in a lump sum.

     Pending final accounting for a valuation date, the Plan Administrator may
make a partial distribution to a Participant who has incurred a Separation from
Service or to a Beneficiary.

(D) [Reserved]

     6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES. The joint
and survivor annuity requirements do not apply to this Plan. The Plan does not
provide any annuity distributions Participants nor to surviving spouses. A
transfer agreement described in Section 13.05 may not permit a plan which is
subject to the provisions of Code (S)417 to transfer assets to this Plan,
unless the transfer is an elective transfer, as described in Section 13.05.

     6.05 [Reserved].

     6.06 [Reserved].

     6.07 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS. Notwithstanding any
other provision of this Plan, the Trustee, in accordance with the direction of
the Advisory Committee, must comply, with the provisions of a qualified domestic
relations order (as defined in Code (S)414(p)). Notwithstanding any other
provision of this Plan, the Trustee, in accordance with the direction of the
Plan Administrator, must comply with the provisions of a qualified domestic
relations order as defined in Code (S)414(p) ("QDRO"), which is issued with
respect to the Plan. This Plan specifically permits distribution to an alternate
payee under a QDRO at any time, irrespective of whether the Participant has
attained his earliest retirement age (as defined under Code (S)414(p)) under
the Plan. A distribution to an alternate payee prior to the Participant's
attainment of earliest retirement age is available only if: (1) the QDRO
specifies distribution at that time or permits an agreement between the Plan and
the alternate payee to authorize an earlier distribution; and (2) if the present
value of the alternate payee's benefits under the Plan exceeds $5,000, and the
order requires, the alternate payee consents to any distribution occurring prior
to the Participant's attainment of earliest retirement age. Nothing in this
Section 6.07 gives a Participant a right to receive distribution at a time the
Plan otherwise does not permit nor does Section 6.07 authorize the alternate
payee to receive a form of payment not permitted under the Plan.

     The Plan Administrator must establish reasonable procedures to determine
the qualified status of a domestic relations order. Upon receiving a domestic
relations order, the Plan Administrator promptly will notify the Participant and
any alternate payee named in the order, in writing, of the receipt of the order
and the Plan's procedures for determining the qualified status of the order.
Within a reasonable period of time after receiving the domestic relations order,
the Plan Administrator must determine the qualified status of the order and must
notify the Participant and each alternate payee, in writing, of its
determination. The Plan Administrator must provide notice under this paragraph
by mailing to the individual's address specified in the domestic relations
order, or in a manner consistent with Department of Labor regulations.

                                       22



     If any portion of the Participant's Vested Account Balance is payable
during the period the Plan Administrator is making its determination of the
qualified status of the domestic relations order, the Advisory Committee must
provide for a separate accounting of the amounts payable. If the Plan
Administrator determines the order is QDRO within 18 months of the date amounts
first are payable following receipt of the order, the Advisory Committee will
direct the Trustee to distribute the payable amounts in accordance with the
order. If the Plan Administrator does not make its determination of the
qualified status of the order within the 18 month determination period, the
Advisory Committee will direct the Trustee to distribute the payable amounts in
the manner the Plan would distribute if the order did not exist and will apply
the order prospectively if the Plan Administrator later determines the order is
a QDRO.

     To the extent it is not inconsistent with the provisions of the QDRO, the
Plan Administrator under Section 9.11 may direct the Trustee to segregate the
QDRO amount in a segregated investment account. The Trustee will make any
payments or distributions required under this Section 6.07 by separate benefit
checks or other separate distribution to the alternate payee(s).

     6.08. DEFAULTED LOAN -- TIMING OF OFFSET. If a Participant or Beneficiary
defaults on a Plan loan, the Plan treats the default as a distributable event.
The Trustee, at the time of the default, will reduce the Participant's Vested
Account Balance by the lesser of the amount in default (plus accrued interest)
or the Plan's security interest in that Vested Account Balance. To the extent
the loan is attributable to the Participant's Deferral Contributions Account,
Qualified Matching Contributions Account or Qualified Nonelective Contributions
Account, the Trustee will not reduce the Participant's Vested Account Balance
unless the Participant has separated from Service or unless the Participant has
attained age 59 1/2.

     6.09. [Reserved].

     6.10. DIRECT ROLLOVER OF ELIGIBLE ROLLOVER DISTRIBUTIONS.

(A) Participant Election. A Participant (including for this purpose, a former
Employee) may elect, at the time and in the manner prescribed by the Advisory
Committee, to have any portion of his/her eligible rollover distribution from
the Plan paid directly to an eligible retirement plan specified by the
Participant in a direct rollover election. For purposes of this Section 6.10, a
Participant includes as to their respective interests, a Participant's surviving
spouse and the Participant's spouse or former spouse who is an alternate payee
under a QDRO.

(B) Rollover and Withholding Notice. At least 30 days and not more than 90 days
prior to the Trustee's distribution of an eligible rollover distribution, the
Advisory Committee must provide a written notice (including a summary notice as
permitted under applicable Treasury regulations) explaining to the distributee
the rollover option, the applicability of mandatory 20% federal withholding to
any amount not directly rolled over, and the recipient's right to roll over
within 60 days after the date of receipt of the distribution ("rollover
notice"). If applicable, the rollover notice also must explain the availability
of income averaging and the exclusion of net unrealized appreciation. A
recipient of an eligible rollover distribution (whether he/she elects a direct
rollover or elects to receive the distribution), also may elect to receive
distribution at any administratively practicable time which is earlier than 30
days following receipt of the rollover notice.

(C) Default rollover. The Advisory Committee, in the case of a Participant who
does not respond timely to the notice described in Section 6.10(B), may make a
direct rollover of the Participant's Account Balance (as described in Revenue
Ruling 2000-36 or in any successor guidance) in lieu of distributing the
Participant's Account Balance.

(D) Definitions. The following definitions apply to this Section 6.10:

     (1) Eligible rollover distribution.-" An eligible rollover distribution is
any distribution of all or any portion of the balance to the credit of the
Participant, except that an eligible rollover distribution does not include: (a)
any distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the Participant or the joint lives (or joint life expectancies)
or the Participant and the Participant's designated beneficiary, or for a
specified period of ten years or more; (b) any Code (S)401(a)(9) required
minimum distribution; (d) any hardship distribution made after December 31,
1998, from a Participant's deferral contributions Account (except where the
Participant also satisfies a non-hardship distribution event described in
Section 14.03(m)); and the portion of any distribution that is not includible in
gross income (determined without regard to the exclusion of net unrealized
appreciation with respect to employer securities).

     (2) Eligible retirement plan. An eligible retirement plan is an individual
retirement account described in Code (S)408(a), an individual retirement
annuity described in Code (S)408(b), an annuity plan described in Code (S)
403(a), or a qualified trust described in Code (S)403(a), or a qualified trust
described in Code (S)401(a), that accepts the Participant's or an alternate
payee's eligible rollover distribution. However, in the case of an eligible
rollover distribution to the surviving spouse, an eligible retirement plan is an
individual retirement account or individual retirement annuity.

                                       23



     (d) Direct rollover. A direct rollover is a payment by the Plan to the
eligible retirement plan specified by the distributee.

                                       24



                                   ARTICLE VII
                       EMPLOYER ADMINISTRATIVE PROVISIONS

     7.01 INFORMATION TO COMMITTEE. The Employer must supply current information
to the Advisory Committee as to the name, date of birth, date of employment,
annual compensation, leaves of absence, Years of Service and date of termination
of employment of each Employee who is, or who will be eligible to become, a
Participant under the Plan, together with any other information which the
Advisory Committee considers necessary. The Employer's records as to the current
information the Employer furnishes to the Advisory Committee are conclusive as
to all persons.

     7.02 NO LIABILITY. The Employer assumes no obligation or responsibility to
any of its Employees, Participants or Beneficiaries for any act of, or failure
to act, on the part of its Advisory Committee (unless the Employer is the
Advisory Committee), the Trustee or the Plan Administrator (unless the Employer
is t he Plan Administrator).

     7.03 INDEMNITY OF COMMITTEE. The Employer indemnifies and saves harmless
the members of the Advisory Committee, and each of them, from and against any
and all loss resulting from liability to which the Advisory Committee, or the
members of the Advisory Committee, may be subjected by reason of any act or
conduct (except willful misconduct or gross negligence) in their official
capacities in the administration of this Trust or Plan or both, including all
expenses reasonably incurred in their defense, in case the Employer fails to
provide such defense. The indemnification provisions of this Section 7.03 do not
relieve any Advisory Committee member from any liability he may have under ERISA
for breach of a fiduciary duty. Furthermore, the Advisory Committee members and
the Employer may execute a letter agreement further delineating the
indemnification agreement of this Section 7.03, provided the letter agreement
must be consistent with and must not violate ERISA. The indemnification
provisions of this Section 7.03 extend to the Trustee solely to the extent
provided by a letter agreement executed by the Trustee and the Employer, except
that such indemnification provisions shall automatically apply to a trustee who
is also an Employee.

     7.04 EMPLOYER DIRECTION OF INVESTMENT. The Employer and Advisory Committee
has the right to direct the Trustee with respect to the investment and
re-investment of assets comprising the Trust Fund. Any such direction must be in
writing. To the extent the Employer directs the Trustee, the Employer
indemnifies and saves harmless the Trustee from and against any and all loss
resulting from liability to which the Trustee may be subjected by reason of any
act or conduct (except the Trustee's misconduct or negligence) in its official
capacity in the administration and investment of the Trust Fund, including all
expenses reasonably incurred in its defense, in case the Employer fails to
provide such defense. Notwithstanding the foregoing, the indemnification
provisions of this Section 7.04 do not indemnify or relieve the Trustee from any
liability it may have under ERISA for breach of a fiduciary duty.

     7.05 AMENDMENT TO VESTING SCHEDULE. Though the Employer reserves the right
to amend the vesting schedule at any time, the Advisory Committee will not apply
the amended vesting schedule to reduce the Vested percentage of any
Participant's Account Balance derived from Employer contributions (determined as
of the later of the date the Employer adopts the amendment, or the date the
amendment becomes effective) to a percentage less than the Vested percentage
computed under the Plan without regard to the amendment.

     If the Employer makes a permissible amendment to the vesting schedule, each
Participant having at least 3 Years of Service with the Employer may elect to
have the percentage of his Vested Account Balance computed under the Plan
without regard to the amendment. The Participant must file his election with the
Plan Administrator within 60 days of the latest of (a) the Employer's adoption
of the amendment; (b) the effective date of the amendment; or (c) his receipt of
a copy of the amendment. The Plan Administrator, as soon as practicable, must
forward a true copy of any amendment to the vesting schedule to each affected
Participant, together with an explanation of the effect of this amendment, the
appropriate form upon which the Participant may make an election to remain under
the vesting schedule provided under the Plan prior to the amendment and notice
of the time within which the Participant must make an election to remain under
the prior vesting schedule. For purposes of this Section 7.05, an amendment to
the vesting schedule includes any Plan amendment which directly or indirectly
affects the computation of the Vested percentage of an Employee's rights to his
Employer derived Account Balance.

                                       25



                                  ARTICLE VIII
                      PARTICIPANT ADMINISTRATIVE PROVISIONS

     8.01 BENEFICIARY DESIGNATION. Any Participant may from time to time
designate, in writing, any person or persons, contingently or successively, to
whom the Trustee shall pay his Account Balance (including any life insurance
proceeds payable to the Participant's Account) on event of his death. The
Advisory Committee will prescribe the form for the written designation of
Beneficiary and, upon the Participant's filing the form with the Advisory
Committee, the form effectively revokes all designations filed prior to that
date by the same Participant.

     A married Participant's Beneficiary designation is not valid unless the
Participant's spouse consents, in writing, to the Beneficiary designation. The
spouse's consent must acknowledge the effect of that consent and a notary public
or the Plan Administrator (or his representative) must witness that consent. The
spousal consent requirements of this paragraph do not apply if: (1) the
Participant and his spouse are not married throughout the one year period ending
on the date of the Participant's death; (2) the Participant's spouse is the
Participant's sole primary beneficiary; (3) the Plan Administrator is not able
to locate the Participant's spouse; (4) the Participant is legally separated or
has been abandoned (within the meaning of State law) and the Participant has a
court order to that effect; or (5) other circumstances exist under which the
Secretary of the Treasury will excuse the consent requirement. If the
Participant's spouse is legally incompetent to give consent, the spouse's legal
guardian (even if the guardian is the Participant) may give consent.

     Effect of Marital Dissolution on Beneficiary Designation. This paragraph is
effective for marital dissolutions that become effective on or after January 1,
2002. If, before payments of the Participant's Account Balance on account of the
Participant's death commence, the Advisory Committee receives written proof
satisfactory to the Advisory Committee of the dissolution of the Participant's
marriage, then any earlier designation by the Participant of his or her former
spouse as a Beneficiary shall be treated as though the Participant's former
spouse had predeceased the Participant. Notwithstanding the preceding sentence,
a former spouse of the Participant shall be treated as a Beneficiary of the
Participant if, upon or after the dissolution of the Participant's marriage and
before payments of the Participant's Account Balance on account the
Participant's death commence, either: (a) the Advisory Committee receives a
domestic relations order (including the decree of dissolution of marriage or a
qualified domestic relations order) that provides that the Participant's former
spouse is to be treated as a Beneficiary of the Participant; or (b) the
Participant executes and files with the Advisory Committee another Beneficiary
designation that (i) complies with this Section 8.01 and (ii) designates the
former spouse as a Beneficiary of the Participant. If the Participant's
Beneficiary designation is treated as if the Participant's former spouse
predeceased the Participant, then no payments of the Participant's Account
Balance on account of the Participant's death shall be made to heirs or other
beneficiaries of the former spouse shall receive benefits from the Plan as a
Beneficiary of the Participant, except as otherwise provided in the
Participant's Beneficiary designation (or as provided under Section 8.02).

     8.02 NO BENEFICIARY DESIGNATION. If a Participant fails to name a
Beneficiary in accordance with Section 8.01, or if the Beneficiary named by a
Participant predeceases him or dies before complete distribution of the
Participant's Account Balance, then the Trustee will pay the Participant's
Account Balance in accordance with Section 6.02 in the following order of
priority to:

     (a)  The Participant's surviving spouse;

     (b)  The Participant's surviving children, including adopted children, in
          equal shares;

     (c)  The Participant's surviving parents, in equal shares; or

     (d)  The legal representative of the estate of the last to die of the
          Participant and his Beneficiary.

     The Advisory Committee will direct the Trustee as to the method and to whom
the Trustee will make payment under this Section 8.02.

     8.03 PERSONAL DATA TO COMMITTEE. Each Participant and each Beneficiary of a
deceased Participant must furnish to the Advisory Committee such evidence, data
or information as the Advisory Committee considers necessary or desirable for
the purpose of administering the Plan. The provisions of this Plan are effective
for the benefit of each Participant upon the condition precedent that each
Participant will furnish promptly full, true and complete evidence, data and
information when requested by the Advisory Committee, provided the Advisory
Committee advises each Participant of the effect of his failure to comply with
its request.

     8.04 ADDRESS FOR NOTIFICATION. Each Participant and each Beneficiary of a
deceased Participant must file with the Advisory Committee from time to time, in
writing, his post office address and any change of post office address. Any
communication, statement or notice addressed to a Participant, or Beneficiary,
at his last post office address filed with the Advisory Committee, or as shown
on the records of the Employer, binds the Participant, or Beneficiary, for all
purpose of this Plan.

                                       26



     8.05 ASSIGNMENT OR ALIENATION. Except as permitted under applicable statute
(including Code (S)401(a)(13)(C) and ERISA (S)206(d)(4)) or regulation, a
Participant or a Beneficiary may not assign, alienate, transfer or sell any
right or claim to a benefit or distribution from the Plan and any attempt to
assign, alienate, transfer or sell such a right or claim shall be void; and no
such right or claim under the Plan shall be subject to attachment, garnishment,
levy, execution, sequestration or other legal or equitable process. The
preceding sentence also applies to the creation, assignment, or recognition of a
right to any benefit payable with respect to a participant pursuant to a
domestic relations order, unless such order is determined to be a qualified
domestic relations order pursuant to Section 6.07.

     8.06 NOTICE OF CHANGE IN TERMS. The Plan Administrator, within the time
prescribed by ERISA and the applicable regulations, must furnish all
Participants and Beneficiaries a summary description of any material amendment
to the Plan or notice of discontinuance of the Plan and all other information
required by ERISA to be furnished without charge.

     8.07 LITIGATION AGAINST THE TRUST. A court of competent jurisdiction may
authorize any appropriate equitable relief to redress violations of ERISA or to
enforce any provisions of ERISA or the terms of the Plan. A fiduciary may
receive reimbursement of expenses properly and actually incurred in the
performance of his duties with the Plan.

     8.08 INFORMATION AVAILABLE. Any Participant in the Plan or any Beneficiary
may examine copies of the summary Plan description, latest annual report, any
bargaining agreement, this Plan and Trust, contract or any other instrument
under which the Plan was established or is operated. The Plan Administrator will
maintain all of the items listed in this Section 8.08 in his office, or in such
other place or places as he may designate from time to time in order to comply
with the regulations issued under ERISA, for examination during reasonable
business hours. Upon the written request of a Participant or Beneficiary the
Plan Administrator will furnish him with a copy of any item listed in this
Section 8.08. The Plan Administrator may make a reasonable charge to the
requesting person for the copy so furnished.

     8.09 CLAIMS PROCEDURE FOR DENIAL OF BENEFITS. A Participant or a
Beneficiary may file with the Advisory Committee a written claim for benefits,
if the Participant or the Beneficiary disputes the Advisory Committee's
determination regarding the Participant's or Beneficiary's Plan benefit.
However. the Plan will distribute only such Plan benefits to Participants or
Beneficiaries as the Advisory Committee in its discretion determines a
Participant or Beneficiary is entitled to. The Advisory Committee will maintain
a separate written document as part of (or which accompanies) the Plan's summary
plan description explaining the Plan's claims procedure. This Section 8.09
specifically incorporates the written claims procedure as from time to time
published by the Advisory Committee as a part of the Plan. If the Advisory
Committee pursuant to the Plan's written claims procedure makes a final written
determination denying a Participant's or Beneficiary's benefit claim, the
Participant or Beneficiary to preserve the claim must file an action with
respect to the denied claim not later than 180 days following the date of the
Advisory Committee's final determination.

     8.10 PARTICIPANT DIRECTION OF INVESTMENTA Participant has the right to
direct the Trustee with respect to the investment or re-investment of the assets
comprising the Participant's individual Account from among the investment
choices designated by the Advisory Committee from time to time. As of October 1,
1992, the investment choices include the Employer Stock Fund. To effect
Participant direction of investment, a Participant will follow such methods as
the Advisory Committee shall from time-to-time prescribe, which may include
telephone voice-response systems or internet-based systems. The Advisory
Committee will separately account for participants' investments.

     Each Participant's investment election shall be in multiples of five
percent (5%) or in any other multiple as prescribed by the Advisory Committee.
Each Participant may direct the percentage of future contributions and/or
existing account balances to be allocated to each investment choice at such
times as the Advisory Committee prescribes. A participant's investment direction
becomes effective no later than the next business day after the Trustee receives
the direction, or as soon as administratively practicable thereafter.

     Each Participant shall be solely responsible for the selection of his
investments as allowed under the Plan. The fact that an investment is available
to a Participant for investment under the Plan shall not be construed as a
recommendation to invest in that particular investment.

     A Participant may not direct that more than 25% of future contributions be
invested in the Employer Stock Fund. A Participant may not change the percentage
allocation of his existing Account balances to be invested in the Employer Stock
Fund to exceed 25% (calculating the percentage by using existing Account
balances as of the most recent valuation date preceding the Participant's
requested investment direction). If, due to market gains or losses or for any
other reason, the Employer Stock Fund comprise 25% or more of the value of the
Participant's Account balances (calculating the percentage by using existing
Account balances as of the most recent valuation date preceding the
Participant's requested investment direction), the Participant will not be
required to move assets out of Employer Securities and into other funds in order
to keep the percentage invested the Employer Stock Fund below 25%, and such
Participant may continue to direct that up to 25% of future contributions be
invested in the Employer Stock Fund.

                                       27



     Because the Employer Stock Fund is a pooled account consisting of shares of
Employer Stock, a Participant's investment in the Employer Stock Fund is an
interest in the Employer Stock Fund. No shares of Employer Stock are actually
allocated to a Participant's Account on account of investment in the Employer
Stock Fund.

     Participants who direct investment of their Accounts into the Employer
Stock Fund have voting and similar rights with respect to the underlying
Employer Stock as described in Sections 10.17[A] and 10.17[B]. When exercising
those rights, a Participant who is allocated voting or similar rights acts as a
"named fiduciary" within the meaning of ERISA (S)403(a)(1) with respect to the
shares of Employer Stock effectively allocated to the Participant.

                                       28



                                   ARTICLE IX
             ADVISORY COMMITTEE-DUTIES WITH RESPECT TO PARTICIPANTS'
                                    ACCOUNTS

     9.01 MEMBERS' COMPENSATION, EXPENSES. The Employer must appoint an Advisory
Committee to administer the Plan, the members of which may or may not be
Participants in the Plan, or which may be the Plan Administrator acting alone.
The members of the Advisory Committee shall serve without compensation for
services as such, but the Employer will pay all expenses of the Advisory
Committee, including the expense for any bond required under ERISA.

     9.02 TERM. Each member of the Advisory Committee serves until the
appointment of his successor.

     9.03 POWERS. In case of a vacancy in the membership of the Advisory
Committee, the remaining members of the Advisory Committee may exercise any and
all of the powers, authority, duties and discretion conferred upon the Advisory
Committee pending the filling of the vacancy.

     9.04 GENERAL. The Advisory Committee has the following powers and duties:

     (a) To select a Secretary, who need not be a member of the Advisory
     Committee;

     (b) To determine the rights of eligibility of an Employee to participate in
     the Plan, the value of the Participant's Account Balance and the Vested
     percentage of each Participant's Account Balance;

     (c) To adopt rules of procedure and regulations necessary for the proper
     and efficient administration of the Plan provided the rules are not
     inconsistent with the terms of this Agreement;

     (d) To enforce the terms of the Plan and the rules and regulations it
     adopts;

     (e) To direct the Trustee, in writing, as respects the investment and
     distribution of the Trust;

     (f) To review and render decisions respecting a claim for (or denial of a
     claim for) a benefit under the Plan and to exercise discretionary authority
     to determine eligibility for benefits or to construe the terms of the Plan;

     (g) To furnish the Employer with information which the Employer may require
     for tax or other purposes;

     (h) To engage the service of agents whom it may deem advisable to assist it
     with the performance of its duties;

     (i) To engage the services of an Investment Manager or Managers (as defined
     in ERISA (S)3(38)), each of whom will have full power and authority to
     manage, acquire or dispose (or direct the Trustee, in writing, with respect
     to acquisition or disposition) of any Plan asset under its control;

     (j) To establish a nondiscriminatory policy which the Trustee must observe
     in making loans, if any, to Participants; and

     (k) To establish and maintain a funding standard account and to make
     credits and charges to the account to the extent required by and in
     accordance with the provisions of the Code.

     The Advisory Committee must exercise all of its powers, duties and
discretion under the Plan in a uniform and nondiscriminatory manner.

     Loan Policy. A loan policy described in paragraph (j) must be a written
document and must include: (1) the identity of the person or positions
authorized to administer the participant loan program; (2) a procedure for
applying for the loan; (3) the criteria for approving or denying a loan; (4) the
limitations, if any, on the types and amounts of loans available; (5) the
procedure for determining a reasonable rate of interest; (6) the types of
collateral which may secure the loan; and (7) the events constituting default
and the steps the Plan will take to preserve plan assets in the event of
default.

     9.05 FUNDING POLICY. The Advisory Committee will review, not less often
than annually, all pertinent Employee information and Plan data in order to
establish the funding policy of the Plan and to determine the appropriate
methods of carrying out the Plan's objectives. The Advisory Committee must
communicate periodically, as it deems appropriate, to the Trustee and to any
Plan Investment Manager the Plan's short-term and long-term financial needs so
investment policy can be coordinated with Plan financial requirements.

     9.06 MANNER OF ACTION. The decision of a majority of members appointed and
qualified controls.

     9.07 AUTHORIZED REPRESENTATIVE. The Advisory Committee may authorize any
one of its members, or its Secretary, to sign on its behalf any notices,
directions, applications, certificates, consents, approvals, waivers, letters or
other documents. The Advisory Committee must evidence this authority by an
instrument signed by all members and filed with the Trustee.

     9.08 INTERESTED MEMBER. No member of the Advisory Committee may decide or
determine any matter concerning the distribution, nature or method of settlement
of his own benefits under the Plan, except in exercising an

                                       29



election available to that member in his capacity as a Participant, unless the
Plan Administrator is acting alone in the capacity of the Advisory Committee.

     9.09 INDIVIDUAL ACCOUNTS. The Advisory Committee will maintain a separate
Account, or multiple Accounts, in the name of each Participant to reflect the
Participant's Account Balance under the Plan. If a Participant re-enters the
Plan subsequent to his having a Forfeiture Break in Service (as defined in
Section 5.08), the Advisory Committee must maintain a separate Account for the
Participant's pre-Forfeiture Break in Service Account Balance and a separate
Account for his post-Forfeiture Break in Service Account Balance unless the
Participant's entire Account Balance under the Plan is 100% Vested.

     The Advisory Committee will make its allocations to the Accounts of the
Participants in accordance with the provisions of Section 9.11. The Advisory
Committee may direct the Trustee to maintain a temporary segregated investment
Account in the name of a Participant to prevent a distortion of income, gain or
loss allocations under Section 9.11. The Advisory Committee must maintain
records of its activities.

     9.10 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. The value of each
Participant's Account Balance consists of that proportion of the net worth (at
fair market value) of the Employer's Trust Fund which the net credit balance in
his Account (exclusive of the cash value of incidental benefit insurance
contracts) bears to the total net credit balance in the Accounts (exclusive of
the cash value of incidental benefit insurance contracts) of all Participants
plus the cash surrender value of any incidental benefit insurance contracts held
by the Trustee on the Participant's life.

     For purposes of a distribution under the Plan, the value of a Participant's
Account Balance is its value as of the valuation date that coincides with the
date on which the assets allocated to the Participant's Account are liquidated
by the Plan's recordkeeper (or if there is no valuation date on the liquidation
date, the valuation date immediately preceding the liquidation date).

     9.11 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS. A "valuation
date" under this Plan is each Accounting Date and each interim valuation date
determined under Section 10.14. As of each valuation date the Advisory Committee
must adjust Accounts to reflect net income, gain or loss since the last
valuation date. The valuation period is the period beginning the day after the
last valuation date and ending on the current valuation date.

     Trust Fund Accounts. The allocation provisions of this paragraph apply to
all Participant Accounts other than segregated investment Accounts. The Advisory
Committee first will adjust the Participant Accounts, as those Accounts stood at
the beginning of the current valuation period, by reducing the Accounts for any
forfeitures arising under Section 5.09 or under Section 9.14, for amounts
charged during the valuation period to the Accounts in accordance with Section
9.13 (relating to distributions), for the cash value of incidental benefit
insurance contracts and for the amount of any Account which the Trustee has
fully distributed since the immediately preceding valuation date. The Advisory
Committee then, subject to the restoration allocation requirements of Section
5.04 or of Section 9.14, will allocate the net income, gain or loss pro rata to
the adjusted Participant Accounts. The allocable net income, gain or loss is the
net income (or net loss), including the increase or decrease in the fair market
value of assets, since the last valuation date.

     To the extent there is Participant direction of investment under Section
8.10, the net income, gain or loss will be allocated to Participant Accounts
according to the amount each Participant has invested in each investment.

     The net income, gain or loss on salary deferral contributions and matching
contributions will be credited according to a "weighted average allocation"
method, which will treat a portion of the applicable contributions actually paid
to the Trust during the valuation period as if includible in the Participant's
Account as of the beginning of the valuation period. The method of fixing such
portion will be determined in a nondiscriminatory and uniform manner by the
Advisory Committee.

     Segregated Investment Accounts. A segregated investment Account receives
all income it earns and bears all expense or loss it incurs. As of the valuation
date, the Advisory Committee must reduce a segregated Account for any forfeiture
arising under Section 5.09 after the Advisory Committee has made all other
allocations, changes or adjustments to the Account for the Plan Year.

     Additional Rules. An Excess Amount or suspense account described in Part 2
of Article III does not share in the allocation of net income, gain or loss
described in this Section 9.11. This Section 9.11 applies solely to the
allocation of net income, gain or loss of the Trust. The Advisory Committee will
allocate the Employer contributions and Participant forfeitures, if any in
accordance with Article III.

     9.12 INDIVIDUAL STATEMENT. As soon as practicable after the Accounting Date
of each Plan Year but within the time prescribed by ERISA and the regulations
under ERISA, the Plan Administrator will deliver to each Participant a statement
reflecting the condition of his Account Balance in the Trust as of that date and
such other

                                       30



information ERISA requires be furnished the Participant or Beneficiary. No
Participant, except a member of the Advisory Committee, has the right to inspect
the records reflecting the Account of any other Participant.

     9.13 ACCOUNT CHARGED. The Advisory Committee will charge all distributions
made to a Participant or to his Beneficiary from his Account against the Account
of the Participant when made.

     9.14 LOST PARTICIPANTS. The Plan does not require either the Trustee or the
Advisory Committee to search for, or ascertain the whereabouts of, any
Participant or Beneficiary. If the Advisory Committee is unable to locate any
Participant or Beneficiary whose Account Balance becomes distributable under
Article VI or under Section 13.06 (a "lost Participant"), the Advisory Committee
may apply the provisions of this Section 9.14.

     (A) Attempt to Locate. The Plan Administrator may use one or more of the
following methods to attempt to locate a lost Participant: (1) provide a
distribution notice to the lost Participant at his/her last known address by
certified or registered mail; (2) use of the IRS letter forwarding program under
Revenue Procedure 94-22; (3) use of a commercial locator service, the internet
or other general search method; or (4) use of the Social Security Administration
search program.

     (B) Failure to Locate. If a lost Participant remains unlocated for 6 months
following the date of the Plan Administrator first attempts to locate the lost
Participant using one or more of the methods described in Section 9.14(A), the
Plan Administrator may forfeit the lost Participant's Account. If the Plan
Administrator will forfeit the lost Participant's Account, the forfeiture occurs
at the end of the above-described 6 month period and the Plan Administrator will
allocate the forfeiture in accordance with Section 3.05. If a lost Participant
whose Account Balance whose account was forfeited thereafter at any time makes a
claim for his forfeited Account Balance, the Advisory Committee must restore the
lost Participant's forfeited Account Balance to the same dollar amount as the
dollar amount of the Account Balance forfeited, unadjusted for any net income,
gains or losses occurring subsequent to the date of the forfeiture. The Advisory
Committee will make the restoration during the Plan Year in which the lost
Participant makes the claim first from the amount, if any, of Participant
forfeitures the Advisory Committee otherwise would allocate for the Plan Year,
then from the amount, if ,any, of Trust net income or gain for the Plan Year and
last from the amount, or additional amount, the Employer contributes to enable
the Advisory Committee to make the required restoration. The Advisory Committee
will direct the Trustee to distribute the Participant's or Beneficiary's
restored Account Balance to him not later than 60 days after the close of the
Plan Year in which the Advisory Committee restores the forfeited Account
Balance. The Advisory Committee under this Section 9.14(B) will forfeit the
entire Account Balance of the lost Participant, including deferral contributions
and Participant contributions.

     (C) Nonexclusivity and Uniformity. The provisions of Section 9.14 are
intended to provide permissible but not exclusive means for the Advisory
Committee to administer the Account Balances of lost Participants. The Advisory
Committee may utilize any other reasonable method to locate lost Participants
and to administer the Account Balances of lost Participants, including the
default rollover under Section 6.10(C) and such other methods as the Revenue
Service or the U.S. Department of Labor ("DOL") may in the future specify. The
Advisory Committee will apply Section 9.14 in a reasonable, uniform and
nondiscriminatory manner, but may in determining a specific course of action as
to a particular Account Balance, reasonably take into account differing
circumstances such as the amount of a lost Participant's Account Balance, the
expense in attempting to locate a lost Participant, the Advisory Committee's
ability to establish and the expense of establishing a rollover IRA, and other
factors. The Advisory Committee may charge to the Account Balance of a lost
Participant the reasonable expenses incurred under this Section 9.14 and which
are associated with the lost Participant's Account Balance.

     9.15 PLAN CORRECTION. The Advisory Committee in conjunction with the
Employer may undertake such correction of Plan errors as the Advisory Committee
deems necessary, including correction to preserve tax qualification of the Plan
under Code (S)401(a) or to correct a fiduciary breach under ERISA. Without
limiting the Advisory Committee's authority under the prior sentence, the Plan
Advisory Committee, as it determines to be reasonable and appropriate, may
undertake correction of Plan document, operational, demographic and employer
eligibility failures under a method described in the Plan or under the Employee
Plans Compliance Resolution System CEPCRS") or any successor program to EPCRS.
The Advisory Committee, as it determines to be reasonable and appropriate, also
may undertake or assist the appropriate fiduciary or plan official in
undertaking correction of a fiduciary breach, including correction under the
Voluntary Fiduciary Correction Program ("VFC") or any successor program to VFC.
The Advisory Committee to correct an operational error may require the Trustee
to distribute from the Plan elective deferrals or vested matching contributions,
including earnings, where such amounts result from an operational error other
than a failure of Code (S)415, Code (S)402(g), a failure of the ADP or ACP
tests, or a failure of the multiple use limitation.

     9.16 NO RESPONSIBILITY FOR OTHERS. Except as required under ERISA, the
Advisory Committee has no responsibility or obligation under the Plan to
Participants or Beneficiaries for any act required of the Employer, the Trustee,

                                       31



the Custodian or of any other service provider to the Plan. The Advisory
Committee is not responsible to collect any required plan contribution or to
determine the correctness or deductibility or any Employer contribution. The
Advisory Committee in administering the Plan is entitled to, but is not required
to rely upon, information which a Participant, Beneficiary, Trustee, Custodian,
the Employer, a Plan service provider or representatives thereof provide to the
Plan Administrator.

     9.17 NOTICE, DESIGNATION, ELECTION, CONSENT AND WAIVER. All notices under
the Plan and all Participant or Beneficiary designations, elections, consents or
waivers must be in writing and made in a form the Advisory Committee specifies
or otherwise approves. To the extent permitted by Treasury regulations or other
applicable guidance, any Plan notice, election, consent or waiver may be
transmitted electronically. Any person entitled to notice under the Plan may
waive the notice or shorten the notice period except as otherwise required by
the Code or ERISA.

                                       32



                                    ARTICLE X
                           TRUSTEE, POWERS AND DUTIES

     10.01 ACCEPTANCE. The Trustee accepts the Trust created under the Plan
and agrees to perform the obligations imposed. The Trustee must provide bond for
the faithful performance of its duties under the Trust to the extent required by
ERISA.

     10.02 RECEIPT OF CONTRIBUTIONS. The Trustee is accountable to the Employer
for the funds contributed to it by the Employer, but does not have any duty to
see that the contributions received comply with the provisions of the Plan. The
Trustee is not obliged to collect any contributions from the Employer, nor is
obliged to see that funds deposited with it are deposited according to the
provisions of the Plan.

     10.03 INVESTMENT POWERS.

[A] Trustee Powers. The Trustee has full discretion and authority with regard to
the investment of the Trust Fund, except with respect to a Plan asset under the
control or direction of a properly appointed Investment Manager or with respect
to a Plan asset subject to Employer, Participant or Advisory Committee direction
of investment (including direction of investment by the Employer as provided in
Section 7.04 and by a Participant as provided in Section 8.10). The Trustee must
coordinate its investment policy with Plan financial needs as communicated to it
by the Advisory Committee. The Trustee is authorized and empowered, but not by
way of limitation, with the following powers, rights and duties:

     (a) To invest in Employer Stock (that is, to hold and acquire Employer
     Stock) comprising up to 100% of the value of the Trust Fund and to invest
     any part or all of the Trust Fund in any common or preferred stocks,
     open-end or closed-end mutual funds, put and call options traded on a
     national exchange, United States retirement plan bonds, corporate bonds,
     debentures, convertible debentures, commercial paper, U.S. Treasury bills,
     U.S. Treasury notes and other direct or indirect obligations of the United
     States Government or its agencies, improved or unimproved real estate
     situated in the United States, limited partnerships, insurance contracts of
     any type, mortgages, notes or other property of any kind, real or personal,
     and to buy or sell options on common stock on a nationally recognized
     exchange with or without holding the underlying common stock, and to make
     any other investments the Trustee deems appropriate, as a prudent man would
     do under like circumstances with due regard for the purposes of this Plan.
     Any investment made or retained by the Trustee in good faith is proper but
     must be of a kind (with the exception of Employer Securities) constituting
     a diversification considered by law suitable for trust investments;

     (b) To retain in cash so much of the Trust Fund as it may deem advisable to
     satisfy liquidity needs of the Plan and to deposit any cash held in the
     Trust Fund in a bank account at reasonable interest. If the Trustee is a
     bank or similar financial institution supervised by the United States or by
     a State, this paragraph (b) includes specific authority to invest in any
     type of deposit of the Trustee (or of a bank related to the Trustee within
     the meaning of Code (S)414(b)) at a reasonable rate of interest or in a
     common trust fund (the provisions of which govern the investment of such
     assets and which the Plan incorporates by this reference) as described in
     Code (S)584 which the Trustee (or its affiliate, as defined in Code
     (S)1504) maintains exclusively for the collective investment of money
     contributed by the bank (or the affiliate) in its capacity as trustee and
     which conforms to the rules of the Comptroller of the Currency;

     (c) To manage, sell, contract to sell, grant options to purchase, convey,
     exchange, transfer, abandon, improve, repair, insure, lease for any term
     even though commencing in the future or extending beyond the term of the
     Trust, and otherwise deal with all property, real or personal, in such
     manner, for such considerations and on such terms and conditions as the
     Trustee decides;

     (d) To credit and distribute the Trust as directed by the Advisory
     Committee. The Trustee is not obliged to inquire as to whether any payee or
     distributee is entitled to any payment or whether the distribution is
     proper or within the terms of the Plan, or as to the manner of making any
     payment or distribution. The Trustee accountable only to the Advisory
     Committee for any payment or distributions made by it in good faith on the
     order or direction of the Advisory Committee;

     (e) To borrow money, to assume indebtedness, extend mortgages and encumber
     by mortgage or pledge;

     (f) To compromise, contest, arbitrate or abandon claims and demands, in its
     discretion;

     (g) To have with respect to the Trust all of the rights of an individual
     owner, including the power to give proxies, to participate in any voting
     trusts, mergers, consolidations or liquidations, and to exercise or sell
     stock subscriptions or conversion rights, subject to the requirements of
     Section 10.17;

     (h) To lease for oil, gas and other mineral purposes and to create mineral
     severances by grant or reservation; to pool or unitize interests in oil,
     gas and other minerals; and to enter into operating agreements and to
     execute division and transfer orders;

                                       33



     (i) To hold any securities or other property in the name of the Trustee or
     its nominee, with depositories or agent depositories or in another form as
     it may deem best, with or without disclosing the trust relationship;

     (j) To perform any and all other acts in its judgment necessary or
     appropriate for the proper and advantageous management, investment and
     distribution of the Trust;

     (k) To retain any funds or property subject to any dispute without
     liability for the payment of interest, and to decline to make payment or
     delivery of the funds or property until final adjudication is made by a
     court of competent jurisdiction;

     (l) To file all tax returns required of the Trustee;

     (m) To furnish to the Employer, the Plan Administrator and the Advisory
     Committee a quarterly statement of account, within 30 days of the close of
     each quarter Plan Year, showing the condition of the Trust Fund and all
     investments, receipts, disbursements and other transactions effected by the
     Trustee during the Plan Year covered by the statement and also stating the
     assets of the Trust held at the end of the Plan Year, which accounts are
     conclusive on all persons, including the Employer, the Plan Administrator
     and the Advisory Committee, except as to any act or transaction concerning
     which the Employer, the Plan Administrator or the Advisory Committee files
     with the Trustee written exceptions or objections within 90 days after the
     receipt of the accounts or for which ERISA authorizes a longer period
     within which to object.

     (n) To begin, maintain or defend any litigation necessary in connection
     with the administration of the Plan, except that the Trustee is not obliged
     or required to do so unless indemnified to its satisfaction.

[B] Participant Loans. This Section 10.03[B] specifically authorizes the Trustee
to make loans on a nondiscriminatory basis to a Participant in accordance with
the loan policy established by the Advisory Committee, provided: (1) the loan
policy satisfies the requirements of Section 9.04; (2) loans are available to
all Participants on a reasonably equivalent basis and are not available in a
greater amount for Highly Compensated Employees than for other Employees; (3)
any loan is adequately secured and bears a reasonable rate of interest; (4) the
loan provides for repayment within a specified time; (5) the default provisions
of the note prohibit offset of the Participant's Vested Account Balance prior to
the time the Trustee otherwise would distribute the Participant's Vested Account
Balance; (6) the amount of the loan does not exceed (at the time the Plan
extends the loan) the present value of the Participant's Vested Account Balance;
and (7) the loan otherwise conforms to the exemption provided by Code
(S)4975(d)(1). If the joint and survivor requirements of Article VI apply to the
Participant, the Participant may not pledge any portion of his Account Balance
as security for a loan made after August 18, 1985, unless, within the 90 day
period ending on the date the pledge becomes effective, the Participant's
spouse, if any, consents (in a manner described in Section 6.05 other than the
requirement relating to the consent of a subsequent spouse) to the security or,
by separate consent, to an increase in the amount of security.

     10.04 RECORDS AND STATEMENTS. The records of the Trustee pertaining to the
Plan must be open to the inspection of the Plan Administrator, Advisory
Committee and the Employer at all reasonable times and may be audited from time
to time by any person or persons as the Employer, Plan Administrator or Advisory
Committee may specify in writing. The Trustee must furnish the Plan
Administrator or Advisory Committee with whatever information relating to the
Trust Fund the Plan Administrator or Advisory Committee considers necessary.

     10.05 FEES AND EXPENSES FROM FUND. The Trustee will receive reasonable
annual compensation as may be agreed upon from time to time between the Employer
and the Trustee. The Trustee will pay all fees and expenses reasonably incurred
for administration of the Plan from the Trust Fund unless the Employer pays the
fees and expenses. The Advisory Committee will not treat any fee or expense
paid, directly or indirectly, by the Employer as an Employer contribution,
provided the fee or expense relates to the ordinary and necessary administration
of the Fund. No person who is receiving full pay from the Employer shall receive
compensation for services as Trustee.

     10.06 PARTIES TO LITIGATION. Except as otherwise provided by ERISA, only
the Employer, the Plan Administrator, the Advisory Committee, and the Trustee
are necessary parties to any court proceeding involving the Trustee or the Trust
Fund. No Participant, or Beneficiary, is entitled to any notice of process
unless required by ERISA. Any final judgment entered in any proceeding will be
conclusive upon the Employer, the Plan Administrator, the Advisory Committee,
the Trustee, Participants and Beneficiaries.

     10.07 PROFESSIONAL AGENTS. The Trustee may employ and pay from the Trust
Fund reasonable compensation to agents, attorneys, accountants and other persons
to advise the Trustee as in its opinion may be necessary. The Trustee may
delegate to any agent, attorney, accountant or other person selected by it any
non-Trustee power or duty vested in it by the Plan, and the Trustee may act or
refrain from acting on the advice or opinion of any agent, attorney, accountant
or other person so selected.

                                       34



     10.08 DISTRIBUTION OF CASH OR PROPERTY. The Trustee may make distribution
under the Plan in cash or property, or partly in each, at its fair market value
as determined by the Trustee. For purposes of a distribution to a Participant or
to a Participant's designated Beneficiary or surviving spouse, "property"
includes a Nontransferable Annuity contract, provided the contract satisfies the
requirements of this Plan.

     10.09 DISTRIBUTION DIRECTIONS. If no one claims a payment or distribution
made from the Trust, the Trustee shall promptly notify the Advisory Committee
and then dispose of the payment in accordance with the subsequent direction of
the Advisory Committee.

     10.10 THIRD PARTY. No person dealing with the Trustee is obligated to see
to the proper application of any money paid or property delivered to the
Trustee, or to inquire whether the Trustee has acted pursuant to any of the
terms of the Plan. Each person dealing with the Trustee may act upon any notice,
request or representation in writing by the Trustee, or by the Trustee's duly
authorized agent, and is not liable to any person whomsoever in so acting. The
certificate of the Trustee that it is acting in accordance with the Plan will be
conclusive in favor of any person relying on the certificate.

     If more than two persons act as Trustee, the decision of a majority of such
persons controls with respect to any decision regarding the administration or
investment of the Trust Fund.

     10.11 RESIGNATION. The Trustee may resign at any time as Trustee of the
Plan by giving 30 days' written notice in advance to the Employer and to the
Advisory Committee. If the Employer fails to appoint a successor Trustee within
60 days of its receipt of the Trustee's written notice of resignation, the
Trustee will treat the Employer as having appointed itself as Trustee and as
having filed its acceptance of appointment with the former Trustee.

     10.12 REMOVAL. The Employer, by giving 30 days' written notice in advance
to the Trustee, may remove any Trustee. In the event of the resignation or
removal of a Trustee, the Employer must appoint a successor Trustee if it
intends to continue the Plan. If two or more persons hold the position of
Trustee, in the event of the removal of one such person, during any period the
selection of a replacement is pending, or during any period such person is
unable to serve for any reason, the remaining person or persons will act as the
Trustee.

     10.13 INTERIM DUTIES AND SUCCESSOR TRUSTEE. Each successor Trustee succeeds
to the title to the Trust vested in his predecessor by accepting in writing his
appointment as successor Trustee and filing the acceptance with the former
Trustee and the Advisory Committee without the signing or filing of any further
statement. The resigning or removed Trustee, upon receipt of acceptance in
writing of the Trust by the successor Trustee, must execute all documents and do
all acts necessary to vest the title of record in any successor Trustee. Each
successor Trustee has and enjoys all of the powers, both discretionary and
ministerial, conferred under this Agreement upon his predecessor. A successor
Trustee is not personally liable for any act or failure to act of any
predecessor Trustee, except as required under ERISA. With the approval of the
Employer and the Advisory Committee, a successor Trustee, with respect to the
Plan, may accept the account rendered and the property delivered to it by a
predecessor Trustee without incurring any liability or responsibility for so
doing.

     10.14 VALUATION OF TRUST. The Trustee must value the Trust Fund as of each
Accounting Date and each March 31, June 30 and September 30 and on each business
day of the Trustee to determine the fair market value of the assets in the Trust
Fund. The Trustee must also value the Trust Fund on such other dates as directed
in writing by the Advisory Committee. Collectively, all such dates shall be
known as the "valuation dates."

     10.15 LIMITATION ON LIABILITY - IF INVESTMENT MANAGER APPOINTED. The
Trustee is not liable for the acts or omissions of any Investment Manager or
Managers the Advisory Committee may appoint, nor is the Trustee under any
obligation to invest or otherwise manage any asset of the Plan which is subject
to the management of a properly appointed Investment Manager. The Advisory
Committee, the Trustee and any properly appointed Investment Manager may execute
a letter agreement as a part of this Plan delineating the duties,
responsibilities and liabilities of the Investment Manager with respect to any
part of the Trust Fund under the control of the Investment Manager.

     10.16 INVESTMENT IN GROUP TRUST FUND. The Trustee, for collective
investment purposes, may combine into one trust fund the Trust created under
this Plan with the Trust created under any other qualified retirement plan the
Employer maintains. However, separate records of account must be maintained for
the assets of each Trust in order to reflect properly each Participant's Account
Balance under the plan(s) in which he is a Participant.

     The Employer specifically authorizes the Trustee to invest all or any
portion of the assets comprising the Trust Fund in any group trust fund which at
the time of the investment provides for the pooling of the assets of plans
qualified under Code (S)401(a). This authorization applies solely to a group
trust fund exempt from taxation under code (S)501(a) and the trust agreement of
which satisfies the requirements of Revenue Ruling 81-100. The provisions of the
group trust fund agreement, as amended from time to time, are by this reference
incorporated within this Plan and Trust. The provisions of the group trust fund
will govern any investment of Plan assets in that fund.

                                       35



     10.17 DUTIES PERTAINING TO THE EMPLOYER STOCK FUND.

[A] Investment. The Trustee will purchase or sell Employer Stock for the
Employer Stock Fund through transactions on the open market. Generally, the
Trustee will purchase or sell Employer Stock for the Employer Stock Fund at
least once each month, unless the Advisory Committee directs the Trustee to
purchase and sell more frequently.

[B] Voting. Each Participant with an interest in the Employer Stock Fund shall
have the right to participate confidentially in the exercise of voting rights
appurtenant to shares held in the Employer Stock Fund, provided that such person
had an interest in the Employer Stock Fund as of the most recent valuation date
coincident with or preceding the applicable record date for which records are
available. Such participation shall be achieved by completing and filing with
the Trustee (or such other person who shall be independent of the Employer as
the Advisory Committee shall designate), at least 10 days prior to the date of
the meeting of holders of shares at which such voting rights will be exercised,
a written direction in the form and manner prescribed by the Advisory Committee.
The Trustee (or such other person designated by the Advisory Committee) shall
tabulate the directions given on a strictly confidential basis. (If tabulated by
a person other than the Trustee, the results shall be transmitted confidentially
to the Trustee.) The Trustee shall follow the final results of the tabulation as
to the manner in which such voting rights shall be exercised. As to each matter
in which the holders of shares are entitled to vote, the Trustee shall cast
votes described below.

     (1) The Trustee shall cast a number of affirmative votes equal to the
     product of

          (a)  the total number of shares held in the Employer Stock Fund as of
               the applicable record date; and

          (b)  a fraction, the numerator of which is the aggregate value (as of
               the valuation date coincident with or immediately preceding the
               applicable record date) of the interests in the Employer Stock
               Fund of all persons directing that an affirmative vote be cast,
               and the denominator of which is the aggregate value (as of the
               valuation date coincident with or immediately preceding the
               applicable record date) of the interests in the Employer Stock
               Fund of all persons.

     (2) The Trustee shall cast a number of negative votes, which shall be
     determined in the same manner as the number of affirmative votes to be
     cast, as described in (1) above, except that the word "negative" shall be
     substituted for the word "affirmative" throughout (1)(b) above.

     (3) With respect to stock for which the Trustee is not obligated to cast
     either affirmative or negative votes, the Trustee shall cast votes in such
     manner as the Trustee, its sole discretion, shall decide.

The Advisory Committee shall furnish, or cause to be furnished, to each person
with an interest in the Employer Stock Fund, all annual reports, proxy materials
and other information known to have been furnished by the issuer of shares or by
any proxy solicitor, to the holder of shares.

[C] Tender Offers. Each person with an interest in the Employer Stock Fund shall
have the right to participate confidentially in the response to a tender offer,
or to any other offer, made to the holders of shares generally, to purchase,
exchange, redeem or otherwise transfer shares; provided that such person had an
interest in the Employer Stock Fund as of the valuation date coincident with or
immediately preceding the first day for delivery shares or otherwise responding
to such tender or other offer. Such participation shall be achieved by
completing and filing with the Trustee (or such other person who shall be
independent of the Employer as the Advisory Committee shall designate), at least
10 days prior to the last day for delivering shares or otherwise responding to
such tender or other offer, a written direction in the form and manner
prescribed by the Advisory Committee. The Trustee (or such person designated by
the Advisory Committee) shall tabulate the directions given on a strictly
confidential basis. (If tabulated by a person other than the Trustee, the final
results of the tabulation shall be transmitted in confidence to the Trustee).
The final results of the tabulation shall be followed by the Trustee as to the
number of shares to be delivered. On the last day for delivering shares or
otherwise responding to such a tender, or other offer, the Trustee shall deliver
or withhold shares as described below.

     (1) In response to such tender or offer, the Trustee shall deliver a number
     of shares equal to the product of:

          (a)  the total number of shares then held in the Employer Stock Fund;
               and

          (b)  a fraction, the numerator of which is the aggregate value (as of
               the valuation date coincident with or immediately preceding the
               first day for delivering shares or otherwise responding to such
               tender or other offer) of the interests in the Employer Stock
               Fund of all persons directing that shares be delivered in
               response to such tender or other offer, and the denominator of
               which is the aggregate value (as of the valuation date coincident
               with or immediately preceding the first day for delivering shares
               or otherwise responding to such tender or other offer) of the
               interests in the Employer Stock Fund of all persons.

                                       36



     (2) In response to such tender or offer, the Trustee shall withhold a
     number of shares, which shall be determined in the same manner as the
     number of shares to deliver was determined in (1) above, except that in
     (1)(b) the word "withheld" shall be substituted for the word "deliver."

     (3) With respect to stock that the Trustee is not obligated to deliver or
     withhold, in response to such tender or offer, the Trustee shall deliver or
     withhold shares as the Trustee, its sole discretion, shall decide.

The Advisory Committee shall furnish, or cause to be furnished, to each
Participant whose Account is invested in whole or in part in the Employer Stock
Fund, all information concerning such tender or other offer furnished by the
issuer of shares, or information furnished by or on behalf of the person making
such tender or other offer.

                                       37



                                   ARTICLE XI
              PROVISIONS RELATING TO INSURANCE & INSURANCE COMPANY

     11.01 INSURANCE BENEFIT. The Employer may elect to provide incidental life
insurance benefits for insurable Participants who consent to life insurance
benefits by signing the appropriate insurance company application form. The
Trustee will not purchase any incidental life insurance benefit for any
Participant prior to the Accounting Date as of which the Advisory Committee
first makes an Employer contribution allocation to the Participant's Account.

     The Employer will direct the Trustee as to the insurance company and
insurance agent through which the Trustee is to purchase the insurance
contracts, the amount of the coverage and the applicable dividend plan. Each
application for a policy, and the policies themselves, must designate the
Trustee as sole owner, with the right reserved to the Trustee to exercise any
right or option contained in the policies, subject to the terms and provisions
of this Agreement. The Trustee must be the named beneficiary for the Account of
the insured Participant. Proceeds of insurance contracts paid to the
Participant's Account under this Article XI are subject to the distribution
requirements of Article V and of Article VI. The Trustee will not retain any
such proceeds for the benefit of the Trust.

     The Trustee will charge the premiums on any incidental benefit insurance
contract covering the life of a Participant against the Account of that
Participant. The Trustee will hold all incidental benefit insurance contracts
issued under the Plan as assets of the Trust created under the Plan.

