Voting Rights.    Each outstanding share of Series A preferred stock is entitled to that number of votes equal to the number of shares of common stock into which such share of Series A preferred stock is convertible. Each share of Series A preferred stock is currently convertible into one share of common stock. Except with respect to the directors to be elected by the holders of the Series A preferred stock, voting as a class, the Series A preferred stock and the common stock vote as a single class on all matters submitted to a vote of our shareholders. Until Triumph Partners III, L.P. (which has changed its name to Washington & Congress Capital Partners, L.P.) and its affiliates beneficially own less than 50% of the shares of Series A preferred stock issued to them in the Reorganization, the holders of Series A preferred stock will be entitled, voting as a separate class, to elect one director to our board of directors. In addition, the Series A preferred stock and our common stock will vote as a single class in the election of all other directors of our board of directors. In the event of a covenant breach (as that term is defined in the Certificate of Amendment (relating to the Series A preferred stock) to our Certificate of Incorporation), the holders of the Series A preferred stock will be entitled to elect one additional director to our board of directors. Thereafter, on each six-month anniversary of the occurrence of such breach, the holders of the Series A preferred stock will be able to elect one more director until the breach has been cured or waived. If, at any time while the holders of Series A preferred stock are entitled to elect a director, such director ceases to be a director of our company, the vacancy can only be filled by the vote of the holders of a majority of the Series A preferred stock.

Liquidation Preference.    In the event of any liquidation, dissolution or winding up of our company, the holders of Series A preferred stock will be entitled to receive, before the holders of common stock or any other class or series of stock ranking junior to the Series A preferred stock will be entitled to receive anything in respect of their shares, a liquidation preference equal to $4.53 per share (subject to adjustment for stock splits, stock dividends, recapitalizations and similar transactions), plus any accrued or declared but unpaid dividends on such shares of Series A preferred stock, which we refer to as the "Series A Preference Amount"; provided, however, that in the event that the holders of Series A preferred stock would have received an amount greater than the Series A Preference Amount had they converted their Series A preferred stock into shares of common stock immediately prior to the liquidation, dissolution or winding up of our company, such holders will be entitled to receive an amount per share equal to the amount they would have received had they effected such a conversion.

Conversion into Common Stock.    Each share of Series A preferred stock is currently convertible, at the option of the holder thereof, into one share of common stock without the payment of additional consideration. Subject to the satisfaction of certain conditions, we have the right to require the holders of the Series A preferred stock to convert all, but not less than all, of their shares into common stock. At issuance, as the value of a share of common stock into which a share of Series A preferred stock was convertible was less than the conversion price, there was no economic incentive for a holder of Series A preferred stock to convert and, accordingly, there was no beneficial conversion feature in the Series A preferred stock under generally accepted accounting principles.

Redemption.    Subject to certain limitations, a majority in interest of the holders of the Series A preferred stock have the right to require our company to redeem their shares of Series A preferred stock upon the occurrence of a liquidity event (as described in the Certificate of Amendment (relating to the Series A preferred stock) to our Certificate of Incorporation) or at any time after December 17, 2007 if we have paid our Senior Credit Facility and the Mezzanine Loan in full on or before such date. The redemption right can be exercised up to three times, but for not less than £5 million on any one occasion (or such lower amount as is necessary to redeem all of the shares of Series A preferred stock then outstanding). Upon such a redemption, the holders of the Series A preferred stock will be entitled to receive an amount equal to the Series A Preference Amount.

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The following table presents the changes in the carrying amount of the Series A preferred stock for the six months ended March 31, 2004 and 2003 (dollars in thousands):

				Six Months Ended March 31,
				2004				2003
Balance at October 1, 2003 and 2002, respectively				$	33,151			$	32,254
Accretion of issuance costs					239				246
Foreign exchange effect					—				415
Balance at March 31, 2004 and 2003, respectively				$	33,390			$	32,915

Commitments

Acquisition Agreements

Related to our acquisitions of flexible staffing agencies, we have entered into agreements to pay additional amounts, payable in cash and/or shares of our company's stock, of up to $12.9 million, as of March 31, 2004, in contingent consideration dependent upon future earnings of such acquired entities.

