Learning outcome is an important indicator for educators in evaluating curriculum design. The focus of this study has been to examine the factors within internship programs, recognizing the complex nature of knowledge application in a practical industry environment. Flow theory was adopted to explain the psychological state of hospitality students during internship and relate it to their learning outcome. A total of 152 responses were collected via self-administrated questionnaires from hospitality students at their initial and final stages of internship in Taiwan. Results from SEM analysis indicate that both skill and the challenge from work have significant influence on the interns' flow experience, wherein skill has a positive influence, while challenge does not. The flow theory was well confirmed at the final stage of the internship, which becomes the complete mediator for the skill and challenge to influence the learning outcome. Learning for the interns is not exclusively concerned with skill improvement, but includes a process to overcome the unfamiliarity of the challenge, which consequently leads to a direct positive effect on learning. Thus, proper challenge and improvement of skill are important counterparts, which influence the learning outcome simultaneously, where each of them cannot result in the proper learning outcome alone. The practical implication, which can be derived, is that proper cooperation between the educator and the intern supervisor should create an environment for optimum skill development, in which the challenge is balanced with the acquired new skills. Achieving such a balance via flow will facilitate a better learning outcome.