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

General

The following discussion and analysis should be read in conjunction with the information contained in the Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainty. Our actual results could differ materially from the results discussed in these forward-looking statements. Factors that could cause or contribute to such differences include those discussed on page 2 in this Quarterly Report on Form 10-Q under "Forward-Looking Statements."

We are a leading provider of flexible, or temporary, healthcare staffing to the United Kingdom ("U.K.") healthcare industry as measured by revenues, market share and number of staff. At March 31, 2005, we operated an integrated network of approximately 125 branches throughout most of the U.K. Our healthcare staff consists principally of nurses, nurses aides and home health aides (known as carers in the U.K). We focus on placing our staff on a per diem basis in hospitals, nursing homes, care homes (which provide assisted living without medical services) and private homes. We maintain a pool of over 25,000 nurses, nurses aides and home health aides. We also supply medical-grade oxygen for use in respiratory therapy to the U.K. pharmacy market and to private patients in Northern Ireland.

Critical Accounting Policies

Accounts Receivable

We are required to estimate the collectibility of our accounts receivable, which requires a considerable amount of judgment in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer. Significant changes in required reserves may occur in the future as we continue to expand our business and as conditions in the marketplace change.

Intangible Assets

We have significant amounts of goodwill. The determination of whether or not goodwill has become impaired involves a significant amount of judgment. Changes in strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of goodwill. We have recorded goodwill and separately identifiable intangible assets resulting from our acquisitions through March 31, 2005. Goodwill is tested for impairment annually in the fourth quarter of each fiscal year. A more frequent evaluation will be performed if indicators of impairment are present. We completed the annual impairment test of goodwill during the fourth quarter of fiscal 2004 and determined that there was no impairment to our goodwill balance. The calculation of fair value used for an impairment test includes a number of estimates and assumptions, including future income and cash flow projections, the identification of appropriate market multiples and the choice of an appropriate discount rate. If we are required to record an impairment charge in the future, it could have an adverse impact on our consolidated financial position or results of operations.

Deferred Income Taxes

We account for deferred income taxes based upon differences between the financial reporting and income tax bases of our assets and liabilities. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. The determination of whether or not valuation allowances are required to be recorded involves significant estimates regarding the future profitability of our company, as well as potential tax strategies for the utilization of net loss and operating loss carryforwards.

Contingencies

Related to our acquisitions of certain flexible staffing agencies, we have entered into agreements to pay additional amounts, payable in cash, in contingent consideration dependent upon future earnings of such acquired entities. See Note 14 of the Notes to Condensed Consolidated Financial Statements.

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Also, we are involved in various legal proceedings and claims incidental to our normal business activities. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

Revenue Recognition

Patient services and respiratory therapy revenues are recognized when services are performed and substantiated by proper documentation. For patient services, which are billed at fixed rates and account for approximately 97% of our company's business, revenue is recognized upon completion of timesheets that also require the signature of the recipient of services. Revenues from the rental of home medical equipment (including respiratory equipment) are recognized over the rental period (typically on a month-to-month basis). Revenues from the sale of oxygen and supplies for use in respiratory therapy are recognized when products are shipped, a contractual arrangement exists, the sales price is either fixed or determinable and collection is reasonably assured.

We receive a majority of our revenue from the National Health Services (the "NHS") and other U.K. governmental payors. Certain revenues are subject to review by third-party payors and adjustments, if any, are recorded when determined.

Purchase Accounting

We account for our acquisitions as purchase business combinations. At acquisition, preliminary values and useful lives are allocated based upon fair values that have been determined for assets acquired and liabilities assumed and management's best estimates for values that have not yet been finalized. We obtain a third-party valuation in order to complete our purchase price allocations. Accordingly, final asset and liability fair values as well as useful lives may differ from management's original estimates and could have an adverse impact on our consolidated financial position or results of operations.