Employment Agreements

We have three employment agreements with our Executive Chairman, Chief Executive Officer and Chief Financial Officer that provide for minimum aggregate annual compensation of $0.9 million in fiscal 2004. Our employment agreements with each of our Executive Chairman and Chief Executive Officer contain, among other things, customary confidentiality and termination provisions and also provides that in the event of the termination of the executive following a "change of control" of our company (as defined in such agreements), or a significant change in his or her responsibilities, such person will be entitled to receive a cash payment of up to 2.9 times his or her average annual base salary during the preceding 12 months. Our Executive Chairman and Chief Executive Officer have agreed not to compete with us for a period of twelve months following termination of employment without our prior written consent. Each employment agreement with our Executive Chairman and Chief Executive Officer expires on September 24, 2004; however, each employment agreement shall be automatically renewed on such date, and on each anniversary of such date, for an additional period of one-year, unless our company or the executive gives notice to the other of its intent to terminate the employment agreement within 90 days of the then applicable termination date.

Further, the employment arrangement with our Executive Chairman also provides that in the event of a change of control of our company during fiscal 2004, his salary would be reinstated to the amount in effect immediately prior to his resignation, in January 2004, as Chief Executive Officer. If such an event were to occur, the minimum aggregate annual compensation would increase to $1.2 million for these three executives.

Our employment agreement with our Chief Financial Officer is terminable by either party on six-month's notice and provides that such officer will not compete against us for a period of twelve months following his termination of employment.

Operating Leases

The Company has entered into various operating lease agreements for office space and equipment. Certain of these leases provide for renewal options.

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Contractual Cash Obligations

As described under "Borrowings," "Acquisition Agreements," and "Operating Leases" above, the following table summarizes our contractual cash obligations as of March 31, 2004 (dollars in thousands):

Fiscal				Total Debt Obligations				Total Lease Obligations				Total Other Obligations				Total Obligations
2004				$	7,856			$	1,032			$	3,926			$	12,814
2005					12,783				1,565				10,328				24,676
2006					33,785				1,429				1,482				36,696
2007					63,917				1,288								65,205
2008					20,068				896								20,964
Thereafter					—				2,635								2,635
				$	138,409			$	8,845			$	15,736			$	162,990

Lease obligations reflect future minimum rental commitments required under operating leases that have non-cancelable lease terms as of March 31, 2004. Other obligations reflect contingent consideration related to our acquisitions of certain flexible staffing agencies and third-party fees for the implementation of financial software.

Litigation

On April 13, 1998, one of our shareholders, purporting to sue derivatively on our behalf, commenced a derivative suit in the Supreme Court of the State of New York, County of New York, entitled Kevin Mak, derivatively and on behalf of Transworld Healthcare, Inc., Plaintiff, vs. Timothy Aitken, Scott A. Shay, Lewis S. Ranieri, Wayne Palladino and Hyperion Partners II L.P., Defendants, and Transworld Healthcare, Inc., Nominal Defendant, Index No. 98-106401. The suit alleges that certain of our officers and directors, and Hyperion Partners II L.P. ("HPII"), breached fiduciary duties owed to us and our shareholders, in connection with a transaction, approved by a vote of our shareholders on March 17, 1998, in which we were to issue certain shares of stock to Hyperion Partners II L.P. in exchange for certain receivables due from Health Management, Inc. ("HMI"). The action seeks injunctive relief against this transaction, and damages, costs and attorneys' fees in unspecified amounts. The transaction subsequently closed and the plaintiff has, on numerous occasions, stipulated to extend the defendants' time to respond to this suit.

Contingencies

Some of our subsidiaries were Medicare Part B suppliers who submitted claims to the designated carrier who is the government's claims processing administrator. From time to time, the carrier may request an audit of Medicare Part B claims on a prepayment or postpayment basis. If the outcome of any audit results in a denial or a finding of an overpayment, then the affected subsidiary has appeal rights. Under postpayment audit procedures, the supplier generally pays the alleged overpayment and can pursue appeal rights for a refund of any paid overpayment incorrectly assessed against the supplier. Some of these subsidiaries are currently responding to these audits and pursuing appeal rights in certain circumstances.