     Incidental insurance benefits. The aggregate of life insurance premiums
paid for the benefit of a Participant, at all times, may not exceed the value of
the Participant's Vested Account Balance nor the following percentages of the
aggregate of the Employer's contributions allocated to any Participant's
Account: (i) 49% in the case of the purchase of ordinary life insurance
contracts; or (ii) 25% in the case of the purchase of term life insurance
contracts. If the Trustee purchases a combination of ordinary life insurance
contract(s) and term life insurance contract(s), then the sum of one-half of the
premiums paid for the ordinary life insurance contract(s) and the premiums paid
for the term life insurance contract(s) may not exceed 25% of the Employer
contributions allocated to any Participant's Account.

     11.02 LIMITATION ON LIFE INSURANCE PROTECTION. The Trustee will not
continue any life insurance protection for any Participant beyond the last of
his termination of employment, his attaining Normal Retirement Age, or
notification from the Advisory Committee of his termination of employment. If
the Trustee holds any incidental benefit insurance contract(s) on the life of a
Participant when he terminates his employment (other than by reason of death),
the Trustee must proceed as follows:

     (a) If the entire cash value of the contract(s) is vested in the
     terminating Participant, or if the contract(s) will have no cash value at
     the end of the policy year in which termination of employment occurs, the
     Trustee will transfer the contract(s) to the Participant endorsed so as to
     vest in the transferee all right, title and interest to the contract(s),
     free and clear of the Trust; subject however, to restrictions as to
     surrender or payment of benefits as the issuing insurance company may
     permit and as the Advisory Committee directs;

     (b) If only part of the cash value of the contract(s) is vested in the
     terminating Participant, the Trustee, to the extent the Participant's
     interest in the cash value of the contract(s) is not vested, may adjust the
     Participant's interest in the value of his Account attributable to Trust
     assets other than incidental benefit insurance contracts and proceed as in
     (a), or the Trustee must effect a loan from the issuing insurance company
     on the sole security of the contract(s) for an amount equal to the
     difference between the cash value of the contract(s) at the end of the
     policy year in which termination of employment occurs and the amount of the
     cash value that is vested in the terminating Participant, and the Trustee
     must transfer the contract(s) endorsed so as to vest in the transferee all
     right, title and interest to the contract(s), free and clear of the Trust;
     subject however, to the restrictions as to surrender or payment of benefits
     as the issuing insurance company may permit and the Advisory Committee
     directs;

     (c) If no part of the cash value of the contract(s) is vested in the
     terminating Participant, the Trustee must surrender the contract(s) for
     cash proceeds as may be available.

     In accordance with the written direction of the Advisory Committee, the
Trustee will make any transfer of contract(s) under this Section 11.02 on the
Participant's annuity starting date (or as soon as administratively practicable
after that date). The Trustee may not transfer any contract under this Section
11.02 which contains a method of payment not specifically authorized by Article
VI or which fails to comply with the joint and survivor annuity requirements, if
applicable, of Article VI. In this regard, the Trustee either must convert such
a contract to cash and distribute the cash instead of the contract, or before
making the transfer, require the issuing company to delete the unauthorized
method of payment option from the contract.

     11.03 DEFINITIONS. For purposes of this Article XI:

                                       38



     (a) "Policy" means an ordinary life insurance contract or a term life
     insurance contract issued by an insurer on the life of a Participant.

     (b) "Issuing insurance company" is any life insurance company which has
     issued a policy upon application by the Trustee under the terms of this
     Agreement.

     (c) "Contract" or "Contracts" means a policy of insurance. In the event of
     any conflict between the provisions of this Plan and the terms of any
     contract or policy of insurance issued in accordance with this Article XI,
     the provisions of the Plan control.

     (d) "Insurable Participant" means a Participant to whom an insurance
     company, upon an application being submitted in accordance with the Plan,
     will issue insurance coverage, either as a standard risk or as a risk in an
     extra mortality classification.

     (e) "Term life insurance contract" includes, in addition to a traditional
     term life insurance contract, a universal life insurance contract and any
     other life insurance contract which is not an ordinary life insurance
     contract.

     11.04 DIVIDEND PLAN. The dividend plan is premium reduction unless the
Advisory Committee directs the Trustee to the contrary. The Trustee must use all
premiums for a contract to purchase insurance benefits or additional insurance
benefits for the Participant on whose life the insurance company has issued the
contract. Furthermore, the Trustee must arrange, where possible, for all
policies issued on the lives of Participants under the Plan to have the same
premium due date and all ordinary life insurance contracts to contain guaranteed
cash values with as uniform basic options as are possible to obtain. The term
"dividends" includes policy dividends, refunds of premiums and other credits.

     11.05 INSURANCE COMPANY NOT A PARTY TO AGREEMENT. No insurance company,
solely in its capacity as an issuing insurance company, is a party to this
Agreement nor is the company responsible for its validity.

     11.06 INSURANCE COMPANY NOT RESPONSIBLE FOR TRUSTEE'S ACTIONS. No insurance
company, solely in its capacity as an issuing insurance company, need examine
the terms of this Agreement nor is responsible for any action taken by the
Trustee.

     11.07 INSURANCE COMPANY RELIANCE ON TRUSTEE'S SIGNATURE. For the purpose of
making application to an insurance company and in the exercise of any right or
option contained in any policy, the insurance company may rely upon the
signature of the Trustee and is saved harmless and completely discharged in
acting at the direction and authorization of the Trustee.

     11.08 ACQUITTANCE. An insurance company is discharged from all liability
for any amount paid to the Trustee or paid in accordance with the direction of
the Trustee, and is not obliged to see to the distribution or further
application of any moneys it so pays.

     11.09 DUTIES OF INSURANCE COMPANY. Each insurance company must keep such
records, make such identification of contracts, funds and accounts within funds,
and supply such information as may be necessary for the proper administration of
the Plan under which it is carrying insurance benefits.

                                       39



                                   ARTICLE XII
                                  MISCELLANEOUS

     12.01 EVIDENCE. Anyone required to give evidence under the terms of the
Plan may do so by certificate, affidavit, document or other information which
the person to act in reliance may consider pertinent, reliable and genuine, and
to have been signed, made or presented by the proper party or parties. Both the
Advisory Committee and the Trustee are fully protected in acting and relying
upon any evidence described under the immediately preceding sentence.

     12.02 NO RESPONSIBILITY FOR EMPLOYER ACTION. Neither the Trustee nor the
Advisory Committee has any obligation nor responsibility with respect to any
action required by the Plan to be taken by the Employer, any Participant or
eligible Employee, or for the failure of any of the above persons to act or make
any payment or contributions, or to otherwise provide any benefit contemplated
under this Plan. Furthermore, the Plan does not require the Trustee or the
Advisory Committee to collect any contribution required under the Plan, or
determine the correctness of the amount of any Employer contribution. Neither
the Trustee nor the Advisory Committee need inquire into or be responsible for
any action or failure to act on the part of the others.

     Any action required of a corporate Employer must be by its Board of
Directors, or by any person or persons duly authorized by resolution of said
Board to take such action.

     12.03 FIDUCIARIES NOT INSURERS. The Trustee, the Advisory Committee, the
Plan Administrator and the Employer in no way guarantee the Trust Fund from loss
or depreciation. The Employer does not guarantee the payment of any money which
may be or becomes due to any person from the Trust Fund. The liability of the
Advisory Committee and the Trustee to make any payment from the Trust Fund at
any time and all times is limited to the then available assets of the Trust.

     12.04 WAIVER OF NOTICE. Any person entitle to notice under the Plan may
waive the notice.

     12.05 SUCCESSORS. The Plan is binding upon all persons entitled to benefits
under the Plan, their respective heirs and legal representatives, upon the
Employer, its successors and assigns who so agree in writing, and upon the
Trustee, the Advisory Committee, the Plan Administrator and their successors who
so agree in writing.

     12.06 WORD USAGE. Words used in the masculine also apply to the feminine
where applicable, and wherever the context of the Plan dictates, the plural
includes as the singular and the singular includes the plural.

     12.07 STATE LAW. Washington law will determine all questions arising with
respect to the provisions of this Agreement except to the extent Federal statute
supersedes Washington law.

     12.08 EMPLOYMENT NOT GUARANTEED. Nothing contained in this Plan, or with
respect to the establishment of the Trust, or any modification or amendment to
the Plan or Trust, or in the creation of any Account, or the payment of any
benefit, gives any Employee, Employee-Participant or any Beneficiary any right
to continue employment, any legal or equitable right against the Employer, or
Employee of the Employer, or against the Trustee, or its agents or employees, or
against the Plan Administrator, except as expressly provided by the Plan, the
Trust, ERISA or by a separate agreement.

                                       40



                                  ARTICLE XIII
                    EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION

     13.01 EXCLUSIVE BENEFIT. Except as provided under Article III, the Employer
has no beneficial interest in any asset of the Trust and no part of any asset in
the Trust shall ever revert to or be repaid to an Employer, either directly or
indirectly; nor prior to the satisfaction of all liabilities with respect to the
Participants and their Beneficiaries under the Plan, may any part of the corpus
or income of the Trust Fund, or any asset of the Trust, be (at any time) used
for, or diverted to, purposes other than the exclusive benefit of the
Participants or their Beneficiaries and for defraying reasonable expenses of
administering the Plan.

     13.02 AMENDMENT BY EMPLOYER. The Employer has the right at any time and
from time to time:

     (a) To amend this Agreement in any manner it deems necessary or advisable
     in order to qualify (or maintain qualification of) this Plan and the Trust
     created under it under the appropriate provisions of Code (S)401(a); and

     (b) To amend this Agreement in any other manner.

     The Advisory Committee is authorized to make any amendments under Section
13.02(a). Moreover, the Advisory Committee is authorized to make any amendments
under Section 13.02(b) that are administrative in nature (e.g., amendments
relating to elections and procedures and the investment, valuation and
distribution of Plan assets).

     No amendment may authorize or permit any of the Trust Fund (other than the
part which is required to pay taxes and reasonable administration expenses) to
be used for or diverted to purposes other than for the exclusive benefit of the
Participants or their Beneficiaries or estates. No amendment may cause or permit
any portion of the Trust Fund to revert to or become a property of the Employer.
The Employer also may not make any amendment which affects the rights, duties or
responsibilities of the Trustee, the Plan Administrator or the Advisory
Committee without the written consent of the affected Trustee, the Plan
Administrator or the affected member of the Advisory Committee.

     Code (S)411(d)(6) protected benefits. An amendment (including the adoption
of this Plan as a restatement of an existing plan) may not decrease a
Participant's Account Balance, except to the extent permitted under Code
(S)412(c)(8), and except as provided in Treasury regulations may not reduce or
eliminate Protected Benefits determined immediately prior to the adoption date
(or, if later, the effective date) of the amendment. An amendment reduces or
eliminates Protected Benefits if the amendment has the effect of either (1)
eliminating or reducing an early retirement benefit or a retirement-type subsidy
(as defined in Treasury regulations), or (2) except as provided by Treasury
regulations, eliminating an optional form of benefit. The Advisory Committee
must disregard an amendment to the extent application of the amendment would
fail to satisfy this paragraph. If the Advisory Committee must disregard an
amendment because the amendment would violate clause (1) or clause (2), the
Advisory Committee must maintain a schedule of the early retirement option or
other optional forms of benefit the Plan must continue for the affected
Participants.

     The Employer (or Advisory Committee to the extent authorized in this
Section 13.02) must make all amendments in writing. Each amendment shall state
the date to which it is either retroactively or prospectively effective.

     13.03 DISCONTINUANCE. The Employer has the right, at any time, to suspend
or discontinue its contributions under the Plan and thereafter to continue to
maintain the Plan (subject to such suspension or discontinuance) until the
employer terminates the Plan. The Employer has the right, at any time, to
terminate, at any time, this Plan and the Trust created under this Agreement.
The Plan will terminate upon the first to occur of the following:

     (a) The date terminated by action of the Employer; or

     (b) The dissolution or merger of the Employer, unless a successor makes
     provision to continue the Plan, in which event the successor must
     substitute itself as the Employer under this Plan.

     13.04 FULL VESTING ON TERMINATION. Upon either full or partial termination
of the Plan, or, if applicable, upon complete discontinuance of profit sharing
plan contributions to the Plan, an affected Participant's right to his Account
Balance is 100% Vested, irrespective of the Vested percentage which otherwise
would apply under Article V.

     13.05 MERGER/DIRECT TRANSFER. The Trustee possesses the specific authority
to enter into merger agreements or direct transfer of assets agreements with the
trustees of other retirement plans described in Code (S)401(a), including an
elective transfer, and to accept the direct transfer of plan assets, or to
transfer plan assets, as a party to any such agreement. Except as provided in
Section 13.05(A), the Trustee may not consent to, or be a party to, any merger
or consolidation with another plan, or to a transfer of assets or liabilities to
another plan (or from the other plan to this Plan), unless immediately after the
merger, consolidation or transfer, the surviving Plan provides each Participant
a benefit equal to or greater than the benefit each Participant would have
received had the Plan terminated immediately before the merger or consolidation
or transfer. The Trustee will hold, administer and distribute the transferred
assets as a part of the Trust

                                       41



Fund and the Trustee must maintain a separate Employer contribution Account for
the benefit of the Employee on whose behalf the Trustee accepted the transfer in
order to reflect the value of the transferred assets.

     The Trustee may accept a direct transfer of plan assets on behalf of an
Employee prior to the date the Employee satisfies the Plan's eligibility
conditions(s). If the Trustee accepts a direct transfer of plan assets, the
Advisory Committee and Trustee must treat the Employee as a as a limited
Participant as described in Section 4.04.

     Sections 13.05(A) and (B) are effective for elective transfers made on or
following September 6, 2000. Under an elective transfer which is made pursuant
to Section 13.05(A) or (B), the Protected Benefits in the transferring plan are
not required to be preserved under Section 13.02(B), except as provided in
Section 13.05(B).

(A) Distributable Event Elective Transfer. The Trustee may consent to, or be a
party to, a merger, consolidation or transfer of assets with another qualified
plan in accordance with this Section 13.05(A).

     A transfer between qualified plans is a distributable event elective
transfer if: (1) the Participant has a right to immediate distribution from the
transferor plan; (2) the transfer is voluntary, under a fully informed election
by the Participant; (3) the Participant has an alternative that retains his/her
Protected Benefits (including an option to leave his/her benefit in the
transferor plan, if that plan is not terminating); (4) the transferor plan
satisfies applicable consent and joint and survivor annuity requirements of the
Code; (5) the amount transferred, together with the amount of any
contemporaneous direct rollover of the Participant's remaining Vested Account
Balance, constitutes the Participant's entire Vested Account Balance; (6) the
Participant has a 100% Vested interest in the transferred benefit in the
transferee plan; and (7) if the transfer is from this Plan to a defined benefit
plan, the transferee plan provides a benefit for the affected Participant equal
to the benefit (expressed as an annuity payable at normal retirement age)
derived solely with respect to the transferred assets.

     An elective transfer under this Section 13.05(A) may occur between
qualified plans of any type.

     Commencing January 1, 2002, the Trustee may not undertake an elective
transfer of a Participant's Account under this Section 13.05(A) if the
Participant is eligible to receive an immediate distribution of his/her entire
Vested Account Balance which would consist entirely of an eligible rollover
distribution as described in Section 6.10(D).

(B) Transaction/Employment Change Elective Transfer. The Trustee may consent to,
or be a party to, a merger, consolidation or transfer of assets with another
qualified defined contribution plan in accordance with this Section 13.05(B).

     A transfer is a transaction or employment change transfer irrespective of
whether the Participant has a right to an immediate distribution from the
transferor plan provided: (1) the transfer satisfies requirements (2) and (3) of
Section 13.05(A); (2) the transfer only may occur as between plans described in
applicable Treasury regulations; (3) the transfer must occur in connection with
a merger, asset or stock acquisition, or change in employment resulting in the
participant's loss of right to additional ,allocations in the transferor plan or
in such other circumstances as described in applicable Treasury regulations; (4)
the transfer must consist of the Participant's entire Vested and non-Vested
Account Balance within the transferor plan: and (5) the transferee plan must
protect the QJSA and QPSA benefits (if any) in the transferor plan.

(C) Other Transfers. Any transfer which is not an elective transfer under
Sections 13.05(A) or 13.05(B) and which includes Protected Benefits is subject
to Section 13.02(B). The trustee of the transferee plan in receipt of assets
which are Protected Benefits must preserve the Protected Benefits in accordance
with applicable Treasury regulations. If the transferor plan contains a 401(k)
arrangement with deferral contributions accounts, qualified nonelective
contributions accounts, qualified matching contributions accounts or safe harbor
contributions accounts, such balances remain subject in the transferee plan to
the distribution restrictions described in Section 14.02(m). Any transfer under
this Section 13.05(C) from a defined benefit plan to this Plan must be in the
form of the transfer of a paid up individual annuity contract which guarantees
the payment of benefits in accordance with the transferor plan.

     13.06 POST TERMINATION PROCEDURE AND DISTRIBUTION. Upon termination of the
Plan, the distribution provisions of Article VI shall remain operative except,
in lieu of the timing and form of distribution options available under Article
VI, the Advisory Committee will direct the Trustee to distribute each
Participant's Vested Account Balance, in lump sum, as soon as administratively
practicable after the termination of the Plan, irrespective of the present value
of the Participant's Vested Account Balance and whether the Participant consents
to that distribution. This paragraph is null and void if, as of the period
between the Plan termination date and the final distribution of assets, the
Employer maintains any other defined contribution plan (other than an ESOP).

     If the first paragraph of this Section 13.06 is null and void, the Advisory
Committee will proceed with distribution of the terminated Plan in accordance
with the distribution provisions of Article VI, with the following exceptions:

                                       42



     (1) if the present value of the Participant's Vested Account Balance does
     not exceed $5,000, the Advisory Committee will direct the Trustee to
     distribute the Participant's Vested Account Balance to him in lump sum as
     soon as administratively practicable after the Plan terminates; and

     (2) if the present value of the Participant's Vested Account Balance
     exceeds $5,000, the Participant or the Beneficiary, in addition to the
     distribution events permitted under Article VI, may elect to have the
     Trustee commence distribution of his Vested Account Balance as soon as
     administratively practicable after the Plan terminates. If the Participant
     fails to make an election under this paragraph (2), the Advisory Committee,
     to liquidate the Trust, may transfer the Participant's Vested Account
     Balance to the other defined contribution plan maintained by the Employer,
     or purchase a deferred annuity contract for each such Participant which
     protects the Participant's distribution rights under the Plan.

     Continuing Trust Provisions. The Trust will continue until the Trustee in
accordance with the direction of the Advisory Committee has distributed all of
the benefits under the Plan. On each valuation date, the Advisory Committee will
credit any part of a Participant's Account Balance retained in the Trust with
its proportionate share of the Trust's net income, gains and losses. Upon
termination of the Plan, the amount, if any, in a suspense account under Article
III will revert to the Employer, subject to the conditions of the Treasury
regulations permitting such a reversion. A resolution or amendment to
discontinue all future benefit accrual but otherwise to continue maintenance of
this Plan, is not a termination for purposes of this Section 13.06.

     Distribution restrictions under Code (S)410(k). A Participant's Deferral
Contributions Account, Qualified Nonelective Contributions Account, Qualified
Matching Contributions Account, or transferred assets described in Section 13.05
to which the distribution restrictions of Sections 14.02(m) and 6.03(B) apply,
are distributable on account of Plan termination, as described in this Section
13.06, only if: (a) the Participant otherwise is entitled to a distribution of
that portion of his Vested Account Balance; or (b) the Employer does not
maintain a successor plan and the Advisory Committee distributes the
Participant's entire Vested Account Balance in a lump sum. A successor plan is a
defined contribution plan (other than an ESOP) maintained by the Employer (or by
a Related Employer) at the time of the termination of the Plan or within the
period ending twelve months after the final distribution of assets. However, a
plan is not a successor plan if less than 2% of the Employees eligible. to
participate in the terminating Plan are eligible to participate (beginning 12
months prior to and ending 12 months after the Plan's termination date) in the
potential successor plan.

     "Lost Participants." If the Advisory Committee is unable to locate any
Participant or Beneficiary whose Account Balance becomes distributable upon Plan
termination, the Advisory Committee will apply Section 9.14 except Section
9.14(B) does not apply.

     13.07 TRANSFER OF ASSETS FROM THE TRUSTEE OF THE FLOW INTERNATIONAL
CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN. If the Trustee accepts a transfer of
assets from the trustee of the Flow International Plan Employee Stock Ownership
Plan after March 31, 1998 (whether or not in an elective transfer within the
meaning of Section 13.05), then, in addition to the provisions of Section 13.05,
the following provisions shall also apply:

     (a) The assets in the Account the Trustee maintains for the transferred
     assets shall be subject to the Participant's (or Participant's
     beneficiary's) direction of investment in accordance with Section 8.10.

     (b) The assets in the Account the Trustee maintains for the transferred
     assets shall be distributed only in a single lump sum (regardless whether
     the assets include stock in Flow International Corporation or cash).

     (c) If at the time of distribution the assets in the Account the Trustee
     maintains for the transferred assets include stock in Flow International
     Corporation, the Participant (or Participant's beneficiary) may elect to
     receive the entire distribution in cash.

                                       43



                                   ARTICLE XIV
              PROVISIONS RELATING TO THE CODE (S)401(k) ARRANGEMENT

     14.01 401(k) ARRANGEMENT. The Employer makes the deferral contribution
described in Section 3.01(a) pursuant to a 401(k) arrangement. An Employee who
is eligible to participate in the 401(k) arrangement may file a salary reduction
agreement with the Advisory Committee. The salary reduction agreement may not be
effective earlier than the following date which occurs last: (i) the Employee's
Plan Entry Date (or, in the case of a reemployed Employee, his reparticipation
date under Article II); or (ii) the execution date of the Employee's salary
reduction agreement. A salary reduction agreement must specify the percentage of
Compensation (as defined in Section 1.10) the Employee wishes to defer. The
salary reduction agreement will apply only to Compensation which becomes
currently available to the Employee after the effective date of the salary
reduction agreement. The Employer will apply a reduction election to all
Compensation (and to increases in such Compensation) unless the Employee
specifies in his salary reduction agreement to limit the election to certain
Compensation. The salary reduction agreement form approved by the Advisory
Committee from time to time will specify the minimum and maximum reduction
percentages and the options available for the Employee to so limit his election.

     An Employee's salary reduction contributions for the Plan Year, subject to
the elective deferral limitation of Section 14.03, may not exceed 15% of his
Compensation (40% of Compensation for Nonhighly Compensated Employees) for the
entire Plan Year. An Employee may modify his salary reduction agreement, either
to reduce or to increase the amount of deferral contributions, as of any July 1
or January 1 or any other date established by the Advisory Committee. The
Employee will make this modification by filing a new salary reduction agreement
with the Advisory Committee. An Employee may revoke a salary reduction agreement
at any time, with such revocation to be effective as soon as practicable
thereafter. An Employee who revokes his salary reduction agreement may file a
new salary reduction agreement as of any July 1 or January 1 or any other date
established by the Advisory Committee.

     The Advisory Committee may amend or revoke its salary reduction agreement
with any Participant if it determines that such revocation is necessary, helpful
or advisable to satisfy the special rules under Code (S)(S)401(k), 401(m) or
402(g) (see Sections 14.03, 14.04, 14.05 and 14.06), or the maximum limitations
of Code (S)415 (see Sections 3.07 through 3.12). Moreover, prior to any July 1
or January 1 the Advisory Committee may establish special deferral limits for
highly compensated employees (as defined in Section 14.02).

     14.02 DEFINITIONS.

     (a) "Highly Compensated Employee" means an Eligible Employee who satisfies
     the definition in Section 1.07 of the Plan.

     (b) "Nonhighly Compensated Employee" means an Eligible Employee who is not
     a Highly Compensated Employee.

     (c) "Eligible Employee" means, for purposes of the ADP test described in
     Section 14.04, an Employee who is eligible to enter into a salary reduction
     agreement for all or any portion of the plan year, irrespective of whether
     the Employee actually enters into such an agreement. For purposes of the
     ACP test described in Section 14.05, an "Eligible Employee" means a
     Participant who is eligible to receive an allocation of Employer matching
     contributions (or would be eligible if he made the type of contributions
     necessary to receive an allocation of matching contributions) and a
     Participant who is eligible to make employee contributions, irrespective of
     whether he actually makes employee contributions. An Employee continues to
     be an Eligible Employee during a period the Plan suspends the Employee's
     right to make elective deferrals or nondeductible contributions following a
     hardship distribution.

     (d) "Highly Compensated Group" means the group of Eligible Employees who
     are Highly Compensated Employees for the Plan Year.

     (e) "Nonhighly Compensated Group" means the group of Eligible Employees who
     are Nonhighly Compensated Employees for the Plan Year.

     (f) "Compensation" means, except as specifically provided under this
     Article XIV, Compensation as defined for nondiscrimination purposes in Code
     (S)414(s), uniformly applied to all Eligible Employees for the Plan Year.
     The Advisory Committee may use the general definition of Compensation in
     Section 1.10(A) or may modify that definition in any manner which satisfies
     Code (S)414(s). The Advisory Committee may annually elect operationally to
     include or exclude Elective Contributions, provided the election is
     consistent and uniform with respect to all Employees and plans of the
     Employer for any particular Plan Year. To compute an Employee's ADP or ACP,
     the Advisory Committee may limit Compensation taken into account to
     Compensation received only for the portion of

                                       44



     the Plan Year in which the Employee was an Eligible Employee and only for
     the portion of the Plan Year in which the Code (S)401(k) arrangement was in
     effect.

     (g) "Deferral contributions" means the sum of the deferral contributions
     the Employer contributes to the Trust on behalf of an Eligible Employee,
     pursuant to Section 3.01.

     (h) "Elective deferrals" are the deferral contributions the Employer
     contributes to the Trust at the election of an Eligible Employee. If the
     Code (S)401(k) arrangement includes a cash or deferred feature, any portion
     of a cash or deferred contribution contributed to the Trust because of the
     Employee's failure to make a cash election is an elective deferral, but any
     portion of a cash or deferred contribution over which the Employee does not
     have a cash election is not an elective deferral. Elective deferrals do not
     include amounts which have become currently available to the Employee prior
     to the election nor amounts designated as nondeductible employee
     contributions at the time of deferral or contribution.

     (i) "Matching contributions" are contributions made by the Employer on
     account of elective deferrals under a Code (S)401(k) arrangement or on
     account of employee contributions. Matching contributions also include
     Participant forfeitures allocated on account of such elective deferrals or
     employee contributions.

     (j) "Nonelective contributions" are contributions made by the Employer
     which are not subject to a deferral election by an Employee and which are
     not matching contributions.

     (k) "Qualified matching contributions" are matching contributions which are
     100% Vested at all times and which are subject to the distribution
     restrictions described in paragraph (m). Matching contributions are not
     100% Vested at all times if the Employee has a 100% Vested interest because
     of his Years of Service taken into account under a vesting schedule.

     (l) "Qualified nonelective contributions" are nonelective contributions
     which are 100% Vested at all times and which are subject to the
     distribution restrictions described in paragraph (m). Nonelective
     contributions are not 100% Vested at all times if the Employee has a 100%
     Vested interest because of his Years of Service taken into account under a
     vesting schedule. Any nonelective contributions allocated to a
     Participant's Qualified Nonelective Contributions Account under the Plan
     automatically satisfy the definition of qualified nonelective
     contributions.

     (m) "Distribution restrictions" means the Employee may not receive a
     distribution of the specified contributions (nor earnings on those
     contributions) except in the event of (1) the Participant's death,
     disability, Separation from Service (which for purposes of this Section
     14.02(m) means as the Advisory Committee determines under applicable
     Internal Revenue Service guidance, including the "same desk" rule and
     Revenue Ruling 2000-27 with respect to certain asset sale transactions),
     attainment of age 59 1/2, (2) financial hardship satisfying the
     requirements of Code (s)401(k) and the applicable Treasury regulations, (3)
     plan termination, without establishment of a successor defined contribution
     plan (other than an ESOP), (4) a sale by a corporate Employer of
     substantially all of the assets (within the meaning of Code (S)409(d)(2))
     used in a trade or business, but only to an employee who continues
     employment with the corporation acquiring those assets, or (5) a sale by a
     corporate Employer of its interest in a subsidiary (within the meaning of
     Code (S)409(d)(3)), but only to an employee who continues employment with
     the subsidiary. For Plan Years beginning after December 31, 1988, a
     distribution on account of financial hardship, as described in clause (2),
     may not include earnings on elective deferrals credited as of a date later
     than December 31, 1988, and may not include qualified matching
     contributions and qualified nonelective contributions, nor any earnings on
     such contributions, credited after December 31, 1988. A distribution
     described in clauses (3), (4) or (5), if made after March 31, 1988, must be
     a lump sum distribution, as required under Code (S)401(k)(10).

     (n) "Employee contributions" are contributions made by a Participant on an
     after-tax basis, whether voluntary or mandatory, and designated, at the
     time of contribution, as an employee (or nondeductible) contribution.
     Elective deferrals and deferral contributions are not employee
     contributions. Participant nondeductible contributions, made pursuant to
     Section 4.01 of the Plan, are employee contributions.

     (o) "Current year testing" means for purposes of the ADP test described in
     Section 14.04 and the ACP test described in Section 14.05, the use of data
     from the testing year in determining the ADP or ADP for the Nonhighly
     Compensated Group.

     (p) "Prior year testing" means for purposes of the ADP test described in
     Section 14.04 and the ACP test described in Section 14.05, the use of data
     from the Plan Year immediately prior to the testing year in determining the
     ADP or ACP for the Nonhighly Compensated Group.

     (q) "Salary reduction agreement" is a written election by a Participant to
     make salary reduction contributions as described in Section 14.01.

                                       45



     (r) "Salary reduction contributions" mean Employer contributions elected by
     a Participant to be made from the Participant's Compensation pursuant to a
     salary reduction agreement and which the Advisory Committee must allocate
     to the electing Participant's Account.

     (s) "Testing year" means for purposes of the ADP test described in Section
     14.04 and the ACP test described in Section 14.05, the Plan Year for which
     the ADP or ACP test is being performed.

     14.03 ANNUAL ELECTIVE DEFERRAL LIMITATION.

     (A) Annual Elective Deferral Limitation. An Employee's elective deferrals
for a calendar year beginning after December 31, 1986, may not exceed the Code
(S)402(g) limitation (the "402(g) limitation"). The 402(g) limitation is the
greater of $7,000 or the adjusted amount determined by the Secretary of the
Treasury. If the Employer determines the Employee's elective deferrals to the
Plan for a calendar year would exceed the 402(g) limitation for the calendar
year, the Employer will suspend the Employee's salary reduction agreement, if
any, until the following January 1 and pay in cash to the Employee the portion
of a deferral election which would result in the Employee's elective deferrals
for the calendar year exceeding the 402(g) limitation. If the Advisory Committee
determines an Employee's elective deferrals already contributed to the Plan for
a calendar year exceed the 402(g) limitation, the Advisory Committee will
distribute the amount in excess of the 402(g) limitation (the "excess
deferral"), as adjusted for allocable income under Section 14.03(C), no later
than April 15 of the following calendar year. If the Advisory Committee
distributes the excess deferral by the appropriate April 15, the excess deferral
is not an Annual Addition under Article III, and the Advisory Committee may make
the distribution irrespective of any other provision under this Plan or under
the Code. The Advisory Committee will reduce the amount of excess deferrals for
a calendar year distributable to the Employee by the amount of excess
contributions (as determined in Section 14.04), if any, previously distributed
to the Employee for the Plan Year beginning in that calendar year. Elective
deferrals distributed to an Employee as excess Annual Additions in accordance
with Article III are not taken into account under the Employee's 402(g)
limitation.

     (B) More than One Plan. If an Employee participates in another plan subject
to the 402(g) limitation under which he makes elective deferrals pursuant to a
Code (S)401(k) arrangement, elective deferrals under a SARSEP, elective
contributions under a SIMPLE IRA, or salary reduction contributions to a
tax-sheltered annuity, irrespective of whether the Employer maintains the other
plan, he may provide the Advisory Committee a written claim for excess deferrals
made to the Plan for a calendar year. The Employee must submit the claim no
later than the March 1 following the close of the particular calendar year and
the claim must specify the amount of the Employee's elective deferrals under
this Plan which are excess deferrals. If the Advisory Committee receives a
timely claim, it will distribute the excess deferral (as adjusted for allocable
income) the Employee has assigned to this Plan, in accordance with the
distribution procedure described in Section 14.03(A).

     (C) Allocable income. For purposes of making a distribution of excess
deferrals pursuant to this Section 14.03, allocable income means net income or
net loss allocable to the excess deferrals for the calendar year (but not beyond
the calendar year) in which the Employee made the excess deferral, determined in
a manner which is uniform, nondiscriminatory and reasonably reflective of the
manner used by the Advisory Committee to allocate income to Participants'
Accounts.

     14.04 ACTUAL DEFERRAL PERCENTAGE (ADP) TEST. For each Plan Year, the
Advisory Committee must determine whether the Plan's (S)401(k)arrangement
satisfies one of the following ADP tests:

     (i) The ADP for the Highly Compensated Group does not exceed 1.25 times the
     ADP of the Nonhighly Compensated Group; or

     (ii) The ADP for the Highly Compensated Group does not exceed the ADP for
     the Nonhighly Compensated Group by more than two percentage points (or the
     lesser percentage permitted by the multiple use limitation in Section
     14.06) and the ADP for the Highly Compensated Group is not more than twice
     the ADP for the Nonhighly Compensated Group.

     (A) Calculation of ADP. The average ADP for a group is the average of the
separate deferral percentages calculated for each Eligible Employee who is a
member of that group. An Eligible Employee's deferral percentage for a Plan Year
is the ratio of the Eligible Employee's deferral contributions for the Plan Year
to the Employee's Compensation for the Plan Year.. In determining the ADP, the
Advisory Committee must include any Highly Compensated Employee's excess
deferrals, as described in Section 14.03(A), to this Plan or to any other Plan
of the Employer and the Advisory Committee will disregard any Employee's excess
deferrals. The Advisory Committee operationally may include in the ADP test,
qualified nonelective contributions and qualified matching contributions the
Advisory Committee does not use in the ACP test. The Advisory Committee, under
prior year testing, may include qualified nonelective contributions or qualified
matching contributions in determining the Nonhighly Compensated Employee ADP
only if the Employer makes such contribution to the Plan by the end of the
testing year and the Advisory Committee allocates the contribution to the prior

                                       46



Plan Year. In determining whether the Plan's 401(k) arrangement satisfies either
ADP test, the Advisory Committee will use current year testing for Plan Years
ending before January 1, 2001, and prior year testing for Plan Years beginning
after December 31, 2000.

     (B) Special aggregation rule for Highly Compensated Employees. To determine
the deferral percentage of any Highly Compensated Employee, the Advisory
Committee must take into account any elective deferrals made by the Highly
Compensated Employee under any other Code (S)401(k) arrangement maintained by
the Employer, unless the elective deferrals are to an ESOP. If the plans
containing the Code (S)401(k) arrangements have different plan years, the
Advisory Committee will determine the combined deferral contributions on the
basis of the plan years ending in the same calendar year.

     (C) Aggregation of certain Code (S)401(k) arrangements. If the Employer
treats two plans as a unit for coverage or nondiscrimination purposes, the
Employer must combine the Code (S)401(k) arrangements under such plans to
determine whether either plan satisfies the ADP test. This aggregation rule
applies to the ADP determination for all Eligible Employees, irrespective of
whether an Eligible Employee is a Highly Compensated Employee or a Nonhighly
Compensated Employee. An Employer may aggregate 401(k) arrangements under this
Section 14.08(C) only if the plans have the same plan years and use the same
testing method. An Employer may not aggregate an ESOP (or the ESOP portion of a
plan) with a non-ESOP plan (or non-ESOP portion of a plan).

     (D) Characterization of excess contributions. If, pursuant to this Section
14.04, the Advisory Committee has elected to include qualified matching
contributions in the ADP test, the Advisory Committee will treat excess
contributions as attributable proportionately to deferral contributions and to
qualified matching contributions allocated on the basis of those deferral
contributions. The Advisory Committee will reduce the amount of excess
contributions for a Plan Year distributable to a Highly Compensated Employee by
the amount of excess deferrals (as defined in Section 14.03), if any, previously
distributed to that Employee for the Employee's taxable year ending in that Plan
Year.

     (E) Distribution of excess contributions. If the Advisory Committee
determines the Plan fails to satisfy the ADP test for a Plan Year, the Trustee,
as directed by the Advisory Committee, must distribute the excess contributions,
as adjusted for allocable income under Section 14.04(F), during the next Plan
Year. However, the Employer may incur an excise tax equal to 10% of the amount
of excess contributions for a Plan Year not distributed to the appropriate
Highly Compensated Employees during the first 2 1/2 months of that next Plan
Year. The excess contributions are the amount of deferral contributions made by
the Highly Compensated Employees which causes the Plan to fail to satisfy the
ADP test. The Advisory Committee will determine the total amount of excess
contributions by starting with the Highly Compensated Employee(s) who has the
greatest deferral percentage, reducing his deferral percentage (but not below
the next highest deferral percentage), then, if necessary, reducing the deferral
percentage of the Highly Compensated Employee(s) at the next highest deferral
percentage level, including the deferral percentage of the Highly Compensated
Employee(s) whose the deferral percentage the Advisory Committee already has
reduced (but not below the next highest deferral percentage), and continuing in
this manner until the ADP for the Highly Compensated Group satisfies the ADP
test.

     After the Advisory Committee has determined the excess contribution amount,
the Trustee, as directed by the Advisory Committee, then will distribute to each
Highly Compensated Employee his respective share of the excess contributions.
The Advisory Committee will determine each Highly Compensated Employee's share
of excess contributions by starting with the Highly Compensated Employee(s) who
has the highest dollar amount of elective deferrals, reducing his elective
contributions (but not below the next highest dollar amount of elective
deferrals), then, if necessary, reducing the elective deferrals of the Highly
Compensated Employee(s) at the next highest dollar amount of elective deferrals
of the Highly Compensated Employee(s) whose elective contributions the Advisory
Committee already has reduced (but not below the next highest dollar amount of
elective contributions), and continuing in this manner until the Trustee has
distributed all excess contributions.

     [F] Allocable income. To determine the amount of the corrective
distribution required under this Section 14.04, the Advisory Committee must
calculate the allocable income for the Plan Year (but not beyond the Plan Year)
in which the excess contributions arose. "Allocable income" means net income or
net loss. To calculate allocable income for the Plan Year, the Advisory
Committee will use a uniform and nondiscriminatory method which reasonably
reflects the manner used by the Plan to allocate income to Participants'
Accounts.

     14.05 ACTUAL CONTRIBUTION PERCENTAGE (ACP) TEST. The Advisory Committee
must determine whether the annual Employer matching contributions (other than
qualified matching contributions used in the ADP test under Section 14.04), if
any, and the Employee contributions, if any, satisfy one of the following
average contribution percentage ("ACP") tests:

     (i) The ACP for the Highly Compensated Group does not exceed 1.25 times the
     ACP of the Nonhighly Compensated Group; or

                                       47



     (ii) The ACP for the Highly Compensated Group does not exceed the ACP for
     the Nonhighly Compensated Group by more than two percentage points (or the
     lesser percentage permitted by the multiple use limitation in Section
     14.06) and the ACP for the Highly Compensated Group is not more than twice
     the ACP for the Nonhighly Compensated Group.

     (A) Calculation of ACP. The ACP for a group is the average of the separate
contribution percentages calculated for each Eligible Employee who is a member
of that group. An Eligible Employee's contribution percentage for a Plan Year is
the ratio of the Eligible Employee's aggregate contributions for the Plan Year
to the Employee's Compensation for the Plan Year. "Aggregate contributions" are
Employer matching contributions (other than qualified matching contributions
used in the ADP test under Section 14.04) and Employee contributions (as defined
in Section 14.02).. The Advisory Committee operationally may include in the ACP
test, qualified nonelective contributions and elective deferrals not used in the
ADP test. The Advisory Committee, under prior year testing, may include
qualified nonelective contributions or qualified matching contributions in
determining the Nonhighly Compensated Employee ACP only if the Employer makes
such contribution to the Plan by the end of the testing year and the Advisory
Committee allocates the contribution to the prior Plan Year. In determining
whether the Plan satisfies either ACP test, the Plan Administrator will use
current year testing for Plan Years ending before January 1, 2001, and prior
year testing for Plan Years beginning after December 31, 2000..

     (B) Special aggregation rule for Highly Compensated Employees. To determine
the contribution percentage of any Highly Compensated Employee, the aggregate
contributions taken into account must include any matching contributions (other
than qualified matching contributions used in the ADP test) and any Employee
contributions made on his behalf to any other plan maintained by the Employer,
unless the other plan is an ESOP. If the plans have different plan years, the
Advisory Committee will determine the combined aggregate contributions on the
basis of the plan years ending in the same calendar year.

     (C) Aggregation of certain 401(m) arrangements. If the Employer treats two
or more plans as a unit for coverage or nondiscrimination purposes, the Employer
must combine the 401(m) arrangements under such plans to determine whether the
plans satisfy the ACP test. This aggregation rule applies to the ACP
determination for all Eligible Employees, irrespective of whether an Eligible
Employee is a Highly Compensated Employee or a Nonhighly Compensated Employee.
An Employer may aggregate 401(m) arrangements under this Section 14.05(C) if the
plans have the same plan year and use the same testing method. The Advisory
Committee may not aggregate an ESOP (or the ESOP portion of a plan) with a
non-ESOP plan (or non-ESOP portion of a plan).

     Distribution of excess aggregate contributions. The Advisory Committee will
determine excess aggregate contributions after determining excess deferrals
under Section 14.03 and excess contributions under Section 14.04. If the
Advisory Committee determines the Plan fails to satisfy the ACP test for a Plan
Year, the Trustee, as directed by the Advisory Committee, must distribute the
vested excess aggregate contributions, as adjusted for allocable income, during
the next Plan Year. However, the Employer may incur an excise tax with respect
to the amount of excess aggregate contributions for a Plan Year not distributed
to the appropriate Highly Compensated Employees during the first 2 1/2 months of
that next Plan Year. The excess aggregate contributions are the amount of the
aggregate contributions allocated on behalf of the Highly Compensated Employees
which causes the Plan to fail to satisfy the ACP test. The Advisory Committee
will determine total amount of excess aggregate contributions by starting with
the Highly Compensated Employee(s) who has the greatest contribution percentage,
reducing his contribution percentage (but not below the next highest
contribution percentage), then, if necessary, reducing the contribution
percentage of the Highly Compensated Employee(s) at the next highest
contribution percentage level, including the contribution percentage of the
Highly Compensated Employee(s) whose contribution percentage the Advisory
Committee already has reduced (but not below the next highest contribution
percentages), and continuing in this manner until the ACP for the Highly
Compensated Group satisfies the ACP test.

     After the Advisory Committee has determined the excess aggregate
contribution amount, the Trustee, as directed by the Advisory Committee, then
will distribute to each Highly Compensated Employee his respective share(s) of
the excess aggregate contributions. The Advisory Committee will determine each
Highly Compensated Employee's shares of excess aggregate contributions by
starting with the Highly Compensated Employee(s) who has the highest dollar
amount of aggregate contributions, reducing the amount of his aggregate
contributions (but not below the next highest dollar amount of aggregate
contributions), then, if necessary, reducing the amount of aggregate
contributions of the Highly Compensated Employee(s) at the next highest level of
aggregate contributions, including the aggregate contributions of the Highly
Compensated Employee(s) whose aggregate contributions the Advisory Committee
already has reduced (but not below the next highest level of aggregate
contributions), and continuing in this manner until the Trustee has distributed
all excess aggregate contributions.

                                       48



     (E) Allocable income. To determine the amount of the corrective
distribution required under this Section 14.05, the Advisory Committee must
calculate the allocable income for the Plan Year (but not beyond the Plan Year)
in which the excess aggregate contributions arose. "Allocable income" means net
income or net loss. The Advisory Committee will determine allocable income in
the same manner as described in Section 14.04(F) for excess contributions.

     (F) Characterization of excess aggregate contributions. The Advisory
Committee will treat a Highly Compensated Employee's allocable share of excess
aggregate contributions in the following priority: (1) first as attributable to
his Employee contributions, if any; (2) then as matching contributions allocable
with respect to excess contributions determined under the ADP test described in
Section 14.04; (3) then on a pro rata basis to matching contributions and to the
deferral contributions relating to those matching contributions which the
Advisory Committee has included in the ACP test; and (4) last to qualified
nonelective contributions used in the ACP test. To the extent the Highly
Compensated Employee's excess aggregate contributions are attributable to
matching contributions, and he is not 100% vested in his Account Balance
attributable to matching contributions, the Advisory Committee will distribute
only the vested portion and forfeit the nonvested portion. The vested portion of
the Highly Compensated Employee's excess aggregate contributions attributable to
Employer matching contributions is the total amount of such excess aggregate
contributions (as adjusted for allocable income) multiplied by his vested
percentage (determined as of the last day of the Plan Year for which the
Employer made the matching contribution). The Plan will allocate forfeited
excess aggregate contributions to reduce Employer matching contributions for the
Plan Year in which the forfeiture occurs.

     14.06 MULTIPLE USE LIMITATION. If at least one Highly Compensated Employee
is includible in the ADP test under Section 14.04 and in the ACP test under
Section 14.05, the sum of the Highly Compensated Group's ADP and ACP may not
exceed the multiple use limitation.

     The multiple use limitation is the sum of (i) and (ii):

     (i) 125% of the greater of: (a) the ADP of the Nonhighly Compensated Group
     for the current Plan Year; or (b) the ACP of the Nonhighly Compensated
     Group for the Plan Year beginning with or within current the Plan Year of
     the Code (S)401(k) arrangement.

     (ii) 2% plus the lesser of (i)(a) or (i)(b), but no more than twice the
     lesser of (i)(a) or (i)(b).

     The Advisory Committee, in lieu of determining the multiple use limitation
as the sum of (i) and (ii), may elect to determine the multiple use limitation
as the sum of (iii) and (iv):

     (iii) 125% of the lesser of: (a) the ADP of the Nonhighly Compensated Group
     for the current Plan Year; or (b) the ACP of the Nonhighly Compensated
     Group for the Plan Year beginning with or within the current Plan Year of
     the Code (S)401(k) arrangement.

     (iv) 2% plus the greater of (iii)(a) or (iii)(b), but no more than twice
     the greater of (iii)(a) or (iii)(b).

This Section 14.06 does not apply unless, prior to application of the multiple
use limitation, the ADP and the ACP of the Highly Compensated Group each exceeds
125% of the respective percentages of the Nonhighly Compensated Group.

     The Advisory Committee will determine whether the Plan satisfies the
multiple use limitation after applying the ADP test under Section 14.04 and the
ACP test under Section 14.05 and using the deemed maximum corrected ADP and ACP
percentages in the event the Plan failed either or both tests. If, after
applying this Section 14.06, the Advisory Committee determines the Plan has
failed to satisfy the multiple use limitation, the Advisory Committee will
correct the failure by treating the excess amount excess contributions under
Section 14.04 or as excess aggregate contributions under Section 14.05, as the
Plan Administrator determines in its sole discretion.

                                       49



                                   APPENDIX A
                            ACCOUNTS TRANSFERRED FROM
                     SPIDER STAGING CORPORATION 401(k) PLAN
                                       AND
                 CERTAIN EMPLOYEES OF SPIDER STAGING CORPORATION

     1.01 DEFINITIONS. "1992 Spider Staging Employee" means an employee of
Spider Staging Corporation who was employed by Spider Staging Corporation on
December 31, 1992. "Spider Staging Plan" means the Spider Staging Corporation
401(k) Savings Plan.

     1.02 CONTINUING PARTICIPANTS. Notwithstanding Sections 2.01 and 2.02 of the
Plan, a 1992 Spider Staging Employee who was a participant in the Spider Staging
Plan on December 31, 1992, and is employed by Spider Staging Corporation on
January 1, 1993, shall be a Participant in the Plan on January 1, 1993.

     1.03 ELIGIBILITY COMPUTATION PERIOD. If a 1992 Spider Staging Employee has
not satisfied the service requirement for eligibility to participate under the
Spider Staging Plan as of December 31, 1992, he or she may satisfy the service
requirement as provided in Section 2.02 of the Plan, or as modified in the
following sentence, whichever permits earlier participation in the Plan. As
modified for purposes of this Section 1.03, the third and fourth sentences of
Section 2.02 read: "If the Employee does not complete 1000 Hours of Service
during the 12 month period commencing with the Employment Commencement Date, the
Plan measures the subsequent periods as the 12 consecutive month periods
beginning with each anniversary of the Employee's Employment Commencement Date."

     1.04 CREDITING SERVICE FOR ELIGIBILITY. For purposes of satisfying Section
2.02 of the Plan (including as modified under Section 1.03 above of this
Appendix A), a 1992 Spider Staging Employee shall receive credit for a period of
service with Spider Staging Corporation before January 1, 1993, to the extent
that period of service is credited for eligibility purposes under the Spider
Staging Plan.

     1.05 VESTING CREDIT. For purposes of vesting under Section 5.03 of the
Plan:

     (a) Year of Service includes vesting credit for full years of service as of
     December 31, 1992, to the extent credited for vesting purposes under the
     Spider Staging Plan as of December 31, 1992; and

     (b) A.1992 Spider Staging Employee shall receive vesting credit for his or
     her number of Hours of Service with Spider Staging Corporation or the
     Employer for the 12 month period beginning in 1992 on the Employee's
     Employment Commencement Date with Spider Staging Corporation (or its
     anniversary), to the extent credited for vesting purposes under the Spider
     Staging Plan as of December 31, 1992.

     1.06 DISTRIBUTIONS TO VESTED PARTICIPANTS UNDER SPIDER STAGING CORPORATION
401(k) PLAN OTHER THAN 1992 SPIDER STAGING EMPLOYEES. With respect to a
participant in the Spider Staging Plan who retired, died or terminated service
with vested accrued benefits under the Spider Staging Plan (regardless whether
benefits have commenced), benefits shall be paid to, or in respect of, such
participant under the applicable sections of the Spider Staging Plan in
accordance with the terms of that plan.

     1.07 VALUATION AND TRANSFER OF ACCOUNTS UNDER THE SPIDER STAGING
CORPORATION 401(k) SAVINGS PLAN. The value of the account of each participant
under the Spider Staging Plan shall be determined as of December 31, 1992. The
balance of that account shall be transferred to the trust established under the
Plan as of that date, shall constitute the balance of the Account of that
person.

     1.08. PROTECTED BENEFITS. Accounts under the Plan representing accounts
transferred as described in Section 1.07 of this Appendix A shall be subject to
all provisions of the Plan relating to Accounts, provided, however, that Code
(S)411(d)(6) protected benefits pertaining to those accounts shall not be
eliminated (except as Treasury Regulations may permit). This means, for example,
that optional forms of benefits provided under the Spider Staging Plan as of
December 31, 1992, shall not be eliminated with respect to such transferred
accounts. (Benefits accrued under the Plan after December 31, 1992, however,
shall be paid only in one of the forms permitted under Section 6.02 of the
Plan.)

     1.09. FORFEITURES. Any amount forfeited under the Spider Staging Plan after
the most recent reallocation of forfeitures and before January 1, 1993, shall be
reallocated under the terms of the Spider Staging Plan as of December 31, 1992.

     1.10. SEPARATE ACCOUNTS. The Advisory Committee shall maintain separate
accounts representing accounts transferred as described in Section 1.07 of this
Appendix A.

     1.11. DEFAULT ON A LOAN MADE UNDER SPIDER STAGING PLAN. To the extent the
assets in an account transferred as described in Section 1.07 of this Appendix A
consist of loans to the participant for whom the account

                                       50



is maintained, the Plan shall treat a default in the same manner as provided
under the Spider Staging Plan as in effect on December 31, 1992, which provides,
in Section 6.01(k) of the Adoption Agreement:

     If a Participant or Beneficiary defaults on a loan . . .the [Spider
     Staging] Plan . . .[t]reats the default as a distributable event. The
     Trustee, at the time of the default, will reduce the Participant's Vested
     Account Balance by the lesser of the amount in default (plus accrued
     interest) or the Plan's security interest in that Vested Account Balance.
     To the extent the loan is attributable to the Participant's Deferral
     Contributions Account, Qualified Matching Contributions Account or
     Qualified Nonelective Contributions Account, the Trustee will not reduce
     the Participant's Vested Account Balance unless the Participant has
     separated from Service or unless the Participant has attained age 59 1/2.

     1.12 PARTICIPANT-DIRECTED INVESTMENT. Notwithstanding Section 10.03[A](a)
of the Plan, the investment choices for accounts transferred as described in
Section 1.07 of this Appendix A and for employees of Spider Staging Corporation
shall not include the Employer Stock Fund until so designated by the Advisory
Committee.

     1.13 EFFECTIVE DATE. This Appendix A is effective on and after January 1,
1993.

                                       51



                                   APPENDIX B
                              CERTAIN EMPLOYEES OF
                         ASI ROBOTIC SYSTEMS DIVISION OF
                           CARGILL DETROIT CORPORATION

     1.01 DEFINITIONS. "1994 ASI Division Employee" means an employee of the ASI
Robotic Systems Division of Cargill Detroit Corporation who, on or before
January 3, 1995, accepts an offer of employment by Flow International
Corporation. The "Business" means the manufacture and sale of high precision
multi-axis gantry and cantilever robotics equipment through the ASI Robotic
Systems Division of Cargill Detroit Corporation.

     1.02 CREDITING SERVICE FOR ELIGIBILITY. For purposes of satisfying Section
2.02 of the Plan, a 1994 ASI Division Employee shall be credited with an Hour of
Service for each hour of service with Cargill Detroit Corporation while working
in the Business before January 3, 1995, as if such service had been Service with
Flow International Corporation.

     1.03 PLAN ENTRY DATE. Notwithstanding Sections 1.16 and 2.01 of the Plan, a
1994 ASI Division Employee who completes a Year of Service (taking into account
Section 1.02 of this Appendix B) on or before January 31, 1995, shall become a
Participant in the Plan on January 31, 1995 (if employed by Flow International
Corporation on that date).

     1.04 CREDITING SERVICE FOR VESTING. For purposes of vesting under Section
5.03 of the Plan, a 1994 ASI Division Employee shall be credited under Section
5.06 of the Plan (subject to Sections 5.07 and 5.08 of the Plan) with an Hour of
Service for each hour of service with Cargill Detroit Corporation while working
in the Business before January 3, 1995, as if such service had been Service with
Flow International Corporation.