Results of Operations

Three Months Ended March 31, 2005 vs. Three Months Ended March 31, 2004

Revenues

Total revenues for the three months ended March 31, 2005 were $90.8 million compared to $80.2 million for the three months ended March 31, 2004, an increase of $10.6 million or 13.3%. This was due to acquisitions in the social service sector ($5.3 million), internal growth ($2.5 million) and the favorable effects of changes in foreign exchange ($2.8 million).

Gross Profit

Total gross profit increased by $3.7 million to $26.2 million for the three months ended March 31, 2005 from $22.5 million for the three months ended March 31, 2004, an increase of 16.3%. The favorable effects of changes in foreign exchange accounted for $0.8 million of the increase. As a percentage of total revenue, gross profit for the three months ended March 31, 2005 increased to 28.8% from 28.1% for the comparable prior period. Gross margins for patient services increased (28.1% for the three months ended March 31, 2005 versus 27.8% for the comparable prior period) mainly due to management's focus on supplying healthcare staff to our higher margin customers and acquisitions being focused on higher margin businesses. Gross margins in respiratory, medical equipment and supplies sales increased (58.3% for the three months ended March 31, 2005 versus 42.4% for the comparable prior period) mainly due to an increased focus on sales of portable oxygen therapy equipment and a steady increase in the number of patients in Northern Ireland, while keeping costs static.

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Selling, General and Administrative Expenses

Total selling, general and administrative expenses increased by $2.1 million to $18.0 million for the three months ended March 31, 2005 from $15.9 million for the three months ended March 31, 2004, an increase of 13.6%. This increase was mainly due to an increased level of overhead ($1.6 million), principally related to new acquisitions, and changes in foreign exchange of $0.5 million.

Interest Income

Total interest and other income for the three months ended March 31, 2005 was $0.1 million compared to $0.2 million for the three months ended March 31, 2004. The decrease in interest income was attributable to a lower level of funds invested.

Interest Expense

Total interest expense for the three months ended March 31, 2005 was $1.0 million compared to $3.2 million for the three months ended March 31, 2004, which represents a decrease of $2.2 million. This decrease was principally due to reduced bank debt in the three months ended March 31, 2005.

Other Income

Total other income for the three months ended March 31, 2005 was $0.2 million, which represents the benefit related to the change in the fair value of our company's interest swap agreements.

Provision for Income Taxes

We recorded a provision for income taxes amounting to $2.4 million or 31.9% of income before income taxes for the three months ended March 31, 2005, compared to a provision of $1.0 million or 27.6% of income before income taxes for the three months ended March 31, 2004. The difference in the effective tax rate between the three months ended March 31, 2005 and the three months ended March 31, 2004 is mainly due to the U.S. pre-tax loss recorded in the second quarter of fiscal 2004 for which no benefit was provided and permanent differences in the U.K. Our company does not provide a tax benefit for U.S. pre-tax losses as it is more likely than not that we will not utilize our net operating losses in the U.S.

Net Income

As a result of the foregoing, we recorded net income of $5.1 million for the three months ended March 31, 2005 compared to net income of $2.6 million for the three months ended March 31, 2004.

Series A Preferred Stock

On July 7, 2004, all of our Series A preferred stock was converted into a like number of shares of common stock. For the three months ended March 31, 2004, we accrued $0.9 million of dividends for the Series A preferred stock issued in connection with the exchange of equity investments and subordinated debt investments in our U.K. subsidiaries for shares of our common stock and shares of our Series A preferred stock in fiscal 2002 (the "Reorganization") and accreted $0.1 million of costs related to the issuance of our Series A preferred stock.

Six Months Ended March 31, 2005 vs. Six Months Ended March 31, 2004

Revenues

Total revenues for the six months ended March 31, 2005 were $177.4 million compared to $158.7 million for the six months ended March 31, 2004, an increase of $18.7 million or 11.8%. This increase was mainly due to acquisitions in the social services sector ($9.5 million), the favorable effects of changes in foreign exchange ($10.2 million) and internal growth in our respiratory, medical equipment and supplies operations ($0.5 million). This increase was offset by decreases in our NHS business, in

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early fiscal 2005, as a result of the NHS quality standards that were introduced in fiscal 2004, which resulted in fewer workers being available for placement with the NHS and additional competition from NHS Professionals, the internal NHS agency. As a result of our company's reemphasis on internal growth in our patient services operations, we have experienced improvements in our patient services internal growth in the second quarter of fiscal 2005.

