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SECURITIESAND EXCHANGE COMMISSION

Washington, D.C.20549

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FORM10-K

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|   | ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |

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| For  | the fiscal year endedSeptember  30,2006 |

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|   | TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |

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| For  | the transition period from                 to                 |

CommissionFile No.: 1-11570

ALLIED HEALTHCAREINTERNATIONAL INC.

(Exact Name ofRegistrant as Specified in ItsCharter)

|                                               |  |  |           |  |  |                                                          |
|-----------------------------------------------|--|--|-----------|--|--|----------------------------------------------------------|
| NewYork                                       |  |  |      |  |  | 13-3098275                                               |
| (Stateor Other Jurisdiction of Incorporation) |  |  |      |  |  | (I.R.S. EmployerIdentificationNumber)                    |
| 555Madison AvenueNew York, New York           |  |  | 10022     |  |  | (212)750-0064                                            |
| (Address ofprincipal executiveoffices)        |  |  | (ZipCode) |  |  | (Registrant’stelephone number, including areacode) |
|                                               |

Securities registered pursuant toSection 12(b) of theAct:

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| Titleof Each Class |  |  | Name of EachExchange on Which Registered |
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Securitiesregistered pursuant to Section 12(g) of the Act:

CommonStock, $.01 parvalue

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(Title ofClass)

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(Title ofClass)

Indicate by check mark if the registrantis a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.       

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of theAct.       

Indicateby check mark whether the registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such reporting requirements for the past 90 days. Yes  X       No      

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, tothe best or registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K.      

Indicate bycheck mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated file. See definition of‘‘accelerated filer and large acceleratedfiler’’ in Rule 12b-2 of the Exchange Act. (Checkone):

Large Accelerated Filer                                                          AcceleratedFiler      X                                                  Non-AcceleratedFiler          

Indicateby check mark whether the registrant is a shell company (as defined in12b-2 of the Exchange Act). Yes           No   X  

The aggregatemarket value of the voting and non-voting common equity held bynon-affiliates of the registrant as of March  31,  2006,the last business day of its most-recently completed second fiscalquarter, was approximately $115,695,567 based on the closing salesprice of $4.85 per share of common stock of the registrant on suchdate, as reported by the Nasdaq National Market. The calculation of thenumber of shares held by non-affiliates is based on the assumption thatthe affiliates of the registrant include only (i) directors, (ii)executive officers and (iii)  shareholders who have filed aSchedule 13D or 13G which reflects ownership of at least 10% ofthe outstanding common stock.

The number ofshares of common stock of the registrant outstanding on December8,  2006 was 44,957,492.

DOCUMENTS INCORPORATED BYREFERENCE

None

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ALLIEDHEALTHCARE INTERNATIONAL INC.ANNUAL REPORT ON FORM 10-KForthe Fiscal Year Ended September 30, 2006

TABLE OFCONTENTS

|          |  |  |                                                                                                                  |  |  |  |  |    |  |
|----------|--|--|------------------------------------------------------------------------------------------------------------------|--|--|--|--|----|--|
| PARTI    |
| Item1.   |  |  | Business                                                                                                         |  |  |  |  | 2  |  |
| Item1A.  |  |  | Risk Factors                                                                                                     |  |  |  |  | 11 |  |
| Item1B.  |  |  | Unresolved StaffComments                                                                                         |  |  |  |  | 19 |  |
| Item2.   |  |  | Properties                                                                                                       |  |  |  |  | 19 |  |
| Item3.   |  |  | LegalProceedings                                                                                                 |  |  |  |  | 20 |  |
| Item4.   |  |  | Submission of Matters to a Vote of Security Holders                                                              |  |  |  |  | 20 |  |
| PARTII   |
| Item5.   |  |  | Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of EquitySecurities |  |  |  |  | 21 |  |
| Item6.   |  |  | Selected FinancialData                                                                                           |  |  |  |  | 21 |  |
| Item7.   |  |  | Management’s Discussion and Analysis of FinancialCondition and Results ofOperations                        |  |  |  |  | 24 |  |
| Item7A.  |  |  | Quantitative and Qualitative Disclosures About MarketRisk                                                        |  |  |  |  | 35 |  |
| Item 8.  |  |  | FinancialStatements and SupplementaryData                                                                        |  |  |  |  | 36 |  |
| Item 9.  |  |  | Changes inand Disagreements with Accountants on Accounting and FinancialDisclosure                               |  |  |  |  | 36 |  |
| Item9A.  |  |  | Controls andProcedures                                                                                           |  |  |  |  | 37 |  |
| Item9B.  |  |  | OtherInformation                                                                                                 |  |  |  |  | 40 |  |
| PARTIII  |
| Item10.  |  |  | Directors and Executive Officers ofthe Registrant                                                                |  |  |  |  | 41 |  |
| Item11.  |  |  | ExecutiveCompensation                                                                                            |  |  |  |  | 45 |  |
| Item12.  |  |  | Security Ownership of Certain Beneficial Owners andManagement and Related StockholderMatters                     |  |  |  |  | 50 |  |
| Item13.  |  |  | Certain Relationships and RelatedTransactions                                                                    |  |  |  |  | 53 |  |
| Item14.  |  |  | Principal Accountant Fees andServices                                                                            |  |  |  |  | 54 |  |
| PARTIV   |
| Item 15. |  |  | Exhibits andFinancial StatementSchedules                                                                         |  |  |  |  | 55 |  |
|          |

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FORWARD-LOOKINGSTATEMENTS

This Annual Report on Form 10-K includesforward-looking statements.

Forward-looking statements areidentified by words such as ‘‘believe,’’‘‘anticipate,’’‘‘expect,’’‘‘intend,’’‘‘plan,’’‘‘will,’’‘‘may,’’‘‘should,’’‘‘could,’’‘‘think,’’‘‘estimate’’ and‘‘predict,’’ and other similar expressions.In addition, any statements that refer to expectations, projections orother characterizations of future events or circumstances areforward-looking statements.

We based these forward-lookingstatements on our current expectations and projections about futureevents. Our actual results could differ materially from those discussedin, or implied by, these forward-looking statements. Factors that couldcause actual results to differ from those implied by theforward-looking statements include:

|  |              |                                                                                  |
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|  | •  | ourability to continue to recruit and retain qualified flexible healthcarestaff; |

|  |              |                                                                                                                                                                 |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | our ability to enter intocontracts with hospitals, other healthcare facility clients and localgovernmental social service departments on terms attractive tous; |

|  |              |                                                                                  |
|--|--------------|----------------------------------------------------------------------------------|
|  | •  | our ability to meet the performancecriteria of our respiratory therapy contract; |

|  |              |                                                                                                 |
|--|--------------|-------------------------------------------------------------------------------------------------|
|  | •  | the general level of patient occupancy atour clients’ hospitals and healthcarefacilities; |

|  |              |                                                                    |
|--|--------------|--------------------------------------------------------------------|
|  | •  | our dependence on the properfunctioning of our informationsystems; |

|  |              |                                                                                                                                    |
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|  | •  | the effect of existing orfuture government regulation of the healthcare industry, and ourability to comply with these regulations; |

|  |              |                                                                        |
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|  | •  | the impact of medical malpractice and otherclaims asserted against us; |

|  |              |                                                                                                                              |
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|  | •  | the effectof regulatory change that may apply to us and that may increase ourcosts and reduce our revenue and profitability; |

|  |              |                                                                             |
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|  | •  | our ability to use our net operating losscarryforward to offset net income; |

|  |              |                                                                                                                             |
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|  | •  | theeffect that fluctuations in foreign currency exchange rates may have onour dollar-denominated results of operations; and |

|  |              |                                                                                                                                                                    |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | the impairment of our goodwill, of which wehave a substantial amount on our balance sheet, may have the effect ofdecreasing our earnings or increasing our losses. |

Other factorsthat could cause actual results to differ from those implied by theforward-looking statements in this Annual Report on Form 10-K are morefully described elsewhere in this document, as well as changes in anyof the following: the demand for our products and services, generaleconomic conditions, governmental regulation, the level of competitionwe face, customer strategies and pricing and reimbursementpolicies.

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PreliminaryNotes

As used in this Annual Report on Form 10-K,‘‘our company,’’‘‘we,’’ ‘‘us’’and similar terms mean Allied Healthcare International Inc. and itssubsidiaries.

Historical financial and other data originallydenominated in pounds sterling have been converted to dollars at thethen applicable exchange rate. Financial and other data (excludinghistorical financial and other data) originally denominated in poundssterling have been converted to dollars using the exchange ratio atSeptember  30,  2006 of £1.00 = $1.8726.

PARTI

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| Item 1.  | Business |

ALLIED HEALTHCAREINTERNATIONAL INC.

Our Company

We are a leading providerof flexible, or temporary, healthcare staffing to the healthcareindustry in the United Kingdom as measured by revenues, market shareand number of staff. As of September  30,  2006, weoperated an integrated network of approximately 100 branches throughoutmost of the United Kingdom. Our healthcare staff consists principallyof nurses, nurses aides and home health aides (known as carers in theUnited Kingdom). We focus on placing our staff on a per diem basis inhospitals, nursing homes, care homes (which, unlike nursing homes, donot generally provide medical services to their residents) and homes.We maintain a pool of over 22,000 nurses, nurses aides and home healthaides, a majority of whom we placed during the fiscal year endedSeptember  30,  2006. Our healthcare staffing businessaccounted for 95% of our revenues during the fiscal year endedSeptember  30,  2006. We also supply medical-grade oxygenfor use in respiratory therapy to the U.K. pharmacy market and NorthernIreland and oxygen concentrators to customers in Northern Ireland.Following the award by the U.K. Department of Health in February2006 of two  new oxygen contracts, we now also provide oxygenservices directly to customers in the South East of England. Our oxygenbusiness accounted for approximately 5% of our revenues duringthe fiscal year ended September  30,  2006.

We focusour operations primarily on the per diem staffing market rather thanthe long-term staffing market because we believe that per diem staffinghas a more favorable pricing structure. Per diem arrangements generallycommand higher prices than long-term contracts and generally havehigher margins. In the per diem market, healthcare facilities and localgovernmental social service departments retain flexible staffers on ajob-to-job basis when needed, without any long-term contractualcommitment by the purchaser or provider. In contrast, long-termcontracts are negotiated for a number of months or years and guaranteea supply of staff to the purchaser, but generally do not guarantee thatstaffing services will be purchased.

Our principal executiveoffices are located at 555 Madison Avenue, New York, New York 10022,and our telephone number at that location is (212)750-0064.

Recent Developments

Oxygen Business inEngland

In 2005, the U.K. Department of Health sought tounify the supply of oxygen to National Health Service patients inEngland and Wales. The previous system used pharmacies to supplycylindered gases, while oxygen concentrators were supplied via regionalcontracts with homecare providers. Under the revised system, which cameinto effect on February  1,  2006, homecare providerssupply cylindered gas and liquid oxygen as well as oxygen concentratorsdirectly to patients. Following a bidding process, we were awarded twoof the contracts with the U.K Department of Health, both of whichcommenced in February  2006 and both of which cover the SouthEast of England. The 

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contracts required the set up of additionalfacilities in the South East of England, which was effected in thesecond quarter of fiscal 2006, and which has resulted in our companyincurring additional charges and capital expenditures in fiscal 2006 aswe commenced supplying under the new contracts. Our supply ofcylindered gases in Northern Ireland and Scotland is unaffected by thenew contracts, as is our contract to supply oxygen concentratorservices in Northern Ireland.

Due to transition problems thathave affected our company, as well as other U.K. suppliers, relating tothe transfer of the oxygen cylinder business from community pharmacies,we have incurred higher than anticipated implementation expenses tobuild the infrastructure and distribution network to absorb theincreased volume of oxygen patients from the community basedpharmacies. There have been substantially more patients requiringservice than was originally expected. We currently have more than12,500 patients on service and the time allotted for the migration ofpatients was inadequate, creating difficulties in handling the volumeof telephone calls from patients. Further, the capital investmentrequired to perform under the new contracts has exceeded $14.7million, more than twice our original estimate. In addition, this highlevel of activity has put pressure on our administrative services andwe have incurred significant selling, general and administrative coststo meet the large demand. Failure to meet the service criteria in thecontracts awarded to us would have resulted in severe financialpenalties to us. By October  1,  2006 we believe we hadmigrated all the patients on to service as required under thecontracts. We are still facing a higher than anticipated cost structurewith the conversion to the home delivery service model. Theseadditional costs are expected to continue for the foreseeable futurebefore cost efficiencies can be achieved.

Impairment ofGoodwill

During our annual review of goodwill in the fourthquarter of fiscal 2006, we determined there was an impairment to ourrecorded goodwill balance by using a combination of the marketmultiple, comparable transaction and discounted cash flow methods.Based on a combination of factors, contributing to the impairment losswere the decrease in profits due to the decline of revenues from thegovernment-funded National Health Service (the‘‘NHS’’), decrease in profits due to thetransitioning from the old pharmacy based contracts to the new supplyof oxygen direct to patients contracts that have lower margins, ourmarket capitalization at the time of testing as well as current andprojected operating results. As such, we recognized an impairment pretax charge of $121.9  million.

InformationSystems

In fiscal 2005 we implemented a new computerizedaccounting and payroll system based on the Oracle platform. In fiscal2006 we extended this system to explore the feasibility for replacingour branch operating system. We currently have this system operating inonly four branches. We have discovered that the system is too slow forthe nature of our business and therefore is not achieving fullfunctionality. As such, we have decided to abandon certain of thesoftware features of the Oracle platform and not continue with theplanned expansion to our other branches as we believe the cost to havea workable model would exceed alternative solutions. During fiscal2006, we recognized a pre tax charge of $9.0  million on thewrite-off of our investment in the Oracle platform. We are currentlyreassessing our operating system and researching alternative,lower-cost solutions.

The U.K. Flexible Healthcare StaffingIndustry

The U.K. healthcare staffing market is highlyfragmented, with no one company possessing a dominant marketshare.

The major purchasers of flexible healthcare staff in theUnited Kingdomare:

|  |              |                                              |
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|  | •  | Localgovernmental social servicedepartments. |

|  |              |                                                                                                                                                                                                                                                                |
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|  | •  | Thegovernment-funded NHS. Through its Primary Care Trusts, the NHSoversees general practitioners, who refer patients to specialists formore complex treatment. The NHS operates its hospitals through NHSTrusts, each of which operates one or more hospitals. |

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|  |              |                     |
|--|--------------|---------------------|
|  | •  | Privateindividuals. |

|  |              |                                                            |
|--|--------------|------------------------------------------------------------|
|  | •  | Independenthospitals and care homes in the United Kingdom. |

Our BusinessStrategy

We traditionally focused on the provision of temporarynursing staff to the U.K. hospital sector. Following the NHS’sTrust decision to reduce NHS expenditure on temporary staffing providedby external staffing agencies, and to emphasize providing acute andnon-acute care at home, we have transitioned our staffing business tomeet the increasing demand in the domiciliary sector. The mainpurchaser of our services in the domiciliary sector is localgovernmental social services departments, which have not made adetermination to reduce expenditures on temporary staff. We continue tosupply nursing staff to the hospital sector, although this representsless than 10% of the hours we provided in fiscal 2006 and12% of our gross margin during such period.

We seek tobecome the provider of choice to purchasers of healthcare staffingservices and the employer of choice to flexible healthcare workers. Inaddition, we seek to expand our range of healthcare staffing servicesover the long-term. The key elements in achieving these strategicobjectivesare:

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Increaserevenues on a per branch basis.    We believe the increasingdemand for quality healthcare staffing with national coverage anddiversity of services will support organic growth in our branches andthe development of new services. We intend to foster continuedsame-store revenue growth by leveraging our nationally recognized brandnames, competitive benefits package and leadership in providingtemporary healthcarestaffing. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Recruitand retain healthcare staff.    We intend to continue torecruit and retain high-quality staff to take advantage of the severeshortages of nurses and home health aides in the UnitedKingdom, which we expect to continue in the foreseeable future. Weintend to continue our recruitment efforts and to encourage loyaltyfrom our healthcare staff by matching their flexible workingpreferences (both with regards to scheduling preferences and types ofassignments desired) with our customers’ needs, maintainingregular contact and promoting opportunities for training anddevelopment. |

Having expanded by a successful acquisitionstrategy, we have a strong and comprehensive regional branch structurecovering approximately 90% of the U.K. population and we are nowconcentrating on organic growth.

Our Operations

We are aleading provider of flexible, or temporary, staffing to the U.K.healthcare industry. We provide flexible staffing, principally nurses,nurses aides and home health aides, to customers throughout most of theUnited Kingdom. Our branches are located in England, Wales andScotland. We do not have any branches or healthcare staffing customersin Northern Ireland. Following the award in February  2006 of thenew oxygen contract, we now also provide oxygen services directly tocustomers in the South East of England.