     1.05 EFFECTIVE DATE. This Appendix B is effective on and after January 1,
1995.

                                       52



                                   APPENDIX C
                              CERTAIN EMPLOYEES OF
                       FLOW AUTOMATION SYSTEMS CORPORATION

     1.01 DEFINITIONS. "Automation Employee" means an individual who was an
employee of Flow Automation Systems Corporation, formerly known as Dynovation
Machine Systems, Inc. ("Flow Automation"), on December 15, 1994.

     1.02 CREDITING SERVICE FOR ELIGIBILITY. For purposes of satisfying Section
2.02 of the Plan, an Automation Employee shall be credited with an Hour of
Service for each hour of service with Flow Automation before December 15, 1994,
as if such service had been Service with Flow International Corporation.

     1.03 CREDITING SERVICE FOR VESTING. For purposes of vesting under Section
5.03 of the Plan (and for purposes of vesting service described in Section
3.01(A) for Employer Matching Contributions), a an Automation Employee shall be
credited under Section 5.06 of the Plan (subject to Sections 5.07 and 5.08 of
the Plan) with an Hour of Service for each hour of service with Flow Automation
before December 15, 1994, as if such service had been Service with Flow
International Corporation.

     1.04 EFFECTIVE DATE. This Appendix C is effective on and after December 15,
1994.

                                       53



                                   APPENDIX D
                          FORMER CIS ROBOTICS EMPLOYEES

     1.01 DEFINITIONS. "CIS Robotics" means CIS Robotics, Inc. "Former CIS
Robotics Employee" means an employee of CIS Robotics who was employed by CIS
Robotics on April 8, 1998. "CIS Robotics Plan" means the CIS Robotics 401(k)
Profit Sharing Plan & Trust. "Transferred Account" means the account of a Former
CIS Employee under the CIS Robotics Plan that is transferred from the CIS
Robotics Plan to the Plan in a trust-to-trust transfer.

     1.02 CREDITING SERVICE FOR ELIGIBILITY. For purposes of satisfying Section
2.02 of the Plan, a Former CIS Employee shall be credited with (1) all service
with which he or she is credited for eligibility purposes under the CIS Robotics
Plan, or (2) shall be credited with an Hour of Service for each hour of service
with CIS Robotics, as if such service had been Service with Flow International
Corporation, whichever method results in the Former CIS Employee becoming a
Participant in the Plan on the earliest Plan Entry Date.

     1.03 VESTING CREDIT. For purposes of vesting under Section 5.03 of the Plan
(and for purposes of vesting service described in Section 3.01(A) of the Plan
for Employer Matching Contributions), a Former CIS Robotics Employee shall be
credited under Section 5.06 of the Plan (subject to Sections 5.07 and 5.08 of
the Plan) with all service with which he or she is credited for vesting purposes
under the CIS Robotics Plan.

     1.04 TRANSFERRED ACCOUNTS.

     (a) A Former CIS Robotics Employee shall be 100% vested in his or her
     Transferred Account.

     (b) Immediately after the transfer and assignment of a Transferred Account
     to the Plan from the CIS Robotics Plan, each Participant shall have account
     balances in the Plan equal to the sum of the account balances each
     Participant had in the CIS Robotics Plan and in the Plan immediately prior
     to the transfer and assignment.

     (c) A Transferred Account shall be subject to all provisions of the Plan
     relating to Accounts under the Flow Plan, provided, however, that Code
     (S)411(d)(6) protected benefits pertaining to a Transferred Account shall
     not be eliminated (except as Treasury Regulations may permit).

     (d) If a Transferred Account includes amounts attributable to contributions
     other than Code section 401(k) salary deferral contributions (and the
     related gains, earnings and losses), then unless and until the entire
     account balance under the Flow Plan of the affected Former CIS Robotics
     Employee is 100% nonforfeitable, the Advisory Committee shall maintain
     separate accounts for that Former CIS Robotics Employee to reflect properly
     the different percentages of vesting he or she may have in the account
     balance under the Flow Plan.

     1.05 EFFECTIVE DATE. This Appendix D is effective on and after April 8,
1998.

                                       54



                                   APPENDIX E
                           CERTAIN FORMER EMPLOYEES OF
                        SPEARHEAD AUTOMATED SYSTEMS, INC.

     1.01 DEFINITIONS. "Spearhead Employee" means an individual who was an
employee of Spearhead Automated Systems, Inc. ("Spearhead"), on September 9,
1999, and who became an employee of Flow International Corporation on September
10, 1999.

     1.02 CREDITING SERVICE FOR ELIGIBILITY. For purposes of satisfying Section
2.02 of the Plan, a Spearhead Employee shall be credited with an Hour of Service
for each hour of service with Spearhead before September 10, 1999, as if such
service had been Service with Flow International Corporation.

     1.03 PLAN ENTRY DATE AND ELIGIBILITY. For purposes of Section 1.16 of the
Plan, September 10, 1999, is a Plan Entry Date for Spearhead Employees. However,
for purposes of Section 2.01, a Spearhead Employee shall enter the Plan on the
September 10, 1999, Plan Entry Date only if he or she could have entered the
Plan on July 1, 1999, based on service with Spearhead through June 30, 1999.

     1.04 CREDITING SERVICE FOR VESTING. For purposes of vesting under Section
5.03 of the Plan (and for purposes of vesting service described in Section
3.01(A) for Employer Matching Contributions), a Spearhead Employee shall be
credited under Section 5.06 of the Plan (subject to Sections 5.07 and 5.08 of
the Plan) with an Hour of Service for each hour of service with Spearhead before
September 10, 1999, as if such service had been Service with Flow International
Corporation.

     1.05 EFFECTIVE DATE. This Appendix E is effective on and after September
10, 1999.

                                       55



                                 Execution Page

     IN WITNESS WHEREOF, Flow International Corporation, the Employer, by its
duly authorized representative, has executed this Flow International Corporation
Voluntary Pension and Salary Deferral Plan and Trust Agreement, and Security
Trust Company, the Trustee, by its duly authorized representative, has accepted
its position and agreed to the duties, obligations and responsibilities under
this Flow International Corporation Voluntary Pension and Salary Deferral Plan
and Trust Agreement.

              "EMPLOYER"                                 "TRUSTEE"
Flow International Corporation             Security Trust Company


By:                                        By:
    ---------------------------------          ---------------------------------
    Title:                                     Title:
           --------------------------                 --------------------------
January       , 2002                       January       , 2002
        ------                                     ------

                                       56



                                    Amendment
                                       to
    Flow International Corporation Voluntary Pension and Salary Deferral Plan
               (as Amended and Restated Effective January 1, 2002)
                             (Amendment for EGTRRA)

                                    Preamble

          Adoption of Amendment. This Amendment to the Flow International
Corporation Voluntary Pension and Salary Deferral Plan ("Plan"), as amended and
restated effective January 1, 2002 (the "Plan"), is adopted to reflect certain
provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001
("EGTRRA"). This Amendment is intended as good faith compliance with the
requirements of EGTRRA and is to be construed in accordance with EGTRRA and
guidance issued thereunder.

          Supersession of Inconsistent Provisions. This Amendment shall
supersede the provisions of the Plan to the extent those provisions are
inconsistent with the provisions of this Amendment.

                                    Amendment

Section 1. Exclusion of Rollovers in Application of Involuntary Cash-out
           Provisions.

          Effective for distributions made after December 31, 2001, for purposes
of the Sections of the Plan that provide for the involuntary distribution of
vested accrued benefits of $5,000 or less (see Plan Section 6.01(A)(1)), the
value of a Participant's nonforfeitable account balance shall be determined
without regard to that portion of the account balance that is attributable to
rollover contributions (and earnings allocable thereto) within the meaning of
Sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16) of the
Internal Revenue Code of 1986, as amended (the "Code"). If the value of the
Participant's nonforfeitable account balance as so determined is $5,000 or less,
then the Plan shall immediately distribute the Participant's entire
nonforfeitable account balance.

Section 2. Catch-up Contributions.

          Effective as of the first day of the first Plan Year beginning after
December 31, 2001, all employees who are eligible to make elective deferrals
under this Plan and who have attained age 50 before the close of the plan year
shall be eligible to make catch-up contributions in accordance with, and subject
to the limitations of, Section 414(v) of the Code. Such catch-up contributions
shall not be taken into account for purposes of the provisions of the Plan
implementing the required limitations of Sections 402(g) and 415 of the Code.
The Plan shall not be treated as failing to satisfy the provisions of the plan
implementing the requirements of Section 401(k)(3), 401(k)(11), 401(k)(12),
410(b), or 416 of the Code, as applicable, by reason of the making of such
catch-up contributions.

Section 3. Increase in Compensation Limit.

          The annual compensation of each Participant taken into account in
determining allocations

                                       1



Amendment
Flow International Corporation Voluntary Pension and Salary Deferral Plan
(as Amended and Restated Effective January 1, 2002)
(Amendment for EGTRRA)

for any Plan Year beginning after December 31, 2001, shall not exceed $200,000,
as adjusted for cost-of-living increases in accordance with section
401(a)(17)(B) of the Code. Annual compensation means compensation during the
Plan Year or such other consecutive 12-month period over which compensation is
otherwise determined under the Plan (the determination period). The
cost-of-living adjustment in effect for a calendar year applies to annual
compensation for the determination period that begins with or within such
calendar year.

Section 4. Maximum Annual Addition.

          Effective for limitation years beginning after December 31, 2001, and
except to the extent permitted under Section 2 of this Amendment and section
414(v) of the Code, if applicable, the annual addition that may be contributed
or allocated to a Participant's account under the Plan for any limitation year
shall not exceed the lesser of:

     a.   $40,000, as adjusted for increases in the cost-of-living under section
          415(d) of the Code, or

     b.   100 percent of the participant's compensation, within the meaning of
          section 415(c)(3) of the Code, for the limitation year.

The compensation limit referred to in b. shall not apply to any contribution for
medical benefits after separation from service (within the meaning of section
401(h) or section 419A(f)(2) of the Code) which is otherwise treated as an
annual addition.

Section 5. Modification of Top-Heavy Rules.

          5.1 Effective Date. This Section 5 shall apply for purposes of
determining whether the Plan is a top-heavy plan under Section 416(g) of the
Code for plan years beginning after December 31, 2001, and whether the Plan
satisfies the minimum benefits requirements of Section 416(c) of the Code for
such years. This Article amends the top-heavy provisions of the Plan.

          5.2 Determination of Top-Heavy Status.

               5.2.1 Key Employee. Key employee means any employee or former
     employee (including any deceased employee) who at any time during the plan
     year that includes the determination date was an officer of the employer
     having annual compensation greater than $130,000 (as adjusted under section
     416(i)(1) of the Code for plan years beginning after December 31, 2002), a
     5-percent owner of the employer, or a 1-percent owner of the employer
     having annual compensation of more than $150,000. For this purpose, annual
     compensation means compensation within the meaning of Section 415(c)(3) of
     the Code. The determination of who is a key employee will be made in
     accordance with Section 416(i)(1) of the Code and the applicable
     regulations and other guidance of general applicability issued thereunder.

               5.2.2 Determination of Present Values and Amounts. This Section
     5.2.2 shall apply for purposes of determining the present values of accrued
     benefits and the amounts of account balances of employees as of the
     determination date.

               a.   Distributions During Year Ending on the Determination Date.
                    The present values of accrued benefits and the amounts of
                    account balances of an employee as of the determination date
                    shall be increased by the distributions made with respect to

                                       2



Amendment
Flow International Corporation Voluntary Pension and Salary Deferral Plan
(as Amended and Restated Effective January l, 2002)
(Amendment for EGTRRA)

                    the employee under the plan and any plan aggregated with the
                    plan under Section 416(g)(2) of the Code during the 1-year
                    period ending on the determination date. The preceding
                    sentence shall also apply to distributions under a
                    terminated plan which, had it not been terminated, would
                    have been aggregated with the plan under Section
                    416(g)(2)(A)(i) of the Code. In the case of a distribution
                    made for a reason other than separation from service, death,
                    or disability, this provision shall be applied by
                    substituting "5-year period" for "1-year period."

               b.   Employees Not Performing Services During Year Ending on the
                    Determination Date. The accrued benefits and accounts of any
                    individual who has not performed services for the employer
                    during the 1-year period ending on the determination date
                    shall not be taken into account.

          5.3 Minimum Benefits -- Matching Contributions. Employer matching
contributions shall be taken into account for purposes of satisfying the minimum
contribution requirements of Section 416(c)(2) of the Code and the Plan. The
preceding sentence shall apply with respect to matching contributions under the
Plan or, if the Plan provides that the minimum contribution requirement shall be
met in another plan, such other plan. Employer matching contributions that are
used to satisfy the minimum contribution requirements shall be treated as
matching contributions for purposes of the actual contribution percentage test
and other requirements of Section 401(m) of the Code.

Section 6. Direct Rollovers.

          6.1 Effective Date. This Section 6 shall apply to distributions made
after December 31, 2001.

          6.2 Modification of Definition of Eligible Retirement Plan. For
purposes of the direct rollover provisions of the Plan, an eligible retirement
plan shall also mean an annuity contract described in Section 403(b) of the Code
and an eligible plan under Section 457(b) of the Code which is maintained by a
state, political subdivision of a state, or any agency or instrumentality of a
state or political subdivision of a state and which agrees to separately account
for amounts transferred into such plan from this Plan. The definition of
eligible retirement plan shall also apply in the case of a distribution to a
surviving spouse, or to a spouse or former spouse who is the alternate payee
under a qualified domestic relation order, as defined in section 414(p) of the
Code.

          6.3 Modification of Definition of Eligible Rollover Distribution to
Exclude Hardship Distributions. For purposes of the direct rollover provisions
of the Plan, any amount that is distributed on account of hardship shall not be
an eligible rollover distribution and the distributee may not elect to have any
portion of such a distribution paid directly to an eligible retirement plan.

          6.4 Modification of Definition of Eligible Rollover Distribution to
Include After-Tax Employee Contributions. For purposes of the direct rollover
provisions in the Plan, a portion of a distribution shall not fail to be an
eligible rollover distribution merely because the portion consists of after-tax
employee contributions which are not includible in gross income. However, such
portion may be transferred only to an individual retirement account or annuity
described in section 408(a) or (b) of the Code, or to a qualified defined
contribution plan described in section 401(a) or

                                       3



Amendment
Flow International Corporation Voluntary Pension and Salary Deferral Plan
(as Amended and Restated Effective January 1, 2002)
(Amendment for EGTRRA)

403(a) of the Code that agrees to separately account for amounts so transferred,
including separately accounting for the portion of such distribution which is
includible in gross income and the portion of such distribution which is not so
includible.

Section 7. Rollovers From Other Plans.

          Effective as of the first day of the first Plan Year beginning after
December 31, 2001, the Employer, operationally and on a nondiscriminatory basis,
may limit the source of rollover contributions that may be accepted by this
Plan.

Section 8. Repeal of Multiple Use Test.

          The multiple use test described in Treasury Regulation Section
1.401(m)-2 and the Plan shall not apply for Plan Years beginning after December
31, 2001.

Section 9. Elective Deferrals - Contribution Limitation.

          No Participant shall be permitted to have elective deferrals made
under this Plan, or any other qualified plan maintained by the Employer during
any taxable year, in excess of the dollar limitation contained in Section 402(g)
of the Code in effect for such taxable year, except to the extent permitted
under Section 2 of this Amendment and section 414(v) of the Code, if applicable.

Section 10. Distribution Upon Severance of Employment.

          10.1 Effective Date. This Section 10 shall apply for distributions and
transactions made after December 31, 2001, regardless of when the severance of
employment occurred.

          10.2 New Distributable Event. A Participant's elective deferrals,
qualified nonelective contributions, qualified matching contributions, and
earnings attributable to these contributions shall be distributed on account of
the Participant's severance from employment. However, such a distribution shall
be subject to the other provisions of the Plan regarding distributions, other
than provisions that require a separation from service before such amounts may
be distributed.

                                    Execution

          IN WITNESS WHEREOF, Flow International Corporation, by its duly
authorized representative has executed this Amendment to the Flow International
Corporation Voluntary Pension and Salary Deferral Plan (as amended and restated
effective January l, 2002).

Flow International Corporation


By
   ------------------------------
   Its
       ---------------------------

Dated: December               , 2001
                --------------

                                       4



                                   LOAN POLICY

    Flow International Corporation Voluntary Pension and Salary Deferral Plan

1.   DEFINITION OF PARTICIPANT; ELIGIBILITY FOR LOAN.

For purposes of this loan policy, the term "participant" means any participant,
beneficiary or alternate payee with respect to the Plan who is a "party in
interest" as defined in section 3(14) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"). Every current employee of Flow International
Corporation (or other employer that maintains the Plan) is a party in interest.

2.   LOAN APPLICATION.

Any participant may apply for a loan, subject to the terms and conditions of
this loan policy. A participant must apply for a loan by written application.
The application must, among other things, specify the amount of the loan desired
and the requested duration for the loan. A loan will be made only after the
Advisory Committee approves the application.

A participant may apply for a loan only once in a plan year (January 1 through
December 31). Thus, for example, if a participant applies for a loan in April
and prepays the entire loan in the following August, he or she may not apply for
a loan until the following January 1.

A participant loan may be for any purpose.

No loan shall be made if the vested portion of the participant's account is less
than $2,000.

3.   LOAN FUNDING.

The Advisory Committee intends this loan program not to place other participants
at risk with respect to their interests in the Plan. In this regard, the
Advisory Committee will administer any participant loan as a separate,
participant-directed investment of that portion of the participant's vested
account balance under the Plan equal to the outstanding principal balance of the
loan. The Plan will credit that portion of the participant's account balance
with the interest earned on the note and with principal payments received by the
Trustee of the Plan. That portion of the participant's account also shall be
charged with expenses directly related to the origination, maintenance and
collection of the note evidencing the loan.

The loan will be charged against the investment fund(s) in which the assets of
the participant's account are invested on a pro rata basis. If the participant's
matching contribution account balance or the participant's employer contribution
account balance is less than 100% vested, the pro rata charge shall apply only
to the vested portion of that account.

A loan processing fee will be withheld from the loan amount.

4.   NUMBER OF LOANS AND LOAN AMOUNT.

A participant may have no more than one loan outstanding at any time.

The amount of a loan may not be less than $1,000.

The amount of the loan may not exceed 50% of the participant's vested account
balance in



- --------------------------------------------------------------------------------
     Loan Policy Flow International Corporation Voluntary Pension and Salary
                     Deferral Plan Effective January 1, 2003
- --------------------------------------------------------------------------------

the Plan immediately after origination of the loan, as reflected by the books
and records of the Plan. For this purpose, a participant's vested account
balance does not include the value of assets in a participant's account that are
directly invested in stock in Flow International Corporation.

Further, the amount of all loans outstanding to the participant from all
qualified plans of Flow International (or other employer maintaining the Plan)
at any time may not exceed $50,000, reduced by the participant's highest
outstanding participant loan balance (aggregating all loans from all qualified
plans of Flow International Corporation (or other employer that maintains the
plan)) during the 12-month period ending on the date before the loan is made.

5.   EVIDENCE AND TERMS OF LOAN.

Every loan will be evidenced by a promissory note signed by the participant in a
form approved by the Advisory Committee. Such note shall provide for a face
amount equal to the amount of the loan funded from the Plan, with a commercially
reasonable rate of interest. Advisory Committee will use the Bank Prime Loan
rate published in the Federal Reserve Statistical Release H.15 plus 1%. The
Advisory Committee will reevaluate interest rates at least every two weeks. A
note must provide for monthly payments under a level amortization schedule. The
Advisory Committee will fix the term of payment of the loan, which must be
either one (1), two (2), three (3), four (4) or five (5) years; or (solely for a
loan used to acquire a dwelling unit which within a reasonable time is to be
used (determined at the time of the loan) as the principal residence of the
participant) ten (10) years.

6.   LEAVES OF ABSENCE

If the participant is employed by Flow International Corporation or another
employer that maintains the Plan, the participant's loan payment obligations are
suspended for up to one year during (1) the participant's unpaid leave of
absence approved by the employer or (2) the participant's paid leave of absence
approved by the employer when the amount of pay (less applicable employment tax
withholding) is less than the amount of the participant's loan payments.
However, regardless whether installments are suspended pursuant to the preceding
sentence, the entire balance of the loan must be paid within the term
established for repayment of the loan (that is, two (2), three (3), four (4),
five (5) or ten (10) years).

The Advisory Committee will suspend payment requirements while a participant is
on leave for military service. The period of such period of military service
will not be counted as part of the loan term. Once the participant returns from
military service, the loan payments shall resume at an amount and frequency no
less than required by the terms of the original loan. The loan must be repaid in
full during a period that is no greater than the original loan term plus the
period of such military service.

The Administrative Committee will reduce the interest rate of an outstanding
participant loan to 6% while a participant is on military leave, to the extent
required by the Soldiers' and Sailors' Civil Relief Act.

7.   SECURITY FOR LOAN.

A participant must secure a loan with an irrevocable pledge of, and grant of a
security interest in, 50% of the vested amount of the participant's account
balance under the Plan.

                                     Page 2



- --------------------------------------------------------------------------------
     Loan Policy Flow International Corporation Voluntary Pension and Salary
                     Deferral Plan Effective          , 2002
                                             ---------
- --------------------------------------------------------------------------------

If employed by Flow International Corporation or by another employer that
maintains the Plan on the date the loan is disbursed, the participant must also
make an irrevocable assignment of his or her compensation from his or her
employer to the Trustee of the Plan sufficient to discharge the participant's
obligations under the loan, together with an authorization to the employer to
make appropriate payroll deductions, which must continue until the loan is
repaid or the date the participant is entitled to receive a distribution under
the terms of the Plan. If a participant is not employed by Flow International
Corporation or other employer that maintains the Plan on the date the loan is
disbursed, the Advisory Committee may require greater security for the loan. The
pledge and grant of a security interest and the irrevocable assignment of the
participant's compensation must be in a form approved by the Advisory Committee.

8.   WITHDRAWAL AND REPAYMENT

Unless the participant provides other written instructions in the loan
application, (1) if the participant's account is currently invested in more than
one investment fund, the loan will be charged against each investment fund on a
pro-rata basis and (2) loan repayments (principal and interest) will be
reinvested in accordance with the participant's then effective investment
direction for the participant's 401(k) salary deferral contributions, or, if
there is no currently effective direction, pro-rata in accordance with the
current balances of the investment funds in which assets allocated to the
participant's account are invested. In no event will a loan be charged against
assets in a participant's account that are directly invested in stock in Flow
International Corporation. A participant may repay his or her loan in a single
payment without penalty.

9.   DEFAULT/FORFEITURE.

A loan (including all obligations under the note evidencing the loan) shall be
in default upon the occurrence of any of the following events:

(a)  The participant does not pay the full amount of any payment on the date
     when it is due, provided that the participant may cure the default by
     making the payment plus interest on or before the earlier of (1) December
     31 of year in which the payment was originally due, or (2) the last day of
     the calendar quarter that follows the calendar quarter in which the
     repayment was originally due; or

(b)  any representation or statement to the Advisory Committee or the Trustee of
     the Plan by or on behalf of the participant in connection with the loan
     proves to have been false in any material respect when made or furnished;
     or

(c)  a distribution is required to be made under a qualified domestic relations
     order that affects the participant's account, and the amount of the
     distribution would exceed the participant's account balance, less the loan
     balance.

If a participant's loan is in default, the participant will have the opportunity
to repay the loan or, if distribution is available under the plan, request
distribution of the note. If the loan remains in default, the entire balance of
the loan and note shall become immediately due and payable, and, to the extent a
distribution to the participant is permissible under the Plan, consistent with
Plan Section 6.08, the participant's vested account balance under the Plan will
be reduced by the outstanding loan balance. In addition, the Trustee may
foreclose upon any security that it holds. The Advisory Committee will treat the
note as

                                     Page 3



- --------------------------------------------------------------------------------
     Loan Policy Flow International Corporation Voluntary Pension and Salary
                     Deferral Plan Effective          , 2002
                                             ---------
- --------------------------------------------------------------------------------

repaid to the extent of any permissible reduction, and if the entire note is
repaid, shall distribute the canceled note to the participant. The participant,
however, remains obligated for any unpaid principal and accrued interest.

The Trustee of the Plan may also accelerate the participant's obligations under
the loan and note if the Plan is terminated.

10.  ADMINISTRATION OF LOAN POLICY

The Advisory Committee's duties and responsibilities under this Loan Policy,
including, without limitation, the approval of loan applications and form of
promissory note evidencing a loan, are delegated to the Plan's recordkeeper.

11.  EFFECTIVE DATE.

This Loan Policy is effective January 1, 2002

                                    * * * *

                                     Page 4



    Flow International Corporation Voluntary Savings and Salary Deferral Plan

                       Claims and Claims Review Procedure

How do I submit a claim for Plan benefits?

Benefits will be paid to you and your beneficiaries without the necessity of
formal claims. However, if you think an error has been made in determining your
benefits, then you or your beneficiaries may make a request for any Plan
benefits to which you believe you are entitled. Any such request should be in
writing and should be made to the Plan's Advisory Committee (the "Committee").

If the Committee determines the claim is valid, then you will receive a
statement describing the amount of benefit, the method or methods of payment,
the timing of distributions and other information relevant to the payment of the
benefit.

What if my benefits are denied?

Your request for Plan benefits will be considered a claim for Plan benefits, and
it will be subject to a full and fair review. If your claim is wholly or
partially denied, the Committee will provide you with a written or electronic
notification of the Plan's adverse determination. This written or electronic
notification must be provided to you within a reasonable period of time, but not
later than 90 days after the receipt of your claim by the Committee, unless the
Committee determines that special circumstances require an extension of time for
processing your claim. If the Committee determines that an extension of time for
processing is required, written notice of the extension will be furnished to you
prior to the termination of the initial 90 day period. In no event will such
extension exceed a period of 90 days from the end of such initial period. The
extension notice will indicate the special circumstances requiring an extension
of time and the date by which the Committee expects to render the benefit
determination.

The Committee's written or electronic notification of any adverse benefit
determination must contain the following information:

(1)  The specific reason or reasons for the adverse determination.

(2)  Reference to the specific Plan provisions on which the determination is
     based.

(3)  A description of any additional material or information necessary for
     you to perfect the claim and an explanation of why such material or
     information is necessary.

(4)  Appropriate information as to the steps to be taken if you or your
     beneficiary want to submit your claim for review.

If your claim has been denied, and you want to submit your claim for review, you
must follow the Claims Review Procedure.

What is the Claims Review Procedure?

Upon the denial of your claim for benefits, you may file your claim for review,
in writing, with the Committee.

(1)  You must file the claim for review no later than 60 days after you have
     received written or electronic notification of an adverse benefit
     determination.

(2)  You may submit written comments, documents, records, and other information
     relating to your claim for benefits.

(3)  You will be provided, upon request and free of charge, reasonable access
     to, and copies of, all documents, records, and other information relevant
     to your claim for benefits.

(4)  Your claim for review must be given a full and fair review. This review
     will take into account all comments, documents, records, and other
     information submitted by you relating to your claim, without regard to
     whether such information was submitted or considered in the initial benefit
     determination.

The Committee will provide you with written or electronic notification of the
Plan's benefit



    Flow International Corporation Voluntary Savings and Salary Deferral Plan
                       Claims and Claims Review Procedure

determination on review. The Committee must provide you with notification of
this denial within 60 days after the Committee's receipt of your written claim
for review, unless the Committee determines that special circumstances require
an extension of time for processing your claim. If the Committee determines that
an extension of time for processing is required, written notice of the extension
will be furnished to you prior to the termination of the initial 60 day period.
In no event will such extension exceed a period of 60 days from the end of the
initial period. The extension notice will indicate the special circumstances
requiring an extension of time and the date by which the Committee expects to
render the determination on review. In the case of an adverse benefit
determination, the notification will set forth:

(1)  The specific reason or reasons for the adverse determination.

(2)  Reference to the specific Plan provisions on which the benefit
     determination is based.

(3)  A statement that you are entitled to receive, upon request and free of
     charge, reasonable access to, and copies of, all documents, records, and
     other information relevant to your claim for benefits.

Disability

If your employment terminates due to your disability when you are less than 100%
vested, certain additional rules prescribed by the Department of Labor may to
apply to the initial benefit determination and claims review procedure.

Advisory Committee Address

All communications to the Committee should be addressed as follows:

     Advisory Committee of the Flow International Corporation Voluntary Pension
     and Salary Deferral Plan

     c/o Human Resources
     Flow International Corporation
     P.O. Box 97040
     Kent, WA 98064-9740

Authorized Representative

You or your beneficiary may authorize a representative to act on your, his or
her behalf in pursuing a benefit claim or request for review of an adverse
benefits determination. To authorize a representative, file a written
authorization with the Committee:

The written authorization must contain the Plan's name, your (or your
beneficiary's) name, address and telephone number, and the authorized
representative's name, address, telephone number and fax number (if available).
The written authorization must be signed and dated by you (or your beneficiary)
and the authorized representative. An authorization may include the following
text:

     "I, the Claimant named below, authorize the person named below to represent
     me in pursing my claim for benefits under the Flow International
     Corporation Voluntary Savings and Salary Deferral Plan, including any
     appeal of an adverse benefits determination. I authorize the Plan's
     Committee to provide my representative upon request all information and
     documents that I am entitled to request."

Right to Sue; Limitation Period

If you have a claim for benefits which is denied upon review, in whole or in
part, you may file suit in a state or Federal court. As provided in the Plan,
you or your beneficiary to preserve the claim must file an action with respect
to the denied claim not later than 180 days following the date of the
Committee's final determination.

When Effective

This Claims and Claims Review Procedure is effective with respect to claims
filed on or after January 1, 2002. These claims procedures may be amended from
time to time by the Committee.

                                   * * * * *

                                       2

EX-10.9

================================================================================

                                                                  EXHIBIT 10.9**

- ----------------------------------------------------------------------------
**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**


                  SECOND AMENDED AND RESTATED CREDIT AGREEMENT

                                      Among

                         FLOW INTERNATIONAL CORPORATION

                                  as Borrower,

                                       and

                              BANK OF AMERICA, N.A.
                                       and
                         U.S. BANK NATIONAL ASSOCIATION
                                       and
                          KEYBANK NATIONAL ASSOCIATION
                                   as Lenders,

                                       and

                              BANK OF AMERICA, N.A.

                              as Agent for Lenders

                                   ----------

                                  July 28, 2003

                                   ----------

================================================================================



                                TABLE OF CONTENTS



                                                                           Page
                                                                           ----
                                                                        
ARTICLE 1 DEFINITIONS.........................................................2

   Section 1.1    Certain Defined Terms.......................................2
   Section 1.2    General Principles Applicable to Definitions...............10
   Section 1.3    Accounting Terms...........................................11

ARTICLE 2 THE LOANS..........................................................11

   Section 2.1    Amounts and Terms of Commitments...........................11
      (a)   The Revolving Credit.............................................11
      (b)   Overdrafts.......................................................11
   Section 2.2    Manner of Borrowing........................................12
      (a)   Revolving Loans..................................................12
      (b)   Overdrafts.......................................................12
   Section 2.3    Agent's Right to Fund Loans................................12
   Section 2.4    Repayment of Principal.....................................13
   Section 2.5    Interest on Loans..........................................13
      (a)   General Provisions...............................................13
      (b)   Applicable Days For Computation of Interest......................13
   Section 2.6    Prepayments................................................13
   Section 2.7    Notes......................................................13
   Section 2.8    Manner of Payments.........................................14
   Section 2.9    Fees.......................................................14
      (a)   Amendment Fee....................................................14
      (b)   Quarterly Commitment Fee.........................................14
      (c)   Agent's Fee......................................................14
   Section 2.10   Sharing of Payments, Etc...................................15
   Section 2.11   Application of Payments....................................15

ARTICLE 3 LETTERS OF CREDIT..................................................15

   Section 3.1    Letters of Credit..........................................15
   Section 3.2    Manner of Requesting Letters of Credit.....................15
   Section 3.3    Indemnification; Increased Costs...........................16
   Section 3.4    Payment by Borrower........................................17
   Section 3.5    Cash Collateralize.........................................17

ARTICLE 4 CONDITIONS.........................................................18

   Section 4.1    Conditions to Effectiveness of Agreement...................18
      (a)   New Loan Documents...............................................18
      (b)   Borrower Authority...............................................18
      (c)   Guarantor Authority..............................................18


                                       i



                                                                          
      (d)   Opinion of Counsel...............................................19
      (e)   Amended Subordinated Note Purchase Agreement.....................19
      (f)   Payment of Fees..................................................19
      (g)   Domestic Guarantor Consent.......................................19
   Section 4.2    Conditions to All Loans and Issuances of Letters of
                  Credit.....................................................19
      (a)   Prior Conditions.................................................19
      (b)   Notice of Borrowing..............................................19
      (c)   No Default.......................................................19
      (d)   Guarantors.......................................................19
      (e)   Other Information................................................19

ARTICLE 5 REPRESENTATIONS AND WARRANTIES.....................................20

   Section 5.1    Corporate Existence and Power..............................20
   Section 5.2    Corporate Authorization....................................20
   Section 5.3    Government Approvals, Etc..................................21
   Section 5.4    Binding Obligations, Etc...................................21
   Section 5.5    Litigation.................................................21
   Section 5.6    Lien Priority..............................................21
   Section 5.7    Financial Condition........................................21
   Section 5.8    Title and Liens............................................22
   Section 5.9    Taxes......................................................22
   Section 5.10   Laws, Orders, Other Agreements.............................22
   Section 5.11   Federal Reserve Regulations................................22
   Section 5.12   ERISA......................................................22
   Section 5.13   Security Offerings.........................................23
   Section 5.14   Investment Company; Public Utility Holding Company.........23
   Section 5.15   Environmental Compliance...................................23
   Section 5.16   Insurance..................................................23
   Section 5.17   Disclosure.................................................24
   Section 5.18   Intellectual Property, Licenses, Etc.......................24
   Section 5.19   Assets of Foreign Guarantors...............................24
   Section 5.20   Representations as a Whole.................................24

ARTICLE 6 AFFIRMATIVE COVENANTS..............................................25

   Section 6.1    Use of Proceeds............................................25
   Section 6.2    Preservation of Corporate Existence, Etc...................25
   Section 6.3    Visitation Rights..........................................25
   Section 6.4    Keeping of Books and Records...............................25
   Section 6.5    Maintenance of Property, Etc...............................25
   Section 6.6    Compliance with Laws, Etc..................................25
   Section 6.7    Other Obligations..........................................25
   Section 6.8    Insurance..................................................26
   Section 6.9    Financial Information......................................26
      (a)   Annual Audited Financial Statements..............................26
      (b)   Quarterly Unaudited Financial Statements.........................26
      (c)   Annual Financial Projections.....................................27



                                       ii



                                                                          
      (d)   Accounts Receivable Summary......................................27
      (e)   SEC Filings......................................................27
      (f)   Compliance Certificates..........................................27
      (g)   Monthly Reporting................................................27
      (h)   Monthly Comparison Report........................................27
      (i)   Other............................................................27
   Section 6.10   Notification...............................................27
   Section 6.11   Additional Payments; Additional Acts.......................28
   Section 6.12   EBITDA.....................................................28
      (a)   Quarterly Basis..................................................29
      (b)   Cumulative Basis.................................................29
   Section 6.13   Minimum Collateral Requirements............................29
   Section 6.14   Loan Documents from Domestic Subsidiaries..................30
   Section 6.15   Update of Collateral.......................................30
   Section 6.16   Security Interest in Foreign Guarantor Collateral..........30
   Section 6.17   Deposit Accounts...........................................30
   Section 6.18   Lease and Landlord Consents................................31
   Section 6.19   Financial Restructuring....................................31
   Section 6.20   Additional Goals...........................................31

ARTICLE 7 NEGATIVE COVENANTS.................................................32

   Section 7.1    Dividends, Purchase of Stock, Etc..........................32
   Section 7.2    Liquidation, Merger, Sale of Assets........................32
   Section 7.3    Indebtedness...............................................32
   Section 7.4    Guaranties, Etc............................................32
   Section 7.5    Liens......................................................33
   Section 7.6    Investments................................................33
   Section 7.7    Operations.................................................33
   Section 7.8    ERISA Compliance...........................................33
   Section 7.9    Subordinated Notes.........................................33
   Section 7.10   Capital Expenditures.......................................34
   Section 7.11   New Product Development Expenditures.......................34
   Section 7.12   Transactions with Affiliates...............................34
   Section 7.13   Burdensome Agreements......................................34
   Section 7.14   Margin Stock...............................................34
   Section 7.15   Payments to Subordinated Noteholders.......................35

ARTICLE 8 EVENTS OF DEFAULT..................................................35

   Section 8.1    Events of Default..........................................35
      (a)   Payment Default..................................................35
      (b)   Breach of Warranty...............................................35
      (c)   Breach of Certain Covenants......................................35
      (d)   Breach of Other Covenant.........................................35
      (e)   Cross-default....................................................35
      (f)   Voluntary Bankruptcy, Etc........................................36
      (g)   Involuntary Bankruptcy, Etc......................................36



                                       iii



                                                                          
      (h)   Insolvency, Etc..................................................36
      (i)   Judgment.........................................................36
      (j)   Government Approvals.............................................37
      (k)   Other Government Action..........................................37
      (l)   ERISA............................................................37
      (m)   Going Concern Qualification......................................37
      (n)   Failure to Issue Financials......................................37
      (o)   Subordinated Note Purchase Agreement Default.....................37
      (p)   Prepayment of Principal Default..................................37
      (q)   Guarantor Default; Invalidity of Guaranty........................37
      (r)   Impairment of Security...........................................38
      (s)   Change of Control................................................38
      (t)   Material Adverse Change..........................................38
      (u)   Invalidity of Loan Documents.....................................38
      (v)   Restructure Agreement Default....................................38
      (w)   Additional Event of Default......................................38
   Section 8.2    Consequences of Default....................................39

ARTICLE 9 AGENT..............................................................40

   Section 9.1    Appointment and Authorization of Agent.....................40
   Section 9.2    Delegation of Duties.......................................40
   Section 9.3    Liability of Agent.........................................40
   Section 9.4    Reliance by Agent..........................................41
   Section 9.5    Notice of Default..........................................41
   Section 9.6    Credit Decision; Disclosure of Information by Agent........41
   Section 9.7    Indemnification of Agent...................................42
   Section 9.8    Agent in its Individual Capacity...........................42
   Section 9.9    Successor Agent............................................43
   Section 9.10   Agent May File Proofs of Claim.............................43

ARTICLE 10 LETTER OF CREDIT RISK PARTICIPATIONS..............................44

   Section 10.1   Sale of Risk Participations................................44
   Section 10.2   Notice to Lenders..........................................44
   Section 10.3   Payment Obligations........................................44
      (a)   Reimbursements to Agent..........................................44
      (b)   Payments to Lenders..............................................45
      (c)   Reimbursements to Lenders........................................45

ARTICLE 11 MISCELLANEOUS.....................................................45

   Section 11.1   No Waiver; Remedies Cumulative.............................45
   Section 11.2   Governing Law..............................................45
   Section 11.3   Mandatory Arbitration......................................45
   Section 11.4   Consent to Jurisdiction; Waiver of Immunities..............46
   Section 11.5   Notices....................................................46
   Section 11.6   Assignment and Participations..............................47
   Section 11.7   Severability...............................................47



                                       iv



                                                                          
   Section 11.8   Survival...................................................47
   Section 11.9   Executed in Counterparts...................................47
   Section 11.10  Entire Agreement; Amendment, Etc...........................47
   Section 11.11  Headings...................................................47
   Section 11.12  Oral Agreements Not Enforceable............................47
   Section 11.13  Release and Waiver.........................................47
   Section 11.14  Attorney Costs, Expenses and Taxes.........................48
   Section 11.15  Indemnification by the Borrower............................48
   Section 11.16  Payments Set Aside.........................................49
   Section 11.17  Set-off....................................................49
   Section 11.18  Interest Rate Limitations..................................50
   Section 11.19  Waiver of Right to Trial by Jury...........................50
   Section 11.20  Confidential Information...................................50



SCHEDULES
      Schedule 1 - Existing Loan Documents
      Schedule 2 - New Loan Documents
      Schedule 5.5 - Litigation
      Schedule 5.19 - Foreign Guarantor Assets
      Schedule 6.14 - Subsidiaries
      Schedule 7.5 - Liens

EXHIBITS
      Exhibit A-1 - Revolving Loan Note (Bank of America)
      Exhibit A-2 - Revolving Loan Note (U.S. Bank)
      Exhibit A-3- Revolving Loan Note (KeyBank)
      Exhibit B - Foreign Subsidiary Guaranty
      Exhibit C - Foreign Security Agreement
      Exhibit D - Amended and Restated Pledge Agreement
      Exhibit E - Compliance Certificate
      Exhibit F - Opinion of Counsel
      Exhibit G - Restructure Agreement

                                        V



                  SECOND AMENDED AND RESTATED CREDIT AGREEMENT

     THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT (the "Agreement") is made
as of the 28th day of July, 2003, by and among BANK OF AMERICA, N.A., a national
banking association ("Bank of America"), U.S. BANK NATIONAL ASSOCIATION ("U.S.
Bank"), KEYBANK NATIONAL ASSOCIATION ("KeyBank") (each individually a "Lender"
and collectively the "Lenders"), BANK OF AMERICA, as agent for Lenders (the
"Agent") and FLOW INTERNATIONAL CORPORATION, a Washington corporation (the
"Borrower").

     WHEREAS, the Borrower, Bank of America, U.S. Bank and Agent were parties to
that certain Credit Agreement dated as of August 31, 1998, which has been
amended from time to time (as amended the "Original Agreement") and that certain
Security Agreement dated as of August 31, 1998 (the "Original Security
Agreement); and

     WHEREAS, KeyBank was added as a Lender through an Assignment and Assumption
Agreement dated as of January 4, 2001; and

     WHEREAS, Lenders, Agent and Borrower amended and restated the Original
Agreement by that certain Amended and Restated Credit Agreement dated as of
December 29, 2000, which has been amended from time to time (as amended the
"Amended and Restated Agreement"); and

     WHEREAS, Pursuant to the Sixth Amendment to the Amended and Restated
Agreement dated as of August 23, 2002 (the "Sixth Amendment"), Borrower executed
notes and agreements listed on Part (a) of Schedule 1, reflecting a new
commitment amount and granting a security interest in additional collateral in
consideration for accommodations by the Agent and Lenders to Borrower; and

     WHEREAS, Pursuant to the Sixth Amendment, certain domestic subsidiaries of
Borrower executed agreements listed on Part (b) of Schedule 1, guarantying
Borrowers obligations under the Amended and Restated Agreement and granting a
security interest in collateral to Agent as security for such obligations (the
documents listed on Parts (a) and (b) of Schedule 1 are collectively referred to
as the "Existing Loan Documents"); and

     WHEREAS, Borrower is in default of the Existing Loan Documents. Borrower's
defaults include, but are not limited to, noncompliance with Sections 6.12 of
the Amended and Restated Agreement as of the fiscal quarters ending October 31,
2002, January 31, 2003 and April 30, 2003 (the "Existing Defaults"); and

     WHEREAS, Borrower acknowledges the Existing Defaults and is unable to cure
the Existing Defaults; and

     WHEREAS, Borrower has requested that Agent and Lenders enter into this
Agreement, which Agent and Lenders are willing to do, subject to the terms and
conditions contained herein;

     NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained herein, the parties agree as follows:

                                       1



                                    ARTICLE 1
                                   DEFINITIONS

     Section 1.1 Certain Defined Terms. As used in this Agreement, the following
terms have the following meanings:

          "Affiliate" means, with respect to any Person, another Person that
directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified. "Control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of a Person, whether through the
ability to exercise voting power, by contract or otherwise. "Controlling" and
"Controlled" have meanings correlative thereto.

          "Agent" means Bank of America, N.A. and any successor agent selected
pursuant to Section 9.6 hereof.

          "Agent-Related Persons" means the Agent, together with its Affiliates
and the officers, directors, employees, agents and attorneys-in-fact of such
Persons and Affiliates.

          "Alternate Restructure Event" has the meaning given to it in the
Restructure Agreement.

          "Alvarez" means Alvarez & Marsal, Inc., a New York corporation.

          "Asset Sale Net Proceeds" means the gross proceeds attributable to the
sale of any assets (other than assets in the ordinary course of business) owned
by Borrower or any Guarantor minus the expenses associated with such sale.

          "Attorney Costs" means and includes all reasonable fees, expenses and
disbursements of any law firm or other external counsel and, without
duplication, the reasonable allocated cost of internal legal services and all
expenses and disbursements of internal counsel.

          "Avure" means Avure Technologies, Incorporated, a Washington
corporation.

          "Bank of America" means Bank of America, N.A., a national banking
association, in its capacity as Lender, and any Successor.

          "Base Rate" means the sum of (i) the Prime Rate and (ii) 4.00%, or as
otherwise provided in the Restructure Agreement.

          "Borrower" means Flow International Corporation, a Washington
corporation, and any Successor.

          "Borrower Accounts" means any and all checking accounts held by
Borrower at Bank of America.

          "Business Day" means any day other than Saturday, Sunday or another
day on which commercial banks are authorized or obligated to close in Seattle,
Washington.

                                       2



          "Change of Control" means, with respect to any Person, an event or
series of events by which:

          (a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, but excluding any employee
benefit plan of such person or its subsidiaries, and any person or entity acting
in its capacity as trustee, agent or other fiduciary or administrator of any
such plan) becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Securities Exchange Act of 1934, except that a person or group shall
be deemed to have "beneficial ownership" of all securities that such person or
group has the right to acquire (such right, an "option right"), whether such
right is exercisable immediately or only after the passage of time), directly or
indirectly, of 40% or more of the equity securities of such Person entitled to
vote for members of the board of directors or equivalent governing body of such
Person on a fully-diluted basis (and taking into account all such securities
that such person or group has the right to acquire pursuant to any option
right); or

          (b) during any period of 12 consecutive months, a majority of the
members of the board of directors or other equivalent governing body of such
Person cease to be composed of individuals (i) who were members of that board or
equivalent governing body on the first day of such period, (ii) whose election
or nomination to that board or equivalent governing body was approved by
individuals referred to in clause (i) above constituting at the time of such
election or nomination at least a majority of that board or equivalent governing
body or (iii) whose election or nomination to that board or other equivalent
governing body was approved by individuals referred to in clauses (i) and (ii)
above constituting at the time of such election or nomination at least a
majority of that board or equivalent governing body (excluding, in the case of
both clause (ii) and clause (iii), any individual whose initial nomination for,
or assumption of office as, a member of that board or equivalent governing body
occurs as a result of an actual or threatened solicitation of proxies or
consents for the election or removal of one or more directors by any person or
group other than a solicitation for the election of one or more directors by or
on behalf of the board of directors).

          "CIS Acquisition Corp" shall mean CIS Acquisition Corp. a Michigan
corporation.

          "Code" means the Internal Revenue Code of 1986, as amended from time
to time.

          "Collateral" means all personal or real property in which any of the
Loan Documents now or hereafter create or purport to create a Lien.

          "Collateral Differential" has the meaning given to it in Section 6.13.

          "Commitment" shall mean, (a) with respect to each Lender, (i) its
obligation to extend Revolving Loans under this Agreement, or (ii) its
obligation to purchase Letter of Credit Risk Participations pursuant to Article
10 hereof; and (b) with respect to Agent, its obligation to issue Letters of
Credit under this Agreement.

          "Contractual Obligation" means, as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.

                                       3



          "Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with Borrower, are treated as a single employer
under Section 414(b) or 414(c) of the Code.

          "Debtor Relief Laws" means the Bankruptcy Code of the United States,
and all other liquidation, conservatorship, bankruptcy, assignment for the
benefit of creditors, moratorium, rearrangement, receivership, insolvency,
reorganization, or similar debtor relief laws of the United States or other
applicable jurisdictions from time to time in effect and affecting the rights of
creditors generally.

          "Default" means any event which but for the passage of time or the
giving of notice or both would be an Event of Default.

          "Default Rate" shall have the meaning given to it in Section 2.5(a).

          "Deposit Accounts" means any deposit accounts in the name of Borrower
or any Guarantor.

          "Dollars", "dollars" and "$" each mean lawful money of the United
States.

          "Domestic Guarantors" means Avure, CIS Acquisition Corp. and Flow
Waterjet Florida Corporation, a Florida corporation, and any other Subsidiary
that from time to time executes and delivers a supplement in the form attached
to, or otherwise becomes bound by, the Domestic Guaranty.

          "Domestic Guaranty" means that certain Guaranty Agreement dated as of
August 23, 2002, executed by the Domestic Guarantors in favor of Agent and
Lenders, and any additions, supplements, renewals or amendments thereto.

          "Domestic Subsidiary" means a Subsidiary of Borrower incorporated and
organized under the laws of any state of the United States and the District of
Columbia.

          "EBITDA" means pre-tax net income (or pre-tax net loss), plus the sum
of (i) interest expense (including amounts paid to Subordinated Noteholders
pursuant to Section 7.15), (ii) depreciation expense, (iii) depletion expense,
(iv) amortization expense, (v) restructuring expenses, not to exceed $8,900,000,
(vi) fees paid pursuant to Section 2.9, (vii) one-time, non-cash charges related
to write-downs of intangibles or goodwill, and (vii) costs and write-downs
associated with the Restructure Event or Alternate Restructure Event as defined
in Exhibit G hereto; provided however, any add-backs made pursuant to this
definition of "EBITDA" may only be made to the extent that such add-back has
already been deducted in the determination of pre-tax net income (or pre-tax net
loss) for such period.

          "Environmental Laws" means all federal, state or local laws, statutes,
common law duties, rules, regulations, ordinances and codes, together with all
administrative orders, directed duties, requests, licenses, authorizations and
permits of, and agreements with, any Governmental Authorities, in each case
relating to environmental, health, safety and land use matters; including the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the Clean Air Act, the Federal Water Pollution Control Act of 1972,
the

                                       4



Solid Waste Disposal Act, the Federal Resource Conservation and Recovery Act,
the Toxic Substances Control Act, the Emergency Planning and Community
Right-to-Know Act, and any applicable state law.

          "Environmental Liability" means any liability, contingent or otherwise
(including any liability for damages, costs of environmental remediation, fines,
penalties or indemnities), of the Borrower or any Guarantor or any of their
respective Subsidiaries directly or indirectly resulting from or based upon (a)
violation of any Environmental Law, (b) the generation, use, handling,
transportation, storage, treatment or disposal of any Hazardous Materials, (c)
exposure to any Hazardous Materials, (d) the release or threatened release of
any Hazardous Materials into the environment or (e) any contract, agreement or
other consensual arrangement pursuant to which liability is assumed or imposed
with respect to any of the foregoing.

          "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.

          "ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with the Borrower within the meaning of
Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for
purposes of provisions relating to Section 412 of the Code).

          "Event of Default" has the meaning given in Section 8.1.

          "Existing Loan Documents" has the meaning given in the recitals
hereto.

          "FAC" means Flow Asia Corporation, a corporation formed under the laws
of Taiwan.

          "Federal Funds Rate" means, for any period, a fluctuating interest
rate per annum equal for each day during such period to the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for such day on
transactions received by Agent from three federal funds brokers of recognized
standing selected by Agent.

          "FEG" means Flow Europe Gmbh, a corporation formed under the laws of
Germany.

          "FEMG" means Flow Europe Manufacturing Gmbh, a corporation formed
under the laws of Germany.

          "Financial Transactions Obligations" means all indebtedness,
liabilities and obligations of Borrower to Bank of America, U.S. Bank or any
Affiliate of Bank of America or U.S. Bank now or hereafter existing, whether
joint or several, direct or indirect, absolute or contingent or due or to become
due, arising under or in connection with any agreement (including all schedules
thereto, confirmations of transactions thereunder, and documents, definitions,
and agreements incorporated therein by reference or relating thereto) pursuant
to

                                       5



which Bank of America or U.S. Bank has agreed to permit daylight overdrafts to
occur on accounts maintained by Borrower with Bank of America or U.S. Bank,
provide remote disbursement services for Borrower, process automated clearing
house (ACH) transactions for the account of Borrower or extend credit to
Borrower, in the form of credit card accounts, including, without limitation,
any interest due thereon, all fees, costs, and expenses incurred by Bank of
America or U.S. Bank in connection therewith, and termination payments and
indemnifications relating thereto

          "Flow Robotics" means Flow Robotic Systems, a division of Borrower
based in Wixom, Michigan.

          "Flow South America" shall mean Flow Latino, a corporation organized
under the laws of Brazil and any division of Borrower or any Subsidiary that
reports through Flow South America.

          "Foreign Guarantors" means FAC, FEG or FEMG and any other Subsidiary
that from time to time executes and delivers a supplement in the form attached
to, or otherwise becomes bound by, the Foreign Guaranty, and "Foreign Guarantor"
means any one of them.

          "Foreign Guaranty" means that certain Guaranty Agreement dated as of
the date hereof, executed by the Foreign Guarantors in favor of Agent and
Lenders, and any additions, supplements, renewals or amendments thereto.

          "GAAP" has the meaning given in Section 1.3.

          "Government Approval" means an approval, permit, license,
authorization, certificate, or consent of any Governmental Authority.

          "Governmental Authority" means the government of the United States or
any State or any foreign country or any political subdivision of any thereof or
any branch, department, agency, instrumentality, court, tribunal or regulatory
authority which constitutes a part or exercises any sovereign power of any of
the foregoing.

          "Guarantors" means the Domestic Guarantors, the Foreign Guarantors,
and any other Subsidiary that from time to time executes and delivers a
supplement in the form attached to, or otherwise becomes bound by, the Domestic
Guaranty or Foreign Guaranty, and "Guarantor" means any one of them.

          "Hazardous Materials" means all explosive or radioactive substances or
wastes and all hazardous or toxic substances, wastes or other pollutants,
including petroleum or petroleum distillates, asbestos or asbestos-containing
materials, polychlorinated biphenyls, radon gas, infectious or medical wastes
and all other substances or wastes of any nature regulated pursuant to any
Environmental Law.

          "Indebtedness" means for any person (a) all items of indebtedness or
liability (except capital, surplus, deferred credits and reserves, as such)
which would be included in determining total liabilities as shown on the
liability side of a balance sheet as of the date as of which indebtedness is
determined, (b) indebtedness secured by any Lien, whether or not such

                                       6



indebtedness shall have been assumed, (c) any other indebtedness or liability
for borrowed money or for the deferred purchase price of property or services
for which such person is directly or contingently liable as obligor, guarantor,
or otherwise, or in respect of which such person otherwise assures a creditor
against loss, (d) any other obligations of such person under leases which shall
have been or should be recorded as capital leases, and (e) guarantees or other
contingent obligations.

          "Indemnified Liabilities" has the meaning given to it in Section
11.15.