Gross Profit

Total gross profit increased by $6.6 million to $51.4 million for the six months ended March 31, 2005 from $44.8 million for the six months ended March 31, 2004, an increase of 14.6%. The favorable effects of changes in foreign exchange accounted for $2.9 million of the increase. As a percentage of total revenue, gross profit for the six months ended March 31, 2005 increased to 29.0% from 28.3% for the comparable prior period. Gross margins for patient services increased (28.4% for the six months ended March 31, 2005 versus 27.9% for the comparable prior period) mainly due to management's focus on supplying healthcare staff to our higher margin customers and acquisitions being focused on higher margin businesses. Gross margins in respiratory, medical equipment and supplies sales increased (53.0% for the six months ended March 31, 2005 versus 42.5% for the comparable prior period) mainly due to an increased focus on sales of portable oxygen therapy equipment and a steady increase in the number of patients in Northern Ireland, while keeping costs static.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses increased by $2.7 million to $35.3 million for the six months ended March 31, 2005 from $32.6 million for the six months ended March 31, 2004, an increase of 8.2%. This increase was mainly due to an increased level of overhead ($1.7 million), principally related to new acquisitions, and changes in foreign exchange of $1.9 million. This increase was partially offset by the compensation payments of $0.9 million to key executives, made in the quarter ended December 31, 2003, to complete the reimbursement of tax liabilities and to resolve other consequences incurred by them in connection with the Reorganization.

Interest Income

Total interest and other income for the six months ended March 31, 2005 was $0.1 million compared to $0.4 million for the six months ended March 31, 2004, which represents a decrease of $0.1 million. The decrease was attributable to a lower level of funds.

Interest Expense

Total interest expense for the six months ended March 31, 2005 was $2.2 million compared to $5.6 million for the six months ended March 31, 2004, which represents a decrease of $3.4 million. This decrease was due to reduced bank debt in the six months ended March 31, 2005, the recording of a $0.6 million benefit related to the change in the fair value of our company's interest rate cap and floor collar agreement in the six months ended March 31, 2004 and changes in foreign exchange of $0.2 million.

Other Income

Total other income for the six months ended March 31, 2005 was $0.2 million, which represents the benefit related to the change in the fair value of our company's interest swap agreements.

Provision for Income Taxes

We recorded a provision for income taxes amounting to $4.3 million or 30.4% of income before income taxes for the six months ended March 31, 2005, compared to a provision of $2.6 million or 37.4% of income before income taxes for the six months ended March 31, 2004. The difference in the effective tax rate between the six months ended March 31, 2005 and the six months ended March 31,

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2004 is mainly due to the U.S. pre-tax loss recorded in the second quarter of fiscal 2004 for which no benefit was provided and permanent differences in the U.K. Our company does not provide a tax benefit for U.S. pre-tax losses as it is more likely than not that we will not utilize our net operating losses in the U.S.

Net Income

As a result of the foregoing, we recorded net income of $9.9 million for the six months ended March 31, 2005 compared to net income of $4.4 million for the six months ended March 31, 2004.

Series A Preferred Stock

On July 7, 2004, all of our Series A preferred stock was converted into a like number of shares of common stock. For the six months ended March 31, 2004, we accrued $1.9 million of dividends for the Series A preferred stock issued in connection with the Reorganization and accreted $0.2 million of costs related to the issuance of our Series A preferred stock.

Liquidity and Capital Resources

General

For the six months ended March 31, 2005, we generated $9.2 million of cash from operating activities. Cash requirements for the six months ended March 31, 2005 for capital expenditures ($2.7 million), payments for acquisitions and acquisitions payable ($9.5 million), payments on notes payable ($1.9 million) and payments on long-term debt ($13.2 million), were met through operating cash flows, restricted cash, proceeds from long-term debt and cash on hand.