During fiscal 2006, ourrevenues were derived from the following lines ofbusiness:

|  |              |                                        |
|--|--------------|----------------------------------------|
|  | •  | 95%from flexible staffing services;and |

|  |              |                             |
|--|--------------|-----------------------------|
|  | •  | 5% fromrespiratory therapy. |

Flexible Staffing

We providea diverse range of flexible staff, principally consisting of nurses,nurses aides and home health aides, to our customers. We also providespecialist nurses and specialized nurses aides, primarily through ourAllied Staffing Professionals subsidiary. Home health aides providepersonal or basic care in the home (known as social care in the UnitedKingdom). Nurses aides perform many of the functions of home healthaides, but in the hospital setting. As of September  2006, ourmix of flexible staff was approximately 12% nurses, 25%nurses aides and 63% home health aides.

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Our integrated branch network is spreadthroughout most of the United Kingdom. A typical branch is overseen bya branch manager, who is responsible for all the activities in thebranch, including the achievement of its financial targets, developinglocal customer relations and recruiting staff. The branches areorganized into regions that are overseen by our operations managers.Our branches serve as our direct contact with our customers and ourhealthcare staff. Additionally, we employ regional commissioningmanagers who focus on developing and acquiring new businessopportunities by securing sales contracts with the local governmentalsocial service departments.

There are regular management meetingsthat are attended by branch managers and related corporate officedepartments and representatives of senior management where thefinancial performance of the branches is assessed and actions forimprovement are agreed upon.

We generally maintain centralizedmanagement control in the areas of payroll, accounts receivable,contracts, pricing, regulatory matters, quality control and informationtechnology.

Recruitment of FlexibleStaff

Many healthcare workers are attracted to flexiblestaffing positions because of their desire to tailor work schedules topersonal and family needs, obtain varied and challenging workexperiences and acquire new skills. We believe that our ability tooffer quality flexible staffing assignments well-matched toindividuals’ preferences assists in our attracting a largenumber of flexible healthcare workers.

Our branch managers areprimarily responsible for recruiting staff. Branch managers recruit ona local basis, with referrals from existing staff providing animportant source of new staff. From time to time, we may run internalfinancial promotions to encourage referrals from our staff. We alsoformally recruit through local and national print advertising andorganize recruitment events, including national recruitment days, atthe branch level. Our website also advertises national branchvacancies.

We impose a standardized recruitment process on ourbranches. Before they can place a nurse, nurses aide or home healthaide, our branches must obtain, among other things, two professionalreferences and evidence of proper immunizations, as well as a policebackground check. Our branches must also confirm that each nurse hasbeen licensed by the appropriate governmental body and that each nursesaide and home health aide has received the training mandated by law fortheir occupation.

Training and Retention of FlexibleStaff

Our retention philosophy is based upon each branchmaintaining personal contact with the flexible staff on its register,including a structured campaign whereby current and former staff arecontacted periodically by each branch to assess their needs and toattempt to meet their individual working preferences. We also conduct aformal annual review of all charge and pay rates within the businessand compare them to prevailing market rates to ensure that our marginsare competitive.

Quality Assurance

Weinvest heavily in quality assurance systems to ensure that our flexiblehealthcare staff meet our internal quality assurance standards, as wellas those mandated under the Care Standards Act 2000.

It is thebranch manager’s responsibility to ensure that all flexibleworkers are compliant with our internal quality assurance standardswhen they are booked on shifts. We are currently implementing a newcomputerized system to record compliance status for each worker which,when implemented, will make the worker unavailable for work if theircompliance is not up-to-date.

We have a quality assurance auditteam whose primary job responsibility is to visit each of our brancheson a periodic basis to assure that the branches adhere to theprocedures and policies set by our main office. The quality assuranceaudit team is independent of our operations management. A member of ourquality assurance audit team visits each branch at least once per year.During its visits to our branches, the quality assurance audit teamreviews employee files to confirm that staff have proper levels oftraining for the jobs in which they are being placed by the branch andthat the 

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documents required by our standardizedrecruitment process are in order. The quality assurance audit team alsoconfirms that nurses have been licensed with the appropriate U.K. body.In addition, to minimize injury to our staff, the quality assuranceaudit team checks customer files to confirm that all health and safetychecks for customers’ facilities have been made. Reviews ofstaff and customer files are done on a random samplebasis.

Customers

We provide healthcarestaff to four types ofcustomers:

|  |              |                                                                                                                                                                                                                    |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Localgovernmental social service departments.    Local governmentalsocial service departments retain us to provide healthcare staff,generally home health aides, to individuals in theirhomes. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Nursing homes,care homes and independent hospitals.    We provide nurses andhome health aides to nursing homes and home health aides to care homes.Care homes, like nursing homes, generally provide shelter and food fortheir residents, but, unlike nursing homes, generally do not providemedical services to their residents. We also provide nurses and nursesaides to independent hospitals in the privatesector. |

|  |              |                                                                                                                                                                                                      |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | TheNHS.    During our fiscal year ended September30,  2006, we provided nurses and nurses aides to the NHS. Weprovided staff mainly to NHS hospitals and NHS Primary CareTrusts. |

|  |              |                                                                                                                                                                                                                                                       |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Privatepatients.    We provide both nurses and home health aides toprivate patient customers. These patients may include incapacitatedindividuals who require daily attention or patients with long-termillnesses living at home. |

Types of CustomerContracts

We provide staff to our customers under a varietyof arrangements, including the following categories of contracts commonto the healthcare staffingindustry:

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Per diempurchases.    Business provided on a per diem basis arises whena customer requires flexible staff, and there is no formal ongoingcontractual commitment with the customer. The services provided on aper diem basis may be limited to one shift lasting a short period oftime or may be an engagement for an indefinite period. We provide mostof our nurses, nurses aides and home health aides to customers on a perdiem basis. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | NHSFramework Agreements and Service Level Agreements.    The NHSrequires any healthcare staffing company that provides temporary staffto NHS to enter into Framework Agreements. A Framework Agreement setsout one national pay structure for the supply of nurses of allspecifications. Only those staffing companies that have executed theFramework Agreement and met the quality standards can provide temporarystaff to NHS bodies in the region covered by the Framework Agreement.Pursuant to our Framework Agreement, we can supply all types of staffthroughout the U.K., except in London, where our Framework Agreementauthorizes us to supply all categories of staff other than mentalhealth staff and midwives. |

Individual NHS hospitals inEngland may select from the list of staffing companies qualified underthe Framework Agreements and enter into Service Level Agreements.Although the Framework Agreements set the maximum rates to be chargedfor flexible staff, NHS hospitals may obtain a discounted rate if theyenter into a Service Level Agreement

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Preferred suppliercontracts.    These contracts involve the designation of aflexible staffing business by a local governmental social servicesdepartment as a ‘‘preferred supplier’’ ofstaff. A preferred supplier contract agreement specifies rates to bepaid for staff but it is not an exclusive arrangement and does notguarantee that a flexible staffing business will be used by the localgovernmental social services department. A small proportion of ourservices are provided under preferred suppliercontracts. |

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|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | ‘‘Cost-volume’’contracts.    A ‘‘cost-volume’’contract specifies the rates for staff and commits the customer topurchase an agreed-upon volume of staffing services over a specifiedperiod. A ‘‘cost-volume’’ contract mayenable customers to negotiate lower prices in return for agreeing tominimum volumes of business. Local governmental social servicedepartments are the principal users of these contracts. A very smallpercentage of our business is conducted on a‘‘cost-volume’’basis. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Long-termcontracts.    Under a long-term contract a purchaser ofstaffing services enters into a long-term arrangement (typically threeyears) with a supplier of staff under which rates for staff, usuallydiscounted, are agreed to. Long-term contracts may be exclusivearrangements, with penalties if the staffing business is not able tosatisfy the customer’s demand for staff during the term of thecontract. Other than preferred supplier contracts and cost-volumecontracts, none of our staff are provided to customers under long-termcontracts. |

We typically provide in our written contracts that wewill indemnify our customers against liability that they may incur inthe event that the members of our staff cause death, personal injury orproperty damage in the performance of their services. We maintainliability insurance designed to reimburse us in the event that claimsof this type are made. See ‘‘Insurance’’below. In addition, in some of our written contracts, we agree toindemnify our customers for the costs they incur if we are not able toprovide them with the number of staff or man-hours required during theterm of the contract and the customer has to outsource its staffingrequirements to another entity.

MarketingActivities

We market our flexible healthcare staffingbusiness to key decision makers in the NHS, local governmental socialservice departments, nursing homes, care homes and independenthospitals. These decision makers can be procurement officers, contractofficers or social workers. Fundamental to our ability to obtain andretain staffing assignments is establishing and maintaining areputation for quality service and responsiveness to the needs of ourcustomers and their patients.

Competition

The U.K. flexible healthcare staffing business is highly fragmentedwith numerous small operators providing staff locally. The market atthe local level is characterized by relatively low barriers to entry.The barriers to entry at a U.K.-wide level are more significant, as theestablishment and growth of a flexible healthcare staffing business islargely dependent on access to capital.

The privately-ownedcompetitors of our flexible staffing business are mainly small,locally-based agencies serving a limited area or group of customers.These businesses compete with our relevant branch covering the samelocal area, but do not otherwise compete for U.K.-wide market share. Inaddition, a limited number of larger U.K.-based companies compete withus. Such companies include Nestor Healthcare Group plc, Care UK plc,Match Group and Reed Health Group plc.

The nature of the U.K.marketplace is such that nurses and home health aides often acceptplacements with more than one flexible staffing business.

Since2000, the NHS has had its own internal agency, called NHSProfessionals, which has attempted to provide NHS hospitals with highvolume/low margin contracts for flexible healthcare workers and toreduce the NHS’s dependence on external agencies. We work withNHS Professionals to fulfill the per diem demand that it is unable tocover.

Respiratory Therapy

In 2005, the U.K.Department of Health sought to unify the supply of oxygen to NationalHealth Service patients in England and Wales. The previous system usedpharmacies to supply cylindered gases, while oxygen concentrators weresupplied via regional contracts with homecare providers. Under therevised system, which came into effect on February  1,2006, homecare providers supply cylindered gas and liquid oxygen aswell as oxygen concentrators directly to patients. Following a biddingprocess, we were awarded two of the contracts with the U.K Departmentof Health, both of which commenced in February  2006 and both ofwhich cover the South East of England. The 

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contracts required the set up of additionalfacilities in the South East of England, which was effected in thesecond quarter of fiscal 2006, and which has resulted in our companyincurring additional charges and capital expenditures in fiscal 2006 aswe commenced supplying under the new contracts. Our supply ofcylindered gases in Northern Ireland and Scotland is unaffected by thenew contracts, as is our contract to supply oxygen concentratorservices in Northern Ireland.

Payment for Staffing Servicesand Respiratory Products

In most cases, we contract directlywith the governmental entity or private entity or individual to whom weprovide flexible staff or respiratory therapy products. The party withwhom we contract for the supply of staff or to whom we providerespiratory therapy products is responsible for paying us directly. Ingeneral, reimbursement is received regularly and reliably from allgovernmental and private customers. We generally collect payments fromour customers within two months after services are rendered or productsare supplied but we pay accounts payable and employeescurrently.

For the year ended September  30,  2006,our operations received approximately 68.0% of revenues fromcustomers that were U.K. governmental entities (primarily NHS hospitalsand local governmental social service departments), compared toapproximately 65.6% for the year ended September30,  2005. The remaining 32.0% and 34.4% ofrevenues received for 2006 and 2005, respectively, were derived fromservices and products provided to privately-owned nursing homes,privately-owned care homes, pharmacies, independent hospitals andprivate patients.

Trade Names

We operate ourhealthcare staffing business in the United Kingdom principally underthe following tradenames:

|  |              |                         |
|--|--------------|-------------------------|
|  | •  | Allied HealthcareGroup; |

|  |              |                                  |
|--|--------------|----------------------------------|
|  | •  | Allied StaffingProfessionals;and |

|  |              |                            |
|--|--------------|----------------------------|
|  | •  | Nightingale NursingBureau. |

We operate our respiratory therapy business in the UnitedKingdom under the following tradenames:

|  |              |                        |
|--|--------------|------------------------|
|  | •  | Allied Respiratory;and |

|  |              |          |
|--|--------------|----------|
|  | •  | Medigas. |

Employees

Asof November  2006, we employed approximately 960 individuals inour branch network, our U.K. head office and our other offices. None ofour employees are represented by a labor union.

In addition, wemaintain registers of over 22,000 nurses, nurses aides and home healthaides available to staff our customer base on a temporary basis. Wegenerally place about 7,000 individuals each week with our customers.We consider our relationship with the staff to begood.

Government Regulation

General

Weare subject to regulation by the government of the United Kingdom viaActs of Parliament related to healthcare provision and by the generalhealth regulations of the Department of Health.

HealthcareLaws and Regulations

Our operations are subject to licensingand approval regulations from both governmental and non-governmentalbodies according to terms of service and operating procedures decidedby the U.K. government.

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We are currently registered in England andWales under the Care Standards Act 2000 and the Nurses AgenciesRegulations 2002 (which came into force in April  2003) inrelation to England and the Nurses Agencies (Wales) Regulations 2003(which came into force in October  2003) in relation to Wales tocarry on a business for the supply of nurses. Both of these pieces oflegislation require that a person who carries on a business for thesupply of nurses at any location within the jurisdiction of theregistration authority must be the holder of a certificate from thatauthority certifying that the business is registered to supply to thatlocation. We are similarly registered in Scotland under the Regulationof Care (Scotland) Act 2001. Any of our branches that supply homehealth aides working in individuals’ homes are authorized underthe Care Standards Act 2000 and the Domiciliary Care AgenciesRegulations 2002 (in England), the Domiciliary Care Agencies (Wales)Regulations 2004 and the Regulation of Care (Scotland) Act2001.

The Care Standards Act 2000 introduced, among other things,a new registration and regulatory structure for all non-NHS healthcareservices in England and Wales. The Health and Social Care (CommunityHealth and Standards) Act 2003 established two new independentregistration and regulatory bodies for independent healthcare servicesand social care in England, including suppliers of nurses, called theCommission for Social Care and Inspection and the Commission forHealthcare Audit and Inspection; the former enforces registration ofcare agencies and establishments and the latter (typically referred toas the Healthcare Commission) exists to promote improvements in thequality of healthcare and public health. The Health Commission’sambit includes responsibility for assessing and reporting on theperformance of both NHS and independent healthcare organizations. TheCare Standards Act 2000 provides for an arm of the National Assemblyfor Wales to be the regulatory body for such services in Wales. TheCare Standards Act 2000 also made provision for a new General SocialCare Council in England and a new Care Council for Wales to beestablished as non-departmental statutory bodies responsible to theDepartment of Health and National Assembly of Wales, respectively, withthe aim of increasing the protection of service users, their homehealth aides and the general public. The Regulation of Care (Scotland)Act 2001 also introduced legislation relating to this area in Scotlandand appointed the registration authority for Scotland, the ScottishCommission for the Regulation of Care.

The Care Standards Act2000 is essentially an enabling act that provides for regulations to bemade by secondary legislation. Regulations relating to registration arealready in force (the National Care Standards Commission (Registration)Regulations 2001). The Care Standards Act 2000 also provided thatregulations can be made imposing any requirements which the appropriateMinister thinks fit relating to establishments and agencies. Specificregulations set out in the Care Standards Act 2000 that may beintroduced include provisions relating to the services to be providedby suppliers of healthcare staff, the keeping of accounts, the keepingof records and documents and arrangements to be made for dealing withcomplaints made by those seeking or receiving any of the servicesprovided by the suppliers of healthcare staff. A number of regulations(including the Nurses Agencies Regulations 2002 and the DomiciliaryCare Agencies Regulations 2002) include provisions in theseareas.

Contracts between suppliers of healthcare staff and NHShospitals for the provision of services, as well as the performance bythe parties of their obligations thereunder, are reviewed by theHealthcare Commission. We are accredited by various U.K. socialservices agencies for the supply of home health aides within theirjurisdiction. The U.K. Medicines and Healthcare Products RegulatoryAgency has granted licenses to us for the production and distributionof medical-grade oxygen to pharmacies throughout the UnitedKingdom.

We believe that we are in substantial compliance in allmaterial respects with U.K. healthcare laws and regulations applicableto our operations.

Healthcare Reform

Our businessis subject to extensive and complex laws and regulations in the UnitedKingdom. These include, but are not limited to, laws and regulationsrelated to licensing, conduct of operations, payment for services andreferrals, benefits payable to temporary staffers and taxation.Moreover, 

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many political, economic and regulatoryorganizations are supporting fundamental change in the U.K. healthcareindustry. A summary of the material existing and proposed regulationsfollows.

U.K. rules affecting temporaryworkers.    Temporary workers in the UK are entitled to numerousstatutory protections and benefits. In particular, they are entitled toreceive the national minimum wage, and are subject to the provisions ofthe Working Time Regulations 1998 (as amended), which governs hours ofwork, night work, breaks and holidays. There is uncertainty in the caselaw about the circumstances in which agency workers may acquire fullemployment rights. Accordingly, a worker who accrues sufficientqualifying employment could have unfair dismissal rights. Temporaryworkers are also protected from various forms of discrimination in thework place.