          "Intercreditor Agreement" means that certain Intercreditor Agreement
dated as of October 2, 2002 by and among Lenders, Agent and Subordinated
Noteholders and consented to by Borrower and Domestic Guarantors.

          "JD Edwards Financial System" means Borrower's domestic accounting
system or a similar accounting system that is compatible with the domestic
system.

          "KeyBank" means KeyBank National Association, a national banking
association, in its capacity as Lender under this agreement, and any Successor.

          "Letter of Credit" means any standby letter of credit issued by Agent
pursuant to the terms of Article 3 hereof.

          "Letter of Credit Risk Participation" means, with respect to each
Lender, a risk participation purchased by such Lender pursuant to Article 10
hereof with respect to a Letter of Credit (including risk participations deemed
purchased from Agent by Bank of America in its capacity as Lender).

          "Letter of Credit Usage" means, as of any date of determination, the
sum of (i) the aggregate face amount of all outstanding unmatured Letters of
Credit plus (ii) the aggregate amount of all payments made by Agent under
Letters of Credit, no longer outstanding, but not yet reimbursed by Borrower
pursuant to Section 3.4.

          "Lien" means, for any person, any security interest, pledge, mortgage,
charge, assignment, hypothecation, encumbrance, attachment, garnishment,
execution or other voluntary or involuntary lien upon or affecting the revenues
of such person or any real or personal property in which such person has or
hereafter acquires any interest, except (a) liens for Taxes which are not
delinquent or which remain payable without penalty or the validity or amount of
which is being contested in good faith by appropriate proceedings upon stay of
execution of the enforcement thereof; (b) liens imposed by law (such as
mechanics' liens) incurred in good faith in the ordinary course of business
which are not delinquent or which remain payable without penalty or the validity
or amount of which is being contested in good faith by appropriate proceedings
upon stay of execution of the enforcement thereof with, in the case of liens on
property of Borrower, provision having been made to the satisfaction of Agent
for the payment thereof in the event the contest is determined adversely to
Borrower; and (c) deposits or pledges under worker's compensation, unemployment
insurance, social security or other similar laws or made to secure the
performance of bids, tenders, contracts (except for repayment of borrowed
money), or leases, or to secure statutory obligations or surety or appeal bonds
or to secure indemnity, performance, customs or other similar bonds given in the
ordinary course of business.

                                       7



          "Loan Documents" means the Existing Loan Documents and the New Loan
Documents.

          "Loans" means the Revolving Loans and overdraft advances pursuant to
Section 2.1(b).

          "Material Adverse Effect" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties, liabilities
(actual or contingent) or condition (financial or otherwise) of the Borrower or
the Borrower and its Subsidiaries taken as a whole; (b) a material impairment of
the ability of Borrower or any Guarantor to perform its obligations under any
Loan Document to which it is a party; or (c) a material adverse effect upon the
legality, validity, binding effect or enforceability against Borrower or any
Guarantor of any Loan Document to which it is a party.

          "New Loan Documents" means the documents listed on Schedule 3.

          "Notes" has the meaning given in Section 2.7.

          "Notice of Borrowing" means a written or oral request for a Loan from
Borrower delivered to Agent in the manner, at the time, and containing the
information required under Section 2.2.

          "Obligations" means all advances to, and debts, liabilities,
obligations, covenants and duties of Borrower or any Guarantor arising under any
Loan Document or otherwise with respect to any Loan, Letter of Credit or
Financial Transactions Obligations, whether direct or indirect (including those
acquired by assumption), absolute or contingent, due or to become due, now
existing or hereafter arising and including interest and fees that accrue after
the commencement by or against Borrower or any Guarantor or any Affiliate
thereof of any proceeding under any Debtor Relief Laws naming such Person as the
debtor in such proceeding, regardless of whether such interest and fees are
allowed claims in such proceeding.

          "Officer's Certificate" means a certificate executed and delivered on
behalf of Borrower by its Chairman, President or Chief Financial Officer.

          "PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

          "Pension Plan" means an "employee pension benefit plan" (as such term
is defined in ERISA) from time to time maintained by Borrower or a member of the
Controlled Group.

          "Person" or "person" means any natural person, corporation, limited
liability company, trust, joint venture, association, company, partnership,
Governmental Authority or other entity.

          "Plan" means, at any time, an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (a) maintained by Borrower or any member
of the Controlled Group for employees

                                       8



of Borrower or any member of the Controlled Group or (b) maintained pursuant to
a collective bargaining agreement or any other arrangement under which more than
one employer makes contributions and to which Borrower or any member of the
Controlled Group is then making or accruing an obligation to make contributions
or has within the preceding five (5) plan years made contributions.

          "Prime Rate" means the rate publicly announced from time to time by
Bank of America at its "prime rate." The prime rate is a rate set by Bank of
America based upon various factors including Bank of America's costs and desired
return, general economic conditions and other factors, and is used as a
reference point for pricing some loans, which may be priced at, above, or below
such announced rate. Any change in the prime rate announced by Bank of America
shall take effect at the opening of business on the day specified in the public
announcement of such change.

          "Pro Rata Share" means a fraction whose numerator (a) with respect to
Bank of America, is Bank of America's Commitment, (b) with respect to U.S. Bank,
is U.S. Bank's Commitment, and (c) with respect to KeyBank, is KeyBank's
Commitment, and whose denominator is the sum of all Lenders' Commitments.

          "Reduction Letter" means that certain letter from Borrower to Agent
dated July 28, 2003 requesting a reduction of the Total Revolving Commitment in
the amount of One Million Five Hundred Thousand Dollars ($1,500,000) pursuant to
Section 2.1(a).

          "Reimbursement Agreements" has the meaning given in Section 3.2(d).

          "Restricted Payment" means any dividend or other distribution (whether
in cash, securities or other property) with respect to any capital stock or
other equity interest of the Borrower or any Subsidiary, or any payment (whether
in cash, securities or other property), including any sinking fund or similar
deposit, on account of the purchase, redemption, retirement, acquisition,
cancellation or termination of any such capital stock or other equity interest
or of any option (other than options under the Borrower's stock option plan),
warrant or other right to acquire any such capital stock or other equity
interest.

          "Restructure Agreement" means that certain Restructure Agreement
attached as Exhibit G hereto.

          "Restructure Event" has the meaning given to it in the Restructure
Agreement.

          "Revolving Commitment Period" has the meaning given in Section 2.1(a).

          "Revolving Commitment" has the meaning given in Section 2.1(a).

          "Revolving Loans" has the meaning given in Section 2.1(a).

          "Revolving Maturity Date" means August 1, 2004.

          "Subordinated Note Purchase Agreement" means, collectively, the
agreements providing for the purchase of an aggregate principal amount of
$35,000,000 of the Borrower's

                                       9



13% Subordinated Notes due April 30, 2008 and Warrants to Purchase Common Stock
between Borrower and the "Purchasers" identified therein.

          "Subordinated Noteholders" means, as of any date, any persons that are
holders of any of the Subordinated Notes. As of the date hereof, such holders
are John Hancock Life Insurance Company, John Hancock Variable Life Insurance
Company, Signature 4 Limited, and Signature 5 L.P.

          "Subordinated Notes" means the notes issued in connection with, and as
defined in, the Subordinated Note Purchase Agreement, as approved by the Lenders
and Agent.

          "Subsidiary" shall mean any person, corporation, association or other
business entity directly or indirectly controlled by Borrower. For the purposes
of this definition, "controlled by" shall mean the possession, directly or
indirectly of the power to direct or cause the direction of the management and
policies of such Subsidiary, whether through the ownership of voting securities,
by contract or otherwise.

          "Successor" means, for any corporation or banking association, any
successor by merger or consolidation, or by acquisition of substantially all of
the assets of the predecessor.

          "Tax" means, for any person, any tax, assessment, duty, levy, impost
or other charge imposed by any Governmental Authority on such person or on any
property, revenue, income, or franchise of such person and any interest or
penalty with respect to any of the foregoing.

          "Total Revolving Commitment" means an amount as calculated in Section
2.1(a).

          "Total Utilization" means, as of any date of determination, the sum of
(i) the aggregate principal amount of all outstanding Revolving Loans, (ii) any
amounts outstanding under Section 2.1(b), and (iii) the Letter of Credit Usage.

          "Unfunded Vested Liabilities" means, with respect to any Plan at any
time, the amount (if any) by which (a) the present value of all vested
nonforfeitable benefits under such Plan exceeds (b) the fair market value of all
Plan assets allocable to such benefits, all determined as of the then most
recent evaluation date for such Plan, but only to the extent that such excess
represents a potential liability of Borrower or any member of the Controlled
Group to the PBGC or the Plan under Title IV of ERISA.

          "U.S. Bank" means U.S. Bank National Association, a national banking
association, in its capacity as Lender, and any Successor.

     Section 1.2 General Principles Applicable to Definitions. Definitions given
herein shall be equally applicable to both singular and plural forms of the
terms therein defined and references herein to "he" or "it" shall be applicable
to persons whether masculine, feminine or neuter. References herein to any
document including, but without limitation, this Agreement shall be deemed a
reference to such document as it now exists, and as, from time to time
hereafter, the same may be amended. References herein to any section,
subsection, schedule or

                                       10



exhibit shall, unless otherwise indicated, be deemed a reference to sections and
subsections within and schedules and exhibits to this Agreement.

     Section 1.3 Accounting Terms. Except as otherwise provided herein,
accounting terms not specifically defined shall be construed, and all accounting
procedures shall be performed, in accordance with generally accepted United
States accounting principles consistently applied ("GAAP") and as in effect on
the date of application.

                                    ARTICLE 2
                                    THE LOANS

     Section 2.1 Amounts and Terms of Commitments.

          (a) The Revolving Credit. Subject to the terms and conditions of this
Agreement, each Lender hereby severally agrees to make loans ("Revolving Loans")
to Borrower from time to time on Business Days until the Revolving Maturity Date
(the "Revolving Commitment Period") in amounts equal to such Lender's Pro Rata
Share (as set forth below) of each requested loan; provided that, after giving
effect to any requested loan (i) the aggregate of all Revolving Loans from such
Lender will not exceed at any one time outstanding the Total Revolving
Commitment then in effect multiplied by such Lender's Pro Rata Share (such
Lender's "Revolving Commitment"), and (ii) the Total Utilization will not exceed
the Total Revolving Commitment then in effect. Each Lender's initial Revolving
Commitment is set forth opposite its name below. The Revolving Loans described
in this Section 2.1(a) constitute a revolving credit and within the amount and
time specified, Borrower may pay, prepay and reborrow.

                                        Revolving Commitment
Lender                                 as of the date hereof   Pro Rata Share
- ------                                 ---------------------   --------------
Bank of America                            $27,594,246.58       44.506849315%
U.S. Bank                                  $18,549,041.10       29.917808220%
KeyBank                                    $15,856,712.32       25.575342465%
Total Revolving Commitment as of the
   date hereof                             $   62,000,000             100.00%

provided, however, the Total Revolving Commitment shall be permanently reduced
by Scheduled Reductions and Other Reductions. As used herein, the following
terms have the following meanings: "Scheduled Reductions" means (i) on October
31, 2003, $2,000,000; (ii) on January 31, 2004, $7,000,000; and (iii) on April
30, 2004, $2,000,000. "Other Reductions" means (a) any written request for such
reduction by Borrower delivered to Agent, which reduction shall be effective on
the next Business Day after receipt by Agent of such request; (b) any Collateral
Differential; and (c) any Asset Sale Net Proceeds.

          (b) Overdrafts. Subject to the terms and conditions of this Agreement,
including without limitation, Section 4.2, Bank of America, as part of its
Commitment hereunder, hereby severally agrees to make loans, not to exceed the
lesser of (i) Total Revolving

                                       11



Commitment minus the Total Utilization, and (ii) $3,000,000, to cover overdrafts
on Borrower Accounts.

     Section 2.2 Manner of Borrowing.

          (a) Revolving Loans. For each requested Revolving Loan, Borrower shall
deliver to Agent a Notice of Borrowing specifying the date of the requested
borrowing and the amount thereof. Borrower may give an oral Notice of Borrowing
on the same day it wishes the Revolving Loan to be made, provided that said
Notice of Borrowing is received by Agent no later than 11:00 a.m. (Seattle time)
on the date of the requested borrowing. Requests for borrowing, or confirmations
thereof, received after the designated hour will be deemed received on the next
succeeding Business Day. Each such Notice of Borrowing shall be irrevocable and
shall be deemed to constitute a representation and warranty by Borrower that as
of the date of such notice the statements set forth in Article 5 hereof are true
and correct and that no Default or Event of Default has occurred and is
continuing. On receipt of a Notice of Borrowing, Agent shall promptly notify
each Lender by telephone, telex or telefax of the date of the requested
borrowing and the amount thereof. Each Lender shall before 1:00 p.m. (Seattle
time) on the date of the requested borrowing, pay such Lender's Pro Rata Share
of the aggregate principal amount of the requested borrowing in immediately
available funds to Agent at its Commercial Loan Processing Center, Seattle,
Washington. Upon fulfillment to Agent's satisfaction of the applicable
conditions set forth in Article 4, and after receipt by Agent of such funds,
Agent will promptly make such funds available to Borrower by depositing them to
the ordinary checking account maintained by Borrower at Agent's Commercial
Accounts Service Center.

          (b) Overdrafts. Bank of America may, at its option, notify Agent that
any overdraft covered by Section 2.1(b) shall be deemed a Notice of Borrowing
requesting a Loan. If Bank of America so notifies Agent, then all parties hereto
agree that, for all purposes under this Agreement, Borrower will be deemed to
have delivered a Notice of Borrowing to Agent pursuant to Section 2.2(a)
requesting a Revolving Loan on the date and in the amount of such overdraft.
Borrower shall, if requested by Agent, provide a written Notice of Borrowing to
Agent as additional evidence of its request for such Revolving Loan.

     Section 2.3 Agent's Right to Fund Loans. Unless Agent shall have received
notice from a Lender prior to 12:00 Noon (Seattle time) on the date of any
requested borrowing that such Lender will not make available to Agent its share
of the requested borrowing, Agent may assume that such Lender has made such
funds available to Agent on the date such Loan is to be made in accordance with
Section 2.2 hereof and Agent may, in reliance upon such assumption, make
available to Borrower on such date a corresponding amount. If and to the extent
that such Lender shall not have so made such portion available to Agent, such
Lender and Borrower jointly and severally agree to pay to Agent forthwith on
demand such corresponding amount, together with interest thereon for each day
from the date such amount is made available to Borrower until the date such
amount is repaid to Agent, at (a) in the case of Borrower, the Base Rate and (b)
in the case of such Lender, the Federal Funds Rate. Any such repayment by
Borrower shall be without prejudice to any rights it may have against Lender
that has failed to make available its funds for any requested borrowing.

                                       12



     Section 2.4 Repayment of Principal.

          (a) Borrower shall repay to Lenders from time to time such amounts of
principal as may be necessary to ensure that at all times, the Total Utilization
is equal to or less than the Total Revolving Commitment then in effect.

          (b) At 5:00 p.m. (Seattle time) on each Business Day that there is an
outstanding balance in any of the Borrower Accounts, Borrower shall repay to
Agent, for the account of Lenders, an amount equal to such balance.

          (c) Borrower shall pay to Lenders the Asset Sale Net Proceeds.

          (d) Borrower shall pay to Lenders One Million Five Hundred Thousand
Dollars ($1,500,000) pursuant to the Reduction Letter.

          (e) Borrower shall repay the principal amount of the Revolving Loans
on or before the Revolving Maturity Date.

     Section 2.5 Interest on Loans.

          (a) General Provisions. Borrower agrees to pay to Lenders interest on
the unpaid principal amount of each Loan, including overdrafts made pursuant to
Section 2.1(b), from the date of such Loan until such Loan shall be due and
payable at a per annum rate equal to the Base Rate. If a default shall occur in
the payment when due of any Loan (whether at maturity, upon acceleration or
otherwise), interest shall accrue at a per annum rate equal to seven percentage
points (7%) above the Prime Rate (the "Default Rate"). Accrued but unpaid
interest on each Loan shall be paid in arrears on the first Business Day of each
calendar month, and at the Revolving Maturity Date. Notwithstanding the
foregoing, accrued interest on any Loan shall be payable on demand after the
occurrence of an Event of Default.

          (b) Applicable Days For Computation of Interest. Computations of
interest described in Section 2.5 shall be made on the basis of a year of 360
days, for the actual number of days (including the first day but excluding the
last day) occurring in the period for which such interest is payable.

     Section 2.6 Prepayments. Loans may be repaid at any time without penalty or
premium. Notice of prepayments shall be given to the Agent by 9:00 am Seattle
time on the day of prepayment.

     Section 2.7 Notes. The Revolving Loans shall be evidenced by promissory
notes of Borrower substantially in the forms attached hereto as Exhibits A-1,
A-2, and A-3. The promissory notes referred to herein are collectively referred
to as the "Notes." Each Lender is hereby authorized to record the date and
amount of Loans it makes and the date and amount of each payment of principal
and interest thereon on a schedule annexed to and constituting part of the
appropriate Note. Any such recordation by a Lender shall constitute prima facie
evidence of the accuracy of the information so recorded; provided, however, that
the failure to make any such recordation or any error in any such recordation
shall not affect the obligations of Borrower hereunder or under the Notes.

                                       13



     Section 2.8 Manner of Payments.

          (a) All payments and prepayments of principal and interest on any Loan
and all other amounts payable hereunder by Borrower to Agent or any Lender shall
be made by paying the same in Dollars and in immediately available funds to
Agent at its Commercial Loan Processing Center, Seattle, Washington not later
than 12:00 Noon (Seattle time) on the date on which such payment or prepayment
shall become due.

          (b) Borrower hereby authorizes Agent and each Lender, if and to the
extent any payment is not promptly made pursuant to this Agreement or any other
Loan Document, to charge from time to time against any or all of the accounts of
Borrower with Agent or any Lender or any affiliate of any Lender any amount due
hereunder or under such other Loan Document.

          (c) Whenever any payment hereunder or under any other Loan Document
shall be stated to be due would otherwise occur on a day other than a Business
Day, such payment shall be made on the next succeeding Business Day.

          (d) Unless Borrower has notified Agent prior to the date any payment
to be made by it is due, that it does not intend to remit such payment, Agent
may, in its sole and absolute discretion, assume that Borrower has timely
remitted such payment and may, in its sole and absolute discretion and in
reliance thereon, make available such payment to the Lender entitled thereto. If
such payment was not in fact remitted to Agent in immediately available funds,
then each Lender shall forthwith on demand repay to Agent the amount of such
assumed payment made available to such Lender, together with interest thereon in
respect of each day from and including the date such amount was made available
by Agent to such Lender to the date such amount is repaid to Agent at the
Federal Funds Rate.

     Section 2.9 Fees. In addition to certain fees described in Section 3.2(b),
Borrower shall pay the following fees:

          (a) Amendment Fee. Immediately upon the execution and delivery of this
Agreement, Borrower shall pay to Agent for the account of Lenders in accordance
with their Pro Rata Shares, an amendment fee in the amount of Six Hundred Twenty
Thousand Dollars ($620,000). Such fee shall be deemed fully earned when due and
non-refundable, in whole or in part, when paid.

          (b) Quarterly Commitment Fee. On each of July 31, 2003, October 31,
2003, January 31, 2004 and April 30, 2004, Borrower shall pay to Agent for the
account of Lenders in accordance with their Pro Rata Shares a quarterly
commitment fee in an amount equal to the product of (i) 0.25% (25 basis points)
and (ii) the Total Revolving Commitment then in effect. Such fee shall be deemed
fully earned when due and non-refundable, in whole or in part, when paid.

          (c) Agent's Fee. Immediately upon the execution and delivery of this
Agreement, Borrower shall pay Agent, for its own account, an Agent's fee of One
Hundred Thousand Dollars ($100,000). Such fee shall be deemed fully earned when
due and non-refundable, in whole or in part, when paid.

                                       14



     Section 2.10 Sharing of Payments, Etc. If any Lender shall obtain any
payment in respect of Borrower's obligations under the Loan Documents (whether
voluntary or involuntary, through the exercise of any right of setoff or
otherwise) in excess of the amount it would have received if all payments had
been made directly to Agent and apportioned in accordance with the terms hereof,
such Lender shall hold such excess payment in trust for Agent and Lenders and
shall forthwith remit the same to Agent for Lenders' accounts as herein
provided.

     Section 2.11 Application of Payments. Any payment by Borrower hereunder
shall be applied first, against fees, expenses and indemnities due hereunder;
second, against interest then due in respect of any Loan; third, against amounts
due under Section 3.4 hereof; fourth, against any Financial Transaction
Obligations; and thereafter, ratably against amounts owing for the loan
principal. After the applicable maturity date for any Loan, payments to be
applied to loan principal shall be applied first to principal installments then
due and thereafter to principal installments in the inverse order of maturity.
Agent shall distribute any payment by Borrower in respect of Revolving Loans in
accordance with each Lender's Pro Rata Share. After any of the Loans become due
(by maturity, upon acceleration or otherwise), any amounts recovered from
Borrower, including, without limitation, through realization on any Collateral,
shall be applied, and distributed by Agent to Lenders, in accordance with each
Lender's Pro Rata Share.

                                    ARTICLE 3
                                LETTERS OF CREDIT

     Section 3.1 Letters of Credit. Borrower may request that Agent issue
letters of credit for Borrower's account in accordance with the terms and
conditions of this Article 3.

     Section 3.2 Manner of Requesting Letters of Credit.

          (a) From time to time, Borrower may request that Agent issue a standby
letter of credit for Borrower's account or extend or renew any existing Letters
of Credit; provided however, the intended beneficiary of the Letter of Credit is
a customer of Borrower. Such request will be made by delivering a written
request or making an oral request for the issuance, extension or renewal of such
a letter of credit to Agent not later than 9:00 a.m. (Seattle time) on the date
a new letter of credit is to be issued or an existing letter of credit is
scheduled to expire, provided that, any request given orally shall be confirmed
by Borrower in a writing delivered to Agent not later than 10:00 a.m. (Seattle
time) on the date such oral request is made. Each such request shall be deemed
to constitute a representation and warranty by Borrower that as of the date of
such request, statements set forth in Article 5 hereof are true and correct and
that no Default or Event of Default has occurred and is continuing. Each such
request shall specify the face amount of the requested Letter of Credit, the
proposed date of expiration, the name of the intended beneficiary thereof, and
whether such Letter of Credit is a new letter of credit or an extension or
renewal thereof.

          (b) Borrower shall pay to Agent for the account of each Lender in
accordance with its Pro Rata Share, a letter of credit fee equal to five percent
(500 basis points) per annum multiplied by the maximum amount available to be
drawn on the outstanding standby Letters of Credit, which fee shall not be less
than Two Hundred Fifty Dollars ($250). Such letter of credit fees shall be
computed on a quarterly basis in arrears. Such letter of credit fees shall be
due and

                                       15



payable on the first Business Day after the end of each March, June, September
and December, commencing with the first such date to occur after the issuance of
such Letter of Credit, on the Revolving Maturity Date and thereafter on demand.
In addition, Borrower shall pay directly to Agent for its own account the
customary issuance, presentation, amendment and other processing fees, and other
standard costs and charges, of Agent relating to letters of credit as from time
to time in effect. Such customary fees and standard costs and charges are due
and payable on demand and are nonrefundable.

          (c) Each letter of credit requested hereunder: (i) shall be in a face
amount such that after issuance of such letter of credit (A) the Total
Utilization will not exceed the Total Revolving Commitment then in effect, and
(B) the Letter of Credit Usage would not exceed $5,000,000; and (ii) shall have
an expiration date not later than the Revolving Maturity Date.

          (d) At the request of Agent, Borrower shall execute a letter of credit
application and reimbursement agreement, in the standard form then used by
Agent, in respect of each Letter of Credit requested hereunder. The letter of
credit applications and reimbursement agreements now in effect with respect to
each existing Letter of Credit shall remain in full force and effect except
that, if such existing Letter of Credit is extended or renewed, Agent may, at
its option, require Borrower to execute a new letter of credit application and
reimbursement agreement (all reimbursement agreements relating to any of the
Letters of Credit shall, as such agreements may be amended from time to time, be
collectively referred to herein as the "Reimbursement Agreements").

          (e) Subject to the satisfaction of the conditions precedent set forth
in Article 4 and Borrower's compliance with the terms of this Section 3.2, Agent
shall issue and deliver its letter of credit to Borrower or to the designated
beneficiary at such address as Borrower may specify. New Letters of Credit and
extensions or renewals of any existing Letters of Credit shall contain terms and
conditions customarily included in Agent's letters of credit and shall otherwise
be in a form acceptable to Agent.

     In the event of any conflict between the terms of any Reimbursement
Agreement and the terms of this Agreement, the terms of this Agreement shall
control, unless Agent has otherwise agreed in a writing.

     Section 3.3 Indemnification; Increased Costs.

          (a) Borrower agrees to indemnify Agent and each Lender on demand for
any and all additional costs, expenses, or damages incurred by Agent or such
Lender, directly or indirectly, arising out of the issuance of any Letter of
Credit or the purchase of any Letter of Credit Risk Participation, including,
without limitation, any costs of maintaining reserves in respect thereof and any
premium rates imposed by the Federal Deposit Insurance Corporation in connection
therewith. A certificate as to such additional amounts submitted to Borrower by
Agent or such Lender shall be final, conclusive, and binding, absent manifest
error.

          (b) If at any time after the date hereof the introduction of or any
change in applicable law, rule, or regulation or in the interpretation or the
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof, or compliance

                                       16



by Agent or Lender with any requests directed by any such Governmental Authority
(whether or not having the force of law) shall, with respect to any Letter of
Credit or Letter of Credit Risk Participation subject Agent or such Lender to
any Tax or impose, modify, or deem applicable any reserve, special deposit, or
similar requirements against assets of, deposits with or for the account of,
credit extended by Agent or such Lender or shall impose on Agent or such Lender
any other conditions affecting the Letters of Credit or Letter of Credit Risk
Participations and the result of any of the foregoing is to increase the cost to
Agent or such Lender of issuing a Letter of Credit or holding a Letter of Credit
Risk Participation or to reduce the amount of any sum received or receivable by
Agent or such Lender hereunder with respect to the Letters of Credit or Letter
of Credit Risk Participations, then, upon demand by Agent or such Lender,
Borrower shall pay to Agent or such Lender such additional amount or amounts as
will compensate Agent or such Lender for such increased cost or reduction. A
certificate submitted to Borrower by Agent or such Lender setting forth the
basis for the determination of such additional amount or amounts shall be final,
conclusive, and binding, absent manifest error.

          (c) Borrower agrees to indemnify and hold Agent and each Lender (an
"Indemnitee") harmless from and against any and all (a) Taxes (exclusive of
Taxes measured by net income and gross receipts) and other fees payable in
connection with Letters of Credit, Letter of Credit Risk Participations or the
provisions of this Agreement relating thereto, and (b) any and all actions,
claims, damages, losses, liabilities, fines, penalties, costs, and expenses of
every nature, including Attorney Costs, suffered or incurred by the Indemnitee
otherwise arising out of or relating to this Article 3, any Letter of Credit, or
any Letter of Credit Risk Participations; provided, however, said
indemnification shall not apply to the extent that any such action, claim,
damage, loss, liability, fine, penalty, cost, or expense arises out of or is
based solely upon the Indemnitee's willful misconduct or negligence.

     Section 3.4 Payment by Borrower. Borrower agrees to fully reimburse Agent
for all amounts paid by Agent under any Letter of Credit and to pay interest
thereon at the Base Rate from the date Agent makes such payment until the date
of any demand for reimbursement by Agent. Such payment shall be made in
immediately available funds at Agent's Commercial Loan Processing Center not
later than 11:00 a.m. (Seattle time) on the date Borrower is first notified by
Agent that Agent has made payment under the Letter of Credit; provided Agent has
notified Borrower by 9:00 a.m. on such date and provided further, that, if Agent
so elects pursuant to the terms of Section 8.2, following the occurrence of an
Event of Default, the face amount of each Letter of Credit shall become
immediately due and payable. If Borrower shall default in its obligations to
reimburse Agent or make any other payment required hereunder, interest shall
accrue on the unpaid amount thereof at a per annum rate equal to the Default
Rate from the date such amount becomes due and payable until payment in full by
Borrower. Interest on such unpaid amounts shall be calculated on the basis of a
year of 360 days and shall be payable on demand.

     Section 3.5 Cash Collateralize. Upon the request of the Agent, (i) upon a
Default or an Event of Default, (ii) if the Agent has honored any full or
partial drawing request under any Letter of Credit and such drawing has resulted
in a borrowing or (iii) if, as of the date of expiration of any Letter of
Credit, any Letter of Credit may for any reason remain outstanding and partially
or wholly undrawn, in addition to any other remedies the Agent may have pursuant
to this Agreement, any Loan Document or applicable law, Borrower shall
immediately Cash

                                       17



Collateralize the then outstanding amount of all Letters of Credit (in an amount
equal to such outstanding amount determined as of the date of the Default, Event
of Default, such borrowing or the Letter of Credit expiration date, as the case
may be). For purposes hereof, "Cash Collateralize" means to pledge and deposit
with or deliver to the Agent as collateral for the Letter of Credit obligations,
cash or deposit account balances pursuant to documentation in form and substance
satisfactory to the Agent. The Borrower hereby grants to the Agent for the
benefit of the Lenders and the Agent, a security interest in all such cash,
deposit accounts and all balances therein and all proceeds of the foregoing.
Cash collateral shall be maintained in a blocked, non-interest bearing deposit
account at Bank of America, N.A.

                                    ARTICLE 4
                                   CONDITIONS

     Section 4.1 Conditions to Effectiveness of Agreement. Upon the fulfillment
of all of the following conditions, this Agreement shall be effective as of
April 30, 2003 and the Existing Defaults shall be deemed waived:

          (a) New Loan Documents. An authorized officer of Borrower shall have
properly executed and delivered each New Loan Document to which it is a party,
each in form and substance satisfactory to the Agent and Lenders. An authorized
officer of each Guarantor shall have properly executed and delivered each New
Loan Document to which such Guarantor is a party, each in form and substance
satisfactory to the Agent and Lenders.

          (b) Borrower Authority. Agent shall have received the following, each
in form and substance satisfactory to the Agent: (i) such certificates of
resolutions or other action, incumbency certificates and/or other certificates
of officers of the Borrower as the Agent may require to establish the identities
of and verify the authority and capacity of each officer thereof authorized to
act as an officer in connection with this Agreement, the Notes and the other
Loan Documents to which Borrower is a party; and (ii) such evidence as the Agent
may require to verify that the Borrower is duly incorporated or formed, validly
existing, in good standing and qualified to engage in business in each
jurisdiction in which it is required to be qualified to engage in business,
including certified copies of the articles of incorporation for the Borrower and
a certificate of good standing.

          (c) Guarantor Authority. Agent shall have received the following, each
in form and substance satisfactory to the Agent: (i) such certificates of
resolutions or other action, incumbency certificates and/or other certificates
of officers of each Foreign Guarantor as the Agent may require to establish the
identities of and verify the authority and capacity of each officer thereof
authorized to act as an officer in connection with the Foreign Guaranty and the
other Loan Documents to which such Foreign Guarantor is a party; and (ii) such
evidence as the Agent may require to verify that each Foreign Guarantor is duly
incorporated or formed, validly existing, in good standing and qualified to
engage in business in each jurisdiction in which it is required to be qualified
to engage in business, including certified copies of the articles of
incorporation for such Guarantor and a certificate of good standing; provided
however, evidence of FAC's corporate authority to guaranty shall not be a
condition to effectiveness.

                                       18



          (d) Opinion of Counsel. Agent shall have received a favorable opinion
of Preston Gates and Ellis, LLP, counsel to the Borrower, addressed to the
Agent, as to such matters concerning the Borrower and the New Loan Documents to
which it is a party, as the Agent may request, substantially in the form
attached as Exhibit F;

          (e) Amended Subordinated Note Purchase Agreement. Agent shall have
received evidence satisfactory to it that the Subordinated Noteholders have
waived all defaults under the Note Purchase Agreement, have amended the
Subordinated Note Purchase Agreement to conform to the payment restrictions in
this Agreement and have consented to this Agreement.

          (f) Payment of Fees. Agent shall have received the fees set forth in
Section 2.9 (a) and (c) and reimbursement for all reasonable expenses,
including, without limitation, Attorney Costs, consultants' fees and all
Lenders' out-of-pocket expenses incurred in connection with the preparation of
this Agreement, the other Loan Documents and the closing of the transactions
contemplated hereby and thereby and required by Agent prior to closing.

          (g) Domestic Guarantor Consent. Agent shall have received the consent
of Domestic Guarantors to this Agreement.

     Section 4.2 Conditions to All Loans and Issuances of Letters of Credit. The
obligation of each Lender to make any Loan hereunder and the obligation of Agent
to issue any Letter of Credit, are subject to fulfillment of the following
conditions:

          (a) Prior Conditions. All of the conditions set forth in Section 4.1
shall have been satisfied.

          (b) Notice of Borrowing. In respect of any Loan, Agent shall have
received the Notice of Borrowing in respect of such Loan; and, in respect of any
Letter of Credit, Agent shall have received from Borrower a request therefor
complying with the requirements of Section 3.2.

          (c) No Default. At the date of the requested Loan or issuance of
requested Letter of Credit, no Default or Event of Default shall have occurred
and be continuing or will have occurred as the result of the making of the Loan
or issuing the Letter of Credit; and the representations and warranties of
Borrower in Article 5 shall be true on and as of such date with the same force
and effect as if made on and as of such date.

          (d) Guarantors. Neither the Agent nor any Lender shall have received
from the Borrower or any Guarantor any notice terminating or purporting to
terminate any Guarantor's obligations under any Loan Document to which it is a
party or claiming that any such Loan Document is not or will in the future not
be fully enforceable against each Guarantor in accordance with their terms.

          (e) Other Information. Agent and each Lender shall have received such
other statements, opinions, certificates, documents and information as it may
reasonably request in order to satisfy itself that the foregoing conditions have
been fulfilled.

                                       19



                                    ARTICLE 5
                         REPRESENTATIONS AND WARRANTIES

     Borrower represents and warrants to Agent and Lenders as follows; provided
however, such representations and warranties relating to the corporate authority
to guaranty shall not apply to FAC until the earlier of (i) the thirtieth (30th)
day after the date hereof and (ii) the date upon which Agent has received
evidence that FAC has the corporate authority to guaranty:

     Section 5.1 Corporate Existence and Power.

          (a) Borrower is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Washington. Borrower is duly
qualified to do business in each other jurisdiction where the nature of its
activities or the ownership of its properties requires such qualification,
except to the extent that failure to be so qualified does not have a material
adverse effect on its business, operations or financial condition. Borrower has
full corporate power, authority and legal right to carry on its business as
presently conducted, to own and operate its properties and assets, and to
execute, deliver and perform the Loan Documents to which it is a party.

          (b) Each Guarantor is a business entity duly formed, validly existing
and in good standing under the laws of the jurisdiction of its formation. Each
Guarantor is duly qualified to do business in each other jurisdiction where the
nature of its activities or the ownership of its properties requires such
qualification, except to the extent that failure to be so qualified does not
have a material adverse effect on its business, operations or financial
condition. Each Guarantor has full corporate power, authority and legal right to
carry on its business as presently conducted, to own and operate its properties
and assets, and to execute, deliver and perform the Loan Documents to which it
is a party.

     Section 5.2 Corporate Authorization.

          (a) The execution, delivery and performance by Borrower of the Loan
Documents to which it is a party and any borrowing thereunder and the request
for the issuance of any Letter of Credit thereunder, have been duly authorized
by all necessary corporate action of Borrower, and do not require any
shareholder approval or the approval or consent of any trustee or the holders of
any Indebtedness of Borrower except such as have been obtained (certified copies
thereof having been delivered to Agent), do not contravene any law, regulation,
rule or order binding on it or its Articles of Incorporation or Bylaws and do
not contravene the provisions of or constitute a default under any indenture,
mortgage, contract or other agreement or instrument to which Borrower is a party
or by which Borrower, or any of its properties, may be bound or affected.

          (b) The execution, delivery and performance by each Guarantor of the
Loan Documents to which it is a party, and the guaranteeing of obligations
thereunder, have been duly authorized by all necessary corporate action of such
Guarantor, and do not require any shareholder approval or the approval or
consent of any trustee or the holders of any Indebtedness of such Guarantor
except such as have been obtained (certified copies thereof having been
delivered to Agent), do not contravene any law, regulation, rule or order
binding on it or its

                                       20



Articles of Incorporation, Bylaws or other organizing documents, and do not
contravene the provisions of or constitute a default under any indenture,
mortgage, contract or other agreement or instrument to which such Guarantor is a
party or by which such Guarantor, or any of its properties, may be bound or
affected.

     Section 5.3 Government Approvals, Etc. No Government Approval or filing or
registration with any Governmental Authority is required for the making and
performance by Borrower or any Guarantor of the Loan Documents to which it is a
party or in connection with any of the transactions contemplated hereby or
thereby, except such as have been heretofore obtained and are in full force and
effect (certified copies thereof having been delivered to Agent).

     Section 5.4 Binding Obligations, Etc. This Agreement has been duly executed
and delivered by Borrower and constitutes, and the other Loan Documents when
duly executed and delivered by Borrower or any Guarantor will constitute, the
legal, valid and binding obligations of Borrower or Guarantor enforceable
against Borrower or Guarantor in accordance with their respective terms except
as such enforceability may be limited by applicable bankruptcy, insolvency, or
similar laws affecting the enforcement of creditors' rights generally or by the
exercise of judicial discretion in accordance with general principles of equity.

     Section 5.5 Litigation. There are no actions, proceedings, investigations,
or claims against or affecting Borrower or any Guarantor now pending before any
court, arbitrator or Governmental Authority (nor to the knowledge of Borrower
has any thereof been threatened nor does any basis exist therefor) which might
reasonably be determined adversely to Borrower or such Guarantor and which, if
determined adversely, would be likely to have a material adverse effect on the
financial condition or operations of Borrower or such Guarantor or to impair
Agent's lien on the Collateral or Borrower's or such Guarantor's rights therein,
except as described on Schedule 5.5 hereto.

     Section 5.6 Lien Priority. On the date any Loan or any Letter of Credit is
issued, made or outstanding hereunder, each Loan Document that creates or
perfects a Lien, will constitute a valid and perfected Lien of first priority in
and to all the Collateral and will be enforceable against all third parties in
all jurisdictions as security for all obligations which such Loan Document
purports to secure.

     Section 5.7 Financial Condition. The consolidated balance sheet of Borrower
and its Subsidiaries as of April 30, 2003, and the related statements of income
and retained earnings of Borrower and its Subsidiaries for the fiscal year then
ended, copies of which have been furnished to Lenders, fairly present the
consolidated financial condition of Borrower and its Subsidiaries as at such
date, including all material contingent liabilities, and the consolidated
results of operations of Borrower for the period then ended, all in accordance
with GAAP. Neither Borrower nor its Subsidiaries had on such date any material
contingent liabilities, unusual forward or long-term commitments or unrealized
or anticipated losses from any unfavorable commitments, except as referred to or
reflected or provided for in that balance sheet and in the notes to those
financial statements and since that date there has been no material adverse
change in the financial condition or operations of Borrower or its Subsidiaries.

                                       21



     Section 5.8 Title and Liens. Borrower has good and marketable title to each
of the properties and assets reflected in its balance sheet referred to in
Section 5.7 hereof (except such as have been since sold or otherwise disposed of
in the ordinary course of business). No assets or revenues of Borrower are
subject to any Lien except as permitted by this Agreement. All properties of
Borrower and its use thereof comply in all material respects with applicable
zoning and use restrictions and with applicable laws and regulations relating to
the environment.

     Section 5.9 Taxes. Borrower and each Subsidiary has filed all tax returns
and reports required of it, has paid all Taxes which are shown to be due and
payable on such returns and reports, and has provided adequate reserves for
payment of any Tax whose payment is being contested. The charges, accruals and
reserves on the books of Borrower or Subsidiary in respect of Taxes for all
fiscal periods to date are accurate in all material respects and there are no
material questions or disputes between Borrower or any Subsidiary and any
Governmental Authority with respect to any Taxes except as disclosed in the
balance sheet referred to in Section 5.7 or otherwise disclosed to Agent in
writing prior to the date of this Agreement.

     Section 5.10 Laws, Orders, Other Agreements. Neither Borrower nor any of
its Subsidiaries is in violation of or subject to any contingent liability on
account of any laws, statutes, rules, regulations and orders of any Governmental
Authority. Neither Borrower or any of its Subsidiaries is in material breach of
or default under any material agreement to which it is a party or which is
binding on it or any of its assets.

     Section 5.11 Federal Reserve Regulations. Borrower is not engaged
principally or as one of its important activities in the business of extending
credit for the purpose of purchasing or carrying any margin stock (within the
meaning of Federal Reserve Regulation U), and no part of the proceeds of any
Loan or Letter of Credit will be used to purchase or carry any such margin stock
or to extend credit to others for the purpose of purchasing or carrying any such
margin stock or for any other purpose that violates the applicable provisions of
any Federal Reserve Regulation. Borrower will furnish to any Lender on request a
statement conforming with the requirements of Regulation U.

     Section 5.12 ERISA.

          (a) The present value of all benefits vested under all Pension Plans
did not, as of the most recent valuation date of such Pension Plans, exceed the
value of the assets of the Pension Plans allocable to such vested benefits by an
amount which would represent a potential material liability of Borrower or
affect materially the ability of Borrower to perform this Agreement or the other
Loan Documents.

          (b) No Plan or trust created thereunder, or any trustee or
administrator thereof, has engaged in a "prohibited transaction" (as such term
is defined in Section 406 or Section 2003(a) of ERISA) which could subject such
Plan or any other Plan, any trust created thereunder, or any trustee or
administrator thereof, or any party dealing with any Plan or any such trust to
any material tax or penalty on prohibited transactions imposed by Section 502 or
Section 2003(a) of ERISA.

                                       22



          (c) No Pension Plan or trust has been terminated, and there have been
no "reportable events" as that term is defined in Section 4043 of ERISA since
the effective date of ERISA.

          (d) No Pension Plan or trust created thereunder has incurred any
"accumulated funding deficiency" (as such term is defined in Section 302 of
ERISA) whether or not waived, since the effective date of ERISA.

          (e) The required allocations and contributions to Pension Plans will
not violate Section 415 of the Code in any material respect.

          (f) Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other federal or state laws. Each
Plan that is intended to qualify under Section 401(a) of the Code has received a
favorable determination letter from the United States Internal Revenue Service
("IRS") or an application for such letter is currently being processed by the
IRS with respect thereto and, to the best knowledge of the Borrower, nothing has
occurred which would prevent, or cause the loss of, such qualification. The
Borrower and each ERISA Affiliate have made all required contributions to each
Plan subject to Section 412 of the Code, and no application for a funding waiver
or an extension of any amortization period pursuant to Section 412 of the Code
has been made with respect to any Plan. There are no pending or, to the best
knowledge of the Borrower, threatened claims, actions or lawsuits, or action by
any Governmental Authority, with respect to any Plan that could reasonably be
expected to have a Material Adverse Effect.

     Section 5.13 Security Offerings. Neither Borrower nor anyone acting on its
behalf has directly or indirectly offered any Note or similar instrument or
security for sale to any person or solicited from any person any offer to buy
any such instrument or security or approached or negotiated with any person
concerning any such instrument or security in any manner which would violate any
applicable state or federal securities laws, including without limitation, the
Securities Act of 1933, as amended.

     Section 5.14 Investment Company; Public Utility Holding Company. Borrower
is not (a) an "investment company" or a company "controlled" by an investment
company within the meaning of the Investment Company Act of 1940, as amended; or
(b) a "holding company" or a "subsidiary company" of a "holding company" or an
"affiliate" of either a "holding company" or a "subsidiary company" within the
meaning of the Public Utility Holding Company Act of 1935, as amended.

     Section 5.15 Environmental Compliance. The Borrower and its Subsidiaries
conduct in the ordinary course of business a review of the effect of existing
Environmental Laws and claims alleging potential liability or responsibility for
violation of any Environmental Law on their respective businesses, operations
and properties, and as a result thereof, Borrower has reasonably concluded that
such Environmental Laws and claims could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.

     Section 5.16 Insurance. The properties of the Borrower and its Subsidiaries
are insured with financially sound and reputable insurance companies not
Affiliates of the Borrower,

                                       23



in such amounts, with such deductibles and covering such risks as are
customarily carried by companies engaged in similar businesses owing similar
properties in localities where the Borrower or the applicable Subsidiary
operates.

     Section 5.17 Disclosure. The Borrower has disclosed to the Agent and the
Lenders all agreements, instruments and corporate or other restrictions to which
it or any of its Subsidiaries is subject, and all other matters known to it,
that, individually or in the aggregate, could reasonably be expected to result
in a Material Adverse Effect. No report, financial statement, certificate or
other information furnished (whether in writing or by e-mail) by or on behalf of
Borrower or any Guarantor to the Agent or any Lender in connection with the
transactions contemplated hereby and the negotiation of this Agreement or any
other Loan Document or delivered hereunder or thereunder (as modified or
supplemented by other information so furnished) contains any material
misstatement of facts or omits to state any material fact necessary to make the
statements therein, in light of the circumstance in which they are made, not
misleading; provided that, with respect to projected financial information, the
Borrower represents only that such information was prepared in good faith based
upon assumptions believed to be reasonable at the time.

     Section 5.18 Intellectual Property, Licenses, Etc. The Borrower and its
Subsidiaries own, or possess the right to use, all of the trademarks, service
marks, trade names, copyrights, patents, patent rights, franchises, licenses and
other intellectual property rights that are reasonably necessary for the
operation of their respective businesses, without conflict with the rights of
any other Person. To the best knowledge of the Borrower, no slogan or other
advertising device, product, process, method, substance, part or other material
now employed, or now contemplated to be employed, by the Borrower or any
Subsidiary infringes upon any rights held by any other Person. No claim or
litigation regarding any of the foregoing is pending or, to the best knowledge
of the Borrower, threatened, which either individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect.

     Section 5.19 Assets of Foreign Guarantors. The assets listed on Schedule
5.19 constitute all of the accounts receivable, inventory, equipment and other
fixed assets and registered copyrights, trademarks and patents owned, used, or
held in connection with the Foreign Guarantors. The Foreign Guarantors have good
and marketable title to each asset and no asset is subject to any Lien, except
as permitted by this Agreement.

     Section 5.20 Representations as a Whole. This Agreement, the other Loan
Documents, the financial statements referred to in Section 5.7, and all other
instruments, documents, certificates and statements furnished to Agent and
Lenders by Borrower, taken as a whole, do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements contained herein or therein not misleading. Without limiting the
foregoing, each of the representations and warranties made by Borrower in the
other Loan Documents is true and correct on and as of the date when made, as of
the date hereof, and on and as of each date this representation is deemed made
hereunder with the same force and effect as if made on and as of such dates.

                                       24



                                   ARTICLE 6
                              AFFIRMATIVE COVENANTS

     So long as Agent or any Lender shall have any Commitment hereunder or there
shall be any outstanding Letters of Credit and until payment in full of each
Loan and performance of all other obligations of Borrower under this Agreement
and the other Loan Documents, Borrower agrees to do all of the following unless
Agent shall otherwise consent in writing.

     Section 6.1 Use of Proceeds. The proceeds of the Loans and the Letters of
Credit (the "Proceeds") will be used only for working capital or other general
corporate purposes. Notwithstanding the foregoing, the Proceeds shall not be
used for either (i) the payment of One Million Five Hundred Thousand Dollars
($1,500,000) to the Lenders pursuant to Section 2.4(d) or (ii) the payment of
One Million ($1,000,000) to the Subordinated Noteholders pursuant to Section
7.15(i).

     Section 6.2 Preservation of Corporate Existence, Etc. Borrower will, and
will cause the Subsidiaries to, preserve and maintain their corporate existence,
rights, franchises and privileges in the jurisdictions of their incorporation
and will, and will cause the Subsidiaries to, qualify and remain qualified as
foreign corporations in each jurisdiction where qualification is necessary or
advisable in view of their business and operations or the ownership of their
properties.

     Section 6.3 Visitation Rights. At any reasonable time, and from time to
time, Borrower will, and will cause each Subsidiary to, permit Agent and Lenders
to examine and make copies of and abstracts from the records and books of
account of and to visit the properties of Borrower and to discuss the affairs,
finances and accounts of Borrower with any of its officers or directors.

     Section 6.4 Keeping of Books and Records. Borrower will keep, and cause
each Subsidiary to keep, adequate records and books of account in which complete
entries will be made, in accordance with GAAP, reflecting all financial
transactions of Borrower or Subsidiary.

     Section 6.5 Maintenance of Property, Etc. Borrower will maintain and
preserve and will cause each Subsidiary to maintain and preserve all of their
respective properties in reasonably good working order and condition, ordinary
wear and tear excepted, and will from time to time make all needed repairs,
renewals and replacements so that the efficiency of such properties shall be
fully maintained and preserved.

     Section 6.6 Compliance with Laws, Etc. Borrower will comply and will cause
each Subsidiary to comply in all material respects with all laws, regulations,
rules, and orders of Governmental Authorities applicable to Borrower or any
Subsidiary or to their respective operations or property, except any thereof
whose validity is being contested in good faith by appropriate proceedings upon
stay of execution of the enforcement thereof.

     Section 6.7 Other Obligations. Borrower will pay and discharge and cause
each Subsidiary to pay and discharge before the same shall become delinquent all
material Indebtedness, Taxes and other obligations for which Borrower or any
Subsidiary is liable or to which their income or property is subject and all
claims for labor and materials or supplies

                                       25



which, if unpaid, might become by law a Lien upon assets of Borrower or any
Subsidiary, except any thereof whose validity or amount is being contested in
good faith by Borrower or the Subsidiary in appropriate proceedings with
provision having been made to the satisfaction of Agent for the payment thereof
in the event the contest is determined adversely to Borrower or such Subsidiary.
In the event any charge is being contested by Borrower or its Subsidiaries as
allowed above, Borrower or its Subsidiaries shall establish adequate reserves
against possible liability therefor.

     Section 6.8 Insurance. Without limitation on the insurance required by the
Loan Documents to be maintained on the Collateral, Borrower will keep in force
and will cause each Subsidiary to keep in force upon all of their respective
properties and operations policies of insurance carried with responsible
companies in such amounts and covering all such risks as shall be customary in
the industry and reasonably satisfactory to Agent. Borrower will on request
furnish to Agent certificates of insurance or copies of policies evidencing such
coverage.

     Section 6.9 Financial Information. Borrower will deliver to Agent in
sufficient copies for distribution to Agent and each Lender:

          (a) Annual Audited Financial Statements. As soon as available and in
any event within ninety (90) days after the end of each fiscal year of Borrower,
the consolidated and consolidating balance sheet of Borrower and its
Subsidiaries as of the end of such fiscal year and the related consolidated and
consolidating statements of income and the consolidated statement of retained
earnings and statement of cash flows of Borrower and its Subsidiaries for such
year, accompanied by (i) the audit report thereon by independent certified
public accountants selected by Borrower and reasonably satisfactory to Agent
(which reports shall be prepared in accordance with GAAP and shall not be
qualified by reason of restricted or limited examination of any material portion
of the records of Borrower or any Subsidiary and shall contain no disclaimer of
opinion or adverse opinion except such as Agent in its sole discretion
determines to be immaterial) and (ii) an Officer's Certificate of Borrower
certifying that as of the close of such fiscal year no Event of Default or
Default had occurred and was continuing;

          (b) Quarterly Unaudited Financial Statements. As soon as available and
in any event within forty-five (45) days after the end of each of the first
three fiscal quarters of Borrower, the unaudited consolidated and consolidating
balance sheet of Borrower and its Subsidiaries as of the end of such fiscal
quarter and the unaudited consolidated and consolidating statement of income and
consolidated statement of cash flows of Borrower and its Subsidiaries for the
fiscal year to the end of such fiscal quarter, unless the same has been provided
in the form of Borrower's Form 10Q; accompanied by an Officer's Certificate of
Borrower certifying that (i) reports have been prepared in accordance with GAAP
consistently applied and results of operation of Borrower and its Subsidiaries
as at the end of and for such fiscal quarter and that since the previous fiscal
year-end report referred to in Section 6.9(a) there has been no material adverse
change in the financial condition of Borrower or in the financial condition of
any of its Subsidiaries and that (ii) as of the close of such fiscal quarter no
Event of Default or Default had occurred and was continuing;

                                       26



          (c) Annual Financial Projections. As soon as available, but not later
than thirty (30) days before the beginning of each fiscal year, a copy of
Borrower's annual financial projections;

          (d) Accounts Receivable Summary. As soon as available, but not later
than forty-five (45) days after the end of each fiscal quarter an accounts
receivable aging summary;

          (e) SEC Filings. Promptly, copies of all financial statements and
reports that Borrower sends to its shareholders, and copies of all financial
statements and regular, periodical or special reports (including Forms 10K, 10Q
and 8K) that Borrower or any Subsidiary may make to, or file with, the
Securities and Exchange Commission;

          (f) Compliance Certificates. Within ninety (90) days after the close
of each fiscal year of Borrower and within forty-five (45) days after the close
of each of Borrower's fiscal quarters (other than the fourth fiscal quarter), an
Officer's Certificate signed by the chief financial officer of Borrower stating
that to the best of the signer's knowledge and belief after due inquiry no
Default or Event of Default had occurred and was continuing and setting forth
calculations evidencing compliance with Section 6.12 and 6.13 hereof
substantially in the form attached as Exhibit E hereto; provided, however that
as soon as possible, but not later than fifteen (15) days after the end of
March, 2004, and fifteen (15) days after every month thereafter, Borrower shall
provide such Officer's Certificate;

          (g) Monthly Reporting. As soon as available and in any event within
fifteen (15) days after the end of each month, monthly updates of (i)
consolidated revenues (excluding percentage of completion revenues which are
calculated only at quarter-end), (ii) consolidated gross margins and operating
income (excluding revenues and expenses associated with percentage of completion
sales which are calculated only at quarter-end), (iii) consolidated domestic and
consolidated foreign balances for, in each case, cash accounts receivable,
inventory and accounts payable (excluding unbilled revenues which are calculated
only at quarter-end), (iv) summary of domestic consolidated customer deposits
and other prepayments, (v) 13-week rolling cash flow forecast, and (vi)
month-end cash balances;

          (h) Monthly Comparison Report. As soon as available and in any event
within thirty (30) days after the end of each month, a comparison of the
Borrower's consolidated financial statement to the financial projection for that
month; and

          (i) Other. All other statements, reports and other information as
Agent or any Lender may reasonably request concerning the Collateral or the
financial condition and business affairs of Borrower.

