• statements regarding our future business plans and growth strategy;

• statements regarding the realization of backlog in the Advanced segment;

• statements regarding the use of cash, cash needs and ability to raise capital and/or use our credit facility;

• statements regarding our technological leadership position;

• statements regarding our intent to continue to make improvements to our system of internal controls;

• statements regarding anticipated results of potential or actual litigation;

• statements regarding our expectation that our unrecognized tax benefits will not change significantly within the next twelve months.

Additional information on these and other factors that could affect our financial results is set forth below. Finally, there may be other factors not mentioned above or included in our SEC filings that may cause our actual results to differ materially from those in any forward-looking statement. You should not place undue reliance on these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, future events or developments, except as required by federal securities laws.
The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying notes included elsewhere in this Form 10-Q.
Our MD&A includes the following major sections:
• Overview

• Results of Operations

• Liquidity and Capital Resources

• Off Balance Sheet Arrangements

• Contractual Obligations

• Critical Accounting Policies and Estimates

• Recently Issued Accounting Pronouncements

Overview
We are a technology-based global company whose objective is to deliver profitable dynamic growth by providing technologically advanced waterjet cutting and cleaning systems to our customers. To achieve this objective, we offer versatile waterjet cutting and industrial cleaning systems and we strive to:
• expand market share in our current markets both organically and through acquisitions;

• continue to identify and penetrate new markets;

• capitalize on the our customer relationships and business competencies;

• develop and market innovative products and applications; and

• continue to improve operating margins by focusing on operational improvements.

Over the past year, we have taken important steps in the implementation of our strategy. One of the initiatives in our overall strategy is the continued expansion of the market share in our current markets. In addition to the continued growth of the business in our Latin America and Asia Markets, we opened a distribution office in the Czech Republic, which are all markets with rapidly expanding presences.
During the third quarter of fiscal 2009, we, like many companies in the U.S., continued to experience the impact of the current economic recession across most of our major served markets. We have implemented, or are in the process of initiating, a number of measures in response to the downturn in the near term demand for our products.
First, since the beginning of fiscal 2009, we have reduced our global salaried staffing levels by more than 111 positions, or 15%. We incurred charges of approximately $0.5 million during the quarter in conjunction with this staff reduction. These charges are not part of a formally adopted restructuring plan and have been recorded in "Restructuring and Other Charges" in our Condensed Consolidated Statement of Operations.
Secondly, as part of our ongoing efforts to streamline our manufacturing infrastructure, we affected a plan to establish a single facility for designing and building the advanced waterjet systems at our Jeffersonville, Indiana facility and closed our manufacturing facility in Burlington, Ontario, Canada in fiscal 2009. The relocation of the production for this consolidation occurred in the first and second quarters of the current fiscal year. We recorded charges of $1.5 million associated with this facility closure in first quarter of fiscal 2009 and $295,000 in the second quarter of fiscal 2009. We estimate that the remaining costs to be recorded in relation to this facility closure will range from $10,000 to $20,000 during the remainder of fiscal year 2009. In the second quarter of fiscal 2009, as part of our continuous review of strategic alternatives globally, we further resolved to close our office and operations in Korea and sell our products through a distributor network. The charges associated with this action during the second quarter of fiscal 2009 were $151,000. We incurred additional charges of $60,000 related to lease termination costs and legal expenses during the third quarter of fiscal 2009 and expect to incur $60,000 to $90,000 to complete this closure.
Lastly, we continue our strong focus on working capital management and cash flow generation. In addition, we are also limiting our investments to strategic capital expenditures. These efforts will result in additional resources to provide flexibility in the event of a prolonged economic downturn. These new initiatives, in addition to the continued implementation of our long-term strategy, are expected to enable us to mitigate the adverse effects resulting from continuing recessionary economic conditions.
Our ability to fully implement our strategies and achieve our objective may be influenced by a variety of factors, many of which are beyond our control. These risks and uncertainties pertaining to our business are set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended April 30, 2008. The risk factor disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on July 11, 2008, have been updated in

Results of Operations
(Tabular amounts in thousands)
Summary Consolidated Results for the Three and Nine Months ended January 31,
2009 and 2008

                                      Three Months Ended January 31,                        Nine Months Ended January 31,
                                  2009                2008              %               2009                2008              %
Sales                         $    48,711          $ 65,369            (25 )%       $   166,353          $ 180,986            (8 )%
Operating Income (Loss)           (31,827 )           8,853            NM               (24,632 )           10,830            NM