The Employment Agencies Act 1973 and Conduct ofEmployment Agencies and Employment Business Regulations 2003 (the‘‘2003 Regulations’’) and case law impactus. The 2003 Regulations contain detailed provisions in relation to thecharging for our services to a work-seeker and also impose minimumobligations to ensure that the work-seeker and the hirer are suitable.A breach of the 2003 Regulations (or the Employment Agencies Act 1973)resulting in damage is actionable in the civil courts as well as givingpotential liability to prosecution and a fine.

Health andSocial Care (Community Health and Standards) Act 2003.    Underthe Health and Social Care (Community Health and Standards) Act 2003and applicable regulations, providers of flexible healthcare staff haveto register with the Commission for Social Care Inspection and mustcomply with the rules relating to management and staffing, fitness ofpremises and the conduct of specified services.

Changes inU.K. value-added tax (‘‘VAT’’)rules.    We currently act as an agent for VAT purposes insupplying healthcare staff, which, under a concession to existing U.K.law, requires us to charge VAT only on the amount of commission chargedto the purchaser of flexible staff.

The 2003 Regulations, insofaras they relate to VAT, came into effect in the United Kingdom onApril  6,  2004 but the changes envisaged were suspendeduntil such time as a review on this matter has been concluded by thetax authorities. This review commenced in June  2006 andcontributions were invited by August  31,  2006. No newupdates have been released since June  2006 and the taxauthorities have not indicated the date by which the review will becomplete.

In the event that the proposed changes are implemented,the concession under which we operate at present is likely to bewithdrawn and this would place an increased VAT burden on ourcompany.

The 2003 Regulations require employment agencies,including those supplying flexible healthcare staff, to enter intocontractual relationships with the workers that they supply.Consequently, for VAT purposes, the tax authorities’interpretation is that the flexible staff provider acts as principal,rather than agent.

For non-medical staff, VAT would be due on thetotal amount of the charges made by the flexible staff provider,including salary costs, rather than merely on its commission. Thischange may adversely affect our cash flow if we have to pay theincreased VAT liability to the government before our customers havepaid their fees to us.

The law however states that the provisionof medical staff such as nurses should be treated as exempt from VAT.Consequently, as a result of such exemption, the amount of VAT we haveincurred and which can be offset against VAT we owe the government willbe reduced.

NHS Initiatives

Flexible staffingproviders, such as our company, are subject to the risk that the NHSwill seek to regulate the price it pays for temporary staff, reduce itsuse of temporary staff or replace its use of temporary staff wherepossible with permanent employees.

The NHS requires anyhealthcare staffing company that provides temporary staff to the NHShospitals to enter into a Framework Agreement setting forth, amongother things, types of staff to be supplied, quality standards andmaximum payment rates. Only those staffing companies that have met

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the quality standards set by the NHS andexecuted a Framework Agreement applicable to a particular region of thecountry can provide temporary staff to NHS hospitals in that region.Pursuant to our Framework Agreement, we can supply all types of staffthroughout the U.K., except in London, where our Framework Agreementauthorizes us to supply all categories of staff other than mentalhealth staff and midwives. It is likely that a long-term effect of theFramework Agreements will be to reduce the cost of commissions paid tohealthcare staffing companies and/or to reduce the number of healthcarestaffing companies supplying staff to the NHS.

Another initiativeundertaken by the NHS is its creation of NHS Professionals. NHSProfessionals is an internal agency of the NHS that seeks to provide anefficient temporary staffing service for NHS hospitals and to reducethe dependence of the NHS on external agencies. NHS Professionals seeksto coordinate nurse banks operated by NHS hospitals with the intentionof maintaining quality standards and controlling cost across all NHSnurse banks.

The introduction and further extension of the NHSFramework Agreements has impacted our financial results by reducing ourmargins from that source of business. In addition, we have experiencedreduced revenues from the NHS as a result of the NHS FrameworkAgreements, as well as from the efforts of the NHS to source more ofits work by using NHS Professionals.

Insurance

Wemaintain general liability insurance, professional liability insuranceand excess liability coverage that provide coverage in the event that aclaim is brought against us alleging negligence, product liability orsimilar legal theories. Each of these policies provides coverage on an‘‘occurrence’’ basis and has certainexclusions from coverage. Our insurance policies must be renewedannually.

Available Information

We maintain a website atwww.alliedhealthcare.com. The contents of our website are not part of,nor are they incorporated by reference into, this Annual Report on Form10-K.

We make available through our website our annual reports onForm 10-K and amendments thereto, but we do not make available on orthrough our website our quarterly reports on Form 10-Q or our currentreports on Form 8-K, or amendments thereto, because those reports areavailable to the public on the Securities and ExchangeCommission’s website at www.sec.gov. We do provide paper copiesof our 10-Ks, 10-Qs and 8-Ks free of charge upon request.

|               |              |
|---------------|--------------|
| Item1A.  | Risk Factors |

Our business is subject tomany risks that may negatively affect our business, financial conditionand/or results of operations.

Risks Relating To Our Business AndStrategy

If we are unable to attract and retain healthcarestaff at reasonable costs, it could increase our operating costs andnegatively impact our business.

We rely significantly on ourability to attract and retain nurses, nurses aides and home healthaides who possess the skills, experience and, if required, licensesnecessary to meet the requirements of our customers. We compete forflexible healthcare staffing personnel with other flexible healthcarestaffing companies and with hospitals and healthcare facilities. Staffchoose to work for a temporary healthcare staffing company based on thequantity, diversity and quality of assignments offered and oncompensation packages and other benefits. We must continually evaluateand upgrade our flexible staffing network to keep pace with ourcustomers’ needs and to remain competitive in our business.Currently, there is a shortage of nurses, nurses aides and home healthaides in most areas of the United Kingdom. Competition for suchpersonnel is increasing and salaries and benefits have risen. We may beunable to continue to increase the number of nurses and otherhealthcare staff that we 

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recruit, decreasing the potential for growthof our business. Our ability to attract and retain nurses and otherhealthcare staff depends on several factors, including our ability toprovide them with assignments that they view as attractive and toprovide them with competitive benefits and wages. We cannot assure youthat we will be successful in any of these areas. The cost ofattracting nurses and other healthcare staff and providing them withattractive benefit packages may be higher than we anticipate and, as aresult, if we are unable to pass these costs on to our hospital,healthcare facility and other customers, our profitability coulddecline. Moreover, if we are unable to attract and retain nurses andother healthcare staff, our ability to provide adequate services to ourcustomers may decline and, as a result, we could losecustomers.

We operate in a highly competitive market and oursuccess depends on our ability to obtain and retaincustomers.

The flexible healthcare staffing business ishighly competitive. We compete in national, regional and local marketsin the United Kingdom with full-service staffing companies, specializedflexible staffing agencies, NHS Professionals, hospitals, nursing homesand other home healthcare businesses. There are relatively few barriersto entry in the markets we serve and, historically, our industry hasbeen highly fragmented. While we expect to continue to face competitionfrom a broad range of companies, the recent consolidation trend in ourindustry is likely to result in an increase in the number of largercompanies that are able to service regional or national markets. Someof our competitors have greater name recognition, access to capital andmarketing, financial and other resources than we do. We believe thatthe primary competitive factors in obtaining and retaining customersare identifying qualified healthcare staff for specific jobrequirements, providing qualified staff in a timely manner, pricingservices competitively and effectively monitoring job performance.Competition for customers may increase in the future and, as a resultwe may not be able to remain competitive. To the extent competitorsseek to gain or retain market share by reducing prices or increasingmarketing expenditures, we could lose revenues or hospital, healthcarefacility and other customers and our margins could decline, which couldharm our operating results. In addition, the development of alternativerecruitment channels could lead our hospital, healthcare facility andother customers to bypass our services, which would also cause ourrevenues and margins to decline.

Our focus on the per diemmarket may be a competitive disadvantage.

Unlike many otherhealthcare staffing businesses in the United Kingdom, we have activelypursued business in the per diem market rather than through long-termcontracts. Although we believe that current and forecasted healthcarestaff shortages will continue to fuel demand for staff in the per diemmarket, a change in the supply and demand dynamics for healthcareworkers could result in business derived from long-term contractsbecoming more attractive. In particular, the award of long-termcontracts to our competitors (thereby granting‘‘lead’’ supplier status to suchcompetitors) could prevent us from securing the business of potentialpurchasers of temporary healthcare staffing.

A changein treatment of flexible staff for U.K. tax, employment and benefitspurposes could result in increased costs.

Like all employmentbusinesses, we are exposed to potential employment related claims fromindependent contractors who assert that they are employees. Wecurrently treat our nurses and nurses aides as independent contractors,but this position could change if challenged in an employment tribunalor court. A recent tribunal case relating to agency workers indicatedthat agency workers could be the employee of either the agency thatplaces them or the customer at which they are placed, depending on thecircumstances. If our nurses and nurses aides are treated as employees,they could become entitled to additional statutory rights (such as theright to a redundancy payment and the right not to be unfairlydismissed), which could result in an increase in litigation and/orseverance payments. We could also become liable to payemployer’s national insurance contributions in respect of ournurses and nurses aides. As a consequence, our business and financialcondition could be adversely affected.

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Restrictive covenants in our debtfacilities may limit our ability to makeacquisitions.

Restrictive covenants in our senior creditfacility, including a requirement that we obtain bank and lenderconsent for acquisitions exceeding £10  million in theaggregate in any fiscal year or any individual acquisition exceeding£2  million in any fiscal year, may limit our ability tocomplete desirable acquisitions. If we are unable to secure necessaryfinancing under our senior credit facility because of these restrictivecovenants or from other sources, we may be unable to complete desirableacquisitions.

Our decentralized structure could result inunforeseen costs and could adversely impact our business.

Weoperate with a decentralized structure under which our branches operateon a relatively autonomous basis in terms of the recruitment andplacement of staff and the marketing of customers. However, wegenerally maintain centralized management control in the areas ofpayroll, accounts receivable, contracts, pricing, regulatory matters,quality control and information technology. If we fail to exert propercentralized management control, our local branches could engage inunauthorized activities, our management initiatives may not besuccessfully implemented and our business, financial condition andresults of operations may be adversely affected.

Risksassociated with performing under new contracts.

We operatemainly using contractual arrangements under which failure to performmay result in litigation, financial penalties or loss of revenue. Tomitigate these risks we employ an in-house contract team, externallawyers and insurance coverage. Our in-house staff routinely reviewsperformance under the contract terms.

The loss of key seniormanagement personnel could adversely affect our ability to remaincompetitive.

We rely heavily on our senior management team,led by Timothy M.  Aitken, our chairman of the board and chiefexecutive officer, Sarah L. Eames, our executive vice president, andDavid Moffatt, our chief financial officer. We have entered into anemployment agreement with Mr.  Aitken that expires inSeptember  2007, subject to automatic renewal for successiveperiods of one year each unless terminated by either party on 90days’ notice prior to the then applicable renewal date, and anemployment agreement with Ms.  Eames that expires in April2008, subject to automatic renewal for successive periods of one yeareach unless terminated by either party on 90 days’ notice priorto the then applicable renewal date. As of July  31,  2006,we entered into an employment agreement with Mr.  Moffatt thatdoes not have a fixed term; rather, the employment agreement providesthat, during the first six months thereof, either party may terminatethe agreement upon one month’s written notice and, thereafter,either party may terminate the agreement upon six month’swritten notice. The loss or unavailability for an extended period oftime of these officers could have a material adverse effect on ouroperations and prospects.

We are dependent on the properfunctioning of our information systems.

We are dependent onthe proper functioning of our information systems in operating ourbusiness. Our operations have an IT disaster recovery plan. However,they are still vulnerable to fire, storm, flood, power loss,telecommunications failures, physical or software break-ins and similarevents. If critical information systems fail or are otherwiseunavailable, these functions would have to be accomplished manually,which could temporarily impact our ability to identify businessopportunities quickly, to maintain billing and clinical recordsreliably, to bill for services efficiently and to maintain ouraccounting and financial reporting effectively.

In fiscal 2005 weimplemented a new computerized accounting and payroll system and infiscal 2006 we implemented further changes to the system with the goalof improving the operating performance of our branches. However, wehave discovered that the system is too slow for the nature of ourbusiness and therefore is not achieving full functionality. As such, wehave decided to abandon certain of the software features of the Oracleplatform and not continue with the planned expansion 

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as we believe the cost to have a workablemodel would exceed alternative solutions. During fiscal 2006, werecognized a pre-tax charge of $9.0  million on the write-off ofour investment in the Oracle platform. We are currently reassessing ouroperating system and researching alternative, lower-costsolutions.

Our business is subject to certain risks inherentto international operations.

We operate in the UnitedKingdom. As a result, we are subject to a variety of risks,including:

|  |              |                                        |
|--|--------------|----------------------------------------|
|  | •  | fluctuations incurrency exchangerates; |

|  |              |                                                                                    |
|--|--------------|------------------------------------------------------------------------------------|
|  | •  | varying lawsrelating to, among other things, employment and employmenttermination; |

|  |              |                                                |
|--|--------------|------------------------------------------------|
|  | •  | the impact ofa recession in the UnitedKingdom; |

|  |              |                                       |
|--|--------------|---------------------------------------|
|  | •  | changes inregulatory requirements;and |

|  |              |                                      |
|--|--------------|--------------------------------------|
|  | •  | potentially adversetax consequences. |

These risks may materially and adversely affectour business results of operations or financial condition.

RisksRelating To The Flexible Healthcare StaffingMarket

Demand for flexible staffing may fail to rise,remain at current levels or may decline for a variety of reasons,including general economic conditions.

Although we anticipatethat the market for flexible staffing in the healthcare sector willcontinue to expand, there can be no assurance that growth will occur atall or continue at historic rates or at the rate currently expected.Our growth could be adversely affected by a variety of factors,including emphasis on permanent staff and minimization of the use oftemporary staff by healthcare providers and automation orcomputerization of services traditionally performed by temporary staffproviders. In the last few years, a U.K. case on agency workersindicated that agency workers could be considered employees of eitherthe agency that places them or the customer end-user (and in many casesthe customer is likely to be considered the employer). Consequently,some of the advantages to hospitals and other purchasers to usingtemporary workers may be lost because of the risk that they will bedeemed to be the employer of such workers, and therefore they maydecide to hire permanent staff rather than temporary staff. Inaddition, demand for flexible healthcare staffing services may besignificantly affected by the general level of economic activity andeconomic conditions in the regions in which we operate.

If demandfor temporary staffing in the healthcare sector generally declines ordoes not increase at the rate we anticipate, our business, financialcondition and results of operations may be materially and adverselyaffected.

Fluctuations in patient occupancy at the hospitals,nursing homes and care homes of our customers may adversely affect thedemand for our services and therefore our financialperformance.

Demand for our flexible healthcare staff issignificantly affected by the general level of patient occupancy at thehospitals, nursing homes and care homes of our customers. Whenoccupancy increases, temporary employees are often added beforefull-time employees are hired. As occupancy decreases, healthcarefacility customers typically will reduce their use of temporaryemployees before undertaking layoffs of their regular employees. Inaddition, we may experience more competitive pricing pressure duringperiods of occupancy downturn. Occupancy at our healthcarecustomers’ facilities also fluctuates due to the seasonality ofsome elective procedures. We are unable to predict the level of patientoccupancy at any particular time and its effect on our revenues andearnings.

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We operate in a regulatedindustry and violations of laws or regulations may result in increasedcosts or sanctions that could impact our financial performance.Moreover, recent and proposed changes in U.K. regulations affectingflexible staffing companies may result in increased costs that reduceour revenue and profitability.

Our business is subject toextensive and complex laws and regulations in the United Kingdom. Theseinclude, but are not limited to, laws and regulations related tolicensing, conduct of operations, payment for services and referrals,benefits payable to temporary staffers and taxation. If we fail tocomply with the laws and regulations that are applicable to ourbusiness, we could suffer civil and/or criminal penalties or we couldbe required to stop operating in one or morejurisdictions.

Moreover, many political, economic and regulatoryorganizations are supporting fundamental change in the U.K. healthcareindustry. The recent introduction of new regulatory provisions in theUnited Kingdom affecting flexible staffing companies couldsubstantially raise the costs associated with operating our business.Some proposed changes in these regulations could have a similar effect.We may not be able to pass along to our customers the costs ofimplementing any changes that result from these new and changed lawsand regulations. See ‘‘Item 1 — Business —Governmental Regulation’’ for a summary of the materialexisting and proposed regulations affecting our business.

NHSreforms may have a substantial negative impact upon us.

Forour fiscal year ended September  30,  2006, 15% ofour flexible healthcare gross margins was attributable to the NHS.Flexible staffing providers, such as our company, are subject to therisk that the NHS will continue to regulate the price it pays fortemporary staff, reduce its use of temporary staff or replace its useof temporary staff where possible with permanent employees.