We believe that we are in compliance, in all material respects, with all applicable Federal, state and foreign laws and regulations. Because of the broad and sometimes vague nature of these laws and regulations, there can be no assurance that an enforcement action will not be brought against us, or that we will not be found to be in violation of one or more of these laws or regulations. At present, we cannot anticipate what impact, if any, subsequent administrative or judicial interpretations of applicable Federal, state and foreign laws and regulations may have on our financial position, cash flows and results of operations.

We are involved in various legal proceedings and claims incidental to our normal business activities. We are vigorously defending our position in all such proceedings and, at March 31, 2004, have

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recorded an accrual of $0.5 million to cover our estimated exposure related to these matters. We believe that these matters, including the derivative suit, should not have a material adverse impact on our consolidated financial position, cash flows or results of operations.

Impact of Recent Accounting Standards

The Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46") in January 2003 and a revised interpretation of FIN 46 ("FIN 46R") in December 2003. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. For all arrangements entered into after January 31, 2003, we are required to continue to apply FIN 46 through the end of the first quarter of fiscal 2004. We were required to adopt the provisions of FIN 46R, for those arrangements entered into prior to February 1, 2003, in the second quarter of fiscal 2004. As we do not have any variable interest entities, the adoptions of FIN 46 and FIN 46R did not have a material impact on our company's consolidated financial position or results of operations.

In December 2003, the FASB revised FAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS No. 132"), to require additional disclosures to those in the original FAS No. 132 about assets, obligations, cash flows and net periodic benefit costs of defined benefit pension plans and other defined benefit postretirement plans. The year-end provisions of FAS No. 132 will be effective for us for the year ending September 30, 2004. In accordance with the interim disclosure requirements of FAS No. 132, we maintain a defined contribution plan, pursuant to Section 401(k) of the Internal Revenue Code, covering all U.S. employees who meet certain requirements. In addition to the U.S. plan, our U.K. subsidiaries also sponsor personal pension plans that operate as salary reduction plans. We expect to contribute $0.1 million to such plans in fiscal 2004. We believe that the adoption of the year-end disclosure requirements of FAS No. 132 will not have a material impact on our consolidated financial position or results of operations.

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange

We face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our consolidated financial results. Our primary exposures relate to non-U.S. dollar denominated sales in the U.K. where the principal currency is Pounds Sterling and to the Pounds Sterling debt denominated obligations. See "Interest Rate Risk" for debt obligations principal cash flows and related weighted average interest rates by expected maturity dates. Currently, we do not hedge foreign currency exchange rate exposures.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relate primarily to our cash equivalents and the U.K. subsidiaries' December 17, 1999 refinancing which includes the Senior Credit Facility and Mezzanine Loan. Our cash equivalents include highly liquid short-term investments purchased with initial maturities of 90 days or less. We are subject to fluctuating interest rates that may impact, adversely or otherwise, our consolidated results of operations or cash flows for our variable rate Senior Credit Facility, Mezzanine Loan and cash equivalents. In accordance with provisions of the 1999 refinancing, on January 25, 2000, we capped our interest rate (LIBOR cap of 9%) on approximately $41.9 million of our floating rate debt in a contract that expired on June 30, 2003.

On March 20, 2003, we entered into a Rate Cap Floor Collar Agreement that caps our interest rate at LIBOR of 5.50% and our interest floor at LIBOR of 4.47%, subject to special provisions, on approximately $91.3 million of our floating rate debt under a contract that expires March 20, 2008. In accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," as amended by Statement of Financial Accounting Standards No. 138 and related implementation guidance, we have calculated the fair value of the interest cap and floor derivative to be an asset of $0.4 million as of March 31, 2004. In addition, changes in the value from period to period of the interest cap and floor derivative will be recorded as an adjustment to interest expense.