In January 2001, we initiated a stock repurchase program, whereby we may purchase up to approximately $1.0 million of our outstanding shares of common stock in open-market transactions or in privately-negotiated transactions. In May 2003, we initiated a second stock repurchase program, pursuant to which we may purchase up to an additional $3.0 million of our outstanding shares of common stock in open-market transactions or in privately-negotiated transactions. As of March 31, 2005, we had acquired 407,700 shares of our common stock for an aggregate purchase price of $1.3 million pursuant to our stock repurchase programs, which are reflected as treasury stock in the condensed consolidated balance sheet at March 31, 2005.

In fiscal 2004, Mr. Aitken, our company's Chairman and Chief Executive Officer, and Ms. Eames, our company's Executive Vice President, repaid in full the principal and accrued interest on the promissory notes issued by them to our company in connection with the Reorganization in fiscal 2002. The principal and accrued interest repaid aggregated $0.6 million and $0.4 million, respectively. The loans were repaid by delivery to our company of 103,596 and 73,459 shares of our company's common stock held by Mr. Aitken and Ms. Eames, respectively, valued at $5.70 per share, the closing price on the day prior to the repayment date. The shares delivered by Mr. Aitken and Ms. Eames are held by our company as treasury shares.

We believe the existing capital resources and those generated from operating activities and available under existing borrowing arrangements will be adequate to conduct our operations for the next twelve months.

Accounts Receivable

We maintain a cash management program that focuses on the reimbursement function, as growth in accounts receivable has been the main operating use of cash historically. At March 31, 2005 and September 30, 2004, $39.7 million (12.8%) and $31.3 million (11.1%), respectively, of our total assets consisted of accounts receivable. The increase in the accounts receivable from fiscal year end is mainly due to timing of cash collections, increased volume of sales in March 2005 as compared to September 2004 and changes in foreign exchange.

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Our goal is to maintain accounts receivable levels equal to or less than industry average, which would tend to mitigate the risk of negative cash flows from operations by reducing the required investment in accounts receivable and thereby increasing cash flows from operations. Days sales outstanding ("DSOs") is a measure of the average number of days taken by our company to collect its accounts receivable, calculated from the date services are rendered. At March 31, 2005 and September 30, 2004, our average DSOs were 39 and 33, respectively.

Borrowings

General

In the fourth quarter of fiscal 2004, our U.K. subsidiary obtained a New Senior Credit Facility. Additionally, subject to the terms of the New Senior Credit Facility, ancillary facilities, in the form of an additional facility or financial accommodation (including an interest rate swap, cap, or other arrangement for the hedging or fixing of interest) are available up to a maximum of £15 million.

The New Senior Credit Facility (together with approximately $65.7 million of the net proceeds of our July 7, 2004 public offering) refinanced our company's Old Senior Credit Facility and mezzanine indebtedness (the "Mezzanine Loan"), both of which had been entered into on December 17, 1999. The New Senior Credit Facility is secured by a first priority lien on the assets of Allied Healthcare Group Limited ("Allied Holdings") and certain of its subsidiaries. Together with Allied Holdings and certain of its subsidiaries, our company is guaranteeing the debt and other obligations of certain wholly-owned U.K. subsidiaries under the New Senior Credit Facility.

The New Senior Credit Facility consists of the following:

•	£30 million term loan A, maturing July 19, 2009; and

•	£20 million revolving loan B maturing July 19, 2009 which may be drawn upon until June 19, 2009.

Repayment of the term loan A commenced on January 19, 2005 and continues semi-annually until final maturity. Repayment of loan B shall be on the last day of its interest period. Both A and B loans bear interest at rates equal to LIBOR (if sterling) or EURIBOR (if euros) plus any bank mandatory costs (if applicable) plus 0.70% to 0.90% per annum (depending on consolidated debt to consolidated profit ratios). As of March 31, 2005, we had outstanding borrowings of $50.7 million and $15.1 million relating to term loan A and revolving loan B, respectively, under the New Senior Credit Facility, that bore interest at a rate of 5.63%.