Oneinitiative undertaken by the NHS is the requirement that agencieswishing to supply it with temporary staff enter into FrameworkAgreements. It is likely that a long-term effect of the FrameworkAgreements will be to reduce the cost of commissions paid to healthcarestaffing companies and/or to reduce the number of healthcare staffingcompanies supplying staff to the NHS.

Another initiativeundertaken by the NHS is its creation of NHS Professionals. NHSProfessionals is an internal agency of the NHS that seeks to provide anefficient temporary staffing service for NHS hospitals. NHSProfessionals seeks to coordinate nurse banks operated by NHS hospitalswith the intention of maintaining quality standards and controllingcost across all NHS nurse banks. The continued expansion of the NHSProfessionals could adversely affect our revenues in thefuture.

The introduction and further extension of the NHSFramework Agreements has impacted our financial results by reducing ourmargins from that source of business. In addition, we have experiencedreduced revenues from the NHS as a result of the NHS FrameworkAgreements, as well as from the efforts of the NHS to source more ofits work by using NHS Professionals.

Our ability to competein the homecare services market depends on our ability to obtainassignments from local governmental social servicedepartments.

The largest providers of homecare services inthe United Kingdom are local governmental social services departmentsand NHS Primary Care Trusts. Outsourcing of homecare by these bodies isthe principal source of revenue and growth in the homecare staffingmarket. Though figures vary widely among local governments, homecareprovided directly by the local governments typically is significantlymore expensive per hour of care than homecare outsourced to independenthomecare providers. While we believe there is potential for furtheroutsourcing of homecare by local governments, this potential may bepartially offset by tighter local governmental budgets. Moreover, therecan be no assurance that we will be chosen by local governmental socialservice departments to provide outsourced homecare services in thefuture, or that we will be able to recruit and retain homecare staff athourly rates that local governments are willing topay.

Significant legal actions could subject us tosubstantial uninsured liabilities.

In recent years,healthcare providers have become subject to an increasing number oflegal actions alleging medical malpractice, negligent hiring, productliability or other legal theories. Many of 

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these actions involve large claims andsignificant defense costs. In addition, we may be subject to civil orcriminal claims arising from actions taken by our employees ortemporary staffing personnel, such as misuse of proprietary informationor theft of property. In some instances, we are required to indemnifycustomers against some or all of these risks. A failure of any of ouremployees or personnel to observe our policies and guidelines intendedto reduce these risks, relevant customer policies and guidelines orapplicable laws, rules and regulations could result in negativepublicity, payment of fines or other damages. In addition, breaches ofthe Care Standards Act 2000 and associated regulations could result inthe revocation of registration or the imposition of conditions on thatregistration that could adversely effect the continuation of ourbusiness in the United Kingdom. Litigation is costly and, even if we doprevail, the cost of such litigation could adversely affect ourconsolidated financial statements.

In addition, in the course ofour operations we may face possible claims by employees or employeecandidates of discrimination or harassment (including for actions ourcustomers or their employees may have taken), violations of health andsafety regulations, workers compensation claims, retroactiveentitlement to benefits and other similar claims.

Ourinsurance may not be adequate to protect us from claims for which wemay become liable.

To protect ourselves from the cost ofclaims alleging medical malpractice or other causes of action, wemaintain malpractice liability insurance and general liabilityinsurance coverage in amounts and with deductibles that we believe areappropriate for our operations. While we have been able to obtainliability insurance in the past, this insurance varies in cost, isdifficult to obtain and may not be available in the future on termsacceptable to us, if it is available at all. The failure to maintaininsurance coverage or a successful claim not covered by or in excess ofour insurance coverage could have a material adverse effect on ourbusiness, financial position, cash flows or results of operations. Inaddition, claims, regardless of their merit or eventual outcome, mayhave a material adverse effect on our reputation.

Risks RelatingTo Our Financial Condition

We have generatedsubstantial amounts of goodwill from our acquisitions, some or all ofwhich we may be required to write off, which could adversely affect ourfinancial condition or results of operations.

Goodwillrepresents the purchase price of an acquisition less the fair value ofthe net tangible and intangible assets acquired. We have generatedsubstantial amounts of goodwill from our acquisitions. Part of ourstrategy involves making additional acquisitions. Because businesses ofthe type we target often do not have substantial tangible assets, weexpect that our acquisition of these businesses will continue togenerate significant amounts of goodwill.

At September30,  2006 we had goodwill of approximately $112.7  million,which equaled approximately 57.7% of our total assets at thatdate.

In accordance with Statement of Financial AccountingStandards No. 142, ‘‘Goodwill and Other IntangibleAssets,’’ (‘‘FAS No.142’’) issued by the Financial Accounting StandardsBoard, all goodwill and intangible assets deemed to haveindefinite lives are no longer subject to amortization, but will besubject to an annual impairment test. We evaluate, on a regular basis,whether events or circumstances have occurred that indicate all, or aportion, of the carrying amount of goodwill may no longer berecoverable, in which case an impairment charge to our earnings wouldbecome necessary. As of September  30,  2006, the carryingvalue of our goodwill was impaired by $121.9  million.

Wedetermined there was an impairment of $121.9  million to ourrecorded goodwill balance by using a combination of the marketmultiple, comparable transaction and discounted cash flow methods.Based on a combination of factors, contributing to the impairment losswere the decrease in profits due to the decline of revenues from theNHS, the transitioning from the old pharmacy based contracts to the newsupply of oxygen direct to patients contracts that have lower margins,our company’s market capitalization at the time of testing aswell as current and projected operating results. At September30,  2006, we had $112.7  million of remaining goodwill andthere can be no assurances that future goodwill impairment will notoccur.

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We have incurred significantdebt, which could impact our financial condition and results ofoperations. In the event of a payment default under our senior creditfacility, our lenders have the right, among others, to seize ourassets.

At September  30,  2006, we hadapproximately $71.2  million of debt under our senior creditfacility. The level of our indebtedness will have several importanteffects on our future operations, including, withoutlimitation:

|  |              |                                                                                                                           |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------|
|  | •  | we will use aportion of cash flow from operations for the payment of principal orinterest due on outstandingindebtedness; |

|  |              |                                                                                                                                                                    |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | outstandingindebtedness and leverage will increase the impact of negative changesin general economic and industry conditions, as well as competitivepressures; and |

|  |              |                                                                                                                                                                                    |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | the levelof outstanding debt may affect our ability to obtain additionalfinancing for working capital, capital expenditures, additionalacquisitions or general corporate purposes. |

General economicconditions, industry cycle and financial, business and other factorsaffecting operations, many of which are beyond our control, may affectfuture performance. As a result, these and other factors may affect ourability to make principal and interest payments on indebtedness. Ourbusiness might not continue to generate cash flow at or above currentlevels. If we cannot generate sufficient cash flow from operations inthe future to service our debt, we may, among otherthings:

|  |              |                                                        |
|--|--------------|--------------------------------------------------------|
|  | •  | seek additionalfinancing in the debt or equitymarkets; |

|  |              |                                                              |
|--|--------------|--------------------------------------------------------------|
|  | •  | refinance orrestructure all or a portion of ourindebtedness; |

|  |              |                         |
|--|--------------|-------------------------|
|  | •  | sellselected assets; or |

|  |              |                                                              |
|--|--------------|--------------------------------------------------------------|
|  | •  | reduceor delay planned capital expenditures or acquisitions. |

Thesemeasures might not be sufficient to enable us to service our debt. Inaddition, any financing, refinancing or sale of assets might not beavailable on economically favorable terms or at all.

If we areunable to repay our indebtedness when it becomes due, our lenders willhave a number of remedies. Our senior credit facility is secured bysubstantially all of the assets of, and the shares in, our U.K.subsidiaries. If we fail to pay our debt under our senior creditfacility, which amounted to $71.2  million at September30,  2006, the lenders thereunder could become the owner of, orforce the sale of, our businesses or subsidiaries.

Ourcompliance with restrictions and covenants in our senior creditfacility may limit our ability to take corporate actions and harm ourbusiness.

Our senior credit facility contains a number ofcovenants that significantly restrict our operations, our ability toissue additional debt and our ability to pay dividends. Under theseagreements we are also required to comply with specific financialratios and tests, including a fixed charge coverage ratio, a testregarding debtor days (i.e., the number of days sales are outstanding)and an interest coverage ratio. We may not be able to comply in thefuture with these covenants or restrictions as a result of eventsbeyond our control, such as prevailing economic, financial and industryconditions. If we default in the performance of the covenants in oursenior credit facility, our lenders could, in addition to seizing thecollateral securing our obligations, declare all of the principal andinterest outstanding due and payable and terminate their commitments toextend credit to us in the future. We may refinance these agreements orseek alternative credit agreements. We cannot guarantee that we will beable to secure new credit agreements on favorable terms or at all. Ifwe are unable to secure credit on commercially reasonable terms in thefuture, our business could be harmed.

As of September30,  2006, we were not in compliance with the covenant ratio ofEBIT to interest expense that is contained in our senior creditfacility. On December  8,  2006 we obtained a temporarywaiver of such covenant from our lenders. As of September30,  2006, we were in compliance with the remainder of thecovenants in our senior credit facility. Subsequent to September30,  2006, we have amended and restated our senior creditfacility and reset our financial covenants.

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Our lenders have limited theright of our U.K. subsidiaries to pay dividends to ourcompany.

At September  30,  2006, we hadapproximately $71.2  million of debt under our senior creditfacility. Our subsidiaries pay us a management fee, with which we paythe expenses of our corporate headquarters and our executive officers.However, under the terms of our senior credit facility, our U.K.subsidiaries generally may not pay dividends. Therefore, we will not beable to use the cash flow or profits, if any, of our U.K. subsidiariesto finance acquisitions, capital expenditures or otherinitiatives.

Our ability to use our net operating losscarryforward in the future is limited.

As ofSeptember  30,  2006, we had a U.S. federal net operatingloss carryforward of approximately $76.3  million, expiringbetween 2018 and 2023. Our current operations are in the UnitedKingdom. Under U.S. federal tax law, we can only offset our federal netoperating loss carryforward against U.S. taxable income, includingincome earned from operations in the United States andcertain other income, including dividends from our U.K. subsidiaries.As of September  30,  2006, we had recorded a fullvaluation allowance against the deferred tax asset created by the U.S.federal net operating loss carryforward as we did not believe it wasmore likely than not that such losses would be utilized prior to theirexpiration. Our public offering in July  2004 of shares of ourcommon stock caused an ownership change under Section 382 of theInternal Revenue Code of 1986, as amended. Accordingly,Section 382 limits our ability to use our net operating losscarryforward in the future. An inability to use a significant portionof our federal net operating loss carryforward could have a materialadverse effect on our financial condition or results ofoperations.

We face greater costs in complying with theincreasing regulation of corporate governance and disclosurestandards.

We are spending an increased amount of managementtime and external resources to comply with changing laws, regulationsand standards relating to corporate governance and public disclosure,including the Sarbanes-Oxley Act of 2002, new SEC regulations andNasdaq Stock Market rules. In particular, Section 404 of theSarbanes-Oxley Act of 2002 requires management’s annual reviewand evaluation of our internal control systems, and attestations of theeffectiveness of these systems by both management and our independentauditors. This process for fiscal 2006 resulted in additionalaccounting and legal expenses. There can be no assurance that theseadditional expenses will not continue to impact our results ofoperations.

Risks Relating To Our Common Stock

Futuresales of our common stock by existing shareholders may lower the priceof our common stock.

As of December  8,  2006,we had 44,957,492 shares of common stock outstanding.

Inaddition, as of December  8,  2006, our officers,directors, employees and consultants own options to acquire anaggregate of 3,470,614 shares of common stock under our 1992 StockOption Plan and our 2002 Stock Option Plan. Although we will not issueany more options under our 1992 Stock Option Plan, we may issueadditional options under our 2002 Stock Option Plan. The shares ofcommon stock to be issued upon exercise of the options granted underour 1992 Stock Option Plan and our 2002 Stock Option Plan have beenregistered and may be freely sold when issued. We have also issuedwarrants to purchase an aggregate of 350,000 shares of our common stockto a third party. We have granted the holder of these warrants certain‘‘piggyback’’ registration rights withrespect to the shares of our common stock issuable upon exercise of thewarrants.

Pursuant to a registration statement that was declaredeffective by the Securities and Exchange Commission in August2002, we have registered the resale of an aggregate of 23,479,157shares of our common stock.

Sales of substantial amounts ofcommon stock into the public market could lower the market price of ourcommon stock.

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Because a small group of shareholdersmay control our common stock, other investors may have little or nocontrol over our company or our management.

As ofDecember  8,  2006, the four Hyperion funds that areshareholders in our company collectively own approximately 26.6%of our outstanding shares of common stock and Washington & CongressCapital Partners, L.P. owns approximately 17.1% of ouroutstanding shares of common stock. As a result, these shareholdersacting together may be able to exercise control over all mattersrequiring shareholder approval, including the election of directors andapproval of significant corporate transactions.

If provisionsin our corporate documents and New York law delay or prevent a changein control of our company, we may be unable to consummate a transactionthat our shareholders consider favorable.

Our certificate ofincorporation and bylaws may discourage, delay or prevent a merger oracquisition involving us that our shareholders may consider favorable.For example, our certificate of incorporation authorizes our board ofdirectors to issue up to ten million shares of ‘‘blankcheck’’ preferred stock. Without shareholder approval,the board of directors has the authority to attach special rights,including voting and dividend rights, to these shares of preferredstock. With these rights, preferred shareholders could make it moredifficult for a third party to acquire us. New York law may alsodiscourage, delay or prevent someone from acquiring or merging withus.

Under the employment agreements we have entered into withTimothy M.  Aitken, our chief executive officer, and Sarah L.Eames, our executive vice president, we are required to pay Mr.Aitken an amount equal to 2.9 times his salary if his employment withus is terminated within six months of a change in control of ourcompany and we are required to pay Ms.  Eames an amount equal to1.9 times her salary if her employment with us is terminatedwithin six months of a change in control of our company. In addition,under our employment agreement with David Moffatt, our chief financialofficer, we are required to pay him 12 months’ salary in theevent he is terminated due to an acquisition. Such change of controlpayment may have the effect of preventing or delaying a change ofcontrol of our company, even if the change of control was favored byour shareholders.

Our stock price may bevolatile.

In recent years, the stock market has experiencedsignificant price and volume fluctuations that are often unrelated tothe operating performance of specific companies. Our market price mayfluctuate based on a number of factors,including:

|  |              |                                                                         |
|--|--------------|-------------------------------------------------------------------------|
|  | •  | our operatingperformance and the performance of other similarcompanies; |

|  |              |                                                                   |
|--|--------------|-------------------------------------------------------------------|
|  | •  | newsannouncements relating to us, our industry or ourcompetitors; |

|  |              |                                                                      |
|--|--------------|----------------------------------------------------------------------|
|  | •  | changes inearnings estimates or recommendations by researchanalysts; |

|  |              |                                       |
|--|--------------|---------------------------------------|
|  | •  | changes ingeneral economicconditions; |

|  |              |                                              |
|--|--------------|----------------------------------------------|
|  | •  | the number ofshares that are publiclytraded; |

|  |              |                                        |
|--|--------------|----------------------------------------|
|  | •  | actions of ourcurrent shareholders;and |

|  |              |                                                                  |
|--|--------------|------------------------------------------------------------------|
|  | •  | other developmentsaffecting us, our industry or our competitors. |

|               |                           |
|---------------|---------------------------|
| Item1B.  | Unresolved Staff Comments |

Notapplicable.

|               |            |
|---------------|------------|
| Item 2.  | Properties |

Welease 114 facilities in the United Kingdom, of which 33 are for aperiod of three months or less. We lease our corporate headquarters inthe United States. We believe that our existing leases will berenegotiated as they expire or that alternative properties can beleased on acceptable terms. We 

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also believe that our present facilities arewell maintained and are suitable for continuing our existingoperations. (See ‘‘Operating Leases’’ inNote 12 of Notes to Consolidated Financial Statements for our fiscalyear ended September  30,  2006.)

|              |                   |
|--------------|-------------------|
| Item3.  | Legal Proceedings |

We are involved invarious other legal proceedings and claims incidental to our normalbusiness activities. We are vigorously defending our position in allsuch proceedings. We believe that these matters should not have amaterial adverse impact on our consolidated financial position, cashflows, or results of operations.

|              |                                                     |
|--------------|-----------------------------------------------------|
| Item4.  | Submission of Matters to a Vote of SecurityHolders. |

We held our annual meeting of shareholders onSeptember  7,  2006. At the annual meeting, our holders ofcommon stock voted upon the following matters:

(1)    theelection of eight directors; and

(2)    the ratification ofEisner LLP as our independent auditors for the fiscal year endedSeptember  30,  2006.

At the annual meeting ofshareholders, all eight directors named in our proxy statement wereelected and Eisner LLP was approved as our independent auditor for thefiscal year ended September  30,  2006.