Borrower agrees to segregate all new product development costs in each financial
projection and each financial statement provided pursuant to this Section 6.9 to
facilitate tracking of such costs.

     Section 6.10 Notification. Promptly after learning thereof, Borrower shall
notify Agent of (a) any action, proceeding, investigation or claim against or
affecting Borrower or any Subsidiaries instituted before any court, arbitrator
or Governmental Authority or, to Borrower's knowledge, threatened to be
instituted, which might reasonably be determined adversely to Borrower and
which, if determined adversely, would be likely to have a Material Adverse
Effect

                                       27



on the financial condition or operations of Borrower, or to impair Agent's or
Lenders' lien on Collateral or Borrower's rights therein, or to result in a
judgment or order against Borrower for more than $500,000 in excess of insurance
coverage or, when combined with all other pending or threatened claims, more
than $500,000 in excess of insurance coverage; (b) any substantial dispute
between Borrower or any Subsidiaries and any Governmental Authority; (c) any
labor controversy which has resulted in or, to Borrower's knowledge, threatens
to result in a strike which would materially affect the business operations of
Borrower or any Subsidiary; (d) if Borrower or any member of the Controlled
Group gives or is required to give notice to the PBGC of any "reportable event"
(as defined in subsections (b)(1),(2),(5) or (6) of Section 4043 of ERISA) with
respect to any Plan (or the Internal Revenue Service gives notice to the PBGC of
any "reportable event" as defined in subsection (c)(2) of Section 4043 of ERISA
and Borrower obtains knowledge thereof) which might constitute grounds for a
termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event given or
required to be given to the PBGC; (e) the occurrence of any Event of Default or
Default. In the case of the occurrence of an Event of Default or Default,
Borrower will deliver to Agent an Officer's Certificate specifying the nature
thereof, the period of existence thereof, and what action Borrower proposes to
take with respect thereto; (f) of any matter that has resulted or could
reasonably be expected to result in a Material Adverse Effect, including (i)
breach or non-performance of, or any default under, a Contractual Obligation of
the Borrower or any Subsidiary; (ii) any dispute, litigation, investigation,
proceeding or suspension between Borrower or any Subsidiary and any Governmental
Authority; or (iii) the commencement of, or any material development in, any
litigation or proceeding affecting the Borrower or any Subsidiary, including
pursuant to any applicable Environmental Laws; and (g) of any material change in
the accounting policies or financial reporting practices by the Borrower or any
Subsidiary.

     Section 6.11 Additional Payments; Additional Acts. From time to time,
Borrower will (a) pay or reimburse Agent and Lenders on request for all Taxes
(other than Taxes imposed on the net or gross income of Agent or Lenders)
imposed on any Loan Document or payment and for all reasonable expenses,
including Attorney Costs, incurred by Agent or any Lender in connection with the
preparation of the Loan Documents or the making or administration of the Loans,
or the issuance of any Letter of Credit; (b) pay or reimburse Agent and any
Lender for all expenses, including legal fees, incurred by Agent or any Lender
in connection with the enforcement by judicial proceedings or otherwise of any
of the rights of Agent or any Lender under the Loan Documents (including the
enforcement or protection of Agent's or any Lender's rights in any bankruptcy or
any insolvency proceeding); (c) obtain and promptly furnish to Agent evidence of
all such Government Approvals as may be required to enable Borrower to comply
with its obligations under the Loan Documents and to continue in business as
conducted without material interruption or interference; and (d) execute and
deliver or authorize all such instruments (such as Uniform Commercial Code
continuation statements) and perform all such other acts as Agent or any Lender
may reasonably request to carry out the transactions contemplated by the Loan
Documents and to maintain the continuous perfection and priority of Agent's lien
on all Collateral.

     Section 6.12 EBITDA. As of the end of each period indicated below, Borrower
shall maintain, on a consolidated and domestic (U.S.) basis, an EBITDA of at
least (or in the case of

                                       28



(losses), not to exceed) the amount set opposite such period, except as
otherwise provided in the Restructure Agreement:

          (a) Quarterly Basis.

          For fiscal quarter ending:   Consolidated      Domestic
          --------------------------   ------------    ------------
          July 31, 2003                 ($4,728,000)    ($4,073,000)
          October 31, 2003                ($901,000)    ($1,052,000)
          January 31, 2004             $    963,000       ($864,000)
          April 30, 2004               $  3,484,000    $     61,000
          July 31, 2004                $    784,000    $     61,000

          (b) Cumulative Basis.

          Period from May 1, 2003 to:   Consolidated    Domestic
          ---------------------------   ------------   -----------
          July 31, 2003                  ($4,728,000)  ($4,073,000)
          October 31, 2003               ($5,630,000)  ($5,125,000)
          January 31, 2004               ($3,166,000)  ($4,489,000)
          April 30, 2004                $  2,317,000   ($2,428,000)
          July 31, 2004                 $  5,101,000     ($367,000)

     Section 6.13 Minimum Collateral Requirements. As of each date indicated
below, Borrower shall maintain domestic (U.S.) accounts receivable and inventory
which value equals the amount set opposite such date, except as otherwise
provided in the Restructure Agreement:

          Measurement Date
          ----------------
          July 31, 2003                           $31,400,000
          October 31, 2003                        $35,200,000
          January 31, 2004                        $29,200,000
          March 31, 2004                          $24,900,000
          April 30, 2004 and as the last day of
          every month thereafter                  $24,800,000

                                       29



provided, however, if Borrower's actual collateral value is below such amount,
effective on the Business Day following the date the Agent receives the
collateral value pursuant to the financial reports in Section 6.9, the Total
Revolving Commitment shall be permanently reduced by the difference between the
covenant level and the actual collateral value (the "Collateral Differential")
pursuant to Section 2.1(a).

     Section 6.14 Loan Documents from Domestic Subsidiaries. After any Person
becomes a Domestic Subsidiary of Borrower, other than those Subsidiaries listed
on Schedule 6.14, and unless Agent and Lenders provide prior written consent to
the contrary, such Domestic Subsidiary shall execute and deliver to Agent,
promptly upon Agent's request: (a) a supplement to the Loan Documents to which
Domestic Guarantors are parties, unconditionally guarantying Borrower's
obligations under the Loan Documents, and granting Agent for its benefit and the
ratable benefit of Lenders, a first priority and exclusive security interest in
all personal property of such Domestic Subsidiary, (b) a copy of a resolution
adopted by the Board of Directors of such Domestic Subsidiary authorizing the
execution, delivery, and performance of the Loan Documents, and (c) such other
documents and agreements as Agent may reasonably request. All of the foregoing
documents shall be in form and substance satisfactory to Agent. Each such
Domestic Subsidiary shall be considered a Guarantor.

     Section 6.15 Update of Collateral. From time to time, Agent may request
that Borrower supplement, or cause Guarantor to supplement, the Loan Documents
with the following information: (i) any new patent, patent applications,
trademarks or trademark applications acquired by Borrower, or Guarantor, after
the date hereof; and/or (ii) any copyrights in which Borrower or Guarantor then
has any interest. Borrower shall, and shall cause Guarantor to, promptly and
fully comply with any such request and, if requested by Agent, Borrower shall,
and shall cause Guarantor to sign such new security agreements or documents, and
shall take such other actions, as Agent may reasonably request to create and
perfect a security interest in favor of Agent and to establish and ensure the
first priority of such security interest.

     Section 6.16 Security Interest in Foreign Guarantor Collateral. Borrower
shall execute and deliver, and shall cause Foreign Guarantors to execute and
deliver, to Agent any documents and instruments and take all such action as
Agent may from time to time request to perfect, preserve or legitimize Agent's
security interest in the assets of the Foreign Guarantors, now owned or
hereafter acquired, including without limitation, security agreements, pledge
agreements, other collateral agreements, financing statements (or other notice
filings), patents, patent applications, trademark and trademark applications
registered in the United States and in any foreign country.

     Section 6.17 Deposit Accounts. Borrower shall promptly notify Agent of any
deposit accounts, certificate of deposit accounts or securities accounts opened
by Borrower or any Guarantor for which a control agreement has not been executed
and delivered to Agent. Upon Agent's request, Borrower shall, and shall cause
each Guarantor to, promptly execute and deliver to Agent a deposit account
control agreement in form and substance acceptable to Agent and shall cause the
bank or securities intermediary at which such account is held to promptly
execute and deliver to Agent such control agreement.

                                       30



     Section 6.18 Lease and Landlord Consents. Borrower shall, and shall cause
each Guarantor to, promptly notify Agent of any lease agreement, lease amendment
or lease extension agreement entered into after August 23, 2002 by Borrower or
such Guarantor. At Agent's request, Borrower shall and shall cause such
Guarantor to promptly execute and deliver to Agent a leasehold deed of trust,
security agreement and fixture filing in form and substance acceptable to Agent
and shall cause the landlord party to the lease to promptly execute and deliver
to Agent a landlord consent in form and substance acceptable to Agent.

     Section 6.19 Financial Restructuring. On or before the following dates,
Borrower shall deliver the following to Agent:

          (a) September 30, 2003: a certified copy of the resolution or
unanimous consent of Borrower's board of directors detailing Borrower's
refinancing strategy for the Obligations hereunder;

          (b) October 31, 2003: list of qualified financial institutions chosen
by Borrower for such refinancing; and

          (c) November 30, 2003: memorandum concerning Borrower's long term
business plan and proposed terms for refinancing.

     Section 6.20 Additional Goals. The Borrower will take all reasonable
efforts to achieve the following goals towards implementing monthly financial
reporting on or before the following dates:

          (a) August 31, 2003: Hire a Chief Financial Officer for Borrower;

          (b) September 30, 2003: Convert Flow Japan Corporation to J.D. Edwards
Financial System;

          (c) August 1, 2003: Initiate the conversion of Flow Robotics to J.D.
Edwards Financial System;

          (d) November 30, 2003: Complete the conversion of Flow Robotics to
J.D. Edwards Financial System;

          (e) February 28, 2004: Convert FAC to J.D. Edwards Financial System;

          (f) February 28, 2004: Adopt a uniform chart of accounts across all
Subsidiaries;

          (g) March 31, 2004: Execute monthly close on J.D. Edwards Financial
System for all Subsidiaries except for CIS Acquisition Corp. and Flow South
America;

          (h) March 31, 2004: Within 15 days of month's end, provide Agent with
consolidated and consolidating monthly financial reports for Borrower and all
Subsidiaries, including EBITDA calculations on a monthly basis going forward;
and

                                       31



          (i) April 30, 2004: Execute quarterly close on J.D. Edwards Financial
System for all Subsidiaries except for CIS Acquisition Corp. and Flow South
America;

                                    ARTICLE 7
                               NEGATIVE COVENANTS

     So long as Agent or any Lender shall have any Commitment hereunder or there
shall be any outstanding Letters of Credit and until payment in full of each
Loan and performance of all other obligations of Borrower under this Agreement
and the other Loan Documents, Borrower agrees that it will not do any of the
following unless Agent shall otherwise consent in writing, such consent not to
be unreasonably withheld.

     Section 7.1 Dividends, Purchase of Stock, Etc. Borrower shall not, and
shall cause each Subsidiary to not, (a) declare or pay any dividend (except
dividends payable in capital stock) on any shares of any class of its capital
stock or (b) apply any assets to the redemption or other retirement of, or set
aside any sum for the payment of any dividends on or for the purchase,
redemption or other retirement of, or make any other distribution by reduction
of capital or otherwise in respect of, shares of any class of capital stock of
Borrower; provided, however, that Flow Autoclave Corporation, which is 50% owned
by Borrower, is excluded from this restriction until the date on which Borrower
owns more than 50% of such company; and provided further dividends from Foreign
Subsidiaries to Borrower for the purposes of the payment to Lenders pursuant to
Section 2.4(d) and the payment to Subordinated Noteholders pursuant to Section
7.15(i) are hereby excluded from this restriction.

     Section 7.2 Liquidation, Merger, Sale of Assets. Neither Borrower nor any
Guarantor shall liquidate, dissolve or enter into any consolidation, joint
venture, partnership or other combination or sell, lease, or dispose of
(including transfers to any Subsidiary that has not executed a guaranty and
security agreement pursuant to Section 6.14 or is not a Foreign Guarantor) all
or any substantial portion of its business or assets or of any Collateral
(excepting sales of goods in the ordinary course of business). Notwithstanding
the foregoing, Borrower may proceed with the Restructure Event pursuant to the
Restructure Agreement. Neither Borrower nor any Guarantor shall merge with any
other person.

     Section 7.3 Indebtedness. Borrower shall not nor shall it allow any
Guarantor to create, incur or become liable for any Indebtedness except (a) the
Loans and Indebtedness hereunder in respect of the Letters of Credit, (b)
existing Indebtedness reflected on the balance sheets referred to in Section
5.7, (c) current accounts payable or accrued or other current liabilities
incurred by Borrower or Guarantor in the ordinary course of business, (d)
indebtedness for the deferred purchase price, or for obligations under leases,
of real and personal property used by Borrower or Guarantor in its business, (e)
the Subordinated Notes, the principal of which when taken together does not
exceed, in the aggregate, at any one time outstanding, Thirty-Five Million
Dollars ($35,000,000), plus any capitalized interest thereto, and (f)
Indebtedness to Foreign Subsidiaries pursuant to Section 7.12(b).

     Section 7.4 Guaranties, Etc. Except for the Domestic Guaranty, the Foreign
Guaranty, the fully subordinated guaranties delivered pursuant to Section 9.10
of the Subordinated Note Purchase Agreement or as set forth on Schedule 10.5 of
the Subordinated

                                       32



Note Purchase Agreement, neither Borrower nor any Guarantor shall assume,
guaranty, endorse or otherwise become directly or contingently liable for, or
obligated to purchase, pay or provide funds for payment of, any obligation or
Indebtedness of any other person, other than by endorsement of negotiable
instruments for deposit or collection or by similar transactions in the ordinary
course of business.

     Section 7.5 Liens. Neither Borrower nor any Guarantor shall create, assume
or suffer to exist any Lien except (a) liens pursuant to the Loan Documents, (b)
existing Liens reflected in the balance sheet referred to in Section 5.7, (c)
Liens described on Schedule 7.5 hereto, and (d) the Junior Security Interest (as
defined in the Intercreditor Agreement); provided, however, such Junior Security
Interest shall be permitted only so long as the Intercreditor Agreement is in
effect.

     Section 7.6 Investments. Borrower shall not make any loan or advance to any
person or purchase or otherwise acquire the capital stock, assets or obligations
of, or any interest in, any person, except (a) commercial bank time deposits
maturing within one year, (b) marketable general obligations of the United
States or a State or marketable obligations fully guaranteed by the United
States, or (c) short-term commercial paper with the highest rating of a
generally recognized rating service.

     Section 7.7 Operations. Borrower shall not engage in any activity which is
substantially different from or unrelated to the present business activities or
products of Borrower.

     Section 7.8 ERISA Compliance. Neither Borrower nor any member of the
Controlled Group nor any Plan will:

          (a) engage in any "prohibited transaction" (as such term is defined in
Section 406 or Section 2003(a) of ERISA) which could result in a material
liability to Borrower;

          (b) incur any "accumulated funding deficiency" (as such term is
defined in Section 302 of ERISA) whether or not waived which could result in a
material liability to Borrower;

          (c) terminate any Pension Plan in a manner which could result in a
material liability to Borrower or could result in the imposition of a material
Lien on any property of Borrower or any member of the Controlled Group pursuant
to Section 4068 of ERISA; or

          (d) violate state or federal securities laws applicable to any Plan in
any material respect.

     Section 7.9 Subordinated Notes. Borrower shall maintain no funds on deposit
with, shall not acquire any certificates of deposit or other financial
instruments from, nor hold any Indebtedness owing to Borrower by, any holder of
any Subordinated Note unless such holder shall first have executed a written
agreement in favor of Lenders (in form and substance acceptable to Lenders)
subordinating or waiving its rights to set-off or to assert any "bankers lien."

                                       33



     Section 7.10 Capital Expenditures. Borrower shall not, nor shall it allow
any Subsidiary to, make or become legally obligated to make any expenditure in
respect of the purchase or other acquisition of any fixed or capital asset
(excluding normal replacements and maintenance which are properly charged to
current operations), except for capital expenditures in the ordinary course of
business not exceeding, in the aggregate for the Borrower during each time
period set forth below, the amount set forth opposite such time period:

          May 1, 2003 - April 30, 2004 $6,700,000

          May 1, 2004 - August 1, 2004 $800,000

     Section 7.11 New Product Development Expenditures. Borrower shall not, nor
shall it allow any Subsidiary to, fund or become legally obligated to fund any
new product development costs, including without limitation, research,
development and engineering costs, as indicated in financial statements provided
pursuant to Section 6.9, not exceeding, in the aggregate for the Borrower during
each time period set forth below, the amount set forth opposite such time
period:

          May 1, 2003 - April 30, 2004 $10,700,000

          May 1, 2004 - August 1, 2004 $2,700,000

     Section 7.12 Transactions with Affiliates. Borrower shall not, nor shall it
allow any Subsidiary to, directly or indirectly, to transfer cash to Borrower or
any Affiliate of Borrower, except (a) the sale of inventory in the ordinary
course of business in accordance with Borrower's existing intercompany
transactions and transfer pricing policy in effect as the date hereof, (b) cash
transfers from Foreign Subsidiaries to Borrower for the sole and immediate
purpose of satisfying Borrower's obligations under this Agreement, evidenced by
promissory notes at fair market value, (c) payments by Borrower to such Foreign
Subsidiary in accordance with the terms of the promissory notes referred to in
subclause (b), and (d) dividends from Foreign Subsidiaries to Borrower for the
purposes of the payment to Lenders pursuant to Section 2.4(d) and the payment to
Subordinated Noteholders pursuant to Section 7.15(i).

     Section 7.13 Burdensome Agreements. Borrower shall not, nor shall it permit
any Subsidiary to, directly or indirectly, enter into any Contractual Obligation
(other than this Agreement, any Loan Document or the Subordinated Note Purchase
Agreement) (a) that limits the ability of (i) any Subsidiary to make Restricted
Payments to the Borrower or any Guarantor or to otherwise transfer property to
the Borrower or any Guarantor, (ii) of any Subsidiary to guarantee the
Indebtedness of the Borrower or (iii) of the Borrower or any Subsidiary to
create, incur, assume or suffer to exist Liens on the property of such Person;
or (b) that requires the grant of a Lien to secure the obligations of such
Person if a Lien is granted to secure another obligation of such Person.

     Section 7.14 Margin Stock. Borrower shall not, nor shall it permit any
Subsidiary to, use the proceeds of any Loan or Letter of Credit, whether
directly or indirectly, and whether immediately, incidentally or ultimately, to
purchase or carry margin stock (within the meaning of Regulation U of the Board
of Governors of the Federal Reserve System of the United States) or

                                       34



to extend credit to others for the purpose of purchasing or carrying margin
stock or to refund indebtedness originally incurred for such purpose.

     Section 7.15 Payments to Subordinated Noteholders. Borrower shall make no
payments to Subordinated Noteholders before the full repayment of the
Obligations under any Loan Document, except (i) a $1,000,000 payment derived
solely from repatriated funds in the form of dividends from Foreign Subsidiaries
to Borrower, and (ii) if the Total Revolving Commitment is reduced to
$25,000,000 or less, and no Default has occurred or is occurring, Borrower may
pay an amount not more than $1,000,000 in the aggregate to the Subordinated
Noteholders.

                                    ARTICLE 8
                                EVENTS OF DEFAULT

     Section 8.1 Events of Default. The occurrence of any of the following
events shall constitute an "Event of Default" hereunder.

          (a) Payment Default. Borrower shall fail to pay for a period of three
(3) Business Days when due any amount of principal of or interest on any Loan or
any other amount payable by it hereunder including, without limitation, amounts
due in respect of Letters of Credit; or

          (b) Breach of Warranty. Any representation or warranty made (or deemed
made pursuant to Section 2.2 or 3.2 hereof) by Borrower under or in connection
with this Agreement or any Loan Document shall prove to have been incorrect in
any material respect when made; or

          (c) Breach of Certain Covenants. Borrower shall have failed to comply
with Sections 6.2, 6.8, 6.10(e), 6.12, 6.13, any provision of Article 7 of this
Agreement, or, to the extent that it relates to the obtaining and maintaining of
insurance or delivery of evidence of same, any such provision in the Loan
Documents; or

          (d) Breach of Other Covenant. Borrower shall fail to perform or
observe any other material covenant, obligation or term of any Loan Document
executed by it and such failure shall remain unremedied for thirty (30) days
after written notice thereof shall have been given to Borrower by Agent; or

          (e) Cross-default. Borrower shall fail (i) to pay when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) any
amounts owing under any Indebtedness which in the aggregate exceeds One Hundred
Thousand Dollars ($100,000) or any interest or premium thereon and such failure
shall continue after the applicable grace period, if any, specified in the
agreement or instrument relating to such Indebtedness, or (ii) to perform any
term or covenant on its part to be performed under any agreement or instrument
relating to any such Indebtedness and required to be performed and such failure
shall continue after the applicable grace period, if any, specified in such
agreement or instrument, if the effect of such failure to perform is to
accelerate or to permit the acceleration of the maturity of any obligations of
such Indebtedness, or (iii) any amounts owing under such Indebtedness

                                       35



shall be declared to be due and payable or required to be prepaid (other than by
regularly scheduled required prepayment) prior to the stated maturity thereof;
or

          (f) Voluntary Bankruptcy, Etc. Without the prior written consent of
Agent and Lenders, Borrower or any Subsidiary shall: (i) file a petition seeking
relief for itself under Title 11 of the United States Code, as now constituted
or hereafter amended, or file an answer consenting to, admitting the material
allegations of or otherwise not controverting, or fail timely to controvert a
petition filed against it seeking relief under Title 11 of the United State
Code, as now constituted or hereafter amended; or (ii) file such petition or
answer with respect to relief under the provisions of any other now existing or
future applicable bankruptcy, insolvency, or other similar law of the United
States of America or any State thereof or of any other country or jurisdiction
providing for the reorganization, winding-up or liquidation of corporations or
an arrangement, composition, extension or adjustment with creditors; or

          (g) Involuntary Bankruptcy, Etc. An order for relief shall be entered
against Borrower or any Subsidiary under Title 11 of the United States Code, as
now constituted or hereafter amended, which order is not stayed; or upon the
entry of an order, judgment or decree by operation of law or by a court having
jurisdiction in the premises which is not stayed adjudging it a bankrupt or
insolvent under, or ordering relief against it under, or approving as properly
filed a petition seeking relief against it under the provisions of any other now
existing or future applicable bankruptcy, insolvency or other similar law of the
United States of America or any State thereof or of any other country or
jurisdiction providing for the reorganization, winding-up or liquidation of
corporations or any arrangement, composition, extension or adjustment with
creditors; or appointing a receiver, liquidator, assignee, sequestrator, trustee
or custodian of Borrower, or any Subsidiary or of any substantial part of its or
their property, or ordering the reorganization, winding-up or liquidation of its
or their affairs; or upon the expiration of sixty (60) days after the filing of
any involuntary petition against it seeking any of the relief specified in
Section 8.1(f) or this Section 8.1(g) without the petition being dismissed prior
to that time; or

          (h) Insolvency, Etc. Borrower or any Subsidiary shall (i) make a
general assignment for the benefit of its creditors or (ii) consent to the
appointment of or taking possession by a receiver, liquidator, assignee,
trustee, or custodian of all or a substantial part of the property of Borrower
or any Subsidiary, as the case may be, or (iii) admit its insolvency or
inability to pay its debts generally as they become due, or (iv) fail generally
to pay its debts as they become due, or (v) take any action (or suffer any
action to be taken by its directors or shareholders) looking to the dissolution
or liquidation of Borrower or any Subsidiary, as the case may be; or

          (i) Judgment. A final judgment or order for the payment of money in
excess of Five Hundred Thousand Dollars ($500,000) in excess of insurance
coverage or which impairs the lien on Collateral or rights of Borrower therein
in any material respect, shall be rendered against Borrower and such judgment or
order shall continue unsatisfied and in effect for a period of ten (10)
consecutive days following entry, or all or substantially all of the assets of
Borrower are attached, seized, subject to writ or warrant or are levied on or
come into the possession or control of a receiver, trustee, custodian or
assignee for the benefit of creditors; or

                                       36



          (j) Government Approvals. Any Government Approval or registration or
filing with any Governmental Authority now or hereafter required in connection
with the performance by Borrower of its obligations set forth in the Loan
Documents shall be revoked, withdrawn or withheld or shall fail to remain in
full force and effect unless in the reasonable opinion of Agent such revocation,
withdrawal or withholding would not be likely to have a material adverse affect
on the ability of Borrower to perform its obligations under the Loan Documents;
or

          (k) Other Government Action. Borrower is enjoined or restrained or in
any way prevented by order of a court or other Governmental Authority from
conducting all or a substantial part of its business affairs or operations; or

          (l) ERISA. Borrower or any member of the Controlled Group shall fail
to pay when due an amount or amounts aggregating in excess of One Million
Dollars ($1,000,000) which it shall have become liable to pay to the PBGC or to
a Plan under Section 515 of ERISA or Title IV of ERISA; or notice of intent to
terminate a Plan or Plans (other than a multi-employer plan, as defined in
Section 4001(3) of ERISA, having aggregate Unfunded Vested Liabilities in excess
of One Million Dollars ($1,000,000) shall be filed under Title IV of ERISA by
Borrower, any member of the Controlled Group, any plan administrator or any
combination of the foregoing; or the PBGC shall institute proceedings under
Title IV of ERISA to terminate any Plan or Plans which could result in any
liability of Borrower in excess of One Million Dollars ($1,000,000); or

          (m) Going Concern Qualification. Borrower receives a "going concern"
qualification from its external auditors in the annual audited financial
statement for the fiscal year ending April 30, 2003; or

          (n) Failure to Issue Financials. Borrower fails to complete and issue
(i) its fiscal year 2003 financial statements on or before July 29, 2003, or
(ii) any other of Borrower's audited financial statement within 90 days of the
end of Borrower's fiscal year; or

          (o) Subordinated Note Purchase Agreement Default. The occurrence of an
"Event of Default" or "Default" under the Subordinated Note Purchase Agreement,
as such terms are defined therein;

          (p) Prepayment of Principal Default. Borrower shall pay any portion of
the principal of the Subordinated Notes before the repayment of all obligations
under the Loan Documents; or

          (q) Guarantor Default; Invalidity of Guaranty. (i) Any Guarantor shall
fail to perform or observe any covenant, obligation or term of any Loan Document
to which it is a party and such failure shall continue unremedied after the
applicable grace period, if any, specified therein; (ii) any misrepresentation
or breach of any warranty by any Guarantor under any Loan Document to which it
is a party shall occur; (iii) any of the events or circumstances referred to in
Section 8.1(e) through 8.1(p) whose occurrence or existence would constitute a
Default or an Event of Default with respect to Borrower shall occur or exist
with respect to any Guarantor; or (iv) any Loan Document shall for any reason be
revoked or invalidated, or

                                       37



otherwise cease to be in full force and effect (except as expressly permitted
hereunder) in respect of any Guarantor, or any Guarantor or any other Person
shall contest in any manner the validity or enforceability thereof or deny that
it has any further liability or obligation thereunder; or

          (r) Impairment of Security. Any Loan Document that creates and/or
perfects a Lien ceases to be in full force and effect, or is declared by a court
of competent jurisdiction to be null and void, invalid or unenforceable in any
respect; or the Agent shall not have or shall cease to have a valid and
perfected Lien of first priority in the Collateral purported to be covered
thereby (except by any action or inaction attributable solely to Agent); or

          (s) Change of Control. There occurs any Change of Control with respect
to the Borrower; or

          (t) Material Adverse Change. If there shall occur any event that has a
Material Adverse Effect, or that materially increases any Lender's risk that
Borrower will not repay the Loans or other Obligations, or materially impairs
the Collateral or Agent and each Lender's first priority perfected lien on the
Collateral; or

          (u) Invalidity of Loan Documents. Any Loan Document, at any time after
its execution and delivery and for any reason other than as expressly permitted
hereunder or in satisfaction in full of all of the Obligations, ceases to be in
full force and effect; or Borrower, any Guarantor or any Person contests in any
manner the validity or enforceability of any Loan Document; or Borrower or any
Guarantor denies that it has any or further liability or obligation under any
Loan Document, or purports to revoke, terminate or rescind any Loan Document; or

          (v) Restructure Agreement Default. The occurrence of an "Event of
Default" under the Restructure Agreement, as such term is defined therein; or

          (w) Additional Event of Default. Any of the following has not occurred
within sixty (60) days after the date of this Agreement:

               (1) Agent shall have received such evidence as the Agent may
require to verify that FAC is duly incorporated or formed, validly existing, in
good standing and qualified to engage in business in each jurisdiction in which
it is required to be qualified to engage in business, including certified copies
of the articles of incorporation for FAC and a certificate of good standing

               (2) Agent shall have received evidence of Agent's perfected first
priority lien in each Foreign Guarantors' assets as listed on Schedule 5.19, or
in such portion of such property as Agent may request;

               (3) Agent shall have received evidence that notices of Agent's
security interest in all registered patents and trademarks and applications for
patents and trademarks that Agent has taken a security interest in of Borrower,
and each Foreign Guarantor shall have been filed with the applicable
Governmental Authority;

               (4) Agent shall have received such other evidence as it may deem
necessary or appropriate that all documents executed and/or delivered and all
actions taken

                                       38



pursuant to clauses (2) and (3) above have been duly authorized and are legally
effective, binding and enforceable;

               (5) Agent shall have received (i) a deed of trust granting Agent
a security interest in Borrower's leasehold interest on property located at
23500 64th Avenue South, Kent, Washington 98032 and (ii) a landlord consent to
such deed of trust, each in form acceptable to Agent; or

               (6) Borrower and Guarantors shall have provided such additional
information concerning their real and personal property and assets as Agent may
request.

     Section 8.2 Consequences of Default. If an Event of Default described in
Section 8.1(f) or 8.1(g) shall occur and be continuing, then in any such case,
the Total Revolving Commitment shall be immediately terminated and, if any Loans
or Letters of Credit shall have been made or issued, the principal of and
interest on the Loans, the face amounts of all issued and outstanding Letters of
Credit, and all other sums payable by Borrower under the Loan Documents shall
become immediately due and payable all without notice or demand of any kind.

     If any other Event of Default shall occur and be continuing, then in any
such case and at any time thereafter so long as any such Event of Default shall
be continuing, (i) Agent shall at the request, or may with the consent, of
Lenders immediately terminate the Commitment, and, if any Revolving Loans or
Letters of Credit shall have been made or issued, Agent shall at the request, or
may with the consent, of Lenders declare the principal of and the interest on
the Revolving Loans, the face amounts of all issued and outstanding Letters of
Credit, and all other sums payable by Borrower under the Loan Documents with
respect to such Revolving Loans and Letters of Credit immediately due, whereupon
the same shall become immediately due and payable all without protest,
presentment, notice or demand, all of which Borrower expressly waives.

     Regardless of whether Borrower's obligations to repay the Loans and Letters
of Credit have been accelerated pursuant to the preceding sentences, Agent shall
at the request, or may with the consent, of Lenders realize on any or all of the
Collateral by exercising any remedies provided in any Loan Document or otherwise
provided by law. Amounts paid or received hereunder in respect of issued and
outstanding Letters of Credit which exceed amounts paid by Agent under such
Letters of Credit shall be held (and applied) as cash collateral, pursuant to
Section 3.5, to secure the performance of all obligations of Borrower owing to
Agent and Lenders hereunder and under the other Loan Documents. Agent and
Lenders may exercise or pursue any remedy or cause of action permitted by this
Agreement, the Notes, and any other Loan Document or applicable law. The rights
and remedies provided by law, this Agreement, the Notes and the other Loan
Documents are cumulative and non exclusive, and the exercise or partial exercise
of any right, power or remedy hereunder shall not preclude any other or further
exercise thereof or the exercise of any other right, power or remedy.

     While any Event of Default exists (other than during any period of time in
which Agent and Lenders have agreed in writing not to charge the Default Rate
(as defined below)), the Borrower shall pay interest on the principal amount of
all outstanding Obligations hereunder at a fluctuating interest rate per annum
at all times equal to the Default Rate to the fullest extent

                                       39



permitted by applicable laws. The Default Rate shall be in effect on the date of
the occurrence of the Event of the Default and interest shall accrue at the
Default Rate retroactively from such date.

                                    ARTICLE 9
                                      AGENT

     Section 9.1 Appointment and Authorization of Agent. Each Lender hereby
irrevocably appoints, designates and authorizes Agent to take such action on its
behalf under the provisions of this Agreement and each other Loan Document and
to exercise such powers and perform such duties as are expressly delegated to it
by the terms of this Agreement or any other Loan Document, together with such
powers as are reasonably incidental thereto. Notwithstanding any provision to
the contrary contained elsewhere herein or in any other Loan Document, Agent
shall not have any duties or responsibilities, except those expressly set forth
herein, nor shall Agent have or be deemed to have any fiduciary relationship
with any Lender or participant, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against Agent. Without
limiting the generality of the foregoing sentence, the use of the term "agent"
herein and in the other Loan Documents with reference to Agent is not intended
to connote any fiduciary or other implied (or express) obligations arising under
agency doctrine of any applicable Law. Instead, such term is used merely as a
matter of market custom, and is intended to create or reflect only an
administrative relationship between independent contracting parties. All
benefits and immunities provided to Agent in this Article 9 shall apply to Agent
as issuer of Letters of Credit with respect to any acts taken or omissions
suffered by Agent in connection with Letters of Credit issued by it or proposed
to be issued by it and the applications and agreements for letters of credit
pertaining to such Letters of Credit, and as additionally provided herein with
respect to Agent as issuer of letters of Credit.

     Section 9.2 Delegation of Duties. Agent may execute any of its duties under
this Agreement or any other Loan Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel and other
consultants or experts concerning all matters pertaining to such duties. Agent
shall not be responsible for the negligence or misconduct of any agent or
attorney-in-fact that it selects in the absence of gross negligence or willful
misconduct.

     Section 9.3 Liability of Agent. No Agent-Related Person shall (a) be liable
for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct
in connection with its duties expressly set forth herein), or (b) be responsible
in any manner to any Lender for any recital, statement, representation or
warranty made by Borrower or any Guarantor or any officer thereof, contained
herein or in any other Loan Document, or in any certificate, report, statement
or other document referred to or provided for in, or received by Agent under or
in connection with, this Agreement or any other Loan Document, or the validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Loan Document, or for any failure of Borrower or any Guarantor or any
other party to any Loan Document to perform its obligations hereunder or
thereunder. No Agent-Related Person shall be under any obligation to any Lender
to ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this

                                       40



Agreement or any other Loan Document, or to inspect the properties, books or
records of Borrower or any Guarantor or any Affiliate thereof.

     Section 9.4 Reliance by Agent.

          (a) Agent shall be entitled to rely, and shall be fully protected in
relying, upon any writing, communication, signature, resolution, representation,
notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or
telephone message, electronic mail message, statement or other document or
conversation believed by it to be genuine and correct and to have been signed,
sent or made by the proper Person or Persons, and upon advice and statements of
legal counsel (including counsel to Borrower or any Guarantor), independent
accountants and other experts selected by Agent. Agent shall be fully justified
in failing or refusing to take any action under any Loan Document unless it
shall first receive such advice or concurrence of Lenders as it deems
appropriate and, if it so requests, it shall first be indemnified to its
satisfaction by all Lenders against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such action.
Agent shall in all cases be fully protected in acting, or in refraining from
acting, under this Agreement or any other Loan Document in accordance with a
request or consent of Lenders (or such greater number of Lenders as may be
expressly required by any instance), and such request and any action taken or
failure to act pursuant thereto shall be binding upon all Lenders.

          (b) For purposes of determining compliance with the conditions
specified in Section 4.01, each Lender that has signed this Agreement shall be
deemed to have consented to, approved or accepted or to be satisfied with, each
document or other matter required thereunder to be consented to or approved by
or acceptable or satisfactory to a Lender unless Agent shall have received
notice from such Lender prior to the date hereof specifying its objection
thereto.

     Section 9.5 Notice of Default. Agent shall not be deemed to have knowledge
or notice of the occurrence of any Default , except with respect to defaults in
the payment of principal, interest and fees required to be paid to Agent for the
account of Lenders, unless Agent shall have received written notice from a
Lender or Borrower referring to this Agreement, describing such Default and
stating that such notice is a "notice of default." Agent will notify Lenders of
its receipt of any such notice. Agent shall take such action with respect to
such Default as may be directed by Lenders in accordance with Article 9;
provided, however, that unless and until Agent has received any such direction,
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default as it shall deem advisable or
in the best interest of Lenders.

     Section 9.6 Credit Decision; Disclosure of Information by Agent. Each
Lender acknowledges that no Agent-Related Person has made any representation or
warranty to it, and that no act by Agent hereafter taken, including any consent
to and acceptance of any assignment or review of the affairs of Borrower or any
Guarantor or any Affiliate thereof, shall be deemed to constitute any
representation or warranty by any Agent-Related Person to any Lender as to any
matter, including whether Agent-Related Persons have disclosed material
information in their possession. Each Lender represents to Agent that it has,
independently and without reliance upon any Agent-Related Person and based on
such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, prospects, operations,

                                       41



property, financial and other condition and creditworthiness of Borrower and
Guarantors and their respective Subsidiaries, and all applicable bank or other
regulatory Laws relating to the transactions contemplated hereby, and made its
own decision to enter into this Agreement and to extend credit to Borrower
hereunder. Each Lender also represents that it will, independently and without
reliance upon any Agent-Related Person and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit analysis, appraisals and decisions in taking or not taking action under
this Agreement and the other Loan Documents, and to make such investigations as
it deems necessary to inform itself as to the business, prospects, operations,
property, financial and other condition and creditworthiness of Borrower. Except
for notices, reports and other documents expressly required to be furnished to
Lenders by Agent herein, Agent shall not have any duty or responsibility to
provide any Lender with any credit or other information concerning the business,
prospects, operations, property, financial and other condition or
creditworthiness of any of Borrower or Guarantors or any of their respective
Affiliates which may come into the possession of any Agent-Related Person.

     Section 9.7 Indemnification of Agent. Whether or not the transactions
contemplated hereby are consummated, Lenders shall indemnify upon demand each
Agent-Related Person (to the extent not reimbursed by or on behalf of Borrower
and without limiting the obligation of Borrower to do so), pro rata, and hold
harmless each Agent-Related Person from and against any and all Indemnified
Liabilities incurred by it; provided, however, that no Lender shall be liable
for the payment to any Agent-Related Person of any portion of such Indemnified
Liabilities to the extent determined in a final, nonappealable judgment by a
court of competent jurisdiction to have been caused primarily by such
Agent-Related Person's own gross negligence or willful misconduct; it being
agreed by all Lenders that no action taken in accordance with the directions of
Lenders shall be deemed to constitute gross negligence or willful misconduct for
purposes of this Section. Without limitation of the foregoing, each Lender shall
reimburse Agent upon demand for its ratable share of any costs or out-of-pocket
expenses (including Attorney Costs and costs and expenses in connection with the
use of IntraLinks, Inc. or other similar information transmission systems in
connection with this Agreement) incurred by Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement,
any other Loan Document, or any document contemplated by or referred to herein,
to the extent that Agent is not reimbursed for such expenses by or on behalf of
Borrower. The undertaking in this Section 9.7 shall survive termination of the
Total Revolving Commitment, the payment of all other Obligations and the
resignation of Agent.

     Section 9.8 Agent in its Individual Capacity. Bank of America and its
Affiliates may make loans to, issue letters of credit for the account of, accept
deposits from, acquire equity interests in and generally engage in any kind of
banking, trust, financial advisory, underwriting or other business with
Borrower, each Guarantor and their respective Affiliates as though Bank of
America were not Agent hereunder and without notice to or consent of Lenders.
Lenders acknowledge that, pursuant to such activities, Bank of America or its
Affiliates may receive information regarding Borrower or any Guarantor or any
Affiliate (including information that may be subject to confidentiality
obligations in favor of Borrower, such Guarantor or such Affiliate) and
acknowledge that Agent shall be under no obligation to provide such information
to them. With respect to its Loans, Bank of America shall have the same rights
and powers

                                       42



under this Agreement as any other Lender and may exercise such rights and powers
as though it were not Agent, and the terms "Lender" and "Lenders" include Bank
of America in its individual capacity.

     Section 9.9 Successor Agent. Agent may resign as Agent upon 30 days'
written notice to Lenders and Borrower; provided that any such resignation by
Bank of America shall also constitute its resignation as Agent in its capacity
of issuer of Letters of Credit. If Agent resigns under this Agreement, Lenders
shall appoint from among Lenders a successor Agent for Lenders, which successor
Agent shall be consented to by Borrower at all times other than during the
existence of a Default (which consent of Borrower shall not be unreasonably
withheld or delayed). If no successor Agent is appointed prior to the effective
date of the resignation of Agent, Agent may appoint, after consulting with
Lenders and Borrower, a successor Agent from among Lenders. Upon the acceptance
of its appointment as successor Agent hereunder, the Person acting as such
successor Agent shall succeed to all the rights, powers and duties of the
retiring Agent (including those in its capacity as issuer of Letters of Credit)
and the term "Agent" shall mean such successor Agent in all such capacities and
the retiring Agent's appointment, powers and duties as Agent shall be
terminated, without any other or further act or deed on the part of such
retiring Agent or any other Lender, other than the obligation of the successor
Agent to issue letters of credit in substitution for the Letters of Credit, if
any, outstanding at the time of such succession or to make other arrangements
satisfactory to the retiring Agent to effectively assume the obligations of the
retiring Agent with respect to such Letters of Credit. After any retiring
Agent's resignation hereunder as Agent, the provisions of this Article 9 and
Sections 11.14 and 11.15 shall inure to its benefit as to any actions taken or
omitted to be taken by it while it was Agent under this Agreement. If no
successor Agent has accepted appointment as Agent by the date which is 30 days
following a retiring Agent's notice of resignation, the retiring Agent's
resignation shall nevertheless thereupon become effective and Lenders shall
perform all of the duties of Agent hereunder until such time, if any, as Lenders
appoint a successor agent as provided for above.

     Section 9.10 Agent May File Proofs of Claim. In case of the pendency of any
receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement,
adjustment, composition or other judicial proceeding relative to Borrower or any
Guarantor, Agent (irrespective of whether the principal of any Loan shall then
be due and payable as herein expressed or by declaration or otherwise and
irrespective of whether Agent shall have made any demand on Borrower) shall be
entitled and empowered, by intervention in such proceeding or otherwise:

          (a) to file and prove a claim for the whole amount of the principal
and interest owing and unpaid in respect of the Loans and all other Obligations
that are owing and unpaid and to file such other documents as may be necessary
or advisable in order to have the claims of Lenders and Agent (including any
claim for the reasonable compensation, expenses, disbursements and advances of
Lenders and Agent and their respective agents and counsel and all other amounts
due Lenders and Agent under Sections 3.2(b), 2.09 and 11.14) allowed in such
judicial proceeding; and

          (b) to collect and receive any monies or other property payable or
deliverable on any such claims and to distribute the same;

                                       43



and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Lender to make such payments to Agent and, in the event that Agent shall
consent to the making of such payments directly to Lenders, to pay to Agent any
amount due for the reasonable compensation, expenses, disbursements and advances
of Agent and its agents and counsel, and any other amounts due Agent under
Sections 2.09 and 11.14.

     Nothing contained herein shall be deemed to authorize Agent to authorize or
consent to or accept or adopt on behalf of any Lender any plan of
reorganization, arrangement, adjustment or composition affecting the Obligations
or the rights of any Lender or to authorize Agent to vote in respect of the
claim of any Lender in any such proceeding.

                                   ARTICLE 10
                      LETTER OF CREDIT RISK PARTICIPATIONS

     Section 10.1 Sale of Risk Participations. Agent agrees to sell to Lenders,
and upon issuance of any Letter of Credit hereunder each Lender shall be deemed
to have unconditionally and irrevocably purchased from Agent, an undivided risk
participation in such Letter of Credit in proportion to such Lender's Pro Rata
Share.

     Section 10.2 Notice to Lenders. Via telephone, telex, or facsimile, Agent
will promptly advise each Lender of each Letter of Credit issued hereunder.
Agent shall not have any duty to ascertain or to inquire as to the accuracy of
the information furnished by Borrower, or accuracy of the representations and
warranties made by Borrower in any request for the issuance of such Letter of
Credit nor shall Agent have any duty to confirm that all conditions precedent to
the issuance of such Letter of Credit have been fully satisfied.

     Section 10.3 Payment Obligations.

          (a) Reimbursements to Agent. In the event Borrower fails to pay any
amount due under Section 3.4 by 12:00 noon (Seattle time) on the date Agent
shall make demand for payment thereof, Lenders shall each, upon receipt of
notice from Agent of such failure, pay to Agent their Pro Rata Share of such
amount, provided, however, if Borrower pays a portion but less than all of the
amount due under Section 3.4, Lenders shall each pay Agent only their respective
Pro Rata Shares of the difference between the amount due under Section 3.4 and
the amount paid by Borrower on account thereof. Each and every payment to be
made by Lenders to Agent under this Section 10.3(a) shall be made by federal
wire transfer in immediately available funds. If any Lender receives notice from
Agent by 1:30 p.m. (Seattle time) on any Business Day of its obligation to make
payments under this subsection, then such Lender shall make such payment no
later than 2:00 p.m. (Seattle time) on the day such notice is received. If any
Lender receives such notice after 1:30 p.m. (Seattle time) on any Business Day,
then such Lender shall make such payment by no later than 1:00 p.m. (Seattle
time) on the next succeeding Business Day. If any Lender fails to make such
payment by the date and time required, its obligation shall bear interest from
and including the date when such payment was due until paid at the per annum
rate equal to the Federal Funds Rate.

                                       44



          (b) Payments to Lenders. Agent shall immediately remit to Lenders, via
federal wire transfer of funds, such Lender's Pro Rata Share of:

               (1) the letter of credit fee paid by Borrower pursuant to Section
3.2(b) hereof; and

               (2) any amounts (other than fees and expense reimbursements)
received from or for the account of Borrower in respect of any Letter of Credit,
provided, however, Agent shall not remit to any Lender any amounts received from
or for the account of Borrower in respect of a Letter of Credit unless, prior to
Agent's receipt of such funds, such Lender has paid its Pro Rata Share of such
amounts pursuant to Section 10.3(a). In the event Agent is required to refund
any amount which is paid to it or received by it from or for the account of
Borrower, then Lenders agree to repay to Agent their respective Pro Rata Share
of such amount.

          (c) Reimbursements to Lenders. Borrower agrees to reimburse any Lender
for amounts paid by such Lender to Agent pursuant to Section 10.3(a). Any
amounts received from or for the account of Borrower by any Lender in respect of
the aforesaid reimbursement obligation shall reduce Borrower's payment
obligation to Agent under Section 3.4. Any amounts received from or for the
account of Borrower by Agent in satisfaction of its obligations under Section
3.4 shall reduce pro tanto Borrower's reimbursement obligation to Lenders under
this Section 10.3(c).

                                   ARTICLE 11
                                  MISCELLANEOUS

     Section 11.1 No Waiver; Remedies Cumulative. No failure by Agent or any
Lender to exercise, and no delay in exercising, any right, power or remedy under
this Agreement or any other Loan Document shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or remedy under this
Agreement or any other Loan Document preclude any other or further exercise
thereof or the exercise of any other right, power, or remedy. The exercise of
any right, power, or remedy shall in no event constitute a cure or waiver of any
Event of Default this Agreement or any other Loan Document or prejudice the
rights of Agent or Lenders in the exercise of any right hereunder or thereunder.
The rights and remedies provided herein and therein are cumulative and not
exclusive of any right or remedy provided by law.

     Section 11.2 Governing Law. This Agreement and the other Loan Documents
shall be governed by and construed in accordance with the laws of the State of
Washington, U.S.A.

     Section 11.3 Mandatory Arbitration.

          (a) At the written request of either all of Lenders or Borrower, any
controversy or claim between Lenders and Borrower, arising from or relating to
this Agreement or any of the other Loan Documents, or arising from an alleged
tort, shall be settled by arbitration in Seattle, Washington. The United States
Arbitration Act shall apply even though this Agreement is otherwise governed by
Washington law. The proceedings shall be administered by the American
Arbitration Association under its commercial rules of arbitration. Any
controversy over whether an issue is arbitrable shall be determined by the
arbitrator(s). Judgment upon the arbitration award may be entered in any court
having jurisdiction over the

                                       45



parties. The institution and maintenance of an action for judicial relief or
pursuit of an ancillary or provisional remedy shall not constitute a waiver of
the right of either party, including the plaintiff, to submit the controversy or
claim to arbitration if such action for judicial relief is contested. For
purposes of the application of the statute of limitations, laches or other time
bar, the filing of an arbitration pursuant to this subsection is the equivalent
of the filing of a lawsuit, and any claim or controversy which may be arbitrated
under this subsection is subject to any applicable statute of limitations,
laches or other time bar. The arbitrator(s) will have the authority to decide
whether any such claim or controversy is barred by the statute of limitations,
laches or other time bar and, if so, to dismiss the arbitration on that basis.
The parties consent to the joinder of any guarantor, hypothecator, or other
party having an interest relating to the claim or controversy being arbitrated
in any proceedings under this Section.

          (b) No provision of this subsection shall limit the right of Borrower,
Agent or Lenders to exercise self-help remedies such as setoff, foreclosure,
retention or sale of any collateral, or obtaining any ancillary, provisional, or
interim remedies from a court of competent jurisdiction before, after, or during
the pendency of any arbitration proceeding. The exercise of any such remedy does
not waive the right of either party to request arbitration.

     Section 11.4 Consent to Jurisdiction; Waiver of Immunities. Borrower, Agent
and Lenders hereby irrevocably submit to the nonexclusive jurisdiction of any
state or federal court sitting in Seattle, King County, Washington, in any
action or proceeding brought to enforce or otherwise arising out of or relating
to any Loan Document and irrevocably waive to the fullest extent permitted by
law any objection which they may now or hereafter have to the laying of venue in
any such action or proceeding in any such forum, and hereby further irrevocably
waive any claim that any such forum is an inconvenient forum. Borrower agrees
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in any other jurisdiction by suit on the judgment or in any
other manner provided by law. Nothing in this Section 11.4 shall impair the
right of any party to request or demand arbitration under Section 11.3 or the
right of Agent or a Lender or the holder of any Note to bring any action or
proceeding against Borrower or its property in the courts of any other
jurisdiction, and Borrower irrevocably submits to the nonexclusive jurisdiction
of the appropriate courts of the jurisdiction in which Borrower is incorporated
or sitting and any place where property or an office of Borrower is located.

     Section 11.5 Notices. All notices and other communications provided for in
any Loan Document shall be in writing or (unless otherwise specified) by telex,
telefax or cable and shall be mailed (with first class postage prepaid) or sent
or delivered to each party at the address or telefax number set forth under its
name on the signature page hereof, or at such other address as shall be
designated by such party in a written notice to each other party. Except as
otherwise specified all notices sent by mail, if duly given, shall be effective
three (3) Business Days after deposit into the mails, all notices sent by a
nationally recognized overnight courier service, if duly given, shall be
effective one (1) Business Day after delivery to such courier service, and all
other notices and communications if duly given or made shall be effective upon
receipt. Neither Agent nor any Lender shall incur any liability to Borrower for
actions taken in reliance on any telephonic notice referred to in this Agreement
which Agent believes in good faith to have been given by a duly authorized
officer or other person authorized to borrow or give such telephonic notice
hereunder on behalf of Borrower.

                                       46



     Section 11.6 Assignment and Participations. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective Successors and
assigns, except that Borrower may not assign or otherwise transfer all or any
part of its rights or obligations hereunder without the prior written consent of
Agent and Lenders, and any such assignment or transfer purported to be made
without such consent shall be ineffective. Lenders may at any time assign or
otherwise transfer all or any part of their respective interests under the Loan
Documents (including assignments for security and sales of participations), but
only with the prior written consent of Agent and Lenders, and to the extent of
such assignment, the assignee shall have the same rights and benefits against
Borrower and otherwise under the Loan Documents (including the right of setoff)
as if such assignee were a Lender.

     Section 11.7 Severability. Any provision of this Agreement or any other
Loan Document which is prohibited or unenforceable in any jurisdiction shall as
to such jurisdiction be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. To the extent permitted by applicable law, the parties waive any
provision of law which renders any provision hereof prohibited or unenforceable
in any respect.

     Section 11.8 Survival. The representations, warranties and indemnities of
Borrower in favor of Agent and Lenders shall survive indefinitely and, without
limiting the foregoing, shall survive the execution and delivery of this
Agreement and the other Loan Documents, the making of any Loans, the issuance of
any Letters of Credit the expiration of the Commitment and the repayment of all
amounts due under the Loan Documents.

     Section 11.9 Executed in Counterparts. The Loan Documents may be executed
in any number of counterparts and by different parties in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.

     Section 11.10 Entire Agreement; Amendment, Etc. This Agreement together
with the schedules and exhibits hereto comprise the entire agreement of the
parties and may not be amended or modified except by written agreement of
Borrower and Agent executed in conformance with the terms hereof. No provision
of this Agreement may be waived except in writing and then only in the specific
instance and for the specific purpose for which given.

     Section 11.11 Headings. The headings of the various provisions of this
Agreement are for convenience of reference only, do not constitute a part
hereof, and shall not affect the meaning or construction of any provision
hereof.

     Section 11.12 Oral Agreements Not Enforceable.

          ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR
          TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE
          UNDER WASHINGTON LAW.

     Section 11.13 Release and Waiver. Borrower and each Guarantor ratifies and
reconfirms the Loan Documents (as amended herein) and all of their obligations
and liabilities

                                       47



thereunder and hereby waives and releases any and all defenses that any of them
may now have or hereafter acquire with respect to the Loan Documents based on or
otherwise relating to any events or circumstances which occurred or existed on
or prior to the date hereof. Borrower and each Guarantor hereby releases and
forever discharges the Agent, the Lenders, Alvarez, their respective affiliates,
and their respective officers, directors, agents and employees from every claim,
demand and cause of action whatsoever, of every kind and nature, whether
presently known or unknown, suspected or unsuspected, arising or alleged or to
have risen or which shall arise hereafter from any act, omission or condition
which occurred or existed on or prior to the date hereof.