                         Three Months Ended January 31,             Nine Months Ended January 31,
                         2009            2008          %            2009           2008          %
 Sales
 Systems             $   33,739        $ 48,209       (30 )%    $  115,997      $ 130,641       (11 )%
 Consumable parts        14,972          17,160       (13 )%        50,356         50,345         0 %
 Total Sales             48,711          65,369       (25 )%       166,353        180,986        (8 )%

Sales for the three months ended January 31, 2009, declined to $48.7 million or 25% compared to $65.4 million in the prior year comparative period. The decrease was the result of a decrease in organic sales of $15.4 million or 24%, and unfavorable exchange rates of $1.3 million. The decline in organic sales occurred as customers reduced or delayed capital spending and expansion plans as a result of the prevailing economic conditions. We have experienced significant sales volume declines in our North America and Europe markets which appear to be hardest hit thus far by the current recession, with a combined decline in sales of 32% and 11%, respectively, over the prior year comparative periods. Sales for the nine months ended January 31, 2009, declined 8% over the prior year comparative period primarily as a result of the significant decrease in third quarter sales noted above which offset the 2% year over year growth experienced in the first half of the current fiscal year.
Total system sales declined $14.5 million or 30% and $14.6 million or 11% for the three and nine months ended January 31, 2009 over the prior year comparative periods, while consumable parts sales declined $2.2 million or 13% for the three months ended January 31, 2009 over the prior year comparative periods, as a result of the prevailing recessionary economic conditions. Consumable parts sales for the nine months ended January 31, 2009, were consistent with the prior year comparative period due to strong aftermarket sales activity in the first half of the year.
We recorded an operating loss of $31.8 million and $24.6 million for the three and nine months ended January 31, 2009 compared to operating income of $8.9 million and $10.8 million in the comparative prior periods. The three-month operating loss included a provision for the open litigation with OMAX of $29 million discussed further in Note 7: Commitments and Contingencies, of the Condensed Consolidated Financial Statements, a goodwill impairment charge of $2.8 million, and severance expenses of $0.5 million related to actions taken to reduce our global staffing levels. Our operating loss for the nine months ending January 31, 2009 was also negatively impacted by restructuring charges of $2.0 million associated with actions taken to shut down our manufacturing facility in Burlington, Ontario and wind-down our operations in Korea. The decrease in operating income for the nine-month period was partially offset by lower corporate general and administrative expenses, primarily lower performance awards expense.
Segment Results of Operations
Effective May 1, 2008, we modified our internal reporting process and the manner in which the business is managed and in turn, reassessed our segment reporting. As a result of this process, we are now reporting our operating results to the chief operating decision maker based on market segments which has resulted in a change to the operating and reportable segments. Previously, we managed our business based on geography. Our change in operating and reportable segments from a geographic basis to market segments is consistent with management's long-term growth strategy. Our new reportable segments are Standard and Advanced. The Standard segment includes sales and expenses related to our cutting and cleaning systems using ultrahigh-pressure water pumps as well as parts and services to sustain these installed systems. Systems included in this segment do not require significant custom configuration. The Advanced segment includes sales and expenses related to our complex aerospace and automation systems which require specific custom configuration and advanced features to match unique customer applications as well as parts and services to sustain these installed systems.

Accordingly, prior year segment data has been recast to reflect the new segment structure. The chief operating decision maker evaluates the performance of our segments based on sales, gross margin and operating income (loss). For further discussion on our reportable segments, refer to Note 13 - Segment Information of the Condensed Consolidated Financial Statements.

Standard Segment

                                    Three Months Ended January 31,                        Nine Months Ended January 31,
                                 2009               2008              %               2009               2008               %
Sales                        $   41,269          $ 57,675            (28 )%       $  149,898          $ 158,907             (6 )%
% of total company
sales                                85 %              88 %          NM                   90 %               88 %          NM
Gross Margin                     17,176            28,052            (39 )%           67,669             74,822            (10 )%
Gross Margin as % of
sales                                42 %              49 %          NM                   45 %               47 %          NM
Operating Expenses:
Sales and Marketing               9,313             9,399             (1 )%           29,871             28,776              4 %
Research and
Engineering                       2,043             1,549             32 %             5,814              4,847             20 %

General and
Administrative                    2,700             2,530              7 %             9,048              8,366              8 %
Restructuring Charges
and Other                           460                 -            NM                  609                  -            NM
Total Operating
Expenses                         14,516            13,478              8 %            45,342             41,989              8 %
Operating Income                  2,660            14,574            (82 )%           22,327             32,833            (32 )%

NM = Not Meaningful

For the three and nine months ended January 31, 2009:
Sales in our standard segment decreased $16.4 million or 28% and $9.0 million or 6% over the prior year comparative periods. The quarter-to-date and year-to-date decline is primarily due to the following:
• Significant sales volume declines in North America and Europe which are the markets affected the most from the current recession. These two regions had a combined decline in sales of 32% and 11% for the three and nine months ended January 31, 2009, respectively, over the prior year comparative period. This decline was offset by a 15% increase in combined sales in South America and Asia Pacific regions for the nine months ended January 31, 2009, due to continued strong demand for our standard shapecutting systems in those markets.