The votingresults with respect to each proposal are set forthbelow:

|                                   |  |  |     |  |            |         |  |  |                   |  |         |                                |  |  |  |  |           |  |  |  |  |  |         |  |
|-----------------------------------|--|--|-----|--|------------|---------|--|--|-------------------|--|---------|--------------------------------|--|--|--|--|-----------|--|--|--|--|--|---------|--|
| Proposal                          |  |  | For |  |            | Against |  |  | AuthorityWithheld |  |         | Abstentions andBrokerNon-Votes |
| No. 1 (election ofdirectors)      |  |  |     |  |       |         |  |  |                   |  |    |                                |  |  |  |  |      |  |  |  |  |  |    |  |
| Timothy M.Aitken                  |  |  |     |  | 32,669,960 |         |  |  |                   |  | — |                                |  |  |  |  | 913,307   |  |  |  |  |  | — |  |
| SarahL.Eames                      |  |  |     |  | 33,309,787 |         |  |  |                   |  | — |                                |  |  |  |  | 306,480   |  |  |  |  |  | — |  |
| G.RichardGreen                    |  |  |     |  | 33,413,667 |         |  |  |                   |  | — |                                |  |  |  |  | 202,600   |  |  |  |  |  | — |  |
| MarkHanley                        |  |  |     |  | 33,429,217 |         |  |  |                   |  | — |                                |  |  |  |  | 187,050   |  |  |  |  |  | — |  |
| WaynePalladino                    |  |  |     |  | 26,888,549 |         |  |  |                   |  | — |                                |  |  |  |  | 6,727,718 |  |  |  |  |  | — |  |
| JeffreyS.Peris                    |  |  |     |  | 33,410,667 |         |  |  |                   |  | — |                                |  |  |  |  | 205,600   |  |  |  |  |  | — |  |
| ScottA.Shay                       |  |  |     |  | 32,812,260 |         |  |  |                   |  | — |                                |  |  |  |  | 804,007   |  |  |  |  |  | — |  |
| MarkTompkins                      |  |  |     |  | 33,426,517 |         |  |  |                   |  |    |                                |  |  |  |  | 189,750   |  |  |  |  |  |    |  |
| No.2. (ratification of EisnerLLP) |  |  |     |  | 33,562,908 |         |  |  |                   |  | 42,086  |                                |  |  |  |  | —   |  |  |  |  |  | 11,273  |  |
|                                   |

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PARTII

|               |                                                                                                                   |
|---------------|-------------------------------------------------------------------------------------------------------------------|
| Item 5.  | Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities. |

Our common stock trades on the NasdaqNational Market under the symbol ‘‘AHCI.’’The following table sets forth, for the periods indicated, the high andlow sales price of our common stock, as reported by the Nasdaq NationalMarket:

|                                        |  |  |      |   |        |     |  |  |  |   |        |  |
|----------------------------------------|--|--|------|---|--------|-----|--|--|--|---|--------|--|
| PERIOD                                 |  |  | HIGH |   |        | LOW |
| YearEnded September 30, 2005:          |  |  |      |   |   |     |  |  |  |   |   |  |
| FirstQuarter                           |  |  |      | $ | 5.97   |     |  |  |  | $ | 4.85   |  |
| SecondQuarter                          |  |  |      |   | 6.87   |     |  |  |  |   | 5.17   |  |
| ThirdQuarter                           |  |  |      |   | 7.27   |     |  |  |  |   | 5.64   |  |
| FourthQuarter                          |  |  |      |   | 7.50   |     |  |  |  |   | 4.90   |  |
| YearEnded September 30, 2006:          |  |  |      |   |   |     |  |  |  |   |   |  |
| FirstQuarter                           |  |  |      | $ | 6.60   |     |  |  |  |   | 5.60   |  |
| SecondQuarter                          |  |  |      |   | 6.80   |     |  |  |  |   | 4.44   |  |
| ThirdQuarter                           |  |  |      |   | 4.97   |     |  |  |  |   | 2.39   |  |
| FourthQuarter                          |  |  |      |   | 3.45   |     |  |  |  |   | 1.45   |  |
| YearEnded September 30, 2007:          |  |  |      |   |   |     |  |  |  |   |   |  |
| FirstQuarter (through December 8,2006) |  |  |      | $ | 2.41   |     |  |  |  | $ | 1.80   |  |
|                                        |

SinceDecember  30,  2005, our shares of common stock have alsotraded on the Alternative Investment Market (AIM) of the London StockExchange under the symbol ‘‘AIM: AHI.’’ Ourshares of common stock are represented on CREST, the U.K. electronicsettlement system, by depository shares. Our shares of common stock arelisted on AIM, while the depositary interests are transferred in CRESTto settle trades on AIM.

We have neither declared nor paid anydividends on our common stock and do not anticipate paying dividends onour common stock in the foreseeable future. Any future payment ofdividends will be at the discretion of our board of directors and willdepend upon, among other things, our earnings, financial position, cashflows, capital requirements and other relevant considerations,including the extent of our indebtedness and any contractualrestrictions with respect to the payment of dividends.

Under theterms of our senior credit facility, our U.K. subsidiaries generallyare prohibited from paying dividends or making other cash distributionsto us. See ‘‘Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results ofOperations — Liquidity and Capital Resources — Borrowings— General.’’

As of December  8,2006, there were approximately 175 shareholders of record of our commonstock. This number does not include shareholders who hold their sharesthrough one or more intermediaries, such as banks, brokers ordepositaries.

Equity Compensation Plan Information

Forcertain information concerning securities authorized for issuance underour equity compensation plans, see ‘‘Item 12 —Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters — Equity Compensation PlanInformation.’’

Recent Repurchases of EquitySecurities

During the fourth quarter of fiscal 2006, we did notrepurchase any of our equity securities.

Item 6.    SelectedFinancial Data

The following table sets forth our selectedconsolidated financial information. The financial information for theyears ended September  30,  2006, 2005 and 2004 and as ofSeptember  30,  2006 and 

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2005 is derived from audited financialstatements that appear elsewhere in this Form 10-K. The financialinformation for the years ended September  30,  2003 and2002 and as of September  30,  2004, 2003 and 2002 isderived from audited financial statements that do not appear in thisForm 10-K.

You should read the following information inconjunction with our financial statements and notes thereto and theinformation set forth under ‘‘Item 7 —Management’s Discussion and Analysis of Financial Condition andResults of Operations.’’

All data in the followingtable is in thousands, except for per sharedata.

|                                                               |  |  |                        |   |          |      |  |  |      |   |         |      |  |  |      |   |         |     |  |  |  |   |         |  |  |  |  |   |         |      |
|---------------------------------------------------------------|--|--|------------------------|---|----------|------|--|--|------|---|---------|------|--|--|------|---|---------|-----|--|--|--|---|---------|--|--|--|--|---|---------|------|
|                                                          |  |  | YearEnded September30, |
|                                                          |  |  | 2006                   |   |          | 2005 |  |  | 2004 |   |         | 2003 |  |  | 2002 |
| FinancialData:                                                |  |  |                        |   |     |      |  |  |      |   |    |      |  |  |      |   |    |     |  |  |  |   |    |  |  |  |  |   |    |      |
| Totalrevenues                                                 |  |  |                        | $ | 294,607  |      |  |  |      | $ | 351,189 |      |  |  |      | $ | 325,298 |     |  |  |  | $ | 294,379 |  |  |  |  | $ | 242,828 |      |
| Grossprofit                                                   |  |  |                        |   | 83,679   | (1)  |  |  |      |   | 103,671 |      |  |  |      |   | 93,171  |     |  |  |  |   | 81,323  |  |  |  |  |   | 66,079  |      |
| Selling,general and administrativeexpenses                    |  |  |                        |   | 75,552   |      |  |  |      |   | 73,948  | (5)  |  |  |      |   | 63,544  |     |  |  |  |   | 53,648  |  |  |  |  |   | 48,847  | (7)  |
| Impairmentofgoodwill                                          |  |  |                        |   | 121,901  | (2)  |  |  |      |   | — |      |  |  |      |   | — |     |  |  |  |   | — |  |  |  |  |   | — |      |
| Impairmentof long-livedassets                                 |  |  |                        |   | 10,295   | (3)  |  |  |      |   | — |      |  |  |      |   | — |     |  |  |  |   | — |  |  |  |  |   | — |      |
| Operating(loss) income                                        |  |  |                        |   | (124,069 | )    |  |  |      |   | 29,723  |      |  |  |      |   | 29,627  |     |  |  |  |   | 27,675  |  |  |  |  |   | 17,232  |      |
| Interestand other expense,net                                 |  |  |                        |   | 4,106    |      |  |  |      |   | 4,164   |      |  |  |      |   | 13,727  | (6) |  |  |  |   | 11,279  |  |  |  |  |   | 13,472  | (8)  |
| Gainon settlement of PIKinterest                              |  |  |                        |   | —  |      |  |  |      |   | — |      |  |  |      |   | — |     |  |  |  |   | — |  |  |  |  |   | (5,143  | )(9) |
| Foreignexchange (income)loss                                  |  |  |                        |   | (73      | )    |  |  |      |   | 98      |      |  |  |      |   | 184     |     |  |  |  |   | 18      |  |  |  |  |   | 19      |      |
| (Benefit)provision for incometaxes                            |  |  |                        |   | (4,331   | )    |  |  |      |   | 6,725   |      |  |  |      |   | 5,847   |     |  |  |  |   | 4,910   |  |  |  |  |   | 4,971   |      |
| Minorityinterest                                              |  |  |                        |   | —  |      |  |  |      |   | — |      |  |  |      |   | — |     |  |  |  |   | — |  |  |  |  |   | 120     |      |
| (Loss)income from continuingoperations                        |  |  |                        |   | (123,771 | )    |  |  |      |   | 18,736  |      |  |  |      |   | 9,869   |     |  |  |  |   | 11,468  |  |  |  |  |   | 3,793   |      |
| Incomefrom discontinuedoperations                             |  |  |                        |   | —  |      |  |  |      |   | — |      |  |  |      |   | — |     |  |  |  |   | 503     |  |  |  |  |   | 1,001   |      |
| Net(loss) income                                              |  |  |                        |   | (123,771 | )    |  |  |      |   | 18,736  |      |  |  |      |   | 9,869   |     |  |  |  |   | 11,971  |  |  |  |  |   | 4,794   |      |
| Redeemablepreferred dividend, conversion fees andaccretion(4) |  |  |                        |   | —  |      |  |  |      |   | — |      |  |  |      |   | 7,020   |     |  |  |  |   | 4,005   |  |  |  |  |   | 1,016   |      |
| Net(loss) income available to commonstockholders              |  |  |                        | $ | (123,771 | )    |  |  |      | $ | 18,736  |      |  |  |      | $ | 2,849   |     |  |  |  | $ | 7,966   |  |  |  |  | $ | 3,778   |      |
| Basic(loss) income per share of common stockfrom:             |  |  |                        |   |     |      |  |  |      |   |    |      |  |  |      |   |    |     |  |  |  |   |    |  |  |  |  |   |    |      |
| Continuingoperations                                          |  |  |                        | $ | (2.75    | )    |  |  |      | $ | 0.42    |      |  |  |      | $ | 0.10    |     |  |  |  | $ | 0.34    |  |  |  |  | $ | 0.15    |      |
| Discontinuedoperations                                        |  |  |                        |   | —  |      |  |  |      |   | — |      |  |  |      |   | — |     |  |  |  |   | 0.02    |  |  |  |  |   | 0.05    |      |
|                                                          |  |  |                        | $ | (2.75    | )    |  |  |      | $ | 0.42    |      |  |  |      | $ | 0.10    |     |  |  |  | $ | 0.36    |  |  |  |  | $ | 0.20    |      |
| Diluted(loss) income per share of common stockfrom:           |  |  |                        |   |     |      |  |  |      |   |    |      |  |  |      |   |    |     |  |  |  |   |    |  |  |  |  |   |    |      |
| Continuingoperations                                          |  |  |                        | $ | (2.75    | )    |  |  |      | $ | 0.41    |      |  |  |      | $ | 0.10    |     |  |  |  | $ | 0.34    |  |  |  |  | $ | 0.15    |      |
| Discontinuedoperations                                        |  |  |                        |   | —  |      |  |  |      |   | — |      |  |  |      |   | — |     |  |  |  |   | 0.02    |  |  |  |  |   | 0.05    |      |
|                                                          |  |  |                        | $ | (2.75    | )    |  |  |      | $ | 0.41    |      |  |  |      | $ | 0.10    |     |  |  |  | $ | 0.36    |  |  |  |  | $ | 0.20    |      |
| Weightedaverage number of common sharesoutstanding:           |  |  |                        |   |     |      |  |  |      |   |    |      |  |  |      |   |    |     |  |  |  |   |    |  |  |  |  |   |    |      |
| Basic                                                         |  |  |                        |   | 44,930   |      |  |  |      |   | 44,684  |      |  |  |      |   | 27,419  |     |  |  |  |   | 21,962  |  |  |  |  |   | 18,565  |      |
| Diluted                                                       |  |  |                        |   | 44,930   |      |  |  |      |   | 45,169  |      |  |  |      |   | 28,104  |     |  |  |  |   | 22,304  |  |  |  |  |   | 18.932  |      |
|                                                               |

|                                        |  |  |              |  |         |      |  |  |      |   |         |      |  |  |      |   |         |  |  |  |  |   |         |  |  |  |  |   |         |  |
|----------------------------------------|--|--|--------------|--|---------|------|--|--|------|---|---------|------|--|--|------|---|---------|--|--|--|--|---|---------|--|--|--|--|---|---------|--|
|                                   |  |  | September30, |
|                                   |  |  | 2006         |  |         | 2005 |  |  | 2004 |   |         | 2003 |  |  | 2002 |
| BalanceSheetData:                      |  |  |              |  |    |      |  |  |      |   |    |      |  |  |      |   |    |  |  |  |  |   |    |  |  |  |  |   |    |  |
| Workingcapital     |  |  |              |  | (1,165  | )    |  |  |      | $ | 11,369  |      |  |  |      | $ | 13,468  |  |  |  |  | $ | 24,781  |  |  |  |  | $ | 25,918  |  |
| Accountsreceivable,net                 |  |  |              |  | 29,641  |      |  |  |      |   | 33,443  |      |  |  |      |   | 31,263  |  |  |  |  |   | 35,745  |  |  |  |  |   | 32,113  |  |
| Goodwill                               |  |  |              |  | 112,710 |      |  |  |      |   | 216,984 |      |  |  |      |   | 206,110 |  |  |  |  |   | 183,703 |  |  |  |  |   | 123,514 |  |
| Totalassets                            |  |  |              |  | 195,342 |      |  |  |      |   | 303,439 |      |  |  |      |   | 282,394 |  |  |  |  |   | 311,668 |  |  |  |  |   | 268,113 |  |
| Totaldebt                              |  |  |              |  | 71,159  |      |  |  |      |   | 64,342  |      |  |  |      |   | 64,778  |  |  |  |  |   | 165,378 |  |  |  |  |   | 148,530 |  |
| Totalshareholders’equity         |  |  |              |  | 86,383  |      |  |  |      |   | 201,859 |      |  |  |      |   | 186,977 |  |  |  |  |   | 75,163  |  |  |  |  |   | 53,943  |  |
|                                        |