As of March 31, 2004, our Series A preferred stock (with an aggregate liquidation preference of $35.2 million) bears dividends at the per share rate of 9.375% of $4.53 per annum. In addition, we had a note payable of $1.8 million, which was issued in connection with the acquisition of a U.K. flexible staffing agency. The note payable is redeemable, at the holder's option, in fiscal 2004 and bears interest at 5.25% per annum at March 31, 2004. The table below represents the expected maturity of our variable rate debt and their weighted average interest rates at March 31, 2004 (dollars in thousands).

Fiscal				Expected Maturity				Weighted Average Rate
2004				$	6,030			LIBOR +1.70%
2005					12,783			LIBOR +2.00%
2006					33,785			LIBOR +3.22%
2007					63,917			LIBOR +3.50%
2008					20,068			LIBOR +7.00%
Thereafter					—			—
				$	136,583			LIBOR +3.72%

The aggregate fair value of the our debt was estimated based on quoted market prices for the same or similar issues and approximated $139.8 million as of March 31, 2004.

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Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures.    Our company's management, with the participation of our chief executive officer and our chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2004.

Under the rules of the Securities and Exchange Commission, "disclosure controls and procedures" are controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our chief executive officer and acting chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of March 31, 2004, our disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit to the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified under the rules and forms of the Securities and Exchange Commission.

Changes in Internal Control Over Financial Reporting.    There have not been any changes in our "internal control over financial reporting" (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Item 6.    Exhibits and Reports on Form 8-K

(a)    Exhibits

10.1    Agreement, dated February 17, 2004, among Allied Healthcare (UK) Limited and Atos KPMG Consulting Limited regarding implementation of financial software.

31.1    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer, President and Chief Operating Officer.

31.2    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1    Section 1350 Certification of Chief Executive Officer, President and Chief Operating Officer.

32.2    Section 1350 Certification of Chief Financial Officer.

(b)    Reports on Form 8-K.

On February 23, 2004, we furnished to the Securities and Exchange Commission a Current Report on Form 8-K that included information required by Items 5 and 7 of Form 8-K. The Form 8-K disclosed that we ceased trading the shares of our common stock on the American Stock Exchange and commenced trading on the Nasdaq National Market under the trading symbol "AHCI." No financial statements were filed.

On February 12, 2004, we furnished to the Securities and Exchange Commission a Current Report on Form 8-K that included information required by Item 12 of Form 8-K. The Form 8-K disclosed that we had issued a press release on February 12, 2004 announcing our earnings for the quarter ended December 31, 2003. No financial statements were filed. However, the press release attached to the Form 8-K included a table containing statement of operations data.

On February 3, 2004, we furnished to the Securities and Exchange Commission a Current Report on Form 8-K that included information required by Item 5 of Form 8-K. The Form 8-K disclosed that on the cover page of our Annual Report on Form 10-K for the fiscal year ended September 30, 2003, which was filed with the Securities and Exchange Commission on December 29, 2003, we reported that the aggregate market value of the voting and non-voting common equity held by non-affiliates of our company as of December 26, 2003 was approximately $47.0 million. The Form 8-K disclosed that, pursuant to the rules and regulations of the Securities and Exchange Commission, as of March 31, 2003, the end of our company's most recently-completed second fiscal quarter, such aggregate market value, calculated in the same manner, was approximately $31.7 million. No financial statements were filed.

On January 16, 2004, we furnished to the Securities and Exchange Commission a Current Report on Form 8-K that included information required by Item 5 of Form 8-K. The Form 8-K disclosed that we had issued a press release on January 15, 2004 announcing that Timothy M. Aitken had retired as Chief Executive Officer of our company, while remaining as Chairman of our company. Sarah L. Eames was promoted to Chief Executive Officer. No financial statements were filed.

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SIGNATURES

Pursuant to the requirements 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.

Dated: May 17, 2004

ALLIED HEALTHCARE INTERNATIONAL INC.

By: /s/ Charles F. Murphy

Charles F. Murphy Chief Financial Officer (Principal Financial Officer and Duly Authorized to Sign on Behalf of Registrant)

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