• Total systems revenue in our standard segment declined by 35% and 9% for the three and nine months ended January 31, 2009, respectively.

• Consumable parts sales decreased by 13% during the three months ended January 31, 2009 as our customers experienced lower utilization in installed systems as a result of the prevailing weak economic conditions. Consumable parts sales were flat for the nine months ended January 31, 2009, due to greater aftermarket sales activity in the first half of the year.

• Excluding the impact of foreign currency changes, sales in the Standard segment declined $15.4 million or 27% and $11.8 million or 7% for the three and nine months ended January 31, 2009, compared to the prior year comparative period.

Gross margin for the three and nine months ended January 31, 2009, respectively, amounted to $17.2 million or 42%, and $67.7 million or 45% of sales compared to $28.1 million or 49%, and $74.8 million or 47% of sales in the prior year comparative periods. Generally, comparison of gross margin rates will vary period over period based on changes in our product sales mix and prices, and levels of production volume. The margin decline for the three and nine-month periods was primarily attributable to a greater mix of lower margin systems versus the prior year comparative period.

Operating expense changes consisted of the following:
• A decrease in sales and marketing expenses of $86,000 and an increase of $1.1 million or 4% for the three and nine months ended January 31, 2009, respectively. The decrease was as a result of lower commission expense based on lower sales volume offset by the year-to-date increase related to $0.9 million of expenses associated with the bi-annual International Manufacturing Technology Show (IMTS) in September 2008.

• An increase in research and engineering expenses of $494,000 or 32% and $967,000 or 20% for the three and nine months ended January 31, 2009, respectively. The increase for both the current quarter and year to date is mainly attributable to increased investment in research and development activity for new product development as well as lower reimbursements for product development costs in the current period;

• An increase in general and administrative expenses of $170,000 or 7% and $682,000 or 8% for the three and nine months ended January 31, 2009, respectively, based on investment in personnel to support the operations of this segment;

Advanced Segment

                                     Three Months Ended January 31,                        Nine Months Ended January 31,
                                2009                2008               %               2009               2008              %
Sales                        $   7,442          $    7,694             (3 )%       $   16,455          $ 22,079            (26 )%
% of total company
sales                               15 %                12 %          NM                   10 %              12 %          NM
Gross Margin                     2,189               1,242             76 %             3,983             2,416             65 %
Gross Margin as % of
sales                               29 %                16 %          NM                   24 %              11 %          NM
Operating Expenses:
Sales and Marketing                683               1,121            (39 )%            2,124             3,043            (30 )%
Research and
Engineering                        238                 614            (61 )%              995             1,741            (43 )%
General and
Administrative                     586               1,065            (45 )%            2,495             3,506            (29 )%
Restructuring Charges
and Other                           54                   -            NM                1,785                 -            NM
Total Operating
Expenses                         1,561               2,800            (44 )%            7,399             8,290            (11 )%
Operating Income                   628              (1,558 )          NM               (3,417 )          (5,874 )           42 %

NM = Not Meaningful

Sales in the Advanced segment will vary period over period for various reasons, such as the timing of contract awards, timing of project design and manufacturing schedule, and the timing of shipments to customers. For the three and nine months ended January 31, 2009, sales in our Advanced segment decreased by $252,000 or 3% and $5.6 million or 26%, respectively. This decrease is primarily due to the timing of revenue recognition for some of our aerospace contracts which were in the project design phase during the first half of the year. We anticipate continued increase in sales in the Advanced segment in future periods based on our current backlog of $35 million as of January 31, 2009. Backlog includes firm orders for which written authorizations have been accepted and revenue has not yet been recognized.
Gross margin for the three and nine months ended January 31, 2009, amounted to $2.2 million or 29%, and $4.0 million or 24% of sales compared to $1.2 million or 16%, and $2.4 million or 11% of sales in the prior year comparative periods. The improvement in gross margin as a percentage of sales when compared to the prior year comparative periods is attributable to improved contract pricing and labor efficiencies from consolidating the manufacturing for all our advanced systems in our Jeffersonville, Indiana facility.
Operating expenses in the Advanced segment declined by $1.2 million or 44% and $891,000 or 11% for the three and nine months ended January 31, 2009, respectively, as compared to the prior year comparative periods primarily as a result of the reduction in staff in this segment following the closure of our manufacturing facility in Burlington, Ontario. The year over year reduction in operating expenses was offset by $1.8 million expense related to the shutdown of the Burlington facility.
All Other
Our All Other category includes general corporate overhead expenses that do not support either the Standard or Advanced segments, as well as general and administrative expenses related to inactive entities that do not constitute operating segments.