The New Senior Credit Facility agreement is based on the U.K.'s Loan Markets Association Multicurrency Term and Revolving Facilities agreement which is a standard form designed to be commercially acceptable to the corporate lending market.

Subject to certain exceptions, the New Senior Credit Facility prohibits or restricts the following, among other things:

•	incurring liens and granting security interests;

•	incurring additional indebtedness;

•	making certain fundamental corporate changes;

•	paying dividends (including the payment of dividends to us by our subsidiaries);

•	making specified investments, acquisitions or disposals; and

•	entering into certain transactions with affiliates.

The New Senior Credit Facility contains affirmative and negative financial covenants customarily found in agreements of this kind, including the maintenance of certain financial ratios, such as debt to earnings (including amounts provided for depreciation and amortization), earnings (before interest and taxes) to interest expense, minimum net worth, maximum ancillary facilities indebtedness and the prohibition of off balance sheet funding. We are also obligated to ensure that the guarantors of the

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New Senior Credit Facility must not at any time represent less than 90% of the consolidated gross assets, turnover or earnings before interest and taxes of the U.K. subsidiaries. As of March 31, 2005, we were in compliance with such covenants.

Notes Due in Connection with Acquisitions

During the quarters ended December 31, 2004 and 2003, we repaid, through our U.K. subsidiary, notes payable of $1.9 million and $38.3 million, respectively, issued in fiscal 2003 in connection with the acquisition of certain flexible staffing agencies.

Guarantees

The New Senior Credit Facility is secured by a first priority lien on the assets of the Allied Holdings and certain of its subsidiaries. Together with Allied Holdings and certain of its subsidiaries, our company is guaranteeing the debt and other obligations of certain wholly-owned U.K. subsidiaries under the New Senior Credit Facility. At March 31, 2005 and September 30, 2004, the amounts guaranteed, which approximates the amounts outstanding, totaled $65.8 million and $63.0 million, respectively.

Derivative Instrument

On March 20, 2003, upon the expiration of our prior Rate Cap and Floor Collar Agreement, we entered into a Rate Cap and Floor Collar Agreement that capped our interest rate at LIBOR of 5.50% and our interest floor at LIBOR of 4.47%, subject to special provisions, on approximately $94.0 million of our floating rate debt under a contract that would have expired on March 20, 2008. In February 2005, we sold this derivative instrument for approximately $0.1 million.

On February 8, 2005, we entered into two interest rate swap agreements, which expire on July 20, 2009, to protect us against the potential rising of interest rates on our floating rate debt. The two interest rate swap agreements cover approximately $56.4 million of our company's floating rate debt until January 21, 2008 and then decreases by $5.6 million each six month period, in order to reflect the amortizing effect of our floating rate debt, until the end of the interest rate swap agreements. The interest rate under the swap agreements is fixed at 4.935% and is payable semi-annually. In accordance with FAS No. 133, Accounting for Certain Derivative Instruments and Certain Hedging Activities, as amended by FAS No. 138 and related implementation guidance, we have calculated the fair value of the interest rate swap derivatives to be an asset of $0.2 million at March 31, 2005. Changes in the value from period to period of the interest swap agreements are recorded as other expense or income, as appropriate.

Series A Preferred Stock

In the Reorganization, we issued 7,773,660 shares of our Series A preferred stock with an aggregate liquidation preference of £22.3 million ($35.2 million at the fixed exchange rate of $1.58 set forth in an amendment to our certificate of incorporation defining the rights of the Series A preferred stock). The shares of Series A preferred stock were issued to certain equity investors in Allied Holdings in exchange for 22,286,869 ordinary shares of Allied Holdings.