     Section 11.14 Attorney Costs, Expenses and Taxes. The Borrower agrees (a)
to pay or reimburse the Agent and each Lender for all reasonable expenses and
costs incurred in connection with the development, preparation, negotiation and
execution of this Agreement and the other Loan Documents and any amendment,
waiver, consent or other modification of the provisions hereof and thereof
(whether or not the transactions contemplated hereby or thereby are
consummated), and the consummation and administration of the transactions
contemplated hereby and thereby, including all Attorney Costs, and (b) to pay or
reimburse the Agent and each Lender for all reasonable expenses and costs
incurred in connection with the enforcement, attempted enforcement, or
preservation of any rights or remedies under this Agreement or the other Loan
Documents (including all such costs and expenses incurred during any "workout"
or restructuring in respect of the Obligations and during any legal proceeding,
including any proceeding under any Debtor Relief Law), including all Attorney
Costs. The foregoing costs and expenses in (a) and (b) shall include all travel,
search, filing, recording, title insurance and appraisal charges and fees and
taxes related thereto, and other out-of-pocket expenses incurred by the Agent
and the cost of independent public accountants, Alvarez and other outside
experts retained by the Agent or any Lender. All amounts due under this Section
11.14 shall be payable within ten Business Days after demand therefor. The
agreements in this Section shall survive the termination of the commitment of
each Lender to extend credit hereunder and repayment of all other Obligations.

     Section 11.15 Indemnification by the Borrower. Whether or not the
transactions contemplated hereby are consummated, the Borrower shall indemnify
and hold harmless each Agent-Related Person, each Lender and their respective
Affiliates, directors, officers, employees, counsel, agents and
attorneys-in-fact (collectively the "Indemnitees") from and against any and all
liabilities, obligations, losses, damages, penalties, claims, demands, actions,
judgments, suits, costs, expenses and disbursements (including Attorney Costs)
of any kind or nature whatsoever which may at any time be imposed on, incurred
by or asserted against any such Indemnitee in any way relating to or arising out
of or in connection with (a) the execution, delivery, enforcement, performance
or administration of any Loan Document or any other agreement, letter or
instrument delivered in connection with the transactions contemplated thereby or
the consummation of the transactions contemplated thereby, (b) any commitment to
extend credit hereunder, Loan or Letter of Credit or the use or proposed use of
the proceeds therefrom (including any refusal by the Agent as the Letter of
Credit issuer to honor a demand for payment under a Letter of Credit if the
documents presented in connection with such demand do not strictly comply with
the terms of such Letter of Credit), or (c) any actual or alleged presence or
release of Hazardous Materials on or from any property currently or formerly
owned or operated by the Borrower, any Subsidiary or any Guarantor, or any
Environmental Liability related in any

                                       48



way to the Borrower, any Subsidiary or any Guarantor, or (d) any actual or
prospective claim, litigation, investigation or proceeding relating to any of
the foregoing, whether based on contract, tort or any other theory (including
any investigation of, preparation for, or defense of any pending or threatened
claim, investigation, litigation or proceeding) and regardless of whether any
Indemnitee is a party thereto (all the foregoing, collectively, the "Indemnified
Liabilities"), in all cases, whether or not caused by or arising, in whole or in
part, out of the negligence of the Indemnitee; provided that such indemnity
shall not, as to any Indemnitee, be available to the extent that such
liabilities, obligations, losses, damages, penalties, claims, demands, actions,
judgments, suits, costs, expenses or disbursements are determined by a court of
competent jurisdiction by final and nonappealable judgment to have resulted from
the gross negligence or willful misconduct of such Indemnitee. No Indemnitee
shall be liable for any damages arising from the use by others of any
information or other materials obtained through IntraLinks or other similar
information transmission systems in connection with this Agreement, nor shall
any Indemnitee have any liability for any indirect or consequential damages
relating to this Agreement or any other Loan Document or arising out of its
activities in connection herewith or therewith (whether before or after the date
of this Agreement). All amounts due under this Section 11.15 shall be payable
within ten Business Days after demand therefor. The agreements in this Section
shall survive the resignation of the Agent, the replacement of any Lender, the
termination of each Lender's commitment to extend credit hereunder and the
repayment, satisfaction or discharge of all the other Obligations.

     Section 11.16 Payments Set Aside. To the extent that any payment by or on
behalf of the Borrower is made to the Agent or any Lender, or the Agent or any
Lender exercises its right of set-off, and such payment or the proceeds of such
set-off or any part thereof is subsequently invalidated, declared to be
fraudulent or preferential, set aside or required (including pursuant to any
settlement entered into by the Agent or such Lender in its discretion) to be
repaid to a trustee, receiver or any other party, in connection with any
proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of
such recovery, the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such set-off had not occurred, and (b) each Lender
severally agrees to pay to the Agent upon demand its applicable share of any
amount so recovered from or repaid by the Agent, plus interest thereon from the
date of such demand to the date such payment is made at a rate per annum equal
to the Federal Funds Rate from time to time in effect.

     Section 11.17 Set-off. In addition to any rights and remedies of the
Lenders provided by law, upon the occurrence and during the continuance of any
Event of Default, each Lender is authorized at any time and from time to time,
without prior notice to the Borrower or any Guarantor, any such notice being
waived by the Borrower (on its own behalf and on behalf of each Guarantor) to
the fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held by,
and other indebtedness at any time owing by, such Lender to or for the credit or
the account of the Borrower or a Guarantor, as applicable, against any and all
Obligations owing to such Lender hereunder or under any other Loan Document, now
or hereafter existing, irrespective of whether or not the Agent or such Lender
shall have made demand under this Agreement or any other Loan Document and
although such Obligations may be contingent or unmatured or denominated in a
currency different from that of the applicable deposit or indebtedness. Each
Lender agrees promptly to notify the Borrower and the Agent after any such
set-off and application made by

                                       49



such Lender; provided, however, that the failure to give such notice shall not
affect the validity of such set-off and application.

     Section 11.18 Interest Rate Limitations. Notwithstanding anything to the
contrary contained in any Loan Document, the interest paid or agreed to be paid
under the Loan Documents shall not exceed the maximum rate of non-usurious
interest permitted by applicable law (the "Maximum Rate"). If the Agent or any
Lender shall receive interest in an amount that exceeds the Maximum Rate, the
excess interest shall be applied to the principal of the Loans or, if it exceeds
such unpaid principal, refunded to the Borrower. In determining whether the
interest contracted for, charged, or received by the Agent or a Lender exceeds
the Maximum Rate, such Person may, to the extent permitted by applicable Law,
(a) characterize any payment that is not principal as an expense, fee, or
premium rather than interest, (b) exclude voluntary prepayments and the effects
thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal
parts the total amount of interest throughout the contemplated term of the
Obligations hereunder.

     Section 11.19 Waiver of Right to Trial by Jury. EACH PARTY TO THIS
AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR
ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED
THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT
TO TRIAL BY JURY.

     Section 11.20 Confidential Information. Each of Agent and Lenders agrees to
maintain the confidentiality of the Information (as defined below), except that
Information may be disclosed (a) to its and its Affiliates' directors, officers,
employees and agents, including accountants, legal counsel and other advisors
(it being understood that the Persons to whom such disclosure is made will be
informed of the confidential nature of such Information and instructed to keep
such Information confidential); (b) to the extent requested by any regulatory
authority; (c) to the extent required by applicable laws or regulations or by
any subpoena or similar legal process; (d) to any other party to this Agreement;
(e) in connection with the exercise of any remedies hereunder or any other Loan
Document or any suit, action or proceeding relating to this Agreement or any
other Loan Document or the enforcement of rights hereunder or under any other
Loan Document; (f) subject to an agreement containing provisions substantially
the same as those of this Section, to (i) any assignee of or participant in, or
any prospective assignee of or participant in, any of its rights or obligations
under this Agreement or (ii) any direct or indirect contractual counterparty or
prospective counterparty (or such contractual counterparty's or prospective
counterparty's professional advisor) to any credit derivative transaction
relating to obligations of a Loan Party; (g) with the consent of Borrower; (h)
to the extent such Information

                                       50



(i) becomes publicly available other than as a result of a breach of this
Section or (ii) becomes available to Agent or any Lender on a nonconfidential
basis from a source other than Borrower; or (i) to the National Association of
Insurance Commissioners or any other similar organization. In addition, Agent
and Lenders may disclose the existence of this Agreement and information about
this Agreement to market data collectors, similar service providers to the
lending industry, and service providers to Agent and Lenders in connection with
the administration and management of this Agreement, the other Loan Documents,
the Commitment, and the Letters of Credit. For the purposes of this Section,
"Information" means all information received from Borrower or any Subsidiary
relating to Borrower or any Subsidiary or its business, other than any such
information that is available to Agent or any Lender on a nonconfidential basis
prior to disclosure by Borrower or any Subsidiary; provided that, in the case of
information received from Borrower or any Subsidiary after the date hereof, such
information is clearly identified in writing at the time of delivery as
confidential. Any Person required to maintain the confidentiality of Information
as provided in this Section shall be considered to have complied with its
obligation to do so if such Person has exercised the same degree of care to
maintain the confidentiality of such Information as such Person would accord to
its own confidential information. In addition, Agent may disclose to any agency
or organization that assigns standard identification numbers to loan facilities
such basic information describing the facilities provided hereunder as is
necessary to assign unique identifiers (and, if requested, supply a copy of this
Agreement), it being understood that the Person to whom such disclosure is made
will be informed of the confidential nature of such Information and instructed
to make available to the public only such Information as such person normally
makes available in the course of its business of assigning identification
numbers. Notwithstanding anything herein to the contrary, "Information" shall
not include, and Agent and each Lender may disclose to any and all Persons,
without limitation of any kind, any information with respect to the "tax
treatment" and "tax structure" (in each case, within the meaning of Treasury
Regulation Section 1.6011-4) of the transactions contemplated hereby and all
materials of any kind (including opinions or other tax analyses) that are
provided to Agent or such Lender relating to such tax treatment and tax
structure; provided that with respect to any document or similar item that in
either case contains information concerning the tax treatment or tax structure
of the transaction as well as other information, this sentence shall only apply
to such portions of the document or similar item that relate to the tax
treatment or tax structure of the Loans, Letters of Credit and transactions
contemplated hereby.

                                       51



     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers or agents thereunto duly authorized as of
the date first above written.

                          BORROWER:   FLOW INTERNATIONAL CORPORATION


                                      ------------------------------------------
                                      Stephen Light, Chief Executive Officer

                                      Address: 23500 64th Avenue South
                                               Kent, WA 98032
                                               Attn: Stephen Light
                                               Chief Executive Officer
                                      Telefax: (253) 813-3311


                          LENDERS:    BANK OF AMERICA, N.A.


                                      ------------------------------------------
                                      Thomas E. Brown, Senior Vice President

                                      Address: WA1-501-29-10
                                               800 Fifth Avenue, Floor 29
                                               Seattle, WA 98104
                                               Attn: Thomas E. Brown
                                               Senior Vice President
                                      Telefax: (206) 358-7834


                                      U.S. BANK NATIONAL ASSOCIATION


                                      ------------------------------------------
                                      Elizabeth C. Hengeveld, Vice President

                                      Address: 111 SW 5th Avenue, Suite 810
                                               P.O. Box 3108
                                               Portland, OR 97208-3108
                                               Attn: Elizabeth C. Hengeveld
                                               Vice President
                                      Telefax: (503) 275-5919

                                       52



                                      KEYBANK NATIONAL ASSOCIATION


                                      ------------------------------------------
                                      H. Daniel Willetts, Senior Vice President

                                      Address: Asset Recovery Group
                                               3300 East First Avenue, Suite 220

                                               Denver, CO 80206
                                               Attn: H. Daniel Willetts
                                               Senior Vice President
                                      Telefax: (303) 316-2310


                             AGENT:   BANK OF AMERICA, N.A.


                                      ------------------------------------------
                                      Ken Puro, Vice President

                                      Address: Commercial Agency Management
                                               WA1-501-37-20
                                               800 Fifth Avenue, Floor 37
                                               Seattle, WA  98104
                                               Attn:  Ken Puro,
                                               Vice President
                                      Telefax: (206) 358-0971

                                       53



                               GUARANTORS' CONSENT

     Each undersigned guarantor (each a "Guarantor") is a guarantor of the
indebtedness, liabilities and obligations of Flow International Corporation, a
Washington corporation (the "Borrower") under that certain Amended and Restated
Credit Agreement dated as of December 29, 2000 (as amended from time to time,
the "Amended and Restated Credit Agreement") referred to in the within and
foregoing Second Amended and Restated Credit Agreement (the "Second Amended and
Restated Credit Agreement") and the other Loan Documents described in the Second
Amended and Restated Credit Agreement. Each Guarantor hereby acknowledges that
it has received a copy of the Second Amended and Restated Credit Agreement and
hereby consents to its contents and the other Loan Documents described therein
(notwithstanding that such consent is not required). Each Guarantor hereby
confirms that its guarantee of the obligations of Borrower remains in full force
and effect, and that the obligations of Borrower shall include the obligations
of the Borrower under the Second Amended and Restated Credit Agreement. All
capitalized terms not defined herein have the meanings given in the Second
Amended and Restated Credit Agreement.

     GUARANTORS:                      AVURE TECHNOLOGIES, INC.


                                      By:
                                         ---------------------------------------

                                      Name:
                                           -------------------------------------

                                      Title:
                                            ------------------------------------


                                      CIS ACQUISITION CORPORATION


                                      By:
                                         ---------------------------------------

                                      Name:
                                           -------------------------------------

                                      Title:
                                            ------------------------------------


                                      FLOW WATERJET FLORIDA CORPORATION


                                      By:
                                         ---------------------------------------

                                      Name:
                                           -------------------------------------

                                      Title:
                                            ------------------------------------

                                       54



                                   SCHEDULE 1

                             EXISTING LOAN DOCUMENTS

     (a)

Amended and Restated Credit Agreement dated December 29, 2000

Amendment Number One to Amended and Restated Credit Agreement dated February 28,
2001

Amendment Number Two to Amended and Restated Credit Agreement dated May 30, 2001

Amendment Number Three to Amended and Restated Credit Agreement dated as of July
31, 2001

Amendment Number Four to Amended and Restated Credit Agreement dated December
13, 2001

Amendment Number Five to Amended and Restated Credit Agreement dated July 26,
2002

Amendment Number Six to Amended and Restated Credit Agreement dated August 23,
2002

Amendment Number Seven to Amended and Restated Credit Agreement dated September
23, 2002

Amendment Number Eight to Amended and Restated Credit Agreement dated October
11, 2002

Amendment Number Nine to Amended and Restated Credit Agreement dated February
11, 2003

Control Agreement between Agent and Bank of America dated December 17, 2002.

Control Agreement between Agent and U.S. Bank dated December 17, 2002

Environmental Indemnity Agreement by and among Borrower, Lenders and Agent dated
August 23, 2002.

Indiana Mortgage executed by Borrower in favor of Agent and Lenders dated August
23, 2002

Intercreditor Agreement between Agent and Subordinated Noteholders dated October
1, 2002

Letters of Credit issued pursuant to the Amended and Restated Credit Agreement

Michigan Leasehold Mortgage dated December 18, 2002.

Second Amended and Restated Notes executed by Borrower in favor of each Lender,
each dated August 23, 2002

Pledge Agreement executed by Borrower in favor of Agent dated as of August 23,
2002

Reimbursement Agreements

Amended and Restated Security  Agreement  executed by Borrower in favor of Agent
dated August 23, 2002.

UCC Financing Statements perfecting Agent's security interest created by the
foregoing documents.

USPTO Notices

Foreign PTO filings

     (b)

Guaranty executed by Domestic Guarantors in favor of Agent and Lenders dated
August 23, 2002

Security Agreement executed by Domestic Guarantors in favor of Agent and Lenders
dated August 23, 2002

Control Agreement between Agent and Bank One N.A dated December 16, 2002



UCC Financing Statements perfecting Agent's security interest created by the
foregoing documents

                                       56



                                   SCHEDULE 2

                               NEW LOAN DOCUMENTS

Second Amended and Restated Credit Agreement dated July 28, 2003

Security Agreement executed by Foreign Guarantors in favor of Agent and Lenders
dated July 28, 2003

Guaranty executed by Foreign Guarantors in favor of Agent and Lenders dated July
28, 2003

Third Amended and Restated Notes executed by Borrower in favor of each Lender,
each dated July 28, 2003

Amended and Restated Pledge Agreement executed by Borrower in favor of Agent
dated July 28, 2003.

Restructure Agreement dated July 28, 2003

Reduction Letter dated July 28, 2003



                                  SCHEDULE 5.5

                                   LITIGATION

Crucible Incident (June 29, 2002)

Robotic Production Technology, Inc. v. Flow International Corporation, U.S.
District Court, Eastern Division of Michigan, Case No. 99-74659.

                                       58



                                  SCHEDULE 5.19

                            FOREIGN GUARANTOR ASSETS
                                  (By Company)

                                  SCHEDULE 6.14

                                  SUBSIDIARIES



                                                      State or other Jurisdiction of
                    Subsidiary                        Incorporation or Organization
                    ----------                        ------------------------------
                                                       
Avure Technologies AB                                             Sweden

Avure Technologies Incorporated                                 Washington

CEM-FLOW                                                          France

Flow Access BVBA                                                 Belgium

CIS Acquisition Corporation                                      Michigan

Flow Asia Corporation                                            Taiwan

Flow Asia International Corporation                             Mauritius

Flow Autoclave Systems, Inc.                                     Delaware

Flow Automation Systems Corporation                              Ontario

Flow China                                                        China

Flow Europe, GmbH                                                Germany

Foracon Europe Manufacturing GmbH & CO.KG                        Germany

Flow Holdings BVBA                                               Belgium

Flow Holdings GmbH (SAGL) Limited Liability Company            Switzerland

Flow Holdings FPS AB                                             Sweden

Flow Iberica, S.R.L                                               Spain

Flow Italia, S.R.L.                                               Italy

Flow Japan Corporation                                            Japan

Flow Korea                                                        Korea

Flow Pressure Systems Vasteras AB                                 Sweden

Flow Latino                                               Brazil, South America

Flow Surface Prep/Europe, SAGL                                 Switzerland

Flow U.K., Ltd.                                                  England

Flow Waterjet Florida Corporation                                Florida


                                       59





                                                      State or other Jurisdiction of
                    Subsidiary                        Incorporation or Organization
                    ----------                        ------------------------------
                                                           
Robotic Simulations Limited                                   United Kingdom


                                       2



                                  SCHEDULE 7.5

                                      LIENS

     The following liens, as amended, continued or assigned:

1.   UCC-1 filed on December 8, 1988 with the Washington Department of Licensing
     against Borrower as debtor by U.S. Bank of Washington, N.A., Standard
     Chartered Bank, Bank of America N.T. & S.A. DBA Seafirst Bank, Bank of
     America, N.A., U.S. Bank, N.A. (Seattle), and U.S. Bank, N.A. (Portland) as
     secured parties under Filing No. 883430600 covering all accounts receivable
     including but not limited to instruments, chattel paper, documents and
     general intangibles arising out of the sale or lease of goods, or
     furnishing of services, inventory now or hereafter owned or acquired by
     Borrower, all proceeds and insurance proceeds of the foregoing, all
     guaranties and other security therefore, and all of Borrower's books and
     records relating thereto (including computerized information and all
     software relating thereto) and all contract rights with third parties
     relating to the maintenance of any such books, records and information, UCC
     Continuation filed May 20, 2003 under Filing No. 200317432345.

2.   UCC-1 filed on July 3, 1989 with the Washington Department of Licensing
     against Borrower as debtor by U.S. Bank of Washington, N.A. (Bellevue),
     U.S. Bank of Washington, N.A. (Seattle), U.S. Bank, N.A. (Seattle), Bank of
     America N.T. & S.A. DBA Seafirst Bank, and Bank of America, N.A. as secured
     parties under Filing No. 891840371 covering all accounts receivable,
     chattel paper, documents, instruments, general intangibles and leases and
     leasehold interests, inventory, equipment, intellectual property and all
     proceeds thereof, UCC Continuation filed January 29, 1999 under Filing No.
     990290394.

3.   UCC-1 filed on May 9, 1994 with the Washington Department of Licensing
     against Borrower as debtor by Bank of America N.T. & S.A. DBA Seafirst
     Bank, U.S. Bank, N.A., U.S. Bank of Washington, N.A. (Bellevue), and Bank
     of America, N.A. as secured parties under Filing No. 941290437 covering all
     equipment then owned or thereafter acquired, UCC Continuation filed January
     29, 1999 under Filing No. 990290395.

4.   UCC-1 filed on September 15, 1994 with the Washington Department of
     Licensing against Borrower as debtor by U.S. Bancorp Leasing & Financial as
     secured party under Filing No. 942580397 covering certain leased equipment
     comprised of one new Okuma MC-40VB vertical machining center and related
     controls and attachments described therein subject to that certain Lease
     Agreement dated February 26, 1993; UCC Continuation filed May 17, 1999
     under Filing No. 99137-0205.

                                       3



5.   UCC-1 filed on September 29, 1995 with the Washington Department of
     Licensing against Borrower as debtor by U.S. Bank of Washington, N.A.
     (Bellevue), Bank of America N.T. & S.A. DBA Seafirst Bank, and Bank of
     America, N.A. as secured parties under Filing No. 952720047 covering all
     assets, UCC Continuation filed on April 7, 2000 under Filing No.
     20000980010.

6.   UCC-1 filed on September 21, 1998 with the Washington Department of
     Licensing against Borrower as debtor by Bank of America N.T. & S.A. DBA
     Seafirst Bank and Bank of America, N.A. as secured parties under Filing No.
     982450061 covering all assets.

7.   UCC-1 filed on April 29, 1999 with the Washington Department of Licensing
     against Borrower as debtor by Fleet Leasing Corporation as secured party
     under Filing No. 991190205 covering (1) 880 Panasonic Fax S/N 01981001569,
     Lease Number 7-26679-101.

8.   UCC-1 filed on May 24, 1999 with the Washington Department of Licensing
     against Borrower as debtor by Fleet Leasing Corporation as secured party
     under Filing No. 991440209 covering (1) 7750 Panasonic Copier, S/N KIEKF
     662636, Lease #7-1514938-000.

9.   UCC-1 filed on July 6, 1999 with the Washington Department of Licensing
     against Borrower as debtor by Winthrop Resources Corporation as secured
     party under Filing No. 991870742 covering any and all equipment now or
     hereafter the subject of any lease agreement or lease schedule by and
     between parties, including, but not limited to, the following equipment
     contained on or subject to: Lease Agreement Number FL110698 or Lease
     Schedule Number 001 or Schedule A, together will all substitutions,
     replacements, accessions, process, rent, revenue, insurance, and proceeds
     related to the equipment contained in the financing statement or any lease
     agreement or lease schedule by and between the parties.

10.  UCC-1 filed on October 21, 1999 with the Washington Department of Licensing
     against Borrower as debtor by Fleet Business Credit Corporation as secured
     party under Filing No. 992940139 covering all collateral attached as
     Schedule A, Lease Agreement #FL110698, Lease Schedule 001R, Equipment
     Location.

11.  UCC-1 filed on June 22, 2000 with the Washington Department of Licensing
     against Borrower as debtor by U.S. Bank National Association as secured
     party under Filing No. 20001740030 covering equipment leased by secured
     party as lessor to debtor as lessee under Supplementary Schedule No. FL# to
     Master Equipment Lease Agreement L00002 dated February 23, 2000 as more
     fully described in Exhibit attached thereto.

                                       4



12.  UCC-1 filed on August 10, 2000 with the Washington Department of Licensing
     against Borrower as debtor by U.S. Bancorp Leasing & Financial as secured
     party under Filing No. 20002230274 covering all interest in the Schedule A
     attached to Lease Agreement FL110698, Lease Schedule #002R.

13.  UCC-1 filed on November 13, 2000 with the Washington Department of
     Licensing against Borrower as debtor by U.S. Bancorp & Leasing & Financial
     as secured party under Filing No. 20003180416 covering all interest in the
     attached Schedule A to Lease Agreement FL110698, Lease Schedule #003R.

14.  UCC-1 filed on April 13, 2001 with the Washington Department of Licensing
     against Borrower as debtor by TCF Leasing, Inc. as secured party under
     Filing No. 20011030227 covering leased equipment described on Exhibit A
     attached thereto and made a part thereof along with all additions,
     substitutions, attachments, replacements, and accessions thereof, plus the
     proceeds of all the foregoing including amounts payable under any insurance
     policy.

15.  UCC-1 filed on December 12, 2001 with the Washington Department of
     Licensing against Borrower as debtor by Minolta Business Solutions as
     secured party under Filing No. 200200459558 covering L#4398751.4-Minolta
     DI151 Copiers2-Minolta DI200 Copiers 5-Minolta DI450 Copiers 2-Minolta
     DI550 Copiers.

16.  UCC-1 filed on April 29, 2002 with the Washington Department of Licensing
     against Borrower as debtor by U.S. Bank National Association as secured
     party under Filing No. 200212178355 covering all equipment now owned or
     hereafter acquired by debtor including, but not limited to, all office
     machines, trade fixtures and leasehold improvements that are classified as
     equipment and all trade fixtures and leasehold improvements that are
     classified as fixtures. Equipment and fixtures are located at 530 Moon
     Clinton Road, Coraopolis, PA. This statement continues original financing
     statement filed with the Department of State of Pennsylvania on 9/01/1987.
     The filing number of the original financing statement is No. 15550503. The
     original financing statement remains effective. Other than the sale or
     lease of inventory in the ordinary course of debtor's business, the
     purchase by or pledge to another party of any of the above described
     collateral violates the rights of the secured party.

17.  UCC-1 filed on October 4, 2002 with the Washington Department of Licensing
     against Borrower as debtor by John Hancock Life Insurance Company as
     secured party under Filing No. 200228063942 covering all assets except
     those released pursuant to UCC Amendment Filing No. 200315061349.

18.  UCC-1 filed on March 31, 2003 with the Washington Department of Licensing
     against Borrower as debtor by Winthrop Resources Corporation as secured
     party under Filing

                                       5



     No. 200309277824  covering  equipment  noted on  Schedule A  (attached  to
     financing statement) of Lease Agreement #FL110698.

19.  UCC-1 filed on June 17, 2003 with the Washington Department of Licensing
     against Borrower as debtor by Applied Industrial Technologies as secured
     party under Filing No. 200313808837 covering a Purchase Money Security
     Interest in and to all Consignee & apos;s [sic] now held or hereafter
     acquired equipment consigned or shipped to Consignee by or on behalf of
     Consignor pursuant to that certain Consignment Agreement between the
     parties dated May of 2003, and as amended from time to time, whether
     manufactured by Consignor or others and under any product name, including
     all additions and accessions thereto and substitutions therefor and
     products thereof.

FLOW WATERJET FLORIDA CORPORATION

20.  UCC-1 filed on August 26, 2002 with the Florida Secured Transaction
     Registry against Borrower as debtor by Bank of America, N.A. as secured
     party under Filing No. 200202012628 covering all assets.

21.  UCC-1 filed on October 4, 2002 with the Florida Secured Transaction
     Registry against Borrower as debtor by John Hancock Life Insurance Company
     as secured party under Filing No. 200202328021 covering all assets.

CIS ACQUISITION CORPORATION

22.  UCC-1 filed on August 28, 2002 with the Michigan Department of State
     against Borrower as debtor by Bank of America, N.A. as secured party under
     Filing No. 43670C covering all assets.

23.  UCC-1 filed on October 7, 2002 with the Michigan Department of State
     against Borrower as debtor by John Hancock Life Insurance Company. as
     secured party under Filing No. 46226C covering all assets.

AVURE TECHNOLOGIES, INC.

24.  UCC-1 filed on August 26, 2002 with the Washington Department of Licensing
     against Borrower as debtor by Bank of America, N.A. as secured party under
     Filing No. 200315061837 covering all assets except for those assets
     released pursuant to Exhibit A to the UCC Amendment.

25.  UCC-1 filed on October 4, 2002 with the Washington Department of Licensing
     against Borrower as debtor by John Hancock Life Insurance Company as
     secured party under Filing No. 200229SS03433 covering all assets.

                                       6



Foreign Guarantors-lien information to be provided post closing promptly upon
becoming available

                                       7



                                   EXHIBIT A-1

                (to Second Amended and Restated Credit Agreement)

                 THIRD AMENDED AND RESTATED REVOLVING LOAN NOTE
                             (Bank of America, N.A.)

                                       1



                                   EXHIBIT A-2
                (to Second Amended and Restated Credit Agreement)

                 THIRD AMENDED AND RESTATED REVOLVING LOAN NOTE
                        (U.S. Bank National Association)

                                       1



                                   EXHIBIT A-3
                (to Second Amended and Restated Credit Agreement)

                 THIRD AMENDED AND RESTATED REVOLVING LOAN NOTE
                         (KeyBank National Association)

                                       1



                                    EXHIBIT B
                (to Second Amended and Restated Credit Agreement)

                           FOREIGN SUBSIDIARY GUARANTY

                                       1



                                    EXHIBIT C
                (to Second Amended and Restated Credit Agreement)

                           FOREIGN SECURITY AGREEMENT

                                       1



                                    EXHIBIT D
                (to Second Amended and Restated Credit Agreement)

                      AMENDED AND RESTATED PLEDGE AGREEMENT

                                       1



                                    EXHIBIT E
                (to Second Amended and Restated Credit Agreement)

                         FORM OF COMPLIANCE CERTIFICATE

                                         Financial Statement Date:
                                                                  --------------

     THE UNDERSIGNED, being the                     of FLOW INTERNATIONAL
                                -------------------
CORPORATION, a Washington corporation, (the "Borrower") does hereby certify to
BANK OF AMERICA, N.A., U.S. BANK NATIONAL ASSOCIATION, KEYBANK NATIONAL
ASSOCIATION (the "Lenders") and BANK OF AMERICA, N.A., as agent for Lenders (in
such capacity, the "Agent") under the Credit Agreement (as hereinafter defined),
as follows:

     1.This Certificate is given pursuant to Section 5.9(f) of that certain
Credit Agreement dated as of July 28, 2003 by and among the Borrower, the
Lenders and the Agent (as the same may be amended, modified or extended from
time to time the "Credit Agreement"). Capitalized terms not otherwise defined in
this Certificate shall have the meanings set forth in the Credit Agreement.

     2.The financial statements for the fiscal quarter ended            , 20
                                                             -----------    ---
[or calendar month ended          , 20  ] delivered with this Certificate
                         ---------    --
pursuant to the requirements of Section 5.9(f) of the Credit Agreement have been
prepared in accordance with GAAP and present fairly the consolidated financial
position and the results of operations of Borrower and its Subsidiaries as of
the end of and for such fiscal period.

     3.There has not existed during the fiscal quarter ended            , 20
                                                             -----------    ---
[or calendar month ended          , 20  ] and there does not now exist any
                         ---------    --
Default or Event of Default under the Credit Agreement.

     4.The computations and descriptions set forth in Schedule 1 hereto
demonstrate compliance with the financial covenants in Section 6.12 and 6.13 of
the Credit Agreement, and.

     5.Capitalized terms used herein and not otherwise defined shall have the
meanings defined in the Loan Agreement.

     DATED this       day of                , 20   .
                -----        ---------------    ---

                                            FLOW INTERNATIONAL
                                            CORPORATION , a Washington
                                            corporation


                                            By
                                                 -------------------------------
                                            Its
                                                 -------------------------------



     For the fiscal quarter [or calendar month] ended
                                                      -------------------
("Statement Date")

                                   SCHEDULE 1
                            to Compliance Certificate

1.   Section 6.12(a) - Minimum EBITDA (Quarterly or Monthly).

- --------------------------------------------------------------------------------
(a)  EBITDA for measured time period ("Subject Period"):
- --------------------------------------------------------------------------------
     1.   Domestic                                                $
                                                                   -------------
- --------------------------------------------------------------------------------
     2.   Consolidated                                            $
                                                                   -------------
- --------------------------------------------------------------------------------
(b)  Minimum EBITDA (from Section 6.12(a))
- --------------------------------------------------------------------------------
     1.   Domestic                                                $
                                                                   -------------
- --------------------------------------------------------------------------------
     2.   Consolidated                                            $
                                                                   -------------
- --------------------------------------------------------------------------------
             Lesser of (a)1 or (b)1                               $
                                                                   -------------
- --------------------------------------------------------------------------------
             Lesser of (a)2 or (b)2                               $
                                                                   -------------
- --------------------------------------------------------------------------------
     Excess (deficient) for covenant compliance ((a)1 - (b)1):    $
                                                                   -------------
- --------------------------------------------------------------------------------
     Excess (deficient) for covenant compliance ((a)2 - (b)2):    $
                                                                   -------------
- --------------------------------------------------------------------------------

2.   Section 6.12(b) - Minimum EBITDA (Cumulative).
- --------------------------------------------------------------------------------
     (a)  Cumulative EBITDA from May 1, 2003 to Statement Date
          ("Subject Period"):
- --------------------------------------------------------------------------------
     1.   Domestic                                                $
                                                                   -------------
- --------------------------------------------------------------------------------
     2.   Consolidated                                            $
                                                                   -------------
- --------------------------------------------------------------------------------
     (b)  Minimum EBITDA (from Section 6.12(b))
- --------------------------------------------------------------------------------
     1.   Domestic                                                $
                                                                   -------------
- --------------------------------------------------------------------------------
     2.   Consolidated                                            $
                                                                   -------------
- --------------------------------------------------------------------------------
             Lesser of (a)1 or (b)1                               $
                                                                   -------------
- --------------------------------------------------------------------------------



- --------------------------------------------------------------------------------
             Lesser of (a)2 or (b)2                               $
                                                                   -------------
- --------------------------------------------------------------------------------
     Excess (deficient) for covenant compliance ((a)1 - (b)1):    $
                                                                   -------------
- --------------------------------------------------------------------------------
     Excess (deficient) for covenant compliance ((a)2 - (b)2):    $
                                                                   -------------
- --------------------------------------------------------------------------------

                                                               
     3.   Minimum Collateral Requirements
- ------------------------------------------------------------------------------------
     (a)  Actual Collateral Level:
- ------------------------------------------------------------------------------------
     1.   Domestic Accounts Receivable                            $              (+)
                                                                   -------------
- ------------------------------------------------------------------------------------
     2.   Domestic Inventory                                      $              (+)
                                                                   -------------
- ------------------------------------------------------------------------------------
                = TOTAL                                           $
                                                                   -------------
- ------------------------------------------------------------------------------------
     (b)  Minimum Collateral Level (from Section 6.13)            $
                                                                   -------------
- ------------------------------------------------------------------------------------
            Excess (deficient) for covenant compliance((a) - (b)):$
                                                                   -------------
- ------------------------------------------------------------------------------------





                                    EXHIBIT F
                (to Second Amended and Restated Credit Agreement)

                               OPINION OF COUNSEL



                                    EXHIBIT G
                (to Second Amended and Restated Credit Agreement)

                              RESTRUCTURE AGREEMENT

**










- ----------------------------------------------------------------------------
**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**




**









- ----------------------------------------------------------------------------
**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**

                                       2




**








- ----------------------------------------------------------------------------
**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**


                                       3




**
























- ----------------------------------------------------------------------------
**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**


                                       4



**











- ----------------------------------------------------------------------------
**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**


                                       5




**









- ----------------------------------------------------------------------------
**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**

                                       6



                               GUARANTORS' CONSENT

     Each undersigned guarantor (each a "Guarantor") is a guarantor of the
indebtedness, liabilities and obligations of Flow International Corporation, a
Washington corporation (the "Borrower") under that certain Second Amended and
Restated Credit Agreement dated as of July 28, 2003 (as amended from time to
time, the "Credit Agreement") referred to in the within and foregoing
Restructure Agreement dated as of July 28, 2003 (the "Restructure Agreement")
and the other Loan Documents described in the Credit Agreement. Each Guarantor
hereby acknowledges that it has received a copy of the Restructure Agreement and
hereby consents to its contents and the other Loan Documents described therein
(notwithstanding that such consent is not required). Each Guarantor hereby
confirms that its guarantee of the obligations of Borrower remains in full force
and effect, and that the obligations of Borrower under the Credit Agreement and
the other Loan Documents shall include the obligations of the Borrower under the
Restructure Agreement. All capitalized terms not defined herein have the
meanings given in the Credit Agreement.

     GUARANTORS:
                                       AVURE TECHNOLOGIES, INC.


                                       By:
                                          --------------------------------------

                                       Name:
                                            ------------------------------------

                                       Title:
                                             -----------------------------------


                                       CIS ACQUISITION CORPORATION


                                       By:
                                          --------------------------------------

                                       Name:
                                            ------------------------------------

                                       Title:
                                             -----------------------------------


                                       FLOW WATERJET FLORIDA CORPORATION


                                       By:
                                          --------------------------------------

                                       Name:
                                            ------------------------------------

                                       Title:
                                             -----------------------------------

                                        7

EX-10.10

                                                                 Exhibit 10.10**

- ----------------------------------------------------------------------------
**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**

                   Third Amendment to Note Purchase Agreements

     This Third Amendment, dated as of July 28, 2003, to the separate Note
Purchase Agreements, each dated as of April 30, 2001, is by and among Flow
International Corporation, a Washington corporation (the "Company"), John
Hancock Life Insurance Company, John Hancock Variable Life Insurance Company,
Signature 4 Limited and Signature 5 L.P. (collectively, the "Noteholders").
Capitalized terms used herein without definition shall have the meanings set
forth in the Note Purchase Agreements referred to below (including as amended
hereby).

                                    Recitals:

     A. The Company and the Noteholders have heretofore entered into the
separate Note Purchase Agreements, each dated as of April 30, 2001, as amended
by the First Amendment to Note Purchase Agreements dated as of December 14, 2001
and the Second Amendment to Note Purchase Agreements (the "Second Amendment")
dated as of September 16, 2002 (as amended, the "Note Purchase Agreements"),
under and pursuant to which there are outstanding (a) the Company's 13% Senior
Subordinated Notes, due April 30, 2008, in the aggregate principal amount of
$35,000,000 (the "Notes") and (b) certain Warrants to purchase common stock of
the Company (the "Warrants"). Pursuant to the terms of the Second Amendment, the
Notes currently bear interest at the rate of 15% per annum, and the Default Rate
applicable to overdue payments in respect of the Notes is 17% per annum.

     B. The Company has advised the Noteholders that Events of Default have
occurred and are continuing under (a) Section 12(c) of the Note Purchase
Agreements as a result of the Company's failure to comply with the terms of
Sections 9.6 through 9.9 of the Note Purchase Agreements and (b) Section 12(b)
of the Note Purchase Agreements as a result of the Company's failure to make the
scheduled semi-annual interest payment under the Notes due on April 30, 2003
(the "Existing Defaults").

     C. The Company and the Noteholders now desire to amend the Note Purchase
Agreements and the Notes in the respects, but only in the respects, hereinafter
set forth.

     Now, THEREFORE, the Company and the Noteholders, for good and valuable
consideration the receipt and sufficiency of which is hereby acknowledged, do
hereby agree as follows:

Section 1. Amendments.

     Section 1.1. Quarterly and Annual Financial Statements. Section 7.1(a) and
Section 7.1(b) of the Note Purchase Agreements shall be amended and restated in
their entirety to read as follows:



               "(a) Quarterly Statements -- within 45 days after the end of each
          quarterly fiscal period in each fiscal year of the Company (other than
          the last quarterly fiscal period of each such fiscal year), duplicate
          copies of:

                    (i) a consolidated and consolidating balance sheet of the
               Company and its Subsidiaries as at the end of such quarter, and

                    (ii) consolidated and consolidating statements of income and
               consolidated changes in shareholders' equity and cash flows of
               the Company and its Subsidiaries for such quarter and (in the
               case of the second and third quarters) for the portion of the
               fiscal year ending with such quarter,

          setting forth in each case in comparative form the figures for the
          corresponding periods in the previous fiscal year, all in reasonable
          detail, prepared in accordance with GAAP applicable to quarterly
          financial statements generally, and certified by a Senior Financial
          Officer as fairly presenting, in all material respects, the financial
          position of the companies being reported on and their results of
          operations and cash flows, subject to changes resulting from year-end
          adjustments, provided that delivery within the time period specified
          above of copies of the Company's Quarterly Report on Form 10-Q
          prepared in compliance with the requirements therefor and filed with
          the Securities and Exchange Commission shall be deemed to satisfy the
          requirements of this Section 7.1(a);

               (b) Annual Statements -- within 90 days after the end of each
          fiscal year of the Company, duplicate copies of:

                    (i) a consolidated and consolidating balance sheet of the
               Company and its Subsidiaries, as at the end of such year, and

                    (ii) consolidated and consolidating statements of income and
               consolidated changes in shareholders' equity and cash flows of
               the Company and its Subsidiaries, for such year,

          setting forth in each case in comparative form the figures for the
          previous fiscal year, all in reasonable detail, prepared in accordance
          with GAAP, and accompanied by an opinion thereon of independent
          certified public accountants of recognized national standing, which
          opinion (x) shall state that such financial statements present fairly,
          in all material respects, the financial position of the companies
          being reported upon and their results of operations and cash flows and
          have been prepared in conformity with GAAP, (y) shall state that the
          examination of such accountants in connection with such financial
          statements has been made in accordance with generally accepted
          auditing standards, and that such audit provides a reasonable basis
          for such opinion in the circumstances, and (z) shall not be qualified
          by reason of restricted or limited examination of any material portion
          of the records of the Company or any Subsidiary and shall contain no

                                      -2-



          disclaimer of opinion or adverse opinion except such as the Required
          Holders in their sole discretion determine to be immaterial, provided
          that the delivery within the time period specified above of the
          Company's Annual Report on Form 10-K for such fiscal year (together
          with the Company's annual report to shareholders, if any, prepared
          pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance
          with the requirements therefor and filed with the Securities and
          Exchange Commission, together with the accountant's certificate
          described in clause (B) above, shall be deemed to satisfy the
          requirements of this Section 7.1(b);"

     Section 1.2. Monthly Statements. Section 7.1 of the Note Purchase
Agreements shall be further amended by deleting the "." at the end of paragraph
(i) and by inserting in lieu thereof ";" and by adding after paragraph (i) new
paragraphs (j) and (k) to read as follows:

               "(j) Monthly Statements -- as soon as available and in any event
          within 15 days after the end of each calendar month, monthly updates
          of (i) consolidated revenues (excluding percentage of completion
          revenues which are calculated only at quarter-end), (ii) consolidated
          gross margins and operating income (excluding revenues and expenses
          associated with percentage of completion sales which are calculated
          only at quarter-end), (iii) consolidated domestic and consolidated
          foreign balances for, in each case, cash accounts receivable,
          inventory and accounts payable (excluding unbilled revenues which are
          calculated only at quarter-end), (iv) summary of domestic consolidated
          customer deposits and other prepayments, (v) 13-week rolling cash flow
          forecast and (vi) month-end cash balances; and

               (k) Annual Financial Projections -- as soon as available, but not
          later than thirty (30) days before the beginning of each fiscal year,
          a copy of the Company's annual financial projections."

     Section 1.3. Financial Covenants. Sections 9.6 through 9.9 of the Note
Purchase Agreements shall be deleted in their entirety and replaced with the
following:

               "Section 9.6. EBITDA. As of the end of each period indicated
          below, the Company shall maintain, on a consolidated and domestic
          (U.S.) basis, an EBITDA of at least (or in the case of (losses), not
          to exceed) the amount set opposite such period, except as otherwise
          provided in the Restructure Agreement:

                                      -3-



               (a) Quarterly Basis.

          For fiscal quarter
               ending:          Consolidated     Domestic
          -------------------   ------------   ------------
          July 31, 2003          ($4,728,000)   ($4,073,000)
          October 31, 2003         ($901,000)   ($1,052,000)
          January 31, 2004      $    963,000      ($864,000)
          April 30, 2004        $  3,484,000   $     61,000
          July 31, 2004         $    784,000   $     61,000
          Each fiscal quarter   $    784,000   $     61,000
             thereafter

               (b) Cumulative Basis.

               Period from
             May 1, 2003 to:      Consolidated    Domestic
          ---------------------   ------------   -----------
          July 31, 2003            ($4,728,000)  ($4,073,000)
          October 31, 2003         ($5,630,000)  ($5,125,000)
          January 31, 2004         ($3,166,000)  ($4,489,000)
          April 30, 2004          $  2,317,000   ($2,428,000)
          July 31, 2004           $  5,101,000     ($367,000)
          Each period of four     $  5,101,000     ($367,000)
          fiscal quarters ended
             thereafter

               Section 9.7. Minimum Collateral Requirements. As of each date
          indicated below, the Company shall maintain domestic (U.S.) accounts

                                      -4-



          receivable and inventory which value equals the amount set opposite
          such date, except as otherwise provided in the Restructure Agreement:

          Measurement Date
          ----------------
          July 31, 2003                           $31,400,000
          October 31, 2003                        $35,200,000
          January 31, 2004                        $29,200,000
          March 31, 2004                          $24,900,000
          April 30, 2004 and as the last day of   $24,800,000
             every month thereafter

               Section 9.8. Financial Restructuring. On or before the following
          dates, the Company shall deliver the following to the Noteholders:

               (a) September 30, 2003: a certified copy of the resolution or
          unanimous consent of the Company's board of directors detailing the
          Company's refinancing or restructuring strategy for the obligations
          outstanding under the Senior Credit Agreement, the Notes and the other
          Note Documents;

               (b) October 31, 2003: list of qualified financial institutions
          chosen by the Company for such refinancing or restructuring; and

               (c) November 30, 2003: memorandum concerning the Company's long
          term business plan and proposed terms for such refinancing or
          restructuring.

               Section 9.9. Additional Goals. The Company will take all
          reasonable efforts to achieve the following goals towards implementing
          monthly financial reporting on or before the following dates:

               (a) August 31, 2003: hire a Chief Financial Officer for the
          Company;

               (b) September 30, 2003: convert Flow Japan Corporation to J.D.
          Edwards Financial System;

               (c) August 1, 2003: initiate the conversion of Flow Robotics to
          J.D. Edwards Financial System;

                                      -5-



               (d) November 30, 2003: complete the conversion of Flow Robotics
          to J.D. Edwards Financial System;

               (e) February 28, 2004: convert FAC to J.D. Edwards Financial
          System;

               (f) February 28, 2004: adopt a uniform chart of accounts across
          all Subsidiaries;

               (g) March 31, 2004: execute monthly close on J.D. Edwards
          Financial System for all Subsidiaries except for CIS Acquisition Corp.
          and Flow South America;

               (h) March 31, 2004: within 15 days of month's end, provide the
          Noteholders with consolidated and consolidating monthly financial
          reports for the Company and all Subsidiaries, including EBITDA
          calculations on a monthly basis going forward; and

               (i) April 30, 2004: execute quarterly close on J.D. Edwards
          Financial System for all Subsidiaries except for CIS Acquisition Corp.
          and Flow South America."

     Section 1.4. Additional Affirmative Covenants. New Sections 9.13 and 9.14
are hereby added to the Note Purchase Agreements to read as follows:

               "Section 9.13. Additional Guaranties and Collateral. On or before
          September 30, 2003, the Company shall deliver the following to the
          Noteholders:

               (a) the Noteholders shall have received evidence of the
          Noteholders' perfected second priority lien in all of FAC, FEMG and
          FEG's assets as listed on Schedule 9.13, or in such portion of such
          property as shall correspond to the first priority lien being
          substantially concurrently granted to the Senior Lenders;

               (b) the Noteholders shall have received evidence that notices of
          the Noteholders' security interest in all registered patents and
          trademarks and applications for patents and trademarks that the
          Noteholders have taken a security interest in of the Company, FAC,
          FEMG and FEG shall have been filed with the applicable Governmental
          Authority;

               (c) the Noteholders shall have received such other evidence as
          they may deem necessary or appropriate that all documents executed
          and/or delivered and all actions taken

                                      -6-



          pursuant to clauses (a) and (b) above have been duly authorized and
          are legally effective, binding and enforceable;

               (d) the Noteholders shall have received (i) a second priority
          deed of trust granting the Noteholders a security interest in the
          Company's leasehold interest on property located at 23500 - 64th
          Avenue South, Kent, Washington, and (ii) a landlord consent to such
          deed of trust, each in form acceptable to the Noteholders; and

               (e) the Company and the Guarantors shall have provided such
          additional information concerning their real and personal property and
          assets as the Noteholders may request, including a certification by a
          Senior Officer of the Company of all guaranties and collateral granted
          to the Senior Lenders and true, correct and complete copies of all
          documentation relating thereto.

               Section 9.14. Certain Payments. (a) On or before July 29, 2003,
          the Noteholders shall have received such evidence as they shall
          require in order to confirm initiation of the payments made by the
          Company to the Noteholders aggregating not less than $1,000,000. On or
          before August 1, 2003, the Noteholders shall have received such
          evidence as they shall require in order to confirm receipt of such
          payments. Such payments shall be applied by the Noteholders to the
          interest payment due in respect of the Notes on April 30, 2003.

               (b) On August 2, 2004, the Company shall pay in cash to the
          Noteholders an aggregate amount equal to (i) $2,000,000, less (ii)
          payments, if any (excluding the payments referred to in Section
          9.14(a)), made by the Company to the Noteholders on or after the Third
          Amendment Effective Date, it being understood that payments described
          in this subclause (ii) are subject to Section 7.15 of the Senior
          Credit Agreement as in effect on the Third Amendment Effective Date.

               Section 9.15. Additional Financial Covenants. On and after August
          2, 2004:

               (a) As of the end of each fiscal quarter ending after August 2,
          2004, the Company shall maintain, on a consolidated basis, a Fixed
          Charge Coverage Ratio of at least 1.25 to 1. 'Fixed Charge Coverage
          Ratio' shall mean the quotient obtained by dividing (i) the sum of
          Cash Flow for the period of four consecutive fiscal quarters then
          ended by (ii) the sum of Fixed Charges payable in such period. 'Cash
          Flow' shall mean the Company's net income after taxes, plus interest
          expense, depreciation and amortization, less the aggregate amount of
          any

                                      -7-



          dividend issued. 'Fixed Charges' shall mean the Company's interest
          expense, plus any portion of the Company's long-term debt which will
          be due within 12 months from the date of determination.

               (b) As of the end of each fiscal quarter ending after August 2,
          2004, the Company shall maintain, on a consolidated basis, a Funded
          Debt Ratio of not more than 5.00 to 1. 'Funded Debt Ratio' shall mean
          as of the end of any fiscal quarter, the quotient obtained by dividing
          (a) Funded Debt as of the end of such fiscal quarter by (b) the EBITDA
          for such quarter and the three immediately preceding fiscal quarters,
          plus, in the event that the Company has acquired any Subsidiaries
          during such fiscal quarter or during the immediately preceding three
          fiscal quarters, the EBITDA of such Subsidiaries from the first day of
          the immediately preceding three fiscal quarters through the date of
          acquisition of each Subsidiary.

               (c) As of the end of each fiscal quarter ending after August 2,
          2004, the Company shall maintain, on a consolidated basis, a Senior
          Funded Debt Ratio of not more 3.50 to 1. As used herein, 'Senior
          Funded Debt Ratio' shall mean, as of the end of any fiscal quarter,
          the quotient obtained by dividing (A) Senior Funded Debt as of the end
          of such fiscal quarter by (B) the EBITDA for such quarter and the
          three immediately preceding fiscal quarters, plus, in the event that
          the Company has acquired any Subsidiaries during such fiscal quarter
          or during the immediately preceding three fiscal quarters, the EBITDA
          of such Subsidiaries from the first day of the immediately preceding
          three fiscal quarters through the date of acquisition of each
          Subsidiary."

     Section 1.5. Negative Covenants. Sections 10.1 through 10.8 are hereby
amended and restated in their entirety to read as follows:

               "Section 10.1. Transactions With Affiliates. The Company will not
          and will not permit any Subsidiary to enter into directly or
          indirectly any transaction (including without limitation the purchase,
          lease, sale or exchange of properties of any kind or the rendering of
          any service) with any Affiliate (other than the Company or another
          Subsidiary), except in the ordinary course and pursuant to the
          reasonable requirements of the Company's or such Subsidiary's business
          and upon fair and reasonable terms no less favorable to the Company or
          such Subsidiary than would be obtainable in a comparable arm's-length
          transaction with a Person not an Affiliate. Notwithstanding the
          foregoing, the Company shall not, nor shall it allow any Subsidiary
          to, directly or indirectly, to transfer cash to the Company or any
          Affiliate, except (a) the sale of inventory in the ordinary

                                      -8-



          course of business in accordance with the Company's existing
          intercompany transactions and transfer pricing policy in effect on
          July 28, 2003, (b) cash transfers from Foreign Subsidiaries to the
          Company for the sole and immediate purpose of satisfying the Company's
          obligations under the Senior Credit Agreement, evidenced by promissory
          notes at fair market value, (c) payments by the Company to such
          Foreign Subsidiary in accordance with the terms of the promissory
          notes referred to in subclause (b) and (d) dividends from Foreign
          Subsidiaries to the Company in connection with (x) the payment to the
          Senior Lenders referred to in Section 2.4 of the Senior Credit
          Agreement as in effect on the Third Amendment Effective Date and (y)
          the payment to the Noteholders pursuant to Section 9.14.

               Section 10.2. Dividends, Purchase of Stock, Etc. The Company
          shall not, and shall cause each Subsidiary to not, (a) declare or pay
          any dividend (except dividends payable in capital stock) on any shares
          of any class of its capital stock or (b) apply any assets to the
          redemption or other retirement of, or set aside any sum for the
          payment of any dividends on or for the purchase, redemption or other
          retirement of, or make any other distribution by reduction of capital
          or otherwise in respect of, shares of any class of capital stock of
          the Company; provided, however, Flow Autoclave Corporation, which is
          50% owned by the Company, is excluded from this restriction until the
          date on which the Company owns more than 50% of such company, and
          provided, further, dividends from Foreign Subsidiaries to the Company
          in connection with (x) the payment to the Senior Lenders referred to
          in Section 2.4 of the Senior Credit Agreement as in effect on the
          Third Amendment Effective Date and (y) the payment to the Noteholders
          pursuant to Section 9.14 are hereby excluded from this restriction.

               Section 10.3. Liquidation, Merger, Sale of Assets. (a) Neither
          the Company nor any Subsidiary shall liquidate, dissolve or enter into
          any consolidation, joint venture, partnership or other combination or
          sell, lease, or dispose of (including transfers to any Subsidiary that
          has not executed a guaranty and security agreement pursuant to
          Sections 9.10 and 9.11(c) or is not a Foreign Guarantor) all or any
          substantial portion of its business or assets or of any Collateral
          (excepting sales of goods in the ordinary course of business).
          Notwithstanding the foregoing, the Company may proceed with the
          Restructure Event pursuant to the Restructure Agreement. Neither the
          Company nor any Guarantor shall merge with any other Person.