                                         Three Months Ended January 31,                         Nine Months Ended January 31,
                                     2009                 2008              %               2009               2008              %
General and Administrative       $     3,132          $    2,751            14 %        $   11,043          $ 14,119            (22 )%
Provision for Litigation              29,000                   -            NM              29,000                 -            NM
Goodwill Impairment                    2,764                   -            NM               2,764                 -            NM

General and administrative expenses in our All Other category increased by $380,000 or 14%, and decreased by $3.1 million or 22% for the three and nine months ended January 31, 2009, as compared to the prior year comparative periods. The increase in the quarter was attributable to a credit of $475,000 in the prior year for an insurance recovery related to a theft in our Korean sales and service operation. The full year decrease was attributable to lower performance award expenses. The prior year comparative year-to-date period also included $2.9 million related to compensation expenses to amend our former CEO's contract.

We recorded a $29 million provision related to the patent litigation with OMAX during the current fiscal quarter pursuant to a Settlement and Cross Licensing Agreement which is discussed in Note 7 - Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements. Further, our three and nine month results as of January 31, 2009 also include a non- cash goodwill impairment charge of $2.8 million, which represented the carrying value of all of our goodwill. This charge was recognized due to a combination of factors, including the current economic environment which has resulted in a significant decline in the results of our operations and the sustained period of decline in our market capitalization.
Other (Income) Expense
Interest Income (Expense), net
Our interest expense, net was $348,000 and $337,000 for the three and nine months ended January 31, 2009, compared to interest income, net of $37,000 and $301,000 for the comparative prior periods. These changes are driven by a decrease of $189,000 and $329,000 in interest income for the three and nine month periods primarily due to lower average cash balances and interest rates in investment accounts during the current periods and an increase in interest expense of $196,000 and $309,000 for the three and nine month periods due to higher interest on used and unused portions of our credit facility. Further, we wrote off $114,000 of accrued interest due from the Purchaser of Avure following an agreement in principal with the Purchaser in January 2009 that only the principal amount on the note outstanding from the sale of the Avure Business would be paid. Refer to further detail in Note 7 - Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements. Other Income (Expense), Net
Our other Income (Expense), net in the Condensed Consolidated Statement of Operations is comprised of the following:

                                                     Three Months                        Nine Months
                                                   Ended January 31,                  Ended January 31,
                                                 2009             2008              2009              2008
Realized Foreign Exchange Gains (Losses),
net                                            $     206         $   369         $       674         $  (111 )
Unrealized Foreign Exchange Gains
(Losses), net                                       (581 )          (818 )            (1,524 )            85
Premium on Repurchase of Warrants                      -               -                   -            (629 )
Other                                                767              27                 794            (101 )

                                               $     392         $  (422 )       $       (56 )       $  (756 )

During the three and nine months ended January 31, 2009, we recorded Other Income, net of $392,000 and Other Expense, net of $56,000 as compared to Other Expense, net of $422,000 and $756,000 for the three and nine months ended January 31, 2008. These changes primarily resulted from the fluctuation in realized and unrealized foreign exchange gains and losses. The higher year-over-year net foreign exchange loss during the current periods is a result of significant movement in certain key currencies against the U.S. Dollar. In particular, we were negatively impacted by the devaluation of the Canadian Dollar and the Brazilian Real against the U.S. Dollar, due to the revaluation of large U.S. Dollar payables to the US Holding company.
During the three months ended January 31, 2009, we recorded royalty income of $418,000, net of settlement costs of $500,000, from the license of certain patents and $318,000 from a stockholder in settlement of a claim under Section 16(b) of the Exchange Act.
Additionally, during the nine months ended January 31, 2008, we repurchased 403,300 warrants from certain funds managed or advised by Third Point LLC for an aggregate purchase price of $3 million. The cash paid in excess of the fair market value of those warrants on the repurchase date of $629,000 was recorded as an Other Expense in fiscal year 2008. Income Taxes
Our effective tax rates for the three and nine months ended January 31, 2009, were 35% and 25%, respectively compared to 26% and 17% for the prior year comparative periods. We recorded an income tax benefit of $11.1 million and $6.3 million during the three and nine months ended January 31, 2009, which consists of current tax expense of $51,000 and $2.0 million, and deferred tax benefit of $11.2 million and $8.3 million, respectively. Our deferred tax . . .