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|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Includescharge of $5.4  million related to the write-off of oxygencylinders. We have substituted a number of cylinders with oxygenconcentrators. As such, we believe that these oxygen cylinders areobsolete and have no further use to the Company. Also includes a chargeof $0.5  million related to the write-off of an oxygen fillingstation. We invested in a filling station whereby our cylinders wouldbe re-filled. However, due to the location of the plant and strictnoise pollution governmental rules, we do not believe we will be ableto utilize such plant. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Duringour annual review of goodwill for impairment in the fourth quarter offiscal 2006, we determined there was an impairment of $121.9million to our recorded goodwill balance by using a combination of themarket multiple, comparable transaction and discounted cash flowmethods. Based on a combination of factors, contributing to theimpairment loss were the decrease in profits due to the decline ofrevenues from the NHS, the transitioning from the old pharmacy basedcontracts to the new supply of oxygen direct to patients contracts thathave lower margins, our company’s market capitalization at thetime of testing as well as current and projected operatingresults. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Includes charge of$9.0  million of software costs related to our computerizedaccounting and payroll system based on the Oracle platform that is tooslow for the nature of our business and therefore is not achieving fullfunctionality. Also includes charge of $0.3  million softwarecosts related to transitioning to our new oxygen contracts that webelieve will have no future benefit. Also includes charge of$1.0  million relate to the write-off of other intangible assets.We reviewed the carrying amount of our other intangibles and deemedcertain assets to be impaired as of September  30,  2006 asa result of the decline in revenues from theNHS. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Reflects the accrual ofdividends on our Series A preferred stock and accretion costs relatedto the issuance of our Series A preferred stock in our fiscal 2002corporate reorganization. In addition, fiscal 2004 includes conversionfees of $2.0  million paid to the holders of our Series Apreferred stock in connection with the firm commitment follow-on publicoffering of 14,500,000 shares of our common stock and write-off of$1.7  million of the remaining issuancecosts. |

|     |                                                                                                                                                                             |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | Includes a $1.1million charge related to the reorganization of our U.K. subsidiaries,as well as $1.0  million of costs associated with the launch ofour new corporate logo. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (6) | For theyear ended September  30,  2004, we recorded a charge of$4.2  million related to the write-off of deferred financing feesand unamortized debt discount associated with a recapitalization plan,undertaken in connection with fiscal 2004 public offering of 14,500,000shares of our common stock, pursuant to which we (i) refinanced oursenior collateralized term and revolving credit facility (the‘‘Former Senior Credit Facility’’) andmezzanine indebtedness (the ‘‘MezzanineLoan’’), both of which had been entered into inDecember  1999, and (ii) converted all of our then outstandingshares of Series A preferred stock into shares of our commonstock. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (7) | For the year endedSeptember  30,  2002, we recorded a non-cash charge of$4.2  million for the issuance of shares of common stock tosenior management and $1.6  million related to the exchange ofemployees’ redeemable shares in our U.K subsidiary for shares ofour common stock, using the net exercise method, in our fiscal 2002corporate reorganization. We also recorded a net charge of $0.7million for the year ended September  30,  2002, whichmainly related to the write-off of non-capitalized costs incurred inconnection with evaluating options to maximize the value of ourownership interest in our U.K.operations. |

|     |                                                                                                                                                                                                                                                                                                                                |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (8) | EffectiveOctober  1,  2001, we adopted Statement of FinancialAccounting Standards No. 145, which addressed gain or loss on theextinguishment of debt and sale-leaseback accounting for certain leasemodifications and accordingly recorded a charge of $0.9  millionin interest expense for the year ended September  30,2002. |

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|     |                                                                                                                                                                                                                                                                                                                       |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (9) | In our fiscal2002 corporate reorganization, accrued and unpaid interest owed to theholders of notes issued by one of our U.K. subsidiaries was satisfiedby the issuance of shares of our common stock. We recorded a gain of$5.1  million for the year ended September  30,  2002in connection with this transaction. |

|              |                                                                                            |
|--------------|--------------------------------------------------------------------------------------------|
| Item7.  | Management’s Discussion and Analysis ofFinancial Condition and Results ofOperations. |

General

The following discussion andanalysis should be read in conjunction with the consolidated financialstatements included in this Annual Report on Form 10-K and inconjunction with the description of our business included in thisAnnual Report on Form 10-K. It is intended to assist the reader inunderstanding and evaluating our financial position. This discussioncontains, in addition to historical information, forward-lookingstatements that involve risks and uncertainty. Our actual results coulddiffer materially from the results discussed in the forward-lookingstatements. Factors that could cause or contribute to such differencesinclude those discussed in this Annual Report on Form 10-K under‘‘Forward-Looking Statements.’’

Weare a leading provider of flexible, or temporary, healthcare staffingto the healthcare industry in the United Kingdom, as measured byrevenues, market share and number of staff. As of September30,  2006 we operated an integrated network of approximately 100branches throughout most of the United Kingdom. Our healthcare staffconsists principally of nurses, nurses aides and home health aides(known as carers in the U.K.). We focus on placing our staff on a perdiem basis in hospitals, nursing homes, care homes and private homes.We maintain a pool of over 22,000 nurses, nurses aides and home healthaides, a majority of whom we placed during our fiscal year endedSeptember  30,  2006. We also supply medical-grade oxygenfor use in respiratory therapy to the U.K. pharmacy market and NorthernIreland and oxygen concentrators to customers in Northern Ireland.Following the award by the U.K. Department of Health in February2006 of two new oxygen contracts, we now also provide oxygen servicesdirectly to customers in the South East of England.

The NHSrequires any healthcare staffing company that provides temporary staffto the NHS hospitals in a region to enter into a Framework Agreementsetting forth, among other things, applicable quality standards andmaximum payment rates. The introduction and further extension of theNHS Framework Agreements has continued to impact our financial resultsby reducing our margins from that source of business. In addition, wehave experienced reduced revenues from the NHS as a result of the NHSFramework Agreements, as well as from the efforts of the NHS to sourcemore of its work from its own employee base and its in-house agency(NHS Professionals). The reduction in demand from the NHS forhealthcare staffing services as a result of overspending by the NHSTrusts (the NHS operates its hospitals through NHS Trusts, each ofwhich operates one or more hospitals) has also impacted our financialresults.

Critical Accounting Policies

The preparation ofour financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues, expenses and related disclosures in a givenreporting period. We believe the following accounting policies arecritical areas affecting our financial condition and results ofoperations where estimates are required.

AccountsReceivable

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

Our company maintains credit controls to ensure cash collection on atimely basis. The credit terms agreed with our customers range from 7days to a maximum of 30 days from invoice date. We 

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maintain a credit department which consistsof 20-25 personnel who are targeted to collect outstanding receivables.We have established the following guidelines for the credit departmentto use as well as for us to assess the credit department’sperformance:

|  |              |                                                             |
|--|--------------|-------------------------------------------------------------|
|  | •  | to maintain average dayssales outstanding to below 35 days; |

|  |              |                                                                       |
|--|--------------|-----------------------------------------------------------------------|
|  | •  | tolimit our overdues (greater than 90 days) within agreed targets;and |

|  |              |                                                               |
|--|--------------|---------------------------------------------------------------|
|  | •  | to limit bad debt write off in theyear within agreed targets. |

We also apply a policy ofwithdrawing supply from customers who are significantly overdue. Manyprivate customers are contracted on a ‘‘directdebit’’ basis where we can collect payment direct fromcustomers’ bank accounts.

We have devised a provisioningmethodology based on the customer profile and historical credit riskacross our U.K. business. Accounts receivable are written off when thecredit control department determines the amount is no longercollectible. In addition, we do not have a threshold for accountbalance write-offs as our policy focuses on all balances, whatever thesize.

Intangible Assets

We have significantamounts of goodwill and other intangible assets. The determination ofwhether or not goodwill has become impaired involves a significantamount of judgment. Changes in strategy and/or market conditions couldsignificantly impact these judgments and require adjustments torecorded amounts of goodwill. We have recorded goodwill and separatelyidentifiable intangible assets resulting from our acquisitions throughSeptember  30,  2006. Goodwill is tested for impairmentannually in the fourth quarter of each fiscal year. A more frequentevaluation will be performed if indicators of impairment are present.We completed the annual impairment test of goodwill during the fourthquarter of fiscal 2006 and determined that there was impairment to ourgoodwill balance. We recorded a goodwill impairment charge of$121.9  million by using a combination of the market multiple,comparable transaction and discounted cash flow methods. If we arerequired to record a further impairment charge in the future, it couldhave an adverse impact on our consolidated financial position orresults of operations.

Deferred Income Taxes

Weaccount for deferred income taxes based upon differences between thefinancial reporting and income tax bases of our assets and liabilities.Valuation allowances are established, when necessary, to reducedeferred tax assets to the amounts expected to be realized. Thedetermination of whether or not valuation allowances are required to berecorded involves significant estimates regarding the futureprofitability of our company, as well as potential tax strategies forthe utilization of net loss and operating loss carryforwards.

Contingencies

We are involved in various legalproceedings and claims incidental to our normal business activities. Weare required to assess the likelihood of any adverse judgments oroutcomes to these matters as well as potential ranges of probablelosses. A determination of the amount of reserves required, if any, forthese contingencies are made after careful analysis of each individualissue. The required reserves may change in the future due to newdevelopments in each matter or changes in approach such as a change insettlement strategy in dealing with these matters.

RevenueRecognition

Patient services and respiratory therapyrevenues are recognized when services are performed and substantiatedby proper documentation. For patient services, which are billed atfixed rates and account for approximately 95% of ourcompany’s business, revenue is recognized upon completion oftimesheets that also require the signature of the recipient ofservices. Revenues from the rental of 

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home medical equipment are recognized overthe rental period (typically on a month-to-month basis). Revenues fromthe sale of oxygen and supplies for use in respiratory therapy arerecognized when products are delivered, a contractual arrangementexists, the sales price is either fixed or determinable and collectionis reasonably assured.

We receive a majority of our revenue fromthe NHS and other U.K. governmental payors. Certain revenues aresubject to review by third-party payors and adjustments, if any, arerecorded when determined.

Purchase Accounting

Weaccount for our acquisitions as purchase business combinations. Atacquisition, preliminary values and useful lives are allocated basedupon fair values that have been determined for assets acquired andliabilities assumed and management’s best estimates for valuesthat have not yet been finalized. We obtain a third-party valuation inorder to complete our purchase price allocations. Accordingly, finalasset and liability fair values as well as useful lives may differ frommanagement’s original estimates and could have an adverse impacton our consolidated financial position or results ofoperations.

Results of Operations

Year EndedSeptember  30,  2006 vs. Year Ended September30,  2005

Revenues

Total revenuesfor the year ended September  30,  2006 were $294.6million compared to $351.2  million for the year endedSeptember  30,  2005, a decrease of $56.6  million or16.1%. This decrease was mainly due to a reduction in demandfrom the NHS as overspending by the NHS Trusts in other areas hasforced significant reductions in agency spending as well as pricepressures arising from the NHS framework agreements and unfavorableeffects of changes in foreign exchange ($8.0)  million. Thisdecrease was partially offset by an increase in revenue of $5.6million in respiratory, medical equipment and supplies resulting fromthe introduction of the two new unified oxygen supply contracts thatcommenced on February  1,  2006.

GrossProfit

Total gross profit decreased by $20.0  millionto $83.7  million for the year ended September  30,2006 from $103.7  million for the year ended September30,  2005, a decrease of 19.3%. The unfavorable effects ofchanges in foreign exchange accounted for $2.3  million of thedecrease. As a percentage of total revenue, gross profit for the yearended September  30,  2006 decreased to 28.4% from29.5% for the comparable prior period. Gross margins for patientservices increased 30.6% for the year ended September30,  2006 versus 28.9% for the comparable prior period),mainly due to management’s focus on supplying healthcare staffto our higher margin customers. Gross margins in respiratory, medicalequipment and supplies sales decreased (14.2%) for the yearended September  30,  2006 versus 54.0% for thecomparable prior period, mainly due to costs incurred in theintroduction of the new oxygen contracts in the South East of Englandand to the impairment charges on the write-off of oxygen cylinders(37.4%) and oxygen filling station(3.8%).

Selling, General and AdministrativeExpenses

Total selling, general and administrative expensesincreased by $1.7  million to $75.6  million for the yearended September  30,  2006 from $73.9  million forthe year ended September  30,  2005, an increase of2.2%. This increase was mainly due to an increased level ofcosts in IT depreciation and maintenance costs arising from the newcomputerized accounting and payroll systems ($2.7  million),stock-based compensation ($0.7  million), and additional costs inthe respiratory, medical equipment and supplies business in preparationfor the introduction of the new contracts in the South East of Englandbeginning in February  2006 ($3.6  million). Theseincreases were offset by a reduction in headcount and associated costs($3.6  million) and changes in foreignexchange.

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Impairment ofGoodwill

In accordance with FAS No. 142,‘‘Goodwill and Other IntangibleAssets’’ (‘‘FAS No.142’’), we completed our annual impairment test duringthe fourth quarter of fiscal 2006 and determined there was animpairment to our recorded goodwill balance by using a combination ofthe market multiple, comparable transaction and discounted cash flowmethods. Based on a combination of factors, contributing to theimpairment loss were the decrease in profits due to the decline ofrevenues from the NHS, decrease in profits due to the transitioningfrom the old pharmacy based contracts to the new supply of oxygendirect to patients contracts that have lower margins, our marketcapitalization at the time of testing as well as current and projectedoperating results. As such, we recognized an impairment charge of$110.0  million relating to our staffing business and$11.9  million relating to our oxygenbusiness.

Impairment of Long-LivedAssets

In the fourth quarter of fiscal 2006, we recognized acharge of $9.0  million of software costs related to ourcomputerized accounting and payroll system that is based on the Oracleplatform. We currently have the system operating in four branches. Wehave discovered that the system is too slow for the nature of ourbusiness and therefore is not achieving full functionality. As such, wehave decided to abandon certain of the software features of the Oracleplatform and not continue with the planned expansion to our otherbranches as we believe the cost to have a workable model would exceedalternative solutions. We are currently reassessing our operatingsystem and researching alternative, lower-cost solutions. We alsorecognized a charge of $0.3  million of software costs related totransitioning our new oxygen contracts that we believe will have nofuture benefit.

We also reviewed the carrying amount of our otherintangibles and deemed certain assets to be impaired as ofSeptember  30,  2006 as a result of the decline in revenuesfrom the NHS. Thus, in accordance with the provisions of FAS No. 144,‘‘Accounting for the Impairment or Disposal ofLong-Lived Assets’’ (‘‘FAS No.144’’), we have recognized an impairment charge of$1.0  million.

Interest Income

Totalinterest income for the year ended September  30,  2006 was$0.1  million compared to $0.2  million for the year endedSeptember  30,  2005, which represents a decrease of$0.1  million. The decrease was attributable to a lower level offunds invested.

Interest Expense

Totalinterest expense for the year ended September  30,  2006was $4.3  million compared to $4.2  million for the yearended September  30,  2005, which represents an increase of$0.1  million. This increase was principally attributable toincreased bank debt in fiscal 2006. This increase was partially offsetby changes in foreign exchange of $0.2million.

Provision for Income Taxes

Werecorded a benefit from income taxes amounting to $4.3  millionor 3.4% of loss before income taxes for the year endedSeptember  30,  2006, compared to a provision of$6.7  million or 26.4% of income before income taxes forthe year ended September  30,  2005. The difference in theeffective tax rate between the year ended September  30,2006 and the year ended September  30,  2005 is mainly dueto non-deductible goodwill impairment charges.

NetLoss

As a result of the foregoing, we recorded net loss of$123.8  million for the year ended September  30,2006 compared to net income of $18.7  million for the year endedSeptember  30,  2005.

Year EndedSeptember  30,  2005 vs. Year Ended September30,  2004

Revenues

Total revenuesfor the year ended September  30,  2005 were $351.2million compared to $325.3  million for the year endedSeptember  30,  2004, an increase of $25.9  millionor 8.0%. This 

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increase was mainly due to acquisitions inthe social services sector ($22.7  million) and the favorableeffects of changes in foreign exchange ($10.9) million. This increasewas offset by less demand and price pressures arising from theextension of the NHS Framework Agreements.

GrossProfit

Total gross profit increased by $10.5  millionto $103.7  million for the year ended September  30,2005 from $93.2  million for the year ended September30,  2004, an increase of 11.3%. The favorable effects ofchanges in foreign exchange accounted for $3.2  million of theincrease. As a percentage of total revenue, gross profit for the yearended September  30,  2005 increased to 29.5% from28.6% for the comparable prior period. Gross margins for patientservices increased (28.9% for the year ended September30,  2005 versus 28.2% for the comparable prior period),mainly due to management’s focus on supplying healthcare staffto our higher margin customers and acquisitions being focused on highermargin businesses, which offset the impact of lower margins of our NHSbusiness. Gross margins in respiratory, medical equipment and suppliessales increased (54.0% for the year ended September30,  2005 versus 45.5% for the comparable prior period),mainly due to an increased focus on sales of portable oxygen therapyequipment and a steady increase in the number of patients in NorthernIreland, while keeping costs static.

Selling, Generaland Administrative Expenses

Total selling, general andadministrative expenses increased by $10.4  million to$73.9  million for the year ended September  30,2005 from $63.5  million for the year ended September30,  2004, an increase of 16.4%. Changes in foreignexchange accounted for $2.2  million of this increase andacquisitions a further $2.9  million. The remaining increase wasmainly a result of exceptional reorganization costs, including thelaunch of our new corporate logo ($2.1  million), increasedSarbanes-Oxley expenses of $1.6  million (a significantproportion of which were first-year set-up costs), increased ITdepreciation and maintenance costs arising from the implementation ofnew systems ($1.2  million) and $0.4  million of costsrelating to closure of branches during the year. During fiscal 2004 wehad exceptional compensation charges of $1.9million.

Interest Income

Total interestincome for the year ended September  30,  2005 was$0.2  million compared to $0.9  million for the year endedSeptember  30,  2004, which represents a decrease of$0.7  million. The decrease was attributable to a lower level offunds invested.

Interest Expense

Totalinterest expense for the year ended September  30,  2005was $4.2  million compared to $14.6  million for the yearended September  30,  2004, which represents a decrease of$10.4  million. This decrease was principally attributable toreduced bank debt in fiscal 2005 and to the write-off of $4.2million of deferred financing fees and unamortized debt discountassociated with the refinancing of the Former Senior Credit Facility infiscal 2004. This decrease was partially offset by the recording of a$0.5  million benefit related to the change in the fair value ofour company’s interest rate cap and floor collar agreement infiscal 2004 and changes in foreign exchange of$0.2.