During March through May of 2004, we entered into conversion agreements (the "Conversion Agreements") with all of the holders of our Series A preferred stock. Pursuant to the Conversion Agreements, the holders of all 7,773,660 outstanding shares of Series A preferred stock converted their shares of Series A preferred stock into a like number of shares of our common stock upon the consummation of our July 7, 2004 issuance of 14,500,000 shares of our common stock pursuant to the registration statement on Form S-1 that was declared effective by the Securities and Exchange Commission on July 1, 2004 ("Public Offering"). We paid to the holders of the Series A preferred stock an aggregate of $7.4 million in accrued and unpaid dividends and $2.0 million in conversion fees in connection with the conversion.

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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 (dollars in thousands):

Balance at October 1, 2003, net of issuance costs				$	33,151
Accretion of issuance costs, based on interest rate method					239
Balance at March 31, 2004, net of issuance costs				$	33,390

Commitments

Acquisition Agreements

Related to our acquisitions of flexible staffing agencies, we have entered into agreements to pay additional amounts, payable in cash, of up to $14.7 million, as of March 31, 2005, in contingent consideration dependent upon future earnings of such acquired entities.

Employment Agreements

We have three employment agreements with our executive officers that provide for minimum aggregate annual compensation of $1.0 million in fiscal 2005.

In September 2001, we entered into an employment agreement with Timothy M. Aitken. The employment agreement has a three-year term (subject to automatic renewal for successive additional one-year periods unless either party provides the other with notice of intent to terminate the agreement at least 90 days before the then applicable termination date). The employment agreement provides that we will negotiate in good faith, commencing not less than 90 days prior to the anniversary date of the employment agreement, the amount, if any, of future salary increases. The salary of Mr. Aitken is currently £250,000. Mr. Aitken's employment agreement provides that if his employment is terminated during the term of the agreement other than for cause, death or disability, or if, within six months of a "change in control" (as defined in the agreement) of our company, Mr. Aitken or the company terminates his employment, then (1) all stock options in the Company held by Mr. Aitken shall immediately vest and (2) Mr. Aitken will be entitled to receive a cash payment of 2.9 times his average annual base salary during the twelve months preceding the change of control or the termination of employment.

In September 2001, we entered into an employment agreement with Sarah L. Eames, which was modified in November 2004. Pursuant to her employment agreement, as modified, Ms. Eames will serve as Executive Vice President of our company until May 2006 at an annual salary of $200,000. Ms. Eames' employment agreement, as amended, provides that if her employment is terminated during the term of the agreement other than for cause, death or disability, then all stock options in our company held by Mr. Eames shall immediately vest and Ms. Eames shall be entitled to receive her salary through May 2006.

In Deeds of Restrictive Covenants entered into in 1999 with one of our U.K. subsidiaries, Mr. Aitken and Ms. Eames have each agreed not to compete with us or our subsidiaries for twelve months following termination of employment without our prior written consent.

We have also entered into an employment agreement with Charles F. Murphy, our Chief Financial Officer. The employment agreement with Mr. Murphy is terminable by either party on six months' notice and provides that Mr. Murphy will not compete against us for a period of twelve months following his termination of employment. Pursuant to his employment agreement, Mr. Murphy's salary is currently £180,000.

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," and "Commitments" above, the following table summarizes our contractual cash obligations as of March 31, 2005 (dollars in thousands):

Fiscal				Total Debt Obligations(1)				Total Lease Obligations				Total Other Obligations				Total Obligations
2005				$	5,637			$	1,376			$	10,354			$	17,367
2006					11,274				2,193				7,086				20,553
2007					11,274				1,841				1,268				14,383
2008					11,274				1,255				—				12,529
2009					26,306				1,087				—				27,393
Thereafter					—				2,288				—				2,288
				$	65,765			$	10,040			$	18,708			$	94,513

(1)	These amounts do not include interest payments. Based on current levels of debt, we expect to incur annual interest payments of approximately $3.8 million.

Lease obligations reflect future minimum rental commitments required under operating leases that have non-cancelable lease terms as of March 31, 2005. 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 alleged 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 sought injunctive relief against this transaction, and damages, costs and attorneys' fees in unspecified amounts. On January 24, 2005 the plaintiff filed a Stipulation of Discontinuance without costs to any party against any other.