               (b) The Company will not sell, transfer or otherwise dispose of
          any Subsidiary Stock of a Subsidiary (except to qualify directors) or
          any Indebtedness of any Subsidiary, and will not permit any Subsidiary
          to sell, transfer or otherwise dispose of any Subsidiary Stock or
          Indebtedness of

                                      -9-



          any Subsidiary (other than to the Company or a Wholly-owned
          Subsidiary).

               (c) The Company will not permit any Subsidiary to issue any
          Subsidiary Stock to any Person other than the Company or a
          Wholly-owned Subsidiary except (i) to qualify directors or (ii) in
          connection with an issuance of Subsidiary Stock whereby the Company or
          such Subsidiary maintains its same proportionate interest in such
          Subsidiary.

               Section 10.4. Indebtedness and Senior Debt. (a) Neither the
          Company nor any Subsidiary shall create, incur or become liable for
          any Indebtedness except:

                    (i) Indebtedness incurred under this Agreement, the Other
               Agreements, the Notes and the Subsidiary Guaranty;

                    (ii) Indebtedness existing on the date of Closing as
               described in Schedule 5.15;

                    (iii) Senior Debt incurred pursuant to the Senior Credit
               Agreement after the Third Amendment Effective Date (including
               Guaranties of Subsidiaries delivered in connection therewith from
               time to time); provided that, at the time such Senior Debt is
               incurred and after giving effect thereto ad to the application of
               the proceeds thereof, no Default or Event of Default shall exist;

                    (iv) current accounts payable or accrued or other current
               liabilities incurred by the Company or a Subsidiary in the
               ordinary course of business;

                    (v) Indebtedness for the deferred purchase price, or for
               obligations under leases, of real and personal property used by
               the Company or a Subsidiary in its business (excluding financing
               or synthetic leases);

                    (vi) Subordinated Debt of the Company;

                    (vii) Indebtedness of the Company owing to Foreign
               Subsidiaries arising from intercompany loans made by such Foreign
               Subsidiaries to the Company for the sole and immediate purpose of
               making payments to the Senior Lenders under the Senior Credit
               Agreement.

               (b) In addition to the requirements of Section 10.4(a), the
          Company shall not at any time permit the aggregate amount of Senior
          Debt outstanding under the Senior Credit Agreement to exceed
          $68,000,000

                                      -10-



          (reduced, dollar for dollar, by permanent reductions in the
          commitments thereunder).

               Section 10.5. Guaranties. Except for (a) the guaranties set forth
          on Schedule 10.5 hereto and (b) guaranties given in favor of the
          Noteholders pursuant to this Agreement and the Other Agreements, and
          (c) guaranties given in favor of the Senior Lenders pursuant to the
          Senior Credit Agreement, neither the Company nor any Subsidiary shall
          assume, guaranty, endorse or otherwise become directly or contingently
          liable for, or obligated to purchase, pay or provide funds for payment
          of, any obligation or Indebtedness of any other person, other than by
          endorsement of negotiable instruments for deposit or collection or by
          similar transactions in the ordinary course of business.

               Section 10.6. Liens. Neither the Company nor any Subsidiary shall
          create, assume or suffer to exist any Lien except (a) Liens granted by
          the Company and its Subsidiaries securing Indebtedness outstanding
          under the Senior Credit Agreement and this Agreement and the Other
          Agreements and (b) Liens described on Schedule 10.6 hereto.

               Section 10.7. Investments. The Company shall not make any loan or
          advance to any person or purchase or otherwise acquire the capital
          stock, assets or obligations of, or any interest in, any person,
          except (a) commercial bank time deposits maturing within one year, (b)
          marketable general obligations of the United States or a State or
          marketable obligations fully guaranteed by the United States, or (c)
          short-term commercial paper with the highest rating of a generally
          recognized rating service.

               Section 10.8. Operations. The Company shall not engage in any
          activity which is substantially different from or unrelated to the
          business activities or products of the Company on July 15, 2003."

     Section 1.6. Capital Expenditures. Section 10.12 to the Note Purchase
Agreements is hereby amended and restated in its entirety to read as follows:

               "Section 10.12. Capital Expenditures. The Company shall not, nor
          shall it allow any Domestic Subsidiary to, make or become legally
          obligated to make any expenditure in respect of the purchase or other
          acquisition of any fixed or capital asset (excluding normal
          replacements and maintenance which are properly charged to current
          operations), except for capital expenditures in the ordinary course of
          business not exceeding, in the aggregate for the Company during each
          time period set forth below, the amount set forth opposite such time
          period:

                                      -11-



          May 1, 2003 - April 30, 2004   $6,700,000
          May 1, 2004 - August 1, 2004   $  800,000"

     Section 1.7. Additional Negative Covenants. New Sections 10.14 and 10.15,
are hereby added to the Note Purchase Agreements to read as follows:

               "Section 10.14. New Product Development Expenditures. The Company
          shall not, nor shall it allow any Subsidiary to, fund or become
          legally obligated to fund any new product development costs, including
          without limitation, research, development and engineering costs, as
          indicated in financial statements provided pursuant to Section 7.1,
          not exceeding, in the aggregate for the Company during each time
          period set forth below, the amount set forth opposite such time
          period:

          May 1, 2003 - April 30, 2004   $10,700,000
          May 1, 2004 - August 1, 2004   $ 2,700,000

               Section 10.15. Burdensome Agreements. The Company shall not, nor
          shall it permit any Subsidiary to, directly or indirectly, enter into
          any Contractual Obligation (other than this Agreement, the Other
          Agreements or the Senior Credit Agreement) (a) that limits the ability
          of (i) any Subsidiary to make Restricted Payments to the Company or
          any Guarantor or to otherwise transfer property to the Company or any
          Guarantor, (ii) of any Subsidiary to guarantee the Indebtedness of the
          Company or (iii) of the Company or any Subsidiary to create, incur,
          assume or suffer to exist Liens on the property of such Person; or (b)
          that requires the grant of a Lien to secure the obligations of such
          Person if a Lien is granted to secure another obligation of such
          Person."

     Section 1.8. Events of Default. Section 12 of the Note Purchase Agreements
is hereby amended as follows:

          (a) paragraph (c) of Section 12 shall be amended in its entirety to
     read as follows:

               "(c) the Company defaults in the performance of or compliance
          with any term contained in Sections 9.5 through 9.11, inclusive,
          Section 9.14, Section 9.15, Sections 10.1 through 10.10, inclusive, or
          Sections 10.12 through 10.14, inclusive; or"

                                      -12-



          (b) paragraph (f) of Section 12 shall be amended in its entirety to
     read as follows:

               "(f) any Subsidiary Guaranty or any Security Document shall cease
          to be in full force and effect for any reason whatsoever, including,
          without limitation, a determination by a Governmental Authority of
          competent jurisdiction that any such agreement is invalid, void or
          unenforceable or the perfected security interests created pursuant to
          any Security Document is not legal, valid and binding, or the Company
          or any Subsidiary shall contest or deny in writing the validity or
          enforceability of any of its obligations under any Security Document
          or any Subsidiary Guaranty, as applicable; or"

     Section 1.9. Definitions. Schedule B to the Note Purchase Agreements is
hereby amended by adding thereto the following new definitions in the
appropriate alphabetical order:

          " 'Alternate Restructure Event' has the meaning given to it the
     Restructure Agreement.

          'CIS Acquisition Corp' shall mean CIS Acquisition Corp. a Michigan
     corporation.

          'Contractual Obligation' means, as to any Person, any provision of any
     security issued by such Person or of any agreement, instrument or other
     undertaking to which such Person is a party or by which it or any of its
     property is bound.

          'EBITDA' means pre-tax net income (or pre-tax net loss), plus the sum
     of (i) interest expense, (ii) depreciation expense, (iii) depletion
     expense, (iv) amortization expense, (v) restructuring expenses, not to
     exceed $8,900,000 in the aggregate for all periods of determination, (vi)
     fees paid to the Agent and the Senior Lenders pursuant to, and not to
     exceed the fees described in, Section 2.9 of the Senior Credit Agreement as
     in effect on July 28, 2003, (vii) one-time, non-cash charges related to
     write-downs of intangibles or goodwill, and (vii) costs and write-downs
     associated with the Restructure Event or Alternate Restructure Event as
     defined in Exhibit A to the Third Amendment to Note Purchase Agreements;
     provided, however, any add-backs made pursuant to this definition of
     'EBITDA' may only be made to the extent that such add-back has already been
     deducted in the determination of pre-tax net income for such period.

          'FAC' means Flow Asia Corporation, a corporation formed under the laws
     of Taiwan.

          'FEG' means Flow Europe GmbH, a corporation formed under the laws of
     Germany.

                                      -13-



          'FEMG' means Flow Europe Manufacturing CoKg, a corporation formed
     under the laws of Germany.

          'Flow Robotics' means Flow Robotic Systems, a division of the Company
     based in Wixom, Michigan.

          'Flow South America' shall mean Flow Latino, a corporation organized
     under the laws of Brazil and any division of the Company or any Subsidiary
     that reports through Flow South America.

          'Foreign Guarantors' means FAC, FEG, or FEMG and any other Subsidiary
     that from time to time executes and delivers a supplement in the form
     attached to, or otherwise becomes bound by, the Foreign Guaranty, and
     'Foreign Guarantor' means any one of them.

          'Foreign Guaranty' means that certain Guaranty Agreement dated as of
     the date hereof, executed by the Foreign Guarantors in favor of the
     Noteholders, and any additions, supplements, renewals or amendments
     thereto.

          'Foreign Subsidiary' means a Subsidiary of the Company other than a
     Domestic Subsidiary.

          'Guarantors' means the Domestic Guarantors, the Foreign Guarantors,
     and any other Subsidiary that from time to time executes and delivers a
     supplement in the form attached to, or otherwise becomes bound by, the
     Domestic Guaranty or Foreign Guaranty, and 'Guarantor' means any one of
     them.

          'JD Edwards Financial System' means the Company's domestic accounting
     system or a similar accounting system that is compatible with the domestic
     system.

          'Restricted Payment' means any dividend or other distribution (whether
     in cash, securities or other property) with respect to any capital stock or
     other equity interest of the Company or any Subsidiary, or any payment
     (whether in cash, securities or other property), including any sinking fund
     or similar deposit, on account of the purchase, redemption, retirement,
     acquisition, cancellation or termination of any such capital stock or other
     equity interest or of any option (other than options under the Company's
     stock option plan), warrant or other right to acquire any such capital
     stock or other equity interest.

          'Restructure Agreement' means that certain Restructure Agreement
     attached as Exhibit A to the Third Amendment to Note Purchase Agreements.

          'Restructure Event' has the meaning given to it the Restructure
     Agreement.

                                      -14-



          'Senior Credit Agreement' means that certain Second Amended and
     Restated Credit Agreement dated as of July 28, 2003 among the Company and
     Bank of America, N.A., as Agent and Lender, U.S. Bank National Association
     and Keybank National Association, as the same may be amended, modified or
     supplemented in accordance with the terms hereof.

          'Third Amendment Effective Date' means the date on which the Third
     Amendment to Note Purchase Agreements became effective.

          'Third Amendment to Note Purchase Agreements' means the Third
     Amendment to Note Purchase Agreements dated as of July 28, 2003 between the
     Company and each of the Noteholders."

     Section 1.10. Additional Schedule. A new Schedule 9.13 to the Note Purchase
Agreements is hereby added in the form of Exhibit B hereto.

Section 2. Agreements Regarding Interest.

     (a) Agreement Regarding Interest Rate Increase. Pursuant to the Second
Amendment to Note Purchase Agreements dated as of September 16, 2002, the
interest rate payable in respect of the Notes was increased to 15% per annum and
the Default Rate applicable to overdue payments in respect of the Notes was
increased to 17% per annum, in each case, beginning July 29, 2002 and continuing
until such time as the Company shall have achieved a Fixed Charge Coverage of at
least 1.25 to 1, a Funded Debt Ratio equal to or below 5.00 to 1 and a Senior
Funded Debt Ratio equal to or below 3.50 to 1. The Company and the Noteholders
agree that such increased rates shall remain applicable on the terms more
specifically described in said Second Amendment, notwithstanding the amendments
to Sections 9.6, 9.7 and 9.8 of the Note Purchase Agreements.

     Notwithstanding the foregoing, in consideration of the partial interest
payment made by the Company on July 28, 2003, the Noteholders hereby waive the
application of the Default Rate to the interest payment due on April 30, 2003.

     (b) Agreement Regarding Interest Capitalization. Notwithstanding any
provision in the Note Purchase Agreements or the Notes to the contrary, the
Noteholders agree that the portion of the semi-annual interest payment due on
April 30, 2003 which remains unpaid on the date hereof shall be capitalized on
the effective date of this Third Amendment. Accordingly, the principal amount of
each Note shall be increased by an amount which corresponds to the proportionate
principal amount of such Note relative to the aggregate principal amount of all
Notes. In addition, unless the Notes are paid in full prior to the relevant
payment dates, the Noteholders agree to capitalize the semi-annual interest
payments due on October 31, 2003 and April 30, 2004, provided that no Default or
Event of Default shall then exist. Such capitalization of interest shall occur
on the date each such interest payment is due, and the principal amount of each
Note shall be increased by an amount which corresponds to the proportionate
principal amount of such Note relative to the aggregate principal amount of all
Notes.

                                      -15-



     (c) Resumption of Current Pay Interest. Upon the earlier of (i) the
scheduled semi-annual interest payment due on October 31, 2004 or (ii) the
occurrence of a Default or Event of Default, the Company shall pay all interest
then and thereafter becoming due on the Notes in cash on the respective dates
such interest is scheduled to be paid.

     (d) Allonges. In order to reflect the provisions of this Section 2, the
Company shall execute and deliver on the effective date of this Third Amendment
an allonge to each outstanding Note in the form of Exhibit C hereto (each, an
"Allonge") reflecting the foregoing agreements.

Section 3. Representations and Warranties of the Company.

     To induce the Noteholders to execute and deliver this Third Amendment, the
Company represents and warrants to the Noteholders (which representations and
warranties shall survive the execution and delivery of this Third Amendment)
that:

          (a) this Third Amendment and each Allonge referred to in Section 2(b)
     hereof has been duly authorized, executed and delivered by the Company and
     constitutes the legal, valid and binding obligation, contract and agreement
     of the Company enforceable against it in accordance with its terms, except
     as enforcement may be limited by bankruptcy, insolvency, reorganization,
     moratorium or similar laws or equitable principles relating to or limiting
     creditors' rights generally;

          (b) the execution, delivery and performance by the Company of this
     Third Amendment and each Allonge (i) does not require the consent or
     approval of any governmental or regulatory body or agency, and (ii) will
     not (A) violate (1) any provision of law, statute, rule or regulation or
     its certificate of incorporation or bylaws, (2) any order of any court or
     any rule, regulation or order of any other agency or government binding
     upon it, or (3) any provision of any material indenture, agreement or other
     instrument to which it is a party or by which its properties or assets are
     or may be bound, or (B) result in a breach or constitute (alone or with due
     notice or lapse of time or both) a default under any indenture, agreement
     or other instrument referred to in clause (ii)(A)(3) of this clause (b);

          (c) as of the date hereof and after giving effect to this Third
     Amendment, no Default or Event of Default has occurred which is continuing;

          (d) attached hereto as Exhibit D is a true, correct and complete list
     of all Subsidiaries of the Company as of July 28, 2003;

          (e) attached hereto as Exhibit E is a true, correct and complete copy
     of the Second Amended and Restated Senior Credit Agreement dated as of July
     28, 2003; and

          (f) the assets listed on Schedule 9.13, attached hereto as Exhibit B,
     constitute all of the accounts receivable, inventory, equipment and other
     fixed assets and registered copyrights, trademarks and patents owned, used,
     or held in connection with the Foreign

                                      -16-



     Guarantors. The Foreign Guarantors have good and marketable title to each
     asset and no asset is subject to any Lien, except as permitted by the Note
     Purchase Agreements.

Section 4. Conditions to Effectiveness of This Third Amendment.

     This Third Amendment shall not become effective until, and shall become
effective when:

          (a) executed counterparts of this Third Amendment, duly executed by
     the Company and the holders of 100% in aggregate principal amount of
     outstanding Notes, shall have been delivered to the Noteholders;

          (b) Allonges, in the form of Exhibit C attached hereto, shall have
     been duly executed by the Company for each of the outstanding Notes and
     delivered to the appropriate Noteholders;

          (c) (i) Guaranties in form and substance satisfactory to the
     Noteholders, and (ii) a Security Agreement in form and substance
     satisfactory to the Noteholders, shall have been duly executed in favor of
     the Noteholders by each of the Domestic Subsidiaries and Foreign
     Subsidiaries executing and delivering Guaranties and granting security
     interests in their assets to the Senior Lenders under the Senior Credit
     Agreement;

          (d) the Noteholders shall have received a fully executed copy of the
     Second Amended and Restated Senior Credit Agreement, in form and substance
     satisfactory to them;

          (e) the representations and warranties of the Company set forth in
     Section 3 hereof shall be true and correct on and with respect to the
     effective date hereof and the execution and delivery by the Company of this
     Third Amendment shall constitute the certification by the Company of the
     same;

          (f) fees and expenses of counsel to the Noteholders relating to this
     Third Amendment to Note Purchase Agreements will be paid in full; and

          (g) the Noteholders shall have received such evidence, including wire
     transfer numbers and other information, as they shall require to confirm
     that prior to the effectiveness of this Third Amendment the Company wired
     to the Noteholders cash amounts aggregating not less than $1,000,000 for
     application to the interest payment due on the Notes on April 30, 2003.

Upon satisfaction of all of the foregoing, this Third Amendment shall become
effective, and the amendments to the Note Purchase Agreements provided for
herein shall be deemed effective as of April 30, 2003 and the Existing Defaults
waived.

                                      -17-



Section 5. Release; No Discharge.

     As additional consideration for the Noteholders' entering into this Third
Amendment, the Company hereby fully and unconditionally releases and forever
discharges the Noteholders, their agents, employers, trustees, directors,
officers, attorneys, auditors, financial advisors, affiliates, subsidiaries,
successors and assigns and all persons, firms, corporations and organizations
acting on any of their behalves (the "Released Parties") of and from any and all
claims, liabilities, demands, obligations, damages, losses, actions and causes
of action whatsoever which the Company may now have or claim to have against any
Noteholder or any other Released Parties, whether presently known or unknown and
of any nature and extent whatsoever, including, without limitation, on account
of or in any way affecting, concerning or arising out of or founded upon this
Third Amendment or the Note Documents, including but not limited to all such
loss or damage of any kind heretofore sustained or that may arise as a
consequence of the dealings between the parties up to and including the date
hereof, including but not limited to, the administration or enforcement of the
Notes, the Note Purchase Agreements or any of the other Note Documents. The
obligations of the Company under the Note Documents and this Third Amendment
shall be absolute and unconditional and shall remain in full force and effect
without regard to, and shall not be released, discharged or in any way affected
by:

          (a) any exercise or nonexercise of any right, remedy, power or
     privilege under or in respect of this Third Amendment, any Note Documents
     Document, any document relating to or evidencing any of the Noteholders'
     Liens or applicable Law, including, without limitation, any waiver,
     consent, extension, indulgence or other action or inaction in respect
     thereof; or

          (b) any other act or thing or omission or delay to do any other act or
     thing which could operate as or be deemed to be a discharge of the Company
     as a matter of law, other than payment in full of all obligations evidenced
     by the Notes, including but not limited to all obligations under the Note
     Purchase Agreements, the Notes, the other Note Documents and this Third
     Amendment.

Section 6. Entire Agreement.

     The Company acknowledges that there are no other agreements,
representations, either oral or written, expressed or implied, not embodied in
this Third Amendment and the other Note Documents, which, together, represent a
complete integration of all prior and contemporaneous agreements and
understandings of the Company and the Noteholders. No party shall be bound by
any oral agreement, and no rights or liabilities, either expressed or implied,
shall arise on the part of any party, or any third party, until and unless the
agreement on any given issue has been reduced to a written agreement executed in
accordance with the provisions of Section 18 of the Note Purchase Agreements. No
commitment on the part of the Noteholders exists to modify the Note Documents in
any respect, and the Noteholders hereby specifically confirm that they make no
such commitment and specifically advise that no action should be taken by the
Company based upon any understanding that any such a commitment exists or on any
expectation that any such commitment will be made in the future.

                                      -18-



Section 7. The Company Remains in Control.

     The Company acknowledges that it remains in control of its business and
affairs and determines the business plan for, and employment, management and
operating directions and decisions for its or his business and affairs.

Section 8. Miscellaneous.

     This Third Amendment shall be construed in connection with and as part of
the Note Purchase Agreements, and except as modified and expressly amended by
this amendment, all terms, conditions and covenants contained in the Note
Purchase Agreements, the Notes, the Warrants and the other Note Documents are
hereby ratified and confirmed and shall be and remain in full force and effect.
The obligations of the Company under the Note Purchase Agreements, the Notes,
the Warrants and the other Note Documents shall not be released, discharged or
in any way affected by (a) any exercise or nonexercise of any right, remedy,
power or privilege under or in respect of the Note Purchase Agreements, the
Notes, the Warrants or the other Note Documents or applicable law, including,
without limitation, any waiver, consent, extension, indulgence or other action
or inaction in respect thereof; or (b) any other act or thing or omission or
delay to do any other act or thing which could operate as or be deemed to be a
discharge of the Company as a matter of law, other than payment in full of all
obligations under the Note Purchase Agreements and the Notes and performance
under the Warrants and the other Note Documents.

     Any and all notices, requests, certificates and other instruments executed
and delivered after the execution and delivery of this amendment may refer to
the Note Purchase Agreements without making specific reference to this
amendment, but nevertheless all such references shall be deemed to include this
amendment unless the context otherwise requires.

     This Third Amendment may be executed in any number of counterparts, each
executed counterpart constituting an original, but all together only one
agreement.

     This Third Amendment SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE State OF
Washington, EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH State THAT
WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH
State.

     Oral AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER Washington
Law.

                                      -19-



     In Witness Whereof, the Company and the Noteholders have caused this Third
Amendment to be executed, all as of the day and year first above written.

                                      The Company:

                                      Flow International Corporation


                                      By
                                         ---------------------------------------
                                         Its
                                            ------------------------------------

                                      -20-



                                      The Noteholders:

                                      John Hancock Life Insurance Company


                                      By
                                         ---------------------------------------
                                         Its
                                            ------------------------------------


                                      John Hancock Variable Life Insurance
                                      Company


                                      By
                                         ---------------------------------------
                                         Its
                                             -----------------------------------

                                      Signature 4 Limited


                                      By John Hancock Life Insurance Company, as
                                      Portfolio Adviser


                                      By
                                         ---------------------------------------
                                        Its
                                            ------------------------------------

                                      Signature 5 L.P.


                                      By John Hancock Life Insurance Company, as
                                      Portfolio Adviser


                                      By
                                         ---------------------------------------
                                        Its
                                            ------------------------------------

                                      -21-



                              Consent of Guarantors

     The terms of the foregoing Third Amendment to Note Purchase Agreements of
Flow International Corporation are hereby agreed to as of the date first written
above by the following Guarantors.

                                      Avure Technologies, Inc.


                                      By:
                                          --------------------------------------
                                      Name:
                                            ------------------------------------
                                      Title:
                                             -----------------------------------


                                      CIS ACQUISITION CORPORATION


                                      By:
                                          --------------------------------------
                                      Name:
                                            ------------------------------------
                                      Title:
                                            ------------------------------------


                                      FLOW WATERJET FLORIDA CORPORATION


                                      By:
                                          --------------------------------------
                                      Name:
                                            ------------------------------------
                                      Title:
                                             -----------------------------------



                                   Attachments

Exhibit A - Form of Restructure Agreement

Exhibit B - Form of Schedule 9.13 to Note Purchase Agreement [to mirror Schedule
            5.19 to Senior Credit Agreement]

Exhibit C - Form of Allonge

Exhibit D - List of Subsidiaries

Exhibit E - Second Amended and Restated Credit Agreement



                                    EXHIBIT A

                (to Third Amendment to Note Purchase Agreements)

                              RESTRUCTURE AGREEMENT




**

































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EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**



 **






































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EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**



**











































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EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**




**











































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**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**




**










































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**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**




**










































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**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**



**











































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**CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT**



                              Consent of Guarantors

     Each undersigned guarantor (each a "Guarantor") is a guarantor of the
indebtedness, liabilities and obligations of Flow International Corporation, a
Washington corporation (the "Company"), under those certain Note Purchase
Agreements dated as of April 30, 2001 (as amended from time to time, the "Note
Purchase Agreements") referred to in the within and foregoing Restructure
Agreement dated as of July     , 2003 (the "Restructure Agreement") and the
                           ----
other Note Documents described in the Note Purchase Agreements. Each Guarantor
hereby acknowledges that it has received a copy of the Restructure Agreement and
hereby consents to its contents and the other Note Documents described therein
(notwithstanding that such consent is not required). Each Guarantor hereby
confirms that its guarantee of the obligations of the Company remains in full
force and effect, and that the obligations of the Company under the Note
Purchase Agreements, the Notes and the other Note Documents shall include the
obligations of the Company under the Restructure Agreement. All capitalized
terms not defined herein have the meanings given in the Note Purchase
Agreements.

                                      Avure Technologies, Inc.


                                      By:
                                          --------------------------------------
                                      Name:
                                            ------------------------------------
                                      Title:
                                             -----------------------------------


                                      Cis Acquisition Corporation


                                      By:
                                          --------------------------------------
                                      Name:
                                            ------------------------------------
                                      Title:
                                             -----------------------------------


                                      Flow Waterjet Florida Corporation


                                      By:
                                          --------------------------------------
                                      Name:
                                            ------------------------------------
                                      Title:
                                             -----------------------------------



                                    EXHIBIT B
                (to Third Amendment to Note Purchase Agreements)

                                  Schedule 9.13

                            FOREIGN GUARANTOR ASSETS
                                  (By Company)



                                    EXHIBIT C
                (to Third Amendment to Note Purchase Agreements)

                                 Form of Allonge



                                    EXHIBIT D
                (to Third Amendment to Note Purchase Agreements)

                                  SUBSIDIARIES



                                                      State or other Jurisdiction of
                   Subsidiary                         Incorporation or Organization
                   ----------                         ------------------------------
                                                       
Avure Technologies AB                                             Sweden

Avure Technologies Incorporated                                 Washington

CEM-FLOW                                                          France

Flow Access BVBA                                                 Belgium

CIS Acquisition Corporation                                      Michigan

Flow Asia Corporation                                             Taiwan

Flow Asia International Corporation                             Mauritius

Flow Autoclave Systems, Inc.                                     Delaware

Flow Automation Systems Corporation                              Ontario

Flow China                                                        China

Flow Europe, GmbH                                                Germany

Foracon Europe Manufacturing GmbH & CO.KG                        Germany

Flow Holdings BVBA                                              Belgium

Flow Holdings GmbH (SAGL) Limited Liability Company            Switzerland

Flow Holdings FPS AB                                             Sweden

Flow Iberica, S.R.L.                                              Spain

Flow Italia, S.R.L.                                               Italy

Flow Japan Corporation                                            Japan

Flow Korea                                                        Korea

Flow Pressure Systems Vasteras AB                                 Sweden

Flow Latino                                               Brazil, South America

Flow Surface Prep/Europe, SAGL                                 Switzerland

Flow U.K., Ltd.                                                  England

Flow Waterjet Florida Corporation                                Florida

Robotic Simulations Limited                                   United Kingdom




                                    EXHIBIT E
                (to Third Amendment to Note Purchase Agreements)

              Form of Second Amended and Restated Credit Agreement

EX-10.11

                                                                   EXHIBIT 10.11

                                 Landing Center

                                 Lease Agreement

                             Property Reserve, Inc.
                                    Landlord

                         Flow International Corporation
                                     Tenant



                            Index to Lease Agreement
                                       for
                                 Landing Center

                                                                            Page
                                                                            ----

Specific Lease Provisions
         1.    Leased Premises.................................................4
         2.    Term............................................................4
         3.    Rental Payment..................................................4
         4.    Operating Expenses..............................................5
         5.    Security Deposit................................................7
         6.    Proposed Use....................................................7
         7.    Improvements....................................................7
         8.    HVAC Major Repair and Replacement...............................7
         9.    Service and Repairs.............................................8
         10.   Parking.........................................................9
         11.   Option to Renew.................................................9
         12.   Lease Cancellation..............................................9
         13.   Broker's Commission.............................................9
         14.   Graphics........................................................9
         15.   Tenant's Notice Address.........................................9
         16.   Exhibits........................................................9

Exhibit A, General Lease Provisions
         1.    Abandonment.....................................................1
         2.    Assignment of Sublease..........................................1
         3.    Attorney's Fees.................................................2
         4.    Binding.........................................................2
         5.    Care of Leased Premises.........................................2
         6.    Choice of Law...................................................3
         7.    Common Areas - Utility Access ..................................4
         8.    Condition of Premises...........................................4
         9.    Damage to Lease Premises........................................4
         10.   Damage or Destruction - Tenant's Election to terminate..........4
         11.   Damage Near End of Term.........................................5
         12.   Events of Default by Tenant.....................................5
         13.   Defects.........................................................6
         14.   Eminent Domain..................................................6
         15.   Entire Agreement................................................7
         16.   Estoppel Certificate............................................7
         17.   Force Majeure...................................................8
         18.   No Hazardous Substances Allowed.................................8
         19.   Hold Harmless...................................................9
         20.   Holding Over...................................................10
         21.   Improvements, Alterations, and Additions.......................10
         22.   Inconvenience Damage...........................................11

                                        2



         23.   Insurance by Landlord..........................................11
         24.   Insurance by Tenant............................................11
         25.   Laws, Ordinances, Regulations, and Americans with
                  Disabilities  Act...........................................11
         26.   Lease Memorandum...............................................12
         27.   Limitation of Landlord's Liability.............................12
         28.   Name of Project................................................12
         29.   No Joint Venture...............................................12
         30.   Notices........................................................12
         31.   Occupancy Delay................................................13
         32.   Peaceful Enjoyment.............................................13
         33.   Personal Property Tax..........................................14
         34.   Prohibited Activities..........................................14
         35.   Relocation.....................................................14
         36.   Repairs and Inspection Entry...................................14
         37.   Reservations by Landlord.......................................14
         38.   Rules and Regulations..........................................15
         39.   Sales Tax......................................................15
         40.   Severability...................................................15
         41.   Services Interruption..........................................15
         42.   Subordination to Mortgages.....................................16
         43.   Successors and Assigns.........................................16
         44.   Tenant to Keep the Leased Premises Lien Free...................17
         45.   Tenant's Property..............................................17
         46.   Tenant's Request...............................................17
         47.   Tenant's Right to Audit........................................17
         48.   Time is of the Essence.........................................18
         49.   Total Destruction..............................................18
         50.   Waiver.........................................................18
         51.   Waiver of Jury Trial...........................................18
         52.   Waiver of Time Limitations.....................................18
         53.   Waiver of Subrogation..........................................19

Exhibit A, General Lease Provisions
Exhibit B, Description of the Demised Premises _________________________
Exhibit C, Tenant Improvements
Exhibit D, Rules and Regulations

                                       3



                                 LANDING CENTER

                                 LEASE AGREEMENT

     THIS LEASE AGREEMENT made and entered into this ___ day of January,
2003 between PROPERTY RESERVE, INC. (herein_______________________ to as
"Landlord"), whose address for purpose hereof is c/o Norris, Beggs & Simpson,
777 108th Avenue NE, Suite 103, Bellevue, Washington
98004-5121 and FLOW INTERNATIONAL CORPORATION (hereinafter referred to as
"Tenant"), whose address for purposes hereof is 23500 64th Avenue South,
Kent, Washington 98032.

This LEASE AGREEMENT consists of the SPECIFIC LEASE PROVISIONS written
here below, the GENERAL LEASE PROVISIONS attached hereto as Exhibit "A," and all
other EXHIBITS attached hereto. In the event there is a conflict between the
SPECIFIC LEASE PROVISIONS and the GENERAL LEASE PROVISIONS, the SPECIFIC LEASE
PROVISIONS shall prevail.

                            SPECIFIC LEASE PROVISIONS

     1. Leased Premises. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord, subject to the terms and conditions of this Lease
Agreement, those certain premises hereinafter described, and referred to the
"Leased Premises" located in the project commonly referred to as Landing Center
(hereinafter referred to as the "Project") and the building within the Project
commonly referred to as the Flow Building (hereinafter referred to as the
"Building") consisting of approximately 140,000 rental square feet and located
at 23500 64th Avenue South, Kent, Washington 98032, together with right in
common with others to the use of any and all common entrance ways, lobbies,
restaurants, elevators, drives, parking areas, stairs and other similar access
and service ways and common areas in or adjacent to and used in common
with the building of which said Leased Premises are a part. The Leased Premises
are described below and reflected on the plan attached hereto and made a part
hereof as Exhibit "B."

     2. Term. Subject to and upon the term and conditions set forth herein, this
Lease Agreement shall continue in force for a term of 120 months, beginning on
the 1st day of January, 2003, ("Beginning Date") and ending on the 21st day of
December, 2012 ("Expiration Date").

     3. Rental Payment.

     a. Tenant shall pay to Landlord on the first day of each month during the
term of this Lease Agreement in legal tender of the United States of America,
without prior notice or demand and without any offset or deduction
whatsoever, at the office of the Landlord, or at such place or to such
property manager as Landlord may from time to time designate in writing, rental
comprised of both Base Rental ("Base Rental") described be1ow and Additional
Rent ("Additional Rent") as hereinafter described. Base Rental and Additional
Rent are sometimes referred to hereafter as Rent ("Rent").

                                       4



          b. Tenant agrees that if any rental payment or other money due
hereunder from Tenant to Landlord remains unpaid five (5) calendar days after
said amount is due, a late charge shall be paid to Landlord by Tenant in the
amount of the greater of five (5%) percent of such payment due or two hundred
fifty dollars ($250.00) provided that in no event shall such charge be greater
than that permitted by law. Tenant agrees that such amount is a reasonable
estimate of Landlord's collection and administration expenses.

          c. Base Rental is:

             Months 1-12              $25,760/NNN
             Months 13-36             $64,400/NNN
             Months 37-72             $68,600/NNN
             Months 73-84             $71,400/NNN
             Months 85-96             $72,800/NNN
             Months 97-108            $75,600/NNN
             Months 109-120           $78,400/NNN

     4. Operating Expenses. Tenant shall also pay as Additional Rent, the
following Operating Expenses of the Project and/or Building.

          a. Tax and Insurance Expenses.

               i. Tenant agrees to pay, as additional Rent, Tax and Insurance
Expenses. Prior to the commencement of the Lease at least annually during the
Leases Term, Landlord will deliver to Tenant a written estimate of the Tax and
Insurance Expenses for the building in which the Leased Premises are located the
monthly Base Rental shall be increased by one-twelfth (1/12) of said estimated
additional Rent. In the case of a multi-building Project, if such Tax and
Insurance Expense are not separately assessed against the Building but are
assessed against the Project as a whole. Landlord shall determine the portion of
such Taxes and Insurance Expenses allocable to the Building in which the Leased
Premises are located. Landlord will review and challenge, if necessary, property
tax assessments allocable to the Leased Premises. Tenant may request Landlord to
perform a subsequent review if Tenant disputes Landlord's determination not to
appeal a particular assessment.

               ii. Tax and Insurance Expense shall mean: (A) all ad_valorem,
rental, sales, use, and other taxes (other than Landlord's income taxes),
special assessments and other governmental charges, and all assessments
________________ deed restrictions and/or owner's associations which accrue
against the Project during _________________ of this Lease and (B) all insurance
premiums paid by Landlord with respect to the Project including, without
limitation public liability, casualty, rental, and property damage insurance.

          b. Common Area Maintenance.

               i. Tenant agrees to pay as additional Rent, the Common Area
Maintenance Expenses. Prior to the commencement of the Lease, and at least
annually during the Lease Term, Landlord will deliver to Tenant a written
estimate of the Common Area Maintenance Expenses for the building in which the
Leased Premises are located, and Tenant's

                                       5



proportionate share, and the monthly Base Rental shall be increased by
one-twelfth (1/12) of said estimated Additional Rent. In the case of a
multi-building Project, if such Common Area Maintenance is not separately
assessed against the _________ but are assessed against the Project as a whole,
Landlord shall determine the portion of such Common Area Maintenance allocable
to the Building in which the Leased Premises are located.

               ii. Common Area Maintenance shall mean all expenses incurred by
Landlord for the maintenance, repair, and operation of the Project (excluding
only structural soundness of the roof, foundation, and exterior walls),
including but not limited to management fees, common area utilities, maintenance
and repair, mechanical systems (if Landlord provide maintenance services),
system surveys, supplies, material water and sewer, common area janitorial
services, exterior lighting maintenance, maintance of elevators, where
applicable, and mechanical systems, supplies, maintenance, ____________ tools
used in Project, landscaping, trash, security, wages and fringe benefits
payable, to employees of Landlord whose duties are connected with the operation
and maintenance of the Project but only to the extent that they are working on
the operation or maintenance of the Project, amounts paid to contractors or
subcontractors for work or services performed in in __________ with the
operation and maintenance of the Project, all services, supplies, repairs,
____________ other expenses for maintaining, repairing and operating the Project
including, without __________, common areas and parking areas and roof, exterior
walls and foundation work that is not related to structural soundness. It shall
include landscape maintenance, landscape irrigation repairs, pest and rodent
control, parking lot repairs and maintenance, parking lot sweeping _________
lighting, exterior signage and roof repair and maintenance. Common Area
Maintance does not include the cost of any capital improvement to the Project
other than ___________ amortized cost of capital improvements which result in
the reduction of insurance or Common Area Maintenance Expenses. Further, Common
Area Maintenance shall not include repair, restoration or other work occasioned
by fire, windstorm or other casualty with respect to which Landlord actually
receives insurance proceeds, income and franchise __________ Landlord, expenses
or commissions incurred in procuring and leasing to tenants, or ____________
renovating of space for new tenants, interest or principal payments on any
mortgage or other indebtedness of Landlord, compensation paid to any employee of
Landlord above the grade of building superintendent, or depreciation allowance
or expense.

          c. Annual Statement. A _____________ the actual Tax and Insurance and
the actual Common Area Maintenance Expenses thereafter referred to as the
"Statement of Actual Adjustment") shall be delivered by Landlord to Tenant after
any calendar year in which Additional Rent was paid by or due from or due from
Tenant. Within ten (10) days after the delivery by Landlord to Tenant of such
Statement of Actual _____________ Tenant shall pay Landlord the amount of any
Additional Rent shown on such _______________ such State rent shows that Tenant
has paid more than the amount of Additional Rent actual due from Tenant for the
preceding calendar year, and if Tenant is not in default under __________
Agreement, Landlord shall credit the amount of such excess to the next
Additional Rent payment due from Tenant.

          d. Proration

               i. If the Commencement Date of this Lease is a day other than the
first day of a month, or if the Termination Date of this Lease is a day other
than the last day of a month, the amount of Additional Rent shown as due by
Tenant on the Statement of Actual

                                       6



Adjustment shall reflect a proration based on the ratio of the number of days
this Lease was in effect during the month to the actual number of days in the
month.

               ii. If any data necessary to calculate Additional Rent are
unavailable so that the calculation cannot be timely made, Landlord's estimate
shall be used in lieu thereof.

               iii. If the term of this Lease Agreement expires on other than
the last day of a calendar year, then the Tenant's Share of the Estimated
Operating Expenses and Actual Operating Expenses shall be prorated for said
year. If the Lease Agreement shall expire or other wise terminate with any
operating expenses owed by the Tenant, Tenant shall immediately pay the balance
due. Landlord shall pay any refund due Tenant. The provisions of this paragraph
shall survive the termination of the Lease Agreement.

          e. Landlord's Rights. The failure of Landlord to exercise its rights
hereunder to estimate Additional Rent and to require payment of such shall not
constitute a waiver of Landlord's rights which rights may be exercised from time
to time at Landlord's discretion.

          f. Tenant's Additional Cost. If the ______ of Tenant's business or use
of the Leased Premises is such that additional costs are incurred by Landlord
for cleaning, sanitation, trash collection or disposal services, Tenant agrees
to pay as Additional Rent to Landlord the amount of such additional costs upon
demand.

     5. Security Deposit. Tenant has paid to Landlord as holdover rent the sum
of Eighty-One Thousand Five Hundred Fifty-Eight Dollars and Seventy-Five Cents
($81,558.75). Such amount shall be treated as a security deposit, shall not earn
interest for Tenant and shall be used for the purposes set forth in the General
Provisions attached hereto. Provided that Tenant has not been in default of the
Lease Agreement, the deposit shall be applied to the 25th month of rent due
under the Lease and any remaining balance in excess of such monthly rent shall
be refunded to Tenant at the time such 25th month of rent is due.

     6. Proposed Use. Tenant represents, covenants, and warrants that the Leased
Premises will be used lawfully for the following purposes and for no other
purposes: manufacturing, warehousing, storage, and distribution of high pressure
cutting, cleaning and food safety equipment and industrial automation and
_______ equipment, and administrative offices, research and development
facilities, demonstration laboratories.

     7. Improvements. Landlord's obligation to construct and install tenant
improvements (sometimes called "Improvement Items" herein) in the Leased
Premises is set forth in Exhibit "C" hereto. Landlord agrees to ______ these
improvements to the Leased Premises by February 1, 2005, provided Tenant has not
been in default on any rent payment under the terms of the Lease Agreement. The
estimated cost for installation of these improvements, space planning,
construction drawings and permits, and construction management fees is
$314,875.00.

     8. HVAC Major Repairs and Replacement. The Landlord shall be responsible
for any major repairs or replacement of any HVAC units during the term of the
lease. Major repairs will be defined as repairs costing in excess of one-third
of the replacement cost of the unit in

                                       7



question. The determination of whether a unit requires replacement or major
repair will be made by a licensed mechanical contractor acceptable to both
parties.

     9. Service and Repairs.

          a. Utilities. Tenant shall pay for all gas, electricity, water, sewer,
and telephone service utilized in the operations of Tenant's business. Landlord
further reserves the right to have separate meters installed for any of these
services. Water and sewer are part of the common area charges of which Tenant
shall pay its pro rata share to the extent that it is not separately metered.

          b. Lighting. Tenant agrees, at its expense, to maintain and replace
lamps, bulbs, starters and ballasts.

          c. HVAC Maintenance. By signing this Lease Agreement Tenant shall, at
its own cost and expense, enter into a regularly scheduled preventative
maintenance/service contract for servicing all heating and air-conditioning
systems and equipment servicing the Leased Premises. The maintenance contractor
and the contract must be approved by Landlord, which approval shall not be
unreasonably withheld. The service contract must include all services suggested
by the equipment manufacturer within the operation/maintenance manual and must
become effective (and a copy be delivered to Landlord) within thirty (30) days
of the effective date of this Lease Agreement. If the Tenant fails to enter into
such service contract as required, Landlord shall have the right to do so on
Tenant's behalf and Tenant agrees to pay Landlord the cost and expense of same
upon demand.

          d. Routine Maintenance. Landlord shall provide only routine
maintenance, and painting to the structure, and electric lighting service for
all public areas and special service areas of the Project in the manner and to
the extent reasonably deemed by Landlord to be standard.

          e. Repairs by Tenant. The Tenant will keep, maintain and preserve the
Leased Premises in good condition. When and if needed, at the Tenant's sole cost
and expense, the Tenant will make all interior repairs and replacements
including but not limited to interior walls, doors and windows, floors, floor
coverings, light __lbs, plumbing fixtures, heating/air conditioning systems,
except as outlined above, hot _____ systems, and electrical fixtures. Tenant
shall also make all repairs and replacements to Tenant's overhead garage and
exterior pedestrian doors. The Tenant will also repair and replace _ its sole
cost and expense any broken windows and/or damage to the building or Premises
caused by the Tenant or its employees, agents, guests or invitees during the
Lease term hereof.

          If Tenant fails to make such repairs or replacements promptly,
Landlord may, at its option, make such repairs or replacements, and Tenant shall
repay the cost thereof to the Landlord as Additional Rent on demand. However,
Tenant shall not suffer any repair work costing over $5,000 to be performed by
Tenant or Tenant's agents without Landlord's prior written consent.

          f. Additional Services. In the event Tenant desires any of the
aforementioned services in amounts in excess of those deemed by Landlord to be
Project

                                       8



standard, and in the event Landlord elects to provide such additional services,
Tenant shall pay Landlord as Additional Rent hereunder the cost of providing
such additional services.

     10. Parking. Tenant shall have exclusive use of approximately 223
unassigned parking spaces at the Project, which may be modified if the City of
Kent parking requirements are revised.

     11. Option to Renew. Tenant shall be granted two (2), five (5) year options
at future market rates, but not less than the rent payable in Year 10 as
outlined above, provided that Tenant has not been in default during the term of
the Lease. Tenant shall provide Landlord one hundred eighty days (180) written
notice of its intent to exercise this option.

     12. Lease Cancellation. Provided that Tenant has not been in default during
the term of the Lease, Tenant will be granted a one-time right to cancel the
Lease in the sixtieth (60) month of the Lease Term by providing nine (9) months'
prior written notice. The cancellation penalty shall be equal to any unamortized
tenant improvements, unamortized broker commissions and three months' rent. The
cancellation penalty will be paid in full and accompany Tenant's written notice
of cancellation as outlined herein.

     13. Broker's Commission. Landlord acknowledges that Tenant has entered into
an agreement with a broker for representation in connection with this Lease
Agreement. Landlord agrees that it recognizes Puget Sound Properties as Tenant's
sole representative and that Landlord will pay to Puget Sound Properties a
market lease renewal brokerage commission of three percent (3%) of the net lease
consideration for years one through five of the Lease Term, and one and
one-quarter percent (1.25%) for years six through ten of the Lease Term. Tenant
agrees to indemnify Landlord against and to hold Landlord harmless from, all
liabilities arising as a result of a claim brought against Landlord for any
other broker's commission or fee based on an agreement between Tenant and the
claimant.

     14. Graphics. Landlord, at Tenant's cost, shall provide and install one
sign complying with the sign criteria of the Landlord. Sign to be installed
within sixty days of the signing of this Lease Agreement. All graphics of
Tenant, visible in or from public corridors or the exterior of the Leased
Premises, shall require Landlord's prior written approval. All of the above
shall be in accordance with the Project's Rules and Regulations.

     15. Tenant's Notice Address.

          Flow International Corporation
          23500 64th Avenue South
          Kent, WA 98032

     16. Exhibits. The following exhibits are attached hereto and pertain to
this Lease Agreement:

          1.   Exhibit A General Lease Provisions
          2.   Exhibit B Description of the Demised Premises
          3.   Exhibit C Improvement Items
          4.   Exhibit D Rules and Regulations

                                       9



IN WITNESS WHEREOF, the parties have executed this Lease Agreement the day and
year first above written.

AGREED and ACCEPTED                      AGREED and ACCEPTED
LANDLORD:                                TENANT
PROPERTY RESERVE, INC.                   FLOW INTERNATIONAL
                                         CORPORATION


By: /s/ Mark B. Gibbons                  By: /s/ Stephen R. Light
    ---------------------------              -----------------------------------
Its: Mark B. Gibbons, President              Stephen R. Light
Date:                                        President & Chief Executive Officer
     --------------------------          Date: ______uary 30, 200_

                                       10



STATE OF WASHINGTON   )
                      ) ss   TENANT
COUNTY OF KING        )

I certify that I know that Stephen R. Light signed this instrumentation oath
stated that he was authorized to execute the instrument, and acknowledged it as
the President and Chief Executive Officer of Flow International Corporation to
be the free and voluntary _____ _____ party for the uses and purposes mentioned
in the instrument.

Dated: January 30, 2003


                                       /s/ Jean G Balton
                                       -----------------------------------------
                                       Notary Public for the State of Washington
                                       Residing at King _________, Washington

[Seal]

STATE OF UTAH         )
                      ) ss   LANDLORD
COUNTY OF SALT LAKE   )

I certify that I know or have satisfactory evidence that Mark B. Gibbons signed
this instrument, on oath stated that he/she was authorized to execute the
instrument, and acknowledged it as the President of Property Reserve Inc. to be
the free and voluntary act of such party for the uses and purpose mentioned in
the instrument.

Dated: Feb. 3, 2003


                                       /s/ Illegible
                                       -----------------------------------------
                                       Notary Public for the State of Utah
                                       Residing at ____________

[Seal]

- -----------------------------
COSETTE SNARR
NOTARY PUBLIC . STATE OF UTAH
10 E South Temple, Ste 400
Balt Lake City, UT 84133-1101
My Comm. Exp. 11-29-2004
- -----------------------------

                                       11



                                   EXHIBIT "A"

                            GENERAL LEASE PROVISIONS

     These following General Lease Provisions shall become effective when
attached to the signed Lease Agreement containing the Specific Lease Provisions
and shall, together with the Exhibits, form the Lease Agreement.

     1. Abandonment. Tenant shall not vacate nor abandon the Leased Premises at
any time during the term of this Lease Agreement, nor permit the Leased Premises
to remain unoccupied for a period longer than fifteen (15) consecutive days
during the term of this Lease Agreement. If Tenant vacates the Leased Premises
but continues to pay all sums due hereunder and otherwise complies with the
terms hereof, it shall not be considered abandonment.

     2. Assignment or Sublease. Tenant sha11 not, either voluntarily or by
operation of law, assign, encumber, pledge, or otherwise transfer or hypothecate
all or any part of Tenant's leasehold estate hereunder, or permit the Leased
Premises to be occupied by anyone other than Tenant or Tenant's employees, or
sublet the Leased Premises ____ any portion thereof, without Landlord's prior
written consent in every instance. Tenant shall give Landlord written notice of
such desire at least thirty (30) days in advance of the date on which Tenant
desires to make such assignment or sublease, which notice shall include the
name, address, evidence of financial capability, and other pertinent information
regarding the proposed assignee or sublessee. Landlord agrees to cooperate with
Tenant in satisfying _______ interest requirements of its existing lenders.

          a. No assignment or subletting by Tenant shall relieve Tenant of any
obligations under this Lease Agreement. If Tenant is a partnership, a withdrawal
of or change in partners, in one or more transfers, owning more than a fifty
percent(50%) interest in the partnership, shall constitute a voluntary
assignment and shall __ subject to be provisions of this section. If the Tenant
is a corporation (excluding any corporation whose stock is traded on NASDAQ), a
transfer of fifty percent (50%) or more of the corporation's stock in one or
more transfers to a single party and/or its affiliates, or a change in the
control of such company, unless the transfer of stock or control is to a
corporation whose net worth exceeds $50,000,000 and which has a long term debt
to equity ratio or less than ________ deemed for the purposes hereof to be an
assignment of this Lease, and shall be subject to the provisions of this
section.

          b. In the event Tenant shall propose to a _____ or sublet the Leased
Premises and request the consent of Landlord to any assignment or _______, or if
Tenant shall request consent of Landlord to any other act Tenant _________ _____
____ provided, then Tenant shall pay Landlord's reasonable attorney's fees
incurred in connection therewith. Any assignment or subletting shall not relieve
Tenant from responsibility under the Lease Agreement, and Tenant

                                                                               1



shall therefore remain liable for the faithful performance of the Lease
Agreement in case of breach or default by assignee or sublessee.

          c. If the proposed Base Rental between Tenant and any Sublessee is
greater the Base Rental of this lease, then fifty percent (50% of _____ excess
renta1 shall be deemed Additional Rent owed by Tenant to Landlord.

          d. Tenant shall not publicly advertise the Rent for which Tenant is
willing to sublet the space; and all public advertisements of the assignment of
the Lease Agreement or sublet of Leased Premises, or any portion thereof, shall
be subject to prior approval in writing by Landlord.

          e. In any assignment or transfer each assignee or transferee, other
than Landlord, shall assume, as provided herein, all obligations of the Tenant
under this Lease Agreement which relate to all or a portion of the Leased
Premises assigned or sublet, as the case may be, and shall be and remain liable
jointly and severally with Tenant for the payment of the Rent and for due
performance of all the terms, convenants, conditions and agreements herein
contained on Tenant's part to be performed during the term of this Lease
Agreement.

          f. No consent by Landlord to assignment or subletting by Tenant shall
relieve Tenant of any obligation to be performed by the Tenant under this Lease
Agreement, whether accruing before or after such assignment of subletting,
unless granted by Landlord to Tenant in writing. The consent by Landlord to any
assignment or subletting shall not relieve Tenant from the obligation to obtain
Landlord's express written consent to any other assignment or subletting. Any
assignment or subletting which is not in compliance with this Lease Agreement
shall be void, and, at the option of Landlord shall constitute a material
default by Tenant under this Lease Agreement.

     3. Attorney's Fees. In the event either party ________ the enforcement of
this Lease Agreement, or any part thereof, or the collection of any _________,
or to become due hereunder, or recovery of the possession of the Leased Premises
__ the ___ of an attorney, or files suit upon the same, the nonprevailing (or
defaulting) party shall pay to other party's reasonable attorney's fees and
court costs, in any proceeding, whether _____, or appeal therefrom, or on any
petition for review, or in bankruptcy.

     4. Binding. Each individual executing ______ Agreement on behalf of Tenant
and Landlord represents and warrants that he/she __ duly authorized to execute
and deliver this Lease Agreement on behalf of Tenant and Landlord, and t__, this
Lease Agreement is binding upon each in accordance with its terms. This Lease
Agreement shall not be considered binding until it has been fully executed by
Landlord and Tenant.

     5. Care of Leased Premises. Tenant shall not commit or allow any waste or
damage to be committed on any portion of the Leased Premises. Tenant shall not
permit the Leased Premises to be used for any purpose other than stated in the
Lease Agreement.

                                                                               2



          a. No later than the last day of the Term, Tenant will remove all
Tenant's personal property and repair all damage done by or in connection with
installation or removal of said property and surrender the Leased Premises
(together with all keys, access cards, or entrance passes to the Leased
Premises and/or the Project) in as good a condition as they were at the
beginning of the Term, reasonable wear and tear, unrepaired casualty not caused
by Tenant, and condemnation excepted. All property of Tenant remaining in the
Leased Premises after surrender of the Leased Premises by Tenant shall be
deemed conclusively abandoned and may be removed by Landlord, and Tenant
shall reimburse Landlord for the ____ ____ of removing the same, subject,
however, to Landlord's right to require Tenant to remove any improvements
or additions made to the Leased Premises by Tenant pursuant to this
Lease Agreement.

          b. In doing any work related to the installation of Tenant's
furnishings, fixtures, or equipment in the Leased Premises, Tenant, will ____
only contractors or workmen consented to by Landlord in writing prior to the
time such work is commenced. Landlord may condition its consent upon its receipt
of evidence of workers compensation insurance acceptable lien waivers from such
contractors or workmen. Tenant shall promptly remove any lien or claim of lien
for material or labor claimed against the Leased Premises or Project, or both,
by such contractors or workmen, if such claim should arise, and hereby
indemnifies and holds Landlord harmless from and against any and all loss, cost,
damage, expense, or liabilities including, but not limited to, attorney's fees
incurred by Landlord as a result of __ in any way related to such claims or such
liens.

          c. Tenant agrees that all personal property brought into the Leased
Premises by Tenant, its employees, licensees, and invitees shall be at the sole
risk of Tenant, and Landlord shall not be liable for theft thereof or of money
deposited therein or for any damages thereto, such theft or damage being the
sole responsibility of Tenant.

          d. Upon termination of this Lease Agreement Landlord shall have the
right to reenter and resume possession of the Leased Premises. Landlords costs
of post termination cleanup required to return the Leased Premises to as good a
condition as existed at time of commencement of the Lease Agreement, with normal
wear and tear excepted, shall be billed to and promptly paid by Tenant.