Other Expense

Total other expense forthe year ended September  30,  2005 was $0.2million, which represents the expense related to the change in the fairvalue of our interest swap agreements and related ineffective portionof the interest swap cash flow hedges.

Provision forIncome Taxes

We recorded a provision for income taxesamounting to $6.7  million or 26.4% of income beforeincome taxes for the year ended September  30,  2005,compared to a provision of $5.8  million or 37.2% ofincome before income taxes for the year ended September30,  2004. The difference in the effective tax rate between theyear ended September  30,  2005 and the year endedSeptember  30,  2004 is mainly due to the U.S. pre-taxlosses recorded in fiscal 2004 for which no benefit was provided andpermanent differences in the U.K. Our company does not provide a taxbenefit for U.S. pre-tax losses as it is more likely than not that wewill not utilize our net operating losses in the U.S.

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Net Income

As aresult of the foregoing, we recorded net income of $18.7  millionfor the year ended September  30,  2005 compared to netincome of $9.9  million for the year ended September30,  2004.

Series A PreferredStock

For the year ended September  30,  2004,we accrued $2.9  million of dividends for the Series A preferredstock issued in connection with our fiscal 2002 corporatereorganization and accreted $0.4  million of costs related to theissuance of our Series A preferred stock. In July  2004, all ofthe Series A preferred stock was converted into a like number of sharesof common stock. In connection with the conversion, we paid conversionfees of $2.0  million to the holders of the Series A preferredstock and wrote off $1.7  million of the remaining issuancecosts.

Liquidity and CapitalResources

General

For our fiscal year endedSeptember  30,  2006, we generated $25.4  millionfrom operating activities. Cash requirements for our fiscal year endedSeptember  30,  2006 for capital expenditures ($23.8million), payments for acquisitions and acquisitions payable($6.1  million) and principal payments on the long-term debtportion of our senior credit facility ($10.8  million) were metthrough operating cash flows, net borrowings under the revolving loanportion of the senior credit facility ($13.5  million) and cashon hand.

We believe our existing capital resources and thosegenerated from operating activities and available under existingborrowing arrangements will be adequate to conduct our operations forthe next twelve months.

Accounts Receivable

Wemaintain a cash management program that focuses on the reimbursementfunction, as growth in accounts receivable has been the main operatinguse of cash historically. At September  30,  2006 andSeptember  30,  2005, $29.6 (15.2%) million and$33.4  million (11.0%), respectively, of our total assetsconsisted of accounts receivable. The decrease in accounts receivablefrom 2005 to 2006 is mainly due to the timing of cash collections andthe lower volume of business.

Our goal is to maintain accountsreceivable levels equal to or less than industry average, which wouldtend to mitigate the risk of negative cash flows from operations byreducing the required investment in accounts receivable and therebyincreasing cash flows from operations. We maintain credit controls toensure cash collection on a timely basis. Days sales outstanding(‘‘DSOs’’) is a measure of the averagenumber of days we take to collect our accounts receivable, calculatedfrom the date services are rendered. At September  30,2006 and September  30,  2005, our average DSOs were36.

At September  30,  2006 gross receivables were$32.1  million, of which $19.6  million or 61.2%were represented by amounts due from U.K. governmental bodies, eitherthe NHS or local governmental social service departments (the‘‘SSD’’). At September  30,2005 gross receivables were $35.9  million, of which $24.0million or 66.9% were represented by amounts due from U.K.governmental bodies. The remaining accounts receivable balance is duefrom commercial payors (nursing homes, private hospitals andpharmacies) and private payors.

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The following table summarizes theaccounts receivable aging by payor mix at September 30, 2006 andSeptember  30,  2005 (dollars inthousands):

|                                     |  |  |          |   |        |           |  |  |           |   |        |            |  |  |                 |   |        |               |  |  |  |   |        |  |  |  |  |   |        |  |  |  |  |   |        |   |
|-------------------------------------|--|--|----------|---|--------|-----------|--|--|-----------|---|--------|------------|--|--|-----------------|---|--------|---------------|--|--|--|---|--------|--|--|--|--|---|--------|--|--|--|--|---|--------|---|
| AtSeptember 30,2006                 |  |  | 0-30Days |   |        | 31-60Days |  |  | 61-90Days |   |        | 91-120Days |  |  | 121DaysAnd Over |   |        | ARAt9/30/2006 |
| NHS                                 |  |  |          | $ | 4,749  |           |  |  |           | $ | 2,343  |            |  |  |                 | $ | 555    |               |  |  |  | $ | 474    |  |  |  |  | $ | 1,105  |  |  |  |  | $ | 9,226  |   |
| SSD                                 |  |  |          |   | 6,820  |           |  |  |           |   | 2,415  |            |  |  |                 |   | 539    |               |  |  |  |   | 345    |  |  |  |  |   | 243    |  |  |  |  |   | 10,362 |   |
| CommercialPayors                    |  |  |          |   | 6,279  |           |  |  |           |   | 1,729  |            |  |  |                 |   | 429    |               |  |  |  |   | 214    |  |  |  |  |   | 263    |  |  |  |  |   | 8,914  |   |
| PrivatePayors                       |  |  |          |   | 1,780  |           |  |  |           |   | 573    |            |  |  |                 |   | 240    |               |  |  |  |   | 156    |  |  |  |  |   | 841    |  |  |  |  |   | 3,590  |   |
| GrossAR at9/30/06                   |  |  |          | $ | 19,628 |           |  |  |           | $ | 7,060  |            |  |  |                 | $ | 1,763  |               |  |  |  | $ | 1,189  |  |  |  |  | $ | 2,452  |  |  |  |  | $ | 32,092 |   |
| Less:Surcharges(A)                  |  |  |          |   |   |           |  |  |           |   |   |            |  |  |                 |   |   |               |  |  |  |   |   |  |  |  |  |   |   |  |  |  |  |   | (738   | ) |
| Less:Allowance For DoubtfulAccounts |  |  |          |   |   |           |  |  |           |   |   |            |  |  |                 |   |   |               |  |  |  |   |   |  |  |  |  |   |   |  |  |  |  |   | (1,713 | ) |
| AccountsReceivable,net              |  |  |          |   |   |           |  |  |           |   |   |            |  |  |                 |   |   |               |  |  |  |   |   |  |  |  |  |   |   |  |  |  |  | $ | 29,641 |   |
|                                     |

|                                     |  |  |          |   |        |           |  |  |           |   |       |            |  |  |                |   |       |               |   |        |   |   |       |  |  |  |  |   |       |  |  |  |  |   |        |  |
|-------------------------------------|--|--|----------|---|--------|-----------|--|--|-----------|---|-------|------------|--|--|----------------|---|-------|---------------|---|--------|---|---|-------|--|--|--|--|---|-------|--|--|--|--|---|--------|--|
| AtSeptember  30,2005                |  |  | 0-30Days |   |        | 31-60Days |  |  | 61-90Days |   |       | 91-120Days |  |  | 121DaysAndOver |   |       | ARAt9/30/2005 |
| NHS                                 |  |  |          | $ | 8,130  |           |  |  |           | $ | 3,884 |            |  |  |                | $ | 1,216 |               |   |        |   | $ | 668   |  |  |  |  | $ | 583   |  |  |  |  | $ | 14,481 |  |
| SSD                                 |  |  |          |   | 6,244  |           |  |  |           |   | 1,746 |            |  |  |                |   | 304   |               |   |        |   |   | 512   |  |  |  |  |   | 711   |  |  |  |  |   | 9,517  |  |
| CommercialPayors                    |  |  |          |   | 5,231  |           |  |  |           |   | 2,230 |            |  |  |                |   | 530   |               |   |        |   |   | 157   |  |  |  |  |   | 212   |  |  |  |  |   | 8,360  |  |
| PrivatePayors                       |  |  |          |   | 2,001  |           |  |  |           |   | 670   |            |  |  |                |   | 319   |               |   |        |   |   | 142   |  |  |  |  |   | 369   |  |  |  |  |   | 3,501  |  |
| GrossAR at9/30/05                   |  |  |          | $ | 21,606 |           |  |  |           | $ | 8,530 |            |  |  |                | $ | 2,369 |               |   |        |   | $ | 1,479 |  |  |  |  | $ | 1,875 |  |  |  |  | $ | 35,859 |  |
| Less:UnappliedCash                  |  |  |     |   |        |      |  |  |      |   |       |       |  |  |           |   |       |               |   | (168   | ) |
| Less:Surcharges(A)                  |  |  |     |   |        |      |  |  |      |   |       |       |  |  |           |   |       |               |   | (514   | ) |
| Less:Allowance For DoubtfulAccounts |  |  |     |   |        |      |  |  |      |   |       |       |  |  |           |   |       |               |   | (1,734 | ) |
| AccountsReceivable,net              |  |  |     |   |        |      |  |  |      |   |       |       |  |  |           |   |       |               | $ | 33,443 |   |
|                                     |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                             |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------|
| (A) | Surcharges represent interest charges to customerson overdue accounts. The surcharges are recognized in income only uponreceipt of payment. |

As discussed above under‘‘Critical Accounting Policies — AccountsReceivable,’’ each fiscal year we undertake a review ofour methodology and procedure for reserving for our doubtful accounts.This process also takes into account our actual experience of writeoffs in the period. The policy is then applied at each quarter end toarrive at a closing reserve for doubtful accounts. In the secondquarter of fiscal 2006, we reviewed our current methodology and revisedthe basis of estimation for providing against certain classes ofdoubtful account receivable based on an analysis of historicalexperience. This review has given rise to a benefit of approximately$0.3  million to the income statement.

Given the highpercentage of U.K. governmental debt, the large number of customeraccounts with low-value debt within the remainder of the accountsreceivable ledger and the methodology for making provisions fordoubtful accounts, we believe our provisioning method is prudent andappropriate to our business.

We provide nurses and home healthaides on the basis of terms (payment due within 7 to 30 days ofinvoice) and prices (rate per hour) agreed to in advance with ourcustomers. Time sheets are signed by clients for the work performed andthen invoices are generated based on agreed billing rates.Consequently, there is no process for approval of invoices. Our creditcontrol policies currently achieve an average collection ofapproximately 35 days from submission of invoices.

As our currentoperations are in the U.K. and the majority of accounts receivable isfrom U.K. governmental bodies for which payment terms and prices areagreed in advance, we have not 

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recorded any contractual allowances. Therehave been recent agreements with the NHS to adjust rates (bothincreases and decreases) depending on the volume of hours utilized.Billing adjustments are reviewed quarterly based on actual volumesdelivered and any entries are recognized during the appropriate period.No material adjustments have arisen based on volumesdelivered.

Borrowings

General

Inthe fourth quarter of fiscal 2004, our first tier U.K. subsidiary,Allied Healthcare Group Limited (now known as Allied Healthcare GroupHoldings Limited) (‘‘Allied Holdings’’),obtained financing denominated in pounds sterling consisting of a£50  million multicurrency senior credit facility (the‘‘Senior Credit Facility’’). As describedin more detail below, on December  12,  2006, the SeniorCredit Facility was amended and restated (the ‘‘AmendedSenior Credit Facility’’).

The Senior CreditFacility (together with approximately $65.7  million of the netproceeds of the firm commitment follow-on public offering of 14,500,000shares of our common stock that was consummated in July  2004)refinanced our Former Senior Credit Facility and the Mezzanine Loan,both of which had been entered into in December  1999. The SeniorCredit Facility was secured by a first priority lien on the assets ofAllied Holdings and certain of its subsidiaries, and payment wasguaranteed by us and certain of the subsidiaries of AlliedHoldings.

The Senior Credit Facility consisted of thefollowing:

|  |              |                                                                       |
|--|--------------|-----------------------------------------------------------------------|
|  | •  | a £30 ($56.2) millionterm loan A that matures in July  2009;and |

|  |              |                                                                                                                    |
|--|--------------|--------------------------------------------------------------------------------------------------------------------|
|  | •  | a £20 ($37.5) millionrevolving loan B that may be drawn upon until June  2009 and thatmatures in July  2009. |

Repayment of the term loan Acommenced in January  2005 and continued semi-annually. Repaymentof revolving loan B was on the last day of its interest period. Boththe A and B loans bore 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 consolidateddebt to consolidated profit ratios). As of September  30,2006, we had outstanding borrowings of $33.7  million and$37.5  million relating to term loan A and revolving loan B,respectively, under the Senior Credit Facility, that bore interest atrates ranging from 5.66% to 5.68% per annum.

TheSenior Credit Facility contained affirmative and negative financialcovenants customarily found in agreements of this kind, including themaintenance 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 networth, maximum ancillary facilities indebtedness and the prohibition ofoff balance sheet funding. We were also obligated to ensure that theguarantors of the Senior Credit Facility must not at any time representless than 90% of the consolidated gross assets, turnover orearnings before interest and taxes of the U.K. subsidiaries. As ofSeptember  30,  2006, we were not in compliance with thecovenant ratio of EBIT to interest expense. On December8,  2006, we obtained a temporary waiver from the bank on suchcovenant. We subsequently entered into the Amended Senior CreditFacility, which restated the financial covenants. As ofSeptember  30,  2006, we were in compliance with theremainder of the covenants under the Senior Credit Facility.

Inthe fourth quarter of fiscal 2006, the Senior Credit Facility wasamended to provide an overdraft facility (‘‘OverdraftFacility’’) in the amount of £3.0 ($5.6) millionfor general corporate purposes. We had utilized the Overdraft Facilityin the fourth quarter of fiscal 2006 and had no amounts outstanding asof September  30,  2006. The Overdraft Facility wasrepayable upon the earlier of demand from the bank or January11,  2007. Interest on the Overdraft Facility was charged at thesame rate as loans under the revolving loan B. In December  2006,the Overdraft Facility was rolled over and incorporated into our loanunder the Amended Senior Credit Facility.

On December12,  2006, our U.K. subsidiary, Allied Holdings, entered into theAmended Senior Credit Facility, which provides for a £46 ($89.8)million multicurrency senior credit facility to replace the SeniorCredit Facility. The effective date of the Amended Senior CreditFacility is 

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December  13,  2006. The AmendedSenior Credit Facility is secured by a first priority lien on theassets of Allied Holdings and certain of its subsidiaries, and paymentis guaranteed by Allied Healthcare International Inc. and certain ofthe subsidiaries of Allied Holdings. Allied Healthcare InternationalInc. has granted the banks a security interest in substantially all ofits assets to secure the payment of its guarantee.

The AmendedSenior Credit Facility consists of thefollowing:

|  |              |                                                                     |
|--|--------------|---------------------------------------------------------------------|
|  | •  | an £18 ($35.1) millionterm loan A that matures in July  2009; |

|  |              |                                                                                                                                                                        |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | until commencement of the invoice discountfacility, a £20 ($39.0) million revolving loan B1 that may bedrawn upon until June  2009 and that matures in July2009; |

|  |              |                                                                                                                                                                                                                                                                     |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | following commencement of theinvoice discount facility, a £12.5 ($24.4) million revolvingloan B1 and a £7.5 ($14.6) million invoice discounting facilityB2, both of which may be drawn upon until June  2009 and both ofwhich mature in July  2009; and |

|  |              |                                                                                                                      |
|--|--------------|----------------------------------------------------------------------------------------------------------------------|
|  | •  | an £8.0 ($15.6) million revolvingloan C that may be drawn upon until June  2009 and that maturesin July  2009. |

Repayment of term loan A is madesemi-annually. Repayment of revolving loan B1 is on the last day of itsinterest period. Repayment of invoice discounting loan B2 shall be onthe maturity date (July 2009). Repayment of revolving loan C shall beon the maturity date (July 2009) or, if earlier, the date that theother facilities are repaid. The loans bear interest at rates equal toLIBOR (if sterling) or EURIBOR (if euros) plus any bank mandatory costs(if applicable) plus 0.70% to 3.50% per annum (dependingon consolidated debt to consolidated profit ratios).

The AmendedSenior Credit Facility agreement is based on the U.K.’s LoanMarkets Association Multicurrency Term and Revolving Facilitiesagreement, which is a standard form designed to be commerciallyacceptable to the corporate lending market.