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 provisions of the Federal statutes, regulations and laws, and applicable state laws, together with all applicable laws and regulations of other countries in which the Company operates. Due to 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 provisions. 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.

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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 31, 2005, have recorded an accrual of $0.5 million to cover our estimated exposure related to these matters. We believe that these matters should not have a material adverse impact on our consolidated financial position, cash flows or results of operations.

Revenue related to our supplying medical-grade cylindered oxygen for use in respiratory therapy to the U.K. pharmacy market is derived wholly from contracts with pharmaceutical suppliers who hold relevant government service agency contracts, and comprises less than 3% of our revenues.

The U.K. Department of Health is seeking to unify the supply of oxygen to NHS patients in England and Wales. The current system uses pharmacies to supply cylindered gases, while oxygen concentrators are supplied via regional contracts with homecare providers. The revisions would permit homecare providers to supply cylindered gas and liquid oxygen as well as oxygen concentrators. We have submitted a re-tender offer for such businesses. In April 2005, we were notified that we had been provisionally awarded two contracts in the southeast of England subject to a final review of the tender process. We anticipate final confirmation of the awards in June 2005. As the existing cylinder business is organized on a National distribution structure, the award of the areas in the southeast of England only will require a reorganization of some of our facilities from the center of the U.K. to the southeast of England. We are currently evaluating the impact this will have on our consolidated financial position and results of operations. Our supply of cylindered gases in Northern Ireland and Scotland is unaffected, as is our contract to supply oxygen concentrator services in Northern Ireland.

Impact of Recent Accounting Standards

See Note 17 of the Notes to Condensed Consolidated Financial Statements for our quarter ended March 31, 2005.

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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 New Senior Credit Facility. 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 New Senior Credit Facility and cash equivalents.

On March 20, 2003, we entered into a Rate Cap and Floor Collar Agreement that capped our interest rate at LIBOR of 5.50% and our interest floor at LIBOR of 4.47%, subject to special provisions, on approximately $94.0 million of our floating rate debt under a contract that would have expired on March 20, 2008. In February 2005, we sold this derivative instrument for approximately $0.1 million.

On February 8, 2005, we entered into two interest rate swap agreements, which expire on July 20, 2009, to protect us against the potential rising of interest rates on our floating rate debt. The two interest rate swap agreements cover approximately $56.4 million of our company's floating rate debt until January 21, 2008 and then decreases by $5.6 million each six month period, in order to reflect the amortizing effect of our floating rate debt, until the end of the interest rate swap agreements. The interest rate under the swap agreements is fixed at 4.935% and is payable semi-annually. We have calculated the fair value of the interest rate swap derivatives to be an asset of $0.2 million at March 31, 2005. Changes in the value from period to period of the interest swap agreements are recorded as other expense or income, as appropriate.

The table below represents the expected maturity of our variable rate debt (dollars in thousands) for the remainder of the fiscal years indicated below. Such debt had a weighted average interest rate of LIBOR plus 0.8% at March 31, 2005.

Fiscal				Expected Maturity
2005				$	5,637
2006					11,274
2007					11,274
2008					11,274
2009					26,306
Thereafter					—
				$	65,765

As of March 31, 2005, the interest rate on our company's bank debt was reset at least every month to reflect current market rates. Consequently, the carrying value of our variable rate bank debt approximates its fair value at March 31, 2005.

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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, 2005.

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 and forms 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 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, 2005, 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.    Under the rules of the Securities and Exchange Commission, "internal control over financial reporting" is defined as a process designed by, or under the supervision of, an issuer's principal executive and principal financial officers, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

There have not been any changes in our "internal control over financial reporting" during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Item 6.	Exhibits

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

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

32.1	Section 1350 Certification of Chief Executive Officer.

32.2	Section 1350 Certification of Chief Financial Officer.

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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 13, 2005

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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