     6. Choice of Law. All rights and remedies of Landlord and Tenant under this
Lease Agreement shall be cumulative and none shall exclude any other rights or
remedies allowed by law. All of the terms hereof shall be construed and enforced
according to the laws of the State in which the Leased Premises are located.

     7. Common Areas--Utility _________. Premises shall include the appurtenant
right to use, in common with others, the lobbies, entrances, stairs, elevators,
restrooms, and other public portions of the Project. Landlord retains the right
to make changes in the common areas as it solely deems be in the best interest
of the Project. All of the outside

                                                                               3



walls and windows of the Leased Premises, and any space in the Leased Premises
used for shafts, stacks, pipes, conduits, ducts, and electric or other
utilities, custodial sinks or other Project facilities, are part of the rentable
area of the Leased Premises; however, the right to the use thereof and access
thereto through the Leased Premises for the purposes of operation, maintenance,
and repair, are reserved to Landlord.

     8. Condition of Premises. Tenant's taking possession of the Leased Premises
shall be deemed conclusive evidence that, as of the date of taking possession,
the Leased Premises are in good order and satisfactory condition. No promise of
Landlord to alter or remodel, repair, or improve the Lease Premises or the
Project, and no representation, express or implied, respecting any matter or
thing relating to the Leased Premises, the Project or this Lease Agreement,
including, without limitation, the condition of the Leased Premises, has been
made to Tenant by Landlord other than as may he contained herein or in a
separate Exhibit or Addendum attached to this Lease Agreement and incorporated
herein or separately signed by Landlord and Tenant.

     9. Damage to Leased Premises. If all or a portion of the Leased Premises
are rendered untenantable by damage from any casualty insured against under a
standard fire and extended coverage insurance policy, the damage shall be
repaired forthwith by and at the expense of Landlord, provided such repairs can
be, in Landlord's reasonable opinion, completed within one hundred twenty (120)
days after notice to Landlord of the occurrence of such damage, without the
payment of repair, overtime or other premiums. Except as set forth herein below,
until such repairs are completed, the rent shall be abated in proportion to the
part of the Leased Premises which is unusable by Tenant in the conduct of its
business. Should the damage be caused by a casualty not insured against under a
standard fire and extended coverage insurance policy, Landlord shall have no
obligation to repair or rebuild Should Landlord elect not to repair or rebuild,
this lease may be terminated by thirty (30) days' notice to tenant. There shall
be no abatement of rent by reason of any portion of the Leased Premises being
unusable for a period of less than two days. Landlord's opinion as to
completion date of any repair shall be given to Tenant in writing within thirty
(30) days of the occurrence of the damage.

     10. Damage or Destruction --Tenant's Election to Terminate. In case of any
significant damage or destruction mentioned herein, which Landlord is required
or undertakes to repair as provided herein, Tenant may terminate this Lease
Agreement by written notice to Landlord any time prior to completion of the
required repair if Landlord has not restored and rebuilt the Leased Premises
(exclusive of any property of Tenant or improvements installed by Tenant located
therein) to substantially the same condition as existed immediately prior to
such damage or destruction within one hundred twenty (120) days after notice to
Landlord of the occurrence of such damage or destruction, unless Landlord may
have been delayed in doing so by acts of God, adjustment of insurance, labor
trouble, governmental controls, unavailability of materials, or any other cause
beyond Landlord's reasonable control, but in no event shall the repair period
exceed a total of one hundred and eighty (18O) days.

                                                                               4



     11. Damage Near End of Term. Notwithstanding anything to the contrary
contained in this Lease Agreement, Landlord shall not have any obligation
whatsoever to repair, reconstruct, or restore the Leased Premises or the Project
when such damage occurs during the last twelve (12) months of the Lease term or
any extension thereof, and when the cost of repair exceeds twenty percent (20%)
of the value of the Leased Premises or the Project.

     12. Events of Default by Tenant. The following shall constitute events of
default by Tenant: (a) 1f Tenant shall fail to make any payment due under this
Lease Agreement, and such failure shall continue for ten (10) days after written
notice by Landlord; (b) if a default exists in the performance of any of the
other covenants or conditions which Tenant is required to observe and to
perform, and such default shall continue for twenty (20 days after written
notice by Landlord; (c) if the interest of Tenant under this Lease Agreement is
levied upon, or is under execution or other legal process, or if any petition
shall be filed by or against Tenant to declare Tenant as bankrupt or to delay,
reduce, or modify Tenant's debts or obligations; (d) if any petition shall be
filed or other action taken to reorganize or modify Tenant's capital structure
if Tenant be a corporation or other entity; (e) if Tenant is declared insolvent,
or if any assignment of Tenant's property is made for the benefit of creditors
or if a receiver or trustee is appointed for Tenant or its property; (f) if
Tenant vacates or abandons the Leased Premises, as defined above, during the
term of this Lease Agreement or any extensions thereof; or (___ if Tenant makes
any transfer of any interest in the Leased Premises not in accordance with the
requirements of this Lease Agreement, then Landlord may treat the occurrence of
any one or more of the foregoing events as a breach of this Lease Agreement and
thereupon, at Landlord's option, Landlord shall have one or more of the
following described remedies in addition to all other rights and remedies
provided at law or in equity:

          a. Landlord may terminate this Lease Agreement and forthwith, in
accordance with applicable law, repossess the Leased Premises and remove all
persons or property therefrom, and be entitled to recover as damages a sum of
money equal to the total of (i) the cost of recovering the Leased Premises (ii)
the unpaid rent owed thereon from due date plus interest thereon at the rate of
18% per annum or the maximum rate permitted by applicable law, whichever is
lower, (iii) the present value of the balance of the rent for the remainder of
the term, discounted to the present at 8% per annum, and (iv) any other sum of
money and damages owed by Tenant to Landlord;

          b. Landlord shall also be entitled to terminate Tenant's right of
possession in accordance with applicable law and to repossess the Leased
Premises, without demand or notice of any kind to Tenant, by summary
proceedings, any other applicable action or proceeding, or otherwise, all
without terminating this Lease Agreement, in which event Landlord may, but shall
be under no obligation to, relet the same for the account of Tenant for such
rent and upon such terms as shall be satisfactory to Landlord. None of these
actions will be deemed an acceptance of surrender of the Leased Premises. For
the purpose of such reletting Landlord is authorized to decorate or to make any
repairs, changes, alterations, or additions in or to the Leased Premises that
may be necessary or convenient, and (i) if Landlord shall fail or refuse to
relet the Leased

                                                                               5



Premises, or (ii) if the same are relet and a sufficient sum shall not be
realized from such reletting, after paying the unpaid Base Rental due hereunder
earned or unpaid at the time of reletting, plus interest thereon at the rate set
forth herein, the cost of recovering possession, and all of the costs and
expenses of such decoration, repairs, changes, alterations, and additions, and
the expense of such reletting, and of the collection of the rent accruing
therefrom to satisfy the payment of the rent provided for in this Lease
Agreement, then Tenant shall pay to Landlord as damages a sum equal to the
amount of the rental reserved in this Lease Agreement for such period or
periods, or if the Leased Premises have been relet, Tenant shall satisfy and pay
any such deficiency upon demand therefor from time to time; and Tenant agrees
that Landlord may file suit to recover any sums falling due under the terms of
this Lease Agreement from time to time on one or more occasions without Landlord
being obligated to wait until expiration of the term of this Lease Agreement and
without barring or affecting in any manner Landlord's right to bring a later
action or actions for further damages; nor shall such reletting be construed as
an election on the part of Landlord to terminate this Lease Agreement unless a
written notice of such intention be given to Tenant by Landlord. Notwithstanding
any such reletting without termination, Landlord may at any time thereafter
elect to terminate this Lease Agreement for such previous breach.

          c. Without prejudice to any other remedy for default, Landlord may
perform any obligation or make any payment required to cure a default by Tenant.
The cost of performance, including attorneys' fees and all disbursements, shall
immediately be paid by Tenant to Landlord upon demand as Additional Rent.

     13. Defects. Tenant agrees to report in writing to Landlord any defective
condition in or about the Leased Premises known to Tenant, and further agrees to
attempt to contact Landlord by telephone immediately in such instance.

     14. Eminent Domain

          a. In the event the Leased Premises are taken pursuant to powers of
eminent domain, all awards for the taking other than awards for interruption of
Tenant's business shall belong solely to Landlord, and Tenant shall make no
claim therefor.

          b. In the event of a partial taking, which does not result in a
termination of this Lease Agreement, rent shall be abated in proportion to the
part of the Leased Premises so made unusable by said partial taking, and any
award for the taking shall belong solely to Landlord.

          c. No temporary taking of the Leased Premises and/or of Tenant's
rights therein or under this Lease Agreement shall terminate this Lease
Agreement or give Tenant any right to any abatement of rent hereunder; and any
award made to Tenant by reason of any such temporary taking shall belong
entirely to Tenant, and Landlord shall not be entitled to share therein. The
Tenant and Landlord will work together to cause the governmental agency

                                                                               6



responsible for the taking to restore the Leased Premises and Project, after the
taking, to their original condition prior to the taking.

          d. If the whole of the Leased Premises, or so much thereof as to
render the balance unusable by Tenant, shall be taken by any governmental
authority under power of Eminent Domain, this Lease Agreement shall
automatically terminate as of the date of such condemnation, or as of the date
possession is taken by the condemning authority, whichever is earlier. No award
for any partial or entire taking shall be apportioned, and Tenant hereby assigns
to Landlord any award which may be made in such taking or condemnation, together
with any and all rights of Tenant now or hereafter arising in or to the same or
any part thereof, provided, however, that nothing contained herein shall be
deemed to give Landlord any interest in or to require Tenant to assign to
Landlord any award made to Tenant for the taking of personal property,
equipment, and fixtures belonging to Tenant and/or for the interruption of or
damage to Tenant's business or for Tenant's unamortized cost of improvements
installed by Tenant and/or the cost of moving and/or the lost value of Tenant's
unexpired Lease Agreement term.

     15. Entire Agreement. This instrument, along with any exhibits and
attachments or other documents affixed hereto or referred to herein, constitute
the entire and exclusive agreement between Landlord and Tenant relative to the
Leased Premises herein described, and this Agreement and said exhibits and
attachments and other documents may be altered and/or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord and Tenant
hereby agree that all prior written and oral agreements, understandings and/or
practices relative to the leasing of the Leased Premises are merged in or
revoked by this Lease Agreement.

     16. Estoppel Certificate. Tenant shall at any time and from time to time,
upon not less than ten (10) business days prior written notice from Landlord,
execute, acknowledge and deliver to Landlord or to other parties as Landlord may
direct, a statement in writing, (a) certifying that this Lease Agreement is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification and certifying that this Lease Agreement as so modified is in
full force and effect), the date to which the rental and other charges are paid
in advance, and the amount of the Base Rental, Estimated Operating Expense
Adjustment, and the commencement and termination dates of the Lease Agreement,
and (b) acknowledging that there are not, to Tenant's knowledge, any uncured
defaults on the part of Landlord hereunder, or specifying such defaults if any
are claimed. Any such statement may be relied upon by any prospective purchaser
or encumbrancer of all or any portion of the real property of which the Leased
Premises are a part. Tenant's failure to deliver such statement within such time
shall be conclusive upon Tenant that: (i) this Lease Agreement is in full force
and effect, without modification except as may be represented by Landlord, (ii)
there are no uncured defaults in Landlord's performance, and (iii) not more than
one month's Base Rental, or Estimated Operating Expense Adjustment installment,
has been paid in advance. If Landlord desires to finance or refinance the
Project, or any part thereof, Tenant agrees to deliver to any lender designated
by Landlord such financial statements of Tenant as Tenant make publicly
available.

                                                                               7



     17. Force Majeure. Any prevention, delay, or stoppage of work to be
performed by Landlord or Tenant which is due to strikes, labor disputes,
inability to obtain labor, materials, equipment, or reasonable substitutes
therefor, acts of God, governmental restrictions or regulations or controls,
judicial orders, enemy or hostile government actions, civil commotion, fire or
other casualties, or other causes beyond the reasonable control of the party
obligated to perform hereunder, shall excuse performance of the work by that
party for a period equal to the duration of that prevention, delay, or stoppage.
Nothing herein shall excuse or delay Tenant's obligation to pay rent or other
charges under this Lease Agreement, except as otherwise provided in this Lease
Agreement.

     18. No Hazardous Substances Allowed. Tenant shall not cause or permit any
"Hazardous Substances," as defined below, except in amounts as permitted by
law, to be brought upon or kept or used in or about the Premises or the Project
by Tenant, its agents, employees, contractors, or invitees.

          a. Tenant shall at all times and in all respects comply with all
local, state, and federal laws, ordinances, regulations and orders
(collectively, "Hazardous Substances Laws") relating to industrial hygiene,
environmental protection, or the use, analysis, generation, manufacture,
storage, disposal, or transportation of any Hazardous Substances.

          b. As used in this Agreement, the term "Hazardous Substances" means
any hazardous or toxic substances, materials or wastes, including, but not
limited to, those substances, materials, and wastes listed in the United States
Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by
the Environmental Protection Agency as hazardous substances (40 CFR Part 302)
and amendments thereto, or such substances, materials and wastes which are or
become regulated under any applicable local, state or federal law including,
without limitation, any material, waste or substance which is (i) petroleum or
any fraction thereof, (ii) asbestos, (iii) polychlorinated biphenyls, (iv)
defined as a "hazardous waste" under relevant state statutes or any rule
promulgated thereunder, (v) designated as a "hazardous substance" pursuant to
Section 311 of the Clean Water Act, 33, U.S.C. (S)1251, et seq. (33 U.S.C.
(S)1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C.
(S)1317), (vi) defined as a "hazardous waste" pursuant to Section 1004 of the
Resource Conservation and Recovery Act, 42 U.S.C. (S)6901, et seq. (42 U.S.C.
(S)6903) or (vii) defined as "hazardous substance" pursuant to Section 101 of
the Comprehensive Environmental Response, Compensation, and Liability Act, 42
U.S.C. (S)9601, et seq. (42 U.S.C. (S)9601).

          c. Tenant shall indemnify, defend (by counsel acceptable to Lessor),
protect, and hold harmless Lessor, and each of Lessor's partners, directors,
officers, employees, agents, attorneys, successors, and assigns, from and
against any and all claims, liabilities, penalties, fines, judgments,
forfeitures, losses (including, without limitation), diminution in the value of
the Premises or the Building, damages for the loss or restriction on use of
rentable or usable space or of any amenity of the Premises or the Building,
costs or expenses (including attorneys' fees, consultant fees, and expert fees)
for the death of or injury to any person or damage to any

                                                                               8



property whatsoever, arising from or caused in whole or in part, directly or
indirectly, (a) by the presence in, on, under, or about the Premises, or any
discharge or release in or from the Premises of any Hazardous Substances, or
Tenant's use, analysis, storage, transportation, disposal, release, threatened
release, discharge, or generation of Hazardous Substances to, in, on, under,
about, or from the Premises or the Building, or (b) Tenant's failure to comply
with any Hazardous Substances Law. Tenant's obligations under this Section shall
include, without limitation, and whether foreseeable or unforeseeable, any and
all costs incurred in connection with any investigation of site conditions, and
any and all costs of any required or necessary repair, cleanup, detoxification,
or decontamination of the Premises or the Building, and the preparation and
implementation of any closure, remedial action, or other required plans in
connection therewith. Tenant's obligations under this Section shall survive the
expiration or earlier termination of the term of the Lease. For purposes of the
release and indemnity provisions hereof, any acts or omissions of Tenant, or by
employees, agents, assignees, contractors, or subcontractors of Tenant or others
acting for or on behalf of Tenant (whether or not they are negligent,
intentional, willful, or unlawful), shall be strictly attributable to Tenant.

          d. Tenant acknowledges and agrees that it shall not be unreasonable
for Lessor to withhold its consent to any proposed assignment, subletting, or
transfer of Tenant's interest in this Lease if (a) the anticipated use of the
Premise by the proposed assignee, subtenant, or transferee (collectively, a
"Transferee") involves the generation, storage, use treatment, or disposal of
Hazardous Substances; (b) the proposed Transferee has been required by any prior
lessor, lender, or governmental authority to make remedial action in connection
with Hazardous Substances contaminating a property, if the contamination
resulted from such Transferee's actions or use of the property in question; or
(c) the proposed Transferee is subject to an enforcement order issued by any
governmental authority in connection with the use, disposal, or storage of a
Hazardous Substance.

          e. Landlord does hereby represent to Tenant that, to the best of
Landlord's knowledge, no toxic or hazardous substances have been deposited in or
located on the Leased Premises on the commencement date of the lease except in
the amounts as permitted by law.

     19. Hold Harmless:

          a. By Tenant: Tenant hereby agrees to indemnify and hold Landlord
harmless from and against any injury, expense, damage, liability, or claim
imposed on Landlord by any person or entity, whether due to damage to the Leased
Premises or the Project, claims for injuries to the person or property of any
other tenant of the Project or of any other person in or about the Project for
any purpose whatsoever, or due to administrative or criminal action by a
governmental authority, whether such injury, expense, damage, liability, or
claim results either directly or indirectly from the act, omission, negligence,
misconduct, or breach of any provisions of this Lease Agreement by Tenant, the
agents, servants, or employees of Tenant, or any other person entering upon the
Leased Premises under express or implied invitation or consent of Tenant. Tenant
further agrees to reimburse Landlord for any costs or expenses, including, but

                                                                               9



not limited to, court costs and reasonable attorney's fees which Landlord may
incur in investigating, handling, or litigating any such claim or any action by
a governmental authority.

          b. By Landlord: Landlord hereby agrees to indemnify and hold Tenant
harmless from and against any injury, expense, damage, liability, or claim
imposed on Tenant by any person or entity, whether due to damage to the Leased
Premises or the Project, claims for injuries to the person or property of any
other tenant of the Project or of any other person in or about the Project for
any purpose whatsoever, or due to administrative or criminal action by a
governmental authority, whether such injury, expense, damage, liability, or
claim results either directly or indirectly from the act, omission, gross
negligence, misconduct, or breach of any provisions of this Lease Agreement by
Landlord, the agents, servants, or employees of Landlord, or any other person
entering upon the Leased Premises under express or implied invitation or consent
of Landlord. Landlord further agrees to reimburse Tenant for any costs or
expenses, including, but not limited to, court costs and reasonable attorney's
fees, which Tenant may incur in investigating, handling, or litigating any such
claim or any action by a governmental authority

     20. Holding Over. In the event of holding over by Tenant, after expiration
or termination of this Lease Agreement without the written consent of Landlord,
Tenant shall pay to Landlord one and three-eighths times the total of Base
Rental which Tenant was obligated to pay for the month immediately preceding the
end of the term of this Lease Agreement, for each month or any part thereof of
any such holdover period, together with any Additional Rent. No holding over by
Tenant after the termination of this Lease Agreement shall operate to extend
the Lease Agreement term. In the event of any unauthorized holding over, Tenant
shall indemnify Landlord against all claims for damages by any other tenant
against Landlord to whom Landlord may have leased all or any part of the Leased
Premises covered hereby effective upon the termination of this Lease Agreement.
Any holding over with the written consent of Landlord shall thereafter
constitute this Lease Agreement a lease from month to month, and Landlord or
Tenant may terminate it upon not less than thirty (30) days prior written
notice.

     21. Improvements, Alterations, and Additions. Tenant shall not make or
allow to be made any alterations or physical additions in or to the Leased
Premises which affect the structure or any other improvements in excess of the
amount stated in the Specific Lease Provisions without first obtaining the
written consent of Landlord. All work shall be done by contractors approved by
Landlord. Landlord's approval or consent shall not be unreasonably withheld or
delayed. Any and all such alterations, physical additions, or improvements, when
made to the Leased Premises by Tenant, shall at once become the property of
Landlord and shall be surrendered to Landlord upon the termination of this Lease
Agreement by lapse of time or otherwise; provided, however, this clause shall
not apply to movable equipment or furniture owned by Tenant. Tenant shall comply
with all government, local building code and permitting requirements and provide
Landlord with evidence of compliance. Tenant shall give Landlord written notice
five (5) days prior to employing any laborer or contractor to perform work on
the Leased Premises so that Landlord may post a notice of nonresponsibility if
allowed by law. Landlord reserves the right to require Tenant, at Tenant's
expense, to remove such alterations,

                                                                              10



physical additions, or improvements upon termination of this Lease Agreement and
to repair any damage caused by such removal.

     22. Inconvenience Damage. No damages, compensation, or claim shall be
payable by Landlord for inconvenience, loss of business, or annoyance arising
from any repair or restoration of any portion of the Leased Premises or other
portion of the Project. Landlord shall use commercially reasonable efforts to
effect such repair or restoration promptly and in such manner as to not
unreasonably interfere with Tenant's use and occupancy.

     23. Insurance by Landlord. Landlord shall maintain during the term of this
Lease Agreement an all-risk commercial property policy insuring the project,
common areas, and personal property owned by Landlord, in amounts equal to
replacement value. Landlord shall not be obligated to insure any furniture,
equipment, machinery, goods, or supplies owned by Tenant or which Tenant may
bring or obtain upon the Leased Premises, or any additional improvements which
Tenant may construct thereon. If the annual premiums charged Landlord for such
insurance exceed the standard premium rates because of the nature of Tenant's
operations, then Tenant shall, upon receipt of appropriate premium invoices,
reimburse Landlord for such increases in premium. Landlord may, should it choose
to do so, self insure all or part of the above referenced risks. Should Landlord
choose to self insure any insurance risks, the cost demonstrated by a bid from a
reputable insurance company shall be included in the cost of insurance for
expense reimbursement purposes.

     24. Insurance by Tenant. Tenant shall, at all times during the term of this
Lease Agreement, insure Tenant's personal property including any additional
improvements made by Tenant, while in or upon the Leased Premises, with an
all-risk policy. In addition, Tenant shall maintain a policy or policies of
Commercial General Liability Insurance with the premiums thereon fully paid on
or before due date, issued by an insurance company having at least an A.M. Best
rating of A or better and licensed to do business within the state the Project
is located. The limits afforded by said liability policy shall not be less than
One Million Dollars ($1,000,000) combined single occurrence limit for personal
injury and property damage and $2,000,000 annual aggregate. Landlord shall be
added as an additional insured thereto; and said policy shall not be canceled or
substantially modified without first giving Landlord thirty (30) days written
notice thereof. In addition, Tenant shall maintain Workers Compensation
insurance as required by statute. Tenant shall furnish, within thirty (30) days
of Landlord's request and approval, a certificate of insurance, acceptable to
Landlord, evidencing the Commercial General Liability and Workers Compensation
coverages referred to herein and naming Landlord and Property Manager as
additional insured as to the General Liability Insurance.

     25. Laws, Ordinances, Regulations, and Americans with Disabilities Act.
Landlord shall comply, at its sole cost, with all laws, ordinances, orders,
rules and regulations (state, federal, municipal, or promulgated by other
agencies or bodies having any jurisdiction thereof) relating to the use (based
upon the approved use for Tenant hereunder), condition, or occupancy of the
Leased Premises. Tenant shall comply, at its sole cost, with requirements of the

                                                                              11



Americans with Disabilities Act which provides for the removal of architectural
barriers that prevent equal access to disabled persons on the interior of the
Leased Premises. To the extent that barrier removal relates to access on the
exterior of the Project, the obligation shall be that of the Landlord.

     26. Lease Memorandum. Neither this Lease Agreement, nor any notice nor
memorandum regarding the terms hereof, shall be recorded by Tenant without the
prior written consent of the Landlord. Landlord agrees to cooperate with Tenant
in satisfying the security interest requirements of its existing lenders.

     27. Limitation of Landlord's Liability. The obligations of Landlord under
this Lease Agreement do not constitute personal obligations of Landlord or of
the individual partners, directors, officers, employees, or shareholders of
Landlord or its partners, and Tenant shall look solely to the property that is
the Project described in this Lease Agreement and to no other assets of Landlord
for satisfaction of any liability in respect of this Lease Agreement, and Tenant
will not seek recourse against any other property of Landlord or against the
individual partners, directors, officers, employees, or shareholders of Landlord
or its partners or any of their personal assets for such satisfaction.

     28. Name of Project. Tenant shall not use the name of the Project for any
purpose other than as an address of business to be conducted by the Tenant.
Landlord and its agents shall have the right to change the name, number, or
designation of the Project without liability to Tenant upon fourteen (14) days
prior written notice to Tenant.

     29. No Joint Venture. This Lease Agreement shall not be deemed or construed
to create or establish any relationship of partnership or joint venture or
similar relationship or arrangement between Landlord and Tenant hereunder.

     30. Notices. All notices, demands, consents, and approvals, which may or
are required to be given by either party to the other hereunder, shall be in
writing and shall be deemed to have been fully given when personally delivered
or delivered by a nationally recognized over night courier, or, if the notice is
deposited in the United States mail, certified or registered, return receipt
requested, postage prepaid, and addressed to the party to be notified at the
address for such party specified in this Lease Agreement (with copies to
Property Reserve, Inc., 10 E. South Temple Street, Suite 400, Salt Lake City,
Utah 84133, and Kirton and McConkie, 60 E. South Temple Street, Suite 1800, Salt
Lake City, UT 84145), then the notice shall be deemed fully given on earlier of
(i) the (date of delivery, if delivered personally or by courier, or (ii) the
date set forth on the receipt, or (iii) three (3) days after the notice is
deposited in the mail.

     a. Either party may change its address for notice by at least fifteen (15)
days written notice to the other party. Tenant hereby appoints as its agent to
receive the service of all dispossessory or distraint proceedings and notices
thereunder the person in charge of or

                                                                              12



occupying the Leased Premises at the time, and, if no person shall be in charge
of or occupying the same, then, if allowed by law, such service may be made by
attaching the same on the main entrance of the Leased Premises.

     31. Occupancy Delay. In the event that the Leased Premises should not be
ready for occupancy for any reason, this Lease Agreement shall not be void or
voidable, and Landlord shall not be liable or responsible for any claims,
damages, or liabilities in connection therewith or by reason thereof, and the
term of this Lease Agreement shall be for the same term of months as set forth
in the Lease Agreement, but the beginning date shall be effective only from the
time that the Leased Premises are prepared for occupancy in accordance with the
terms and conditions set forth herein. Should the term of this Lease Agreement
begin on a date other than the beginning date, Landlord and Tenant will, at the
request of either, execute a declaration specifying the revised beginning the
term of this Lease Agreement. In such event rental under this Lease Agreement
shall not commence until said revised beginning date, and the stated term in
this Lease Agreement shall thereupon commence and the expiration date shall be
extended so as to give effect to the full stated term. Within five (5) days
after Tenant receives Landlord's notice that the Leased Premises are ready for
occupancy, Tenant shall inspect the Leased Premises, and except for items
specified by Tenant to Landlord within five (5) days of Tenant's inspection,
Tenant shall be deemed to have accepted the Leased Premises in their then
condition, "as is." The existence of "punch list" (as that term is generally
used in the construction industry) items shall not postpone the beginning date
of this Lease Agreement.

     32. Peaceful Enjoyment. Tenant shall occupy and may peacefully have, hold,
and enjoy the Leased Premises, subject to the other provisions hereof, provided
that Tenant pays the rent herein recited and performs all of Tenant's covenants
and agreements herein contained, including the observance of all reasonable
rules and regulations made by Landlord from time to time pursuant to this Lease
Agreement. It is understood and agreed that this covenant and any and all other
covenants of Landlord contained in this Lease Agreement shall be binding upon
Landlord and its successors only with respect to breaches occurring during its
and their respective ownerships of Landlord's interest hereunder.

     33. Personal Property Tax. Tenant shall be liable for and shall pay, not
later than ten (10) days before delinquency, all taxes levied against any
personal property or trade fixture placed by Tenant, in or about the Leased
Premises. Landlord may, after written notice to Tenant, pay any such levy or
tax, regardless of the validity of such levy, but only under proper protest if
so requested by Tenant in writing. Additionally, if the assessed value of
Landlord's property is increased by the inclusion of the value placed upon any
of the personal property or trade fixture of Tenant, Landlord may, after written
notice to Tenant, pay those taxes which are based upon such increased
assessment, regardless of the validity thereof, but only with proper protest if
so requested by Tenant in writing. In such an event Tenant shall, upon demand,
repay to Landlord taxes so levied and paid by Landlord, or that portion of such
taxes resulting from such increase in the assessment. Tenant shall have the
right, in the name of the Landlord and with Landlord's full cooperation, at no
cost to Landlord, to bring suit in any court of competent jurisdiction to

                                                                              13



recover the amount of any such taxes so paid under protest. Any amounts so
recovered shall belong to Tenant.

     34. Prohibited Activities. Tenant shall not do or permit anything to be
done in or about the Leased Premises nor bring or keep anything therein which
will in any way increase the existing rate of or affect any fire or other
insurance upon the Project or any of its contents, or cause cancellation of any
insurance policy covering said Project or any part thereof or any of its
contents. Tenant shall not do or permit anything to be done in or about the
Leased Premises which will in any way obstruct or interfere with the rights of
other tenants or occupants of the Project or injure or annoy them, or use or
allow the Leased Premises to be used for any improper, immoral, unlawful, or
objectionable purpose, nor shall Tenant cause, maintain, or permit any nuisance
in, on, or about the Leased Premises. Tenant shall not violate any of the rules
and regulations of the Project.

          a. Tenant shall not do or permit to be done on or about the Leased
Premises, and the Landlord shall not do or permit to be done outside the Leased
Premises any of the following: (a) any violation of any federal, state or local
law, ordinance, or any regulation, ordinance, order or directive of a
governmental agency as such statutes, ordinances, regulations, orders, or
directives now exist or may hereafter come into effect and concern the use,
safety, or environment of the Property; (b) any violation of any Certificate of
Occupancy covering or affecting the use of the Property or any part thereof; (c)
commit any public or private nuisance.

     35. Relocation. If the size of the Leased Premises is less than Ten
Thousand (10,000) rentable square feet, Landlord reserves the right to relocate
Tenant during the Term of this Lease Agreement or any renewal thereof, to
similar or higher quality space within the Project. If Landlord exercises this
right to relocate Tenant, then any and all costs incident to said relocation
shall be the responsibility of Landlord, said costs to be determined prior to
relocation of Tenant.

     36. Repairs and Inspection Entry. Tenant shall permit Landlord or its
agents or representatives to enter into and upon any part of the Leased Premises
at all reasonable hours to inspect same, clean, make repairs, alterations, or
additions thereto or for any reasonable purpose as Landlord may deem necessary
or desirable, and Tenant shall not he entitled to any abatement or reduction
sums due under this Lease Agreement by reason thereof.

     37. Reservations by Landlord. Landlord reserves the right to:

          a. Make changes, additions improvements, or deletions to, or to
reduce, partition, or otherwise eliminate the Common Areas, including, without
limitation, changes in the location, size shape and number of driveways,
entrances, parking spaces except as may be required by City of Kent
moficiations, parking areas, loading and unloading areas, ingress, egress,
direction of traffic, landscaped areas, and hallways.

                                                                              14



          b.Close temporarily any of the Common Areas for maintenance purposes
so long as reasonable access to the Leased Premises remains available.

          c. Designate other land to be part of the Common Area where the
additional Common Area is available for the use and benefit of tenants of the
Project.

          d. Expand the Project.

     38. Rules and Regulations. Landlord shall have the right to make and
enforce rules and regulations (the "Rules and Regulations") consistent with this
Lease Agreement for the purposes of regulating access, parking, use of the
common areas in the Leased Premises, and promoting safety, order, cleanliness,
and good service to the Project. Tenant will promptly comply with all such Rules
and Regulations. The parties acknowledge that the Rules and Regulations attached
hereto as Exhibit "D" are presently the Rules and Regulations now in effect;
however, Landlord, may at its option and at any time, reasonably amend and
modify said Rules and Regulations, and Tenant, upon receipt of written notice of
same, shall be obligated to comply with said Rules and Regulations.

     39. Sales Tax. In addition to the rental payments hereunder, all state,
county, and municipal transaction privilege (sales) taxes or similar excise
taxes imposed by any state, county, municipality, or other governmental entity
relative to the rental activity under this Lease Agreement, if required, shall
be reimbursed to the Landlord by the Tenant as Additional Rent.

     40. Severability. If any term or provision of this Lease Agreement, or the
application thereof to any person or circumstances, shall to any extent be
invalid or unenforceable, the remainder of this Lease Agreement, or the
application of such provision to persons or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby, and each
provision of this Lease Agreement shall be valid and shall be enforceable to the
extent permitted by law.

     41. Services Interruption. It is understood that Landlord does not warrant
that any of the services referred to above, or any other services which Landlord
may supply, will be free from interruption. Tenant acknowledges that any one or
more such services may be suspended or reduced by reason of accident or repairs,
alterations, or improvements necessary to be made, by strikes or accident or by
any cause beyond the reasonable control of Landlord, or by orders or regulations
of any federal, state, county, or municipal authority.

          a. Any such interruption or suspension of services shall never be
deemed an eviction of or disturbance to Tenant's use and possession of the
Leased Premises or any part thereof, or render Landlord liable to Tenant for
damages by abatement of rent, or otherwise relieve Tenant of performance of
Tenant's obligation under this Lease Agreement. Landlord will use commercially
reasonable efforts to restore service to full operations, and in the event of a
strike to secure parties not involved in the labor dispute to provide minimum
services.

                                                                              15



     42. Subordination to Mortgages. This Lease Agreement shall automatically be
subject and subordinate to the lien of any mortgage or deed of trust given by
Landlord which does now or may hereafter encumber the Project of which the
Leased Premises form apart, and to all renewals, modifications, consolidations,
replacements, and extensions thereof. Landlord shall also have the right to
assign its interest in this Lease Agreement for security purposes to any
mortgagee or trust deed beneficiary. Tenant agrees that it will execute, within
ten (10) days of Landlord's request, such instrument or certificate that
Landlord or any mortgagee or trust deed beneficiary may reasonably require to
further document this subordination, provided that such mortgagee or trust deed
beneficiary shall agree with Tenant not to disturb Tenant's right to possess the
Leased Premises so long as Tenant complies with all of the terms and conditions
of this Lease Agreement. Tenant further agrees that it will provide any such
mortgagee or trust deed beneficiary with any evidence required to show the
authority of Tenant to execute any such subordination instrument or certificate
and will, if so requested by any such mortgagee or trust deed beneficiary,
provide to that person or entity a copy of any notice Tenant gives or is
required to give Landlord under this Lease Agreement. In the event of the
enforcement by the mortgagee or the beneficiary under such mortgage or deed of
trust of the remedies provided for by law or by such mortgage or deed of trust,
or in the event Landlord gives a deed-in-lieu-of foreclosure to such mortgagee
or trust deed beneficiary, Tenant will, upon request of any person or party
succeeding to the interest of Landlord as a result of such enforcement or
termination, automatically become the Tenant of such successor in interest
without change in the terms or other provisions of this Lease Agreement,
provided, however, that such successor in interest shall not be bound by (i) any
payment of rent or additional rent for more than one month in advance, (ii) any
amendment or modification of this Lease Agreement made without the written
consent of such mortgagee or such beneficiary or their successor in interest, or
(iii) any defaults of Landlord under this Lease Agreement which remain uncured
at the time such successor in interest obtains title to the Project. Tenant
shall execute and deliver any instrument or instruments confirming the
attornment herein provided for.

          a. In the event of any act or omission by Landlord by reason of which
Tenant may claim the right to terminate this Lease Agreement or claim a defense
or offset against the Base Rental due hereunder, Tenant agrees not to exercise
any such right until: (i) Tenant has notified the mortgagee or trust deed
beneficiary in writing of such act or omission by Landlord, and (ii) Tenant has
given the mortgagee or trust deed beneficiary a reasonable opportunity to cure
such act or omission, including the time as shall be reasonably required to
obtain possession of the property and to commence and carry to completion the
foreclosure of its mortgage or deed of trust.

     43. Successors and Assigns. This Lease Agreement shall be binding upon and
inure to the benefit of Landlord, its successors and assigns, and shall be
binding upon and inure to the benefit of Tenant, its successors, and, to the
extent assignment may be approved by Landlord hereunder, Tenant's permitted
assigns.

                                                                              16



     44. Tenant to Keep the Leased Premises Lien Free. Tenant shall keep the
Leased Premises and Project free from any mechanic's liens arising from any work
performed, material furnished, or obligations incurred by Tenant, and shall
obtain from its contractor lien releases if required by Landlord. Tenant shall
keep Landlord informed of the status of any contest and shall defend, indemnify,
and hold harmless Landlord from and against any such lien or claim or action
thereon, together with costs of suit and reasonable attorneys' fees incurred by
Landlord in connection with any such claim or action.

     45. Tenant's Property. Landlord shall not be required to carry insurance of
any kind on Tenant's personal property, and shall not be obligated to repair any
damage thereto or replace the same for any reason.

     46. Tenants Requests. Tenant shall pay all the out of pocket legal expenses
incurred by Landlord as a result of requests from Tenant to exercise its rights
granted under this Lease Agreement, except for litigation in which the Tenant is
the prevailing party.

     47. Tenant's Right to Audit. In the event Tenant's Proportionate Share of
Operating Expense increases, excluding property taxes and insurance, by more
than five percent (5%) in any Calender Year, Tenant may audit Landlord common
area operating costs in order to verify the accuracy of operating expense
charges, provided that:

          a. Tenant specifically designates the calender year(s) that Tenant
intends to audit, which shall be a year within two (2) years of date of the
audit, but must be within the Term of this Lease Agreement.

          b. Such audit will be conducted only by a licensed firm, unaffiliated
with Tenant, with prior Landlord approval, and during regular business hours at
the office where Landlord maintains Operating Expense records, and only after
Tenant gives Landlord fourteen (14) days' notice.

          c. Tenant shall pay for all costs associated with audit, provided
however, that Landlord shall reimburse Tenant the costs associated with such
audit should the audit show that Operating Expenses were inaccurate by more than
seven percent (7%).

          d. If audit yields a result that Tenant has underpaid the Tenant will
reimburse Landlord upon receipt of invoice.

          e. Tenant agrees not to divulge the results of the audit to any other
party.

          (f) Tenant shall deliver to Landlord a copy of the results of such
audit within fifteen (15) days of its receipt by Tenant. No such audit shall be
conducted if any other tenant has conducted an audit for the time period Tenant
intends to audit and Landlord furnishes to

                                                                              17



Tenant a copy of the results of such audit. No audit shall be conducted at any
time that Tenant is in default of any of the terms of the Lease Agreement. No
subtenant shall have any right to conduct an audit and no assignee shall conduct
an audit for any period during which such assignee was not in possession of the
Leased Premises. Any refund due Tenant as a result of such audit shall be paid
by Landlord upon receipt of audit and invoice from Tenant.

     48. Time is of the Essence. Time shall be of the essence of this Agreement.

     49. Total Destruction. A total destruction of the Project shall
automatically terminate this Lease Agreement.

     50. Waiver. Failure of Landlord to declare any default immediately upon
occurrence thereof, or delay in taking any action in connection therewith, shall
not waive such default, but Landlord shall have the right to declare any such
default at any time thereafter. Landlord's acceptance of rent will not be deemed
a waiver of any Tenant breach or default existing at the time of payment, except
a default in the payment of money, and then only to the extent of the amount
received by Landlord.

     51. Waiver of Jury Trial. To the full extent allowed by law, the respective
parties hereto shall and they hereby do waive trial by jury in any action,
proceeding or cross-action whatsoever arising out of or in any way connected
with this lease, the relationship of Landlord and Tenant, Tenant's use or
occupancy of the Premises, or any claim for injury or damage, or the enforcement
of any remedy under any statute or otherwise.

     52. Waiver of Time Limitations. In the event Tenant shall have any claim or
cause of action against Landlord arising out of or otherwise related to this
lease, Tenant must file such action with a court of competent jurisdiction
within one year after the accrual of such claim or cause of action; otherwise,
such claim or cause of action shall be deemed waived and permanently barred by
the passage of time and be void.

     53. Waiver of Subrogation. Landlord and Tenant do each hereby release the
other from any and all liability or responsibility (to the other or to anyone
claiming through or under the other by way of subrogation or otherwise) for any
loss or damage to property or for personal injury caused by perils insured
against by the policies to be carried pursuant to this Lease, even if the cause
of such peril or damage shall have been the negligence of the other party or of
anyone for whom such party may be responsible. Such waiver of subrogation shall
be effective with respect to such loss or damage, and each policy hereunder
shall contain a clause or endorsement to the effect that any such release shall
not adversely affect or impair said policies or prejudice the right of the
releasing party to recover thereunder. Landlord and Tenant each agree that their
policies shall include such a clause or endorsement. The failure to obtain a
clause or endorsement providing such waiver of subrogation shall in no manner
limit or restrict the validity and enforceability of the waivers of subrogation
herein contained.

                                                                              18



                                    EXHIBIT C

                               TENANT IMPROVEMENTS

     The Landlord, at Landlord's expense, agrees to complete the following
     improvements as outlined in Paragraph 7 of the Lease Agreement:

     1.   Repaint 71,634 of wall area. This includes walls and lids in office
          spaces; multipurpose room 128 and lunch room 129; and all doors and
          relites contained therein. Estimated cost $59,846.

     2.   Re-carpet existing carpeted office areas. The carpet will be a high
          quality 15-year carpet tile product. Product samples will be provided
          to the Tenant. New 2-1/2" base will be provided. Landlord will pay for
          cost of carpet installation, including demolition and disposal of
          existing carpet and base, and lifting of furniture. Estimated cost
          $161,973.

     3.   Install new vinyl flooring in designated areas. Mannington Multiflec
          coved sheet vinyl with heat welded seams will be provided in men's
          restroom 144, men's restroom 210, women's restroom 211, and new men's
          restroom between gridlines C and D. Rubber stair treads will be
          replaced on entry stair case. Estimated cost $33,111.

     4.   Remove existing sinks and counter top in men's restroom 144 and
          replace with two half round foot operated basins. Estimated cost
          $26,046.

     5.   Add one new restroom at north end of manufacturing area. Will include
          one sink, one toilet, one urinal, toilet partition, bath accessories,
          necessary electrical, HVAC and sprinklers, and concrete cutting and
          patching. Estimated cost $33,899.



                                   EXHIBIT "D"

                              RULES AND REGULATIONS

     1. The doors, sidewalks, passages, exits, and entrances shall be used for
ingress and egress and shall not be obstructed. Tenant shall use reasonable
efforts to keep such areas clean and free from rubbish.

     2. Loitering anywhere in the Project shall not be permitted. Landlord
reserves the right to exclude or expel from the Project any person who, in the
judgment of Landlord, is under the influence of liquor or drugs or who shall in
any manner do any act in violation of the Rules and Regulations of the Project.

     3. Alterations in any way to the interior or exterior of the Leased
Premises including attaching pictures, certificates, licenses, and similar items
may be done only in a reasonable manner, subject to review by Landlord.

     4. Tenant shall not alter, paint, cover, obstruct, screen, tint, install
curtains, draperies, blinds, or shades, or obscure any window, shall not affix
any signs, advertisements, or notices on or to any window, and shall not have
any window treatment other than building standard as established by Landlord,
without the written consent of Landlord.

     5. All Tenant identification in the public areas of the Project must be
installed and approved by Landlord based on the standard sign age as established
by Landlord.

     6. The location of electrical, telephone, computer or other wiring and of
related outlets must be pre-approved prior to installation in writing by
Landlord. Such items shall be installed by qualified personnel in accordance
with building codes applicable to the Project and the Leased Premises.

     7. No items of unusual size or weight shall be used or placed in the
Project without Landlord's written permission. In no event shall any floor be
overloaded as determined by a competent engineer.

     8. The moving of any of Tenant's business or personal furniture, equipment,
inventory, or other items in or out of the Project or Leased Premises will be at
a time and in a manner designated by Landlord.

     9. No Tenant shall use or keep any foul or noxious gas or substance which
may in any manner be offensive or objectionable to Landlord or other occupants
of the Project. No noises, vibrations, odors, or activities bothersome to other
Tenants will be allowed in the Leased Premises or on the grounds of the Project.

     10. No animals, fish, birds, etc., are allowed within the Project without
Landlord's written permission.

     11. The Tenant is prohibited from storing goods, wares, or merchandise in
the Project or Leased Premises in areas not acceptable to Landlord for storage.
No auction, public or private, will be permitted in the Leased Premises.

     12. All Tenant requests for service or maintenance to the Landlord will be
made by notifying the Landlord or its agents at a designated location.
Landlord's agents or contractors shall not perform any work or do anything
outside of their regular or contracted duties unless under special written
instructions from the Landlord.

     13. All keys shall be obtained from Landlord, and all keys shall be
returned to Landlord upon termination or expiration of Tenant's Lease. No
duplicate keys shall be made without Landlord's approval. Tenant is responsible
to control the keys to the Leased Premises, and Tenant shall pay for lost keys.
Tenant shall not change the locks or install other locks on the doors without
Landlord's written approval. If Landlord gives Tenant written approval to change
locks, then Tenant will provide Landlord with keys.

     14. Tenant is responsible to lock and secure all doors to the Leased
Premises after regular business hours or after entering or leaving on
nonbusiness days. Landlord is not responsible to respond to after-hours tenant
lock-outs

                                                                               1



     15. The following acts shall not be allowed or suffered to be done nor
conditions allowed to exist upon the Leased Premises or any part thereof:

     a.   Any violation of any federal, state, or municipal statute or
          ordinance, or any regulation, order, or directive of a governmental
          agency, as such statutes, ordinances, regulations, orders, or
          directives now exist or may hereafter provide concerning the use and
          safety of the Leased Premises.

     b.   Any violation of any certificate of occupancy covering or affecting
          the use of the Leased Premises or any part hereof.

     c.   Any public or private nuisance.

     d.   The display or distribution of drug paraphernalia or sexually related
          paraphernalia, except as the same may be legally dispensed by a
          physician or surgeon, dentist, or pharmacist, duly licensed to
          practice such profession in the State.

     e.   The manufacture, distribution, sales, or dispensing in any manner of
          illegal drugs, or any type of illegal drug activity or consumption.

     f.    The sale or dispensing of alcoholic beverages.

     g.   The showing, displaying, viewing, renting, or selling of movie films
          within the Leased Premises which would be classified or rated as "X or
          R-rated" under present standards or criteria for such classification
          and rating.

     h.   Gambling.

     i.   The establishment or maintenance of a bawdy house, bar, nightclub, or
          tavern.

     j.   Any other act or condition which shall be lewd, obscene, or
          licentious.

     k.   Performance of abortions.

     1.   Mark, or drive nails, screw or drill into, the partitions, woodwork or
          plaster or otherwise deface its premisses or any part thereof.

     m.   Smoking shall not be permitted in or around any offices, interior
          common corridors, restrooms, lobby areas, elevators, stairwells, or
          building entrances.

     16. Landlord shall have the right to regulate parking throughout the
Project in a manner beneficial to the entire Project. Landlord shall have the
right to re-stripe parking stalls, lanes, and other areas as Landlord deems
reasonably necessary to control parking and access. Landlord may refuse to
permit any person who violates the rules to park in the parking lot, and any
violation of the rules shall subject the car to removal. No extended period
parking for campers, trailers, motor homes, emergency equipment, or other
nonstandard sized vehicles is permitted.

     17. Tenant shall not use the Project, Leased Premises, or parking
facilities for housing or sleeping without the written consent of the Landlord.

     18. Landlord shall in no case be liable for damages for any error with
regard to the admission to or exclusion from the Leased Premises of any person.
In the case of invasion, mob riot, public excitement, or other circumstances
rendering such action advisable in Landlord's opinion, Landlord reserves the
right to prevent access to the Leased Premises during the continuance of the
same by such action as Landlord may deem appropriate, including closing doors
and restricting access to public areas of the Project.

                                                                               2



     19. Each Tenant shall see that appliances and utilities are shut off as
appropriate before Tenant or Tenant's employees leave the Leased Premises.
Tenant is required to prevent controllable waste or damage in all aspects of the
Leased Premises from any default or carelessness. All Tenants shall keep the
doors to the Project's corridors closed at all times, except for ingress and
egress, unless door is equipped with an approved magnetic door holder.

     20. No Tenant shall install any radio or television antenna, or satellite
dish, loudspeaker, or other device on the roof or exterior walls of the Project
without Landlord's written permission.

     21. Each Tenant shall store all its refuse or waste within its Leased
Premises and dispose of such refuse or waste only in accordance with Project
rules and all applicable local, state, and federal regulations and laws.

     22. Tenant is not allowed to disturb, solicit, or canvass any occupant of
the Project and shall cooperate to prevent same. Canvassing, soliciting,
distributing handbills or any other written material, or peddling in the Project
is prohibited.

     23. Tenant agrees to enforce and, as necessary, to acquaint all persons
doing business with Tenant with the Project's Rules and Regulations.

     24. The failure of Landlord to enforce any of the Rules and Regulations
against any other Tenant in the Project shall not be deemed a waiver of any of
such Rules and Regulations. Landlord shall not be liable to Tenant for violation
of any of the Rules and Regulations or the breach of any covenant or condition
in any lease by any other Tenant in the Project.

     25. Landlord shall control and operate the public portions of the Project,
and the public facilities, and heating and air conditioning, as well as
facilities furnished for the common use of Tenant. Such control and operation
shall be accomplished in a manner consistent with the best interests of the
tenants in general. Tenant shall not obstruct, alter or in any way impair the
effective operation of the heating and air conditioning, electrical, fire,
safety, or lighting systems, and Tenant shall not tamper with or change any of
the thermostats or temperature control valves in the Project except those that
are in Tenant's space and are provided for Tenant's use.

     26. Tenant shall not use or keep in the Leased Premises or in the Project
any kerosene, gasoline, or other inflammable or combustible fluid or material,
nor use any method or heating or air conditioning not acceptable to Landlord.

     27. All damage done to the Leased Premises or the Project by the
installation or removal of any property of Tenant, or done by Tenant's property
while in the Leased Premises, shall be repaired at the expense of Tenant.

     28. Plumbing fixtures and appliances shall be used only for their intended
purposes, and Tenant shall not deposit any sweepings, rubbish, rags, or other
unsuitable substances therein. Damage resulting from misuse shall be paid for by
Tenant.

     29. Landlord shall not be responsible for any loss or theft or damage to
personal property in the Leased Premises or the Project from any cause
whatsoever, whether or not such loss, theft, or damage occurs when the Leased
Premises or other portions of the Project are locked against entry.

     30. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.

     31. Tenant shall participate in, to the extent possible and under the
direction of the Landlord, the preparation and implementation of an Emergency
Response Plan. The Tenant shall provide individuals to assist with the
carrying-out of any Emergency Response Plan.

     32. In the event of any conflict between these Rules and Regulations and
any lease with Tenant, the provisions of the lease shall be controlling.

                                                                               3

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF

FLOW INTERNATIONAL CORPORATION

Subsidiary	State or other Jurisdiction of Incorporation or Organization
Avure Technologies AB	Sweden
Avure Technologies Incorporated	Washington
CIS Acquisition Corporation	Michigan
Flow Asia Corporation	Taiwan
Flow Asia International Corporation	Mauritius
Flow Autoclave Systems, Inc.	Delaware
Flow Automation Systems Corporation	Ontario
Flow China	China
Flow Europe, GmbH	Germany
Foracon Europe Manufacturing GmbH & CO. KG	Germany
Flow Holdings GmbH (SAGL) Limited Liability Company	Switzerland
Flow Holdings FPS AB	Sweden
Flow Iberica, S.R.L.	Spain
Flow Italia, S.R.L.	Italy
Flow Japan Corporation	Japan
Flow Korea	Korea
Flow Latino	Brazil, South America
Flow Surface Prep/Europe, SAGL	Switzerland
Flow U.K., Ltd.	England
Flow Waterjet Florida Corporation	Florida
Robotic Simulations Limited	United Kingdom
Hydrodynamic Cutting Services	Louisiana

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 33-57100) and Form S-8 (No. 33-40397 and No. 33-44776) of Flow International Corporation of our report dated July 28, 2003 relating to the financial statements and financial statement schedules, which appears in this Form 10-K.

/S/  PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

July 29, 2003

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a),

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen R. Light, certify that:

1. I have reviewed this annual report on Form 10-K of Flow International Corporation;

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.

/s/    STEPHEN R. LIGHT	Dated July 29, 2003
Stephen R. Light
Principal Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a),  AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen D. Reichenbach, certify that:

1. I have reviewed this annual report on Form 10-K of Flow International Corporation;

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.

/s/    STEPHEN D. REICHENBACH	Dated July 29, 2003
Stephen D. Reichenbach
Principal Financial Officer

EX-32.1

                                                                    Exhibit 32.1

                            CERTIFICATION PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
                            (18 U.S.C. SECTION 1350)

In connection with the Annual Report of Flow International Corporation, a
Washington corporation (the "Company"), on Form 10-K for the year ending April
30, 2003 as filed with the Securities and Exchange Commission (the "Report"), I,
Stephen R. Light, Principal Executive Officer of the Company, certify, pursuant
to (S)906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. (S)1350), that to my
knowledge:

     (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.


/s/ STEPHEN R. LIGHT
- ------------------------------------
Stephen R. Light
Principal Executive Officer
July 29, 2003

EX-32.2

                                                                    Exhibit 32.2

                            CERTIFICATION PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
                            (18 U.S.C. SECTION 1350)

In connection with the Annual Report of Flow International Corporation, a
Washington corporation (the "Company"), on Form 10-K for the year ending April
30, 2003 as filed with the Securities and Exchange Commission (the "Report"), I,
Stephen D. Reichenbach, Principal Financial Officer of the Company, certify,
pursuant to (S)906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. (S)1350), that
to my knowledge:

     (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.


/s/ STEPHEN D. REICHENBACH
- ------------------------------------
Stephen D. Reichenbach
Principal Financial Officer
July 29, 2003