Subject to certainexceptions, the Amended Senior Credit Facility prohibits or restrictsthe following, among otherthings:

|  |              |                                                                                                               |
|--|--------------|---------------------------------------------------------------------------------------------------------------|
|  | •  | incurring liens and grantingsecurity interests in our assets or the assets of certain of our U.Ksubsidiaries; |

|  |              |                                   |
|--|--------------|-----------------------------------|
|  | •  | incurring additionalindebtedness; |

|  |              |                                              |
|--|--------------|----------------------------------------------|
|  | •  | making certain fundamentalcorporate changes; |

|  |              |                                                                                         |
|--|--------------|-----------------------------------------------------------------------------------------|
|  | •  | paying dividends(including the payment of dividends to our company by oursubsidiaries); |

|  |              |                                                         |
|--|--------------|---------------------------------------------------------|
|  | •  | making specifiedinvestments, acquisitions or disposals; |

|  |              |                         |
|--|--------------|-------------------------|
|  | •  | repurchasing shares;and |

|  |              |                                                    |
|--|--------------|----------------------------------------------------|
|  | •  | entering into certain transactionswith affiliates. |

The Amended Senior Credit Facility containsaffirmative and negative financial covenants customarily found inagreements of this kind, including the maintenance of certain financialratios, such as cash flow to debt service, earnings (before interest,taxes, depreciation and amortization) to interest expense, and netborrowings to earnings (before interest, taxes, depreciation andamortization). We are also obligated to ensure that the guarantors ofthe Amended Senior Credit Facility must not at any time represent lessthan 90% of the consolidated gross assets, turnover or earningsbefore interest and taxes of the U.K. subsidiaries.

The AmendedSenior Credit Facility places limits on our ability to incur capitalexpenditures, requires us to separate the role of the chairman and thechief executive officer no later than August  1,  2007, andrequires us to engage a consultant to review our operations and makerecommendations with respect thereto.

Notes Due inConnection with Acquisitions

We repaid, through AlliedHoldings, notes payable of $1.9  million and $38.7  millionissued in connection with the acquisition of certain U.K. flexiblestaffing agencies in our 2005 and 2004 fiscal years,respectively.

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Guarantees

TheSenior Credit Facility is collateralized by a first priority lien onthe assets of Allied Healthcare Group Holdings Limited and certain ofits subsidiaries. Together with Allied Healthcare Group HoldingsLimited and certain of its subsidiaries, our company is guaranteeingthe debt and other obligations of certain wholly-owned U.K.subsidiaries under the Senior Credit Facility. Subsequent toSeptember  30,  2006, and in conjunction with the executionof the Amended Senior Credit Facility, Allied Healthcare InternationalInc. granted the lenders a security interest in substantially all ofits assets to secure the payment of its guarantee. At September30,  2006 and September  30  2005, the amountsguaranteed, which approximate the amounts outstanding, totaled$71.2  million and $64.3  million,respectively.

Financial Instrument

See‘‘Item 7A — Quantitative and QualitativeDisclosures About Market Risk — Interest RateRisk.’’

Commitments

EmploymentAgreements

See ‘‘Item 11 — ExecutiveCompensation — Employment Agreements; Termination of Employmentand Change-in-ControlArrangements.’’

OperatingLeases

We have entered into various operating leaseagreements for office space and equipment. Certain of these leasesprovide for renewal options.

Contractual CashObligations

As described under‘‘Borrowings,’’ ‘‘Commitments— Acquisition Agreements,’’ and‘‘Commitments — Operating Leases’’above, the following table summarizes our contractual cash obligationsas of September  30,  2006 (dollars inthousands):

|            |  |  |                         |   |         |                       |  |  |                  |   |       |  |  |  |  |   |        |  |
|------------|--|--|-------------------------|---|---------|-----------------------|--|--|------------------|---|-------|--|--|--|--|---|--------|--|
| Fiscal     |  |  | TotalDebtObligations(1) |   |         | TotalLeaseObligations |  |  | TotalObligations |
| 2007       |  |  |                         | $ | 11,236  |                       |  |  |                  | $ | 2,610 |  |  |  |  | $ | 13,846 |  |
| 2008       |  |  |                         |   | 11,236  |                       |  |  |                  |   | 1,753 |  |  |  |  |   | 12,989 |  |
| 2009       |  |  |                         |   | 48,687  |                       |  |  |                  |   | 1,428 |  |  |  |  |   | 50,115 |  |
| 2010       |  |  |                         |   | — |                       |  |  |                  |   | 1,173 |  |  |  |  |   | 1,173  |  |
| 2011       |  |  |                         |   | — |                       |  |  |                  |   | 809   |  |  |  |  |   | 809    |  |
| Thereafter |  |  |                         |   | — |                       |  |  |                  |   | 774   |  |  |  |  |   | 774    |  |
|       |  |  |                         | $ | 71,159  |                       |  |  |                  | $ | 8,547 |  |  |  |  | $ | 79,706 |  |
|            |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                           |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Theseamounts do not include interest payments. Based on current levels ofdebt, we expect to incur annual interest payments of approximately$4.1  million. |

Lease obligations reflect futureminimum rental commitments required under operating leases that havenon-cancelable lease terms as of September  30,  2006.Certain of these leases provide for renewaloptions.

Miscellaneous

TreasuryShares

In January  2001, we initiated a stockrepurchase program, whereby we may purchase up to approximately$1.0  million of our outstanding shares of common stock inopen-market transactions or 

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in privately-negotiated transactions. InMay  2003, we initiated a second stock repurchase program,pursuant to which we may purchase up to an additional $3.0million of our outstanding shares of common stock in open-markettransactions or in privately-negotiated transactions. As ofSeptember  30, 2006, we had acquired 407,700 shares of our commonstock for an aggregate purchase price of $1.3  million pursuantto our stock repurchase programs, which are reflected as treasury stockin our consolidated balance sheet at September  30,  2006.In addition, as of September  30,  2006, we had acquired177,055 shares of our company’s common stock for an aggregatevalue of $1.0  million from certain of our executive officers.Such shares were acquired in fiscal 2004 and delivered to us as paymenton promissory notes issued by us tothem.

Acquisitions

In fiscal 2006, weacquired the entire issued share capital of a home care training agencyfor approximately $0.8  million in cash and additional contingentcash consideration of up to $0.9  million dependent upon (i)future earnings in fiscal 2006, (ii) providing a set minimum oftraining programs and (iii) the sellers continuing employment with ourcompany until at least December  31,  2006. Of the$0.9  million contingent cash consideration, we have recognizedaccrued compensation costs of $0.5  million, net of income tax,as the acquisition contract required the sellers to remain inemployment with us until at least December  31,  2006 (theearnout period).

In fiscal 2005, we acquired a total of 9flexible staffing agencies for approximately $17.1  million incash and $0.1  million in acquisition payable, which was paid infiscal 2006. As of September  30,  2005, these transactionsincluded provisions to pay additional amounts, payable in cash, of upto $9.7  million in contingent consideration dependent uponfuture earnings of the acquired entities. In fiscal 2006 a total of$6.3  million was earned, of which $2.2  million remainspayable as of September  30,  2006. The remaining balanceof contingent consideration was unearned and will not be required to bepaid.

In fiscal 2004, we acquired a total of 8 flexible staffingagencies for approximately $8.6  million in cash. AtSeptember  30,  2004, these transactions includedprovisions to pay additional amounts, payable in cash, of up to$10.5  million in contingent consideration dependent upon futureearnings of the acquired entities. In fiscal 2005 and 2006 a total of$7.0  million was earned, of which $2.0  million remainspayable as of September  30,  2006. The remaining balanceof contingent consideration was unearned and will not be required to bepaid.

In fiscal 2006, we completed our purchase price allocationfor our fiscal 2005 acquisitions. Accordingly, final tangible assets,separately identifiable intangible assets and liabilities were assignedvalues of approximately $5.9  million, $5.6  million and$2.3  million, respectively, with the remaining portion of$9.2  million attributable to goodwill. As compared to theoriginal valuations at acquisition, the final valuation resulted in areclassification of $0.2  million from separately identifiableintangible assets to goodwill.

In fiscal 2005, we completed ourpurchase price allocation for our fiscal 2004 acquisitions.Accordingly, tangible assets, separately identifiable intangible assetsand liabilities were assigned values of approximately $1.3million, $3.5  million and $0.7  million, respectively,with the remaining portion of $4.9  million attributable togoodwill. As compared to the original valuations at acquisition, thefinal valuation resulted in a reclassification of $0.8  millionfrom goodwill to separately identifiable intangible assets.

Infiscal 2004, we completed our purchase price allocation for our fiscal2003 acquisitions. Accordingly, tangible assets, separatelyidentifiable intangible assets and liabilities were assigned values ofapproximately $0.4  million, $1.2  million and $0.4million, respectively, with the remaining portion of $5.1million attributable to goodwill. As compared to the originalvaluations at acquisition, the final valuation resulted in areclassification of $0.2  million from goodwill to separatelyidentifiable intangible assets.

The pro forma results ofoperations and related per share information for these acquisitionshave not been presented as the amounts are consideredimmaterial.

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Litigation

See‘‘Item 3 — LegalProceedings.’’

Contingencies

Someof our inactive subsidiaries were Medicare Part B suppliers whosubmitted claims to the designated carrier who is the U.S.government’s claims processing administrator. From time to time,the carrier may request an audit of Medicare Part B claims on aprepayment or postpayment basis. If the outcome of any audit results ina denial or a finding of an overpayment, then the affected subsidiaryhas appeal rights. Under postpayment audit procedures, the suppliergenerally pays the alleged overpayment and can pursue appeal rights fora refund of any paid overpayment incorrectly assessed against thesupplier.

We believe that we have been in compliance, in allmaterial respects, with the applicable provisions of federal laws andregulations and applicable state laws, together with all applicablelaws and regulations of other countries in which we operate. Due to thebroad and sometimes vague nature of these laws and regulations, therecan be no assurance that an enforcement action will not be broughtagainst us, or that we will not be found to be in violation of one ormore of these laws or regulations. At present, we cannot anticipatewhat impact, if any, administrative or judicial interpretations ofapplicable federal and state laws and the laws of other countries inwhich we operate may have on our financial position, cash flows andresults of operations.

We are involved in various legalproceedings and claims incidental to our normal business activities. Weare vigorously defending our position in all such proceedings. Webelieve that these matters should not have a material adverse impact onour financial position, cash flows or results ofoperations.

Impact of Recent AccountingStandards

See ‘‘Recent AccountingPronouncements’’ in Note 2 of Notes to ConsolidatedFinancial Statements for our fiscal year ended September30,  2006.

|                |                                                            |
|----------------|------------------------------------------------------------|
| Item 7A.  | Quantitative andQualitative Disclosures About Market Risk. |

Foreign CurrencyExchange

We face exposure to adverse movements in foreigncurrency exchange rates. These exposures may change over time asbusiness practices evolve and could have a material adverse impact onour consolidated financial results. Currently, we do not hedge foreigncurrency exchange rate exposures.

The translation of thefinancial statement of our U.K. operations is impacted by fluctuationsin foreign currency exchange rates. For the fiscal 2006 period ascompared to the fiscal 2005 average rate, the translation of our U.K.financial statements into U.S. dollars resulted in decreased revenuesof $8.0 million, increased operating loss of $3.3 million and increasednet loss of $3.4 million. We estimate that a 10% change in theexchange rate between the British pound and the U.S. dollar would havea $29.5  million, $12.1  million and $12.4  millionimpact on reported revenues, operating income and net income,respectively.

Interest Rate Risk

Our exposure to marketrisk for changes in interest rates relate primarily to our cashequivalents and our Senior Credit Facility. Our cash equivalentsinclude highly liquid short-term investments purchased with initialmaturities of 90 days or less. To manage our exposure to interest ratechanges related to our Senior Credit Facility, we use interest rateswap agreements.

In March  2003, we entered into a Rate Capand Floor Collar Agreement that capped our interest rate at LIBOR plus5.50% and our interest floor at LIBOR plus 4.47%, subjectto special provisions, on approximately $93.6  million of ourfloating rate debt under a contract that would have expired inMarch  2008. In February  2005, we sold this derivativeinstrument for approximately $0.1  million.

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In February  2005, we entered intotwo interest rate swap agreements, which expire in July  2009,the objective of which is to protect us against the potential increasein interest rates on our floating rate debt. The two interest rate swapagreements cover approximately $56.2  million of the our floatingrate debt until January  2008 and then decrease by $5.6million each six-month period, in order to reflect the amortizingeffect of our floating rate debt, until the end of the interest rateswap agreements. The interest rate under the swap agreements is fixedat 4.935% and is payable semi-annually. In the third quarter offiscal 2005, we designated the two interest rate swap agreements ascash flow hedges. In accordance with Statement of Financial AccountingStandards No. 133, ‘‘Accounting for Certain DerivativeInstruments and Certain Hedging Activities,’’ asamended by Statement of Financial Accounting Standards No. 138 andrelated implementation guidance, we calculated the fair value of theinterest rate swap agreements to be an asset of $0.3  million atSeptember  30,  2006 and a liability of $0.8  millionat September  30,  2005. Prior to the cash flow hedgedesignation, changes in the value from period to period of the interestrate swap agreements was recorded as other expense or income, asappropriate. At September  30,  2006 and 2005, theeffective portion of the income (loss) on the interest rate swapagreements designated as cash flow hedges was $0.3  million and$0.4  million, respectively, net of income tax, and is includedin other comprehensive income. We will continue to assess theeffectiveness of these cash flow hedges on a quarterly basis.

Theinterest rate on our remaining bank debt of $15.0  million isreset at least every month to reflect current market rates.Consequently, the carrying value of our variable rate bank debtapproximates its fair value at September  30,2006.

Item 8.    Financial Statements and SupplementaryData.

The consolidated financial statements and requiredfinancial statement schedules of our company begin on page F-i of thisAnnual Report on Form 10-K and are incorporated herein byreference.

Item 9.    Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.

Dismissalof Deloitte & Touche LLP; Retention of KPMG Audit Plc

OnJanuary  11,  2006, we dismissed Deloitte & Touche LLP,independent registered public accounting firm, as our auditor,effective as of such date.

The reports of Deloitte & ToucheLLP on our financial statements and financial statement schedules forthe fiscal years ended September  30,  2004 andSeptember  30,  2005 did not contain an adverse opinion ora disclaimer of opinion and were not qualified or modified as touncertainty, audit scope or accounting principles.

The decisionto change auditors was approved by both our Audit Committee and ourboard of directors.

In connection with Deloitte & ToucheLLP’s audits of our financial statements and financial statementschedules for the fiscal years ended September  30,  2004and September  30,  2005, and during the subsequent interimperiod preceding January  11,  2006, there were nodisagreements with Deloitte & Touche LLP on any matter ofaccounting principles or practices, financial statement disclosure, orauditing scope or procedure, which, if not resolved to the satisfactionof Deloitte & Touche LLP, would have caused Deloitte & ToucheLLP to make reference thereto in its reports on our financialstatements and financial statement schedules for suchperiods.

During our fiscal years ended September30,  2004 and September  30,  2005, and during thesubsequent interim period preceding January  11,  2006,there were no ‘‘reportable events’’ (assuch term defined in Item 304 (a)(1)(v) of Regulation S-K promulgatedby the Securities and Exchange Commission) involving Deloitte &Touche LLP.

On January  11,  2006, we engaged thefirm of KPMG Audit Plc, independent accountants, as our auditor,effective as of such date.

During our fiscal years endedSeptember  30,  2004 and September  30,  2005,and during the subsequent interim period preceding January11,  2006, neither we nor anyone acting on our behalf

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consulted KPMG Audit Plc regarding either:(i) the application of accounting principles to a specific transaction,either completed or proposed, or the type of audit opinion that mightbe rendered on our financial statements; or (ii) any matter that wasthe subject of a disagreement with Deloitte & Touche LLP or thatwas a ‘‘reportable event’’ (as such termdefined in Item 304 (a)(1)(v) of Regulation S-K promulgated by theSecurities and Exchange Commission).

Resignation of KPMG AuditPlc; Retention of Eisner LLP

On July  5,  2006, wereceived notification that KPMG Audit Plc had resigned as our auditorand that the client-auditor relationship between us and KPMG Audit Plchad ceased.

KPMG Audit Plc was retained as our auditor onJanuary  11,  2006, subsequent to the filing by us of ourAnnual Report on Form 10-K with the Securities and Exchange Commissionwith respect to our fiscal year ended September  30,  2005.Accordingly, KPMG Audit Plc did not prepare any audit report on thefinancial statements and financial statement schedules of our companyor any report on management’s assessment of the effectiveness ofinternal control over financial reporting as of September30,  2006 and the effectiveness of internal control overfinancial reporting as of September  30,  2006.

Fromthe retention of KPMG Audit Plc as our auditor’s onJanuary  11,  2006 through the subsequent interim periodpreceding its resignation on July  5,  2006, there were nodisagreements with KPMG Audit Plc on any matter of accountingprinciples or practices, financial statement disclosure, or auditingscope or procedure, which disagreements, if not resolved to thesatisfaction of KPMG Audit Plc, would have caused KPMG Audit Plc tomake reference in connection with their opinion to the subject matterof the disagreement.

From the retention of KPMG Audit Plc as ourauditors on January  11,  2006 through the subsequentinterim period preceding its resignation on July  5,  2006,there were no ‘‘reportable events’’ (assuch term defined in Item 304(a)(1)(v) of Regulation S-K promulgated bythe Securities and Exchange Commission) involving KPMG AuditPlc.

On July  10,  2006, we engaged the firm ofEisner LLP, independent accountants, as our auditor, effective as ofsuch date. The retention of Eisner LLP was approved by our AuditCommittee and our board of directors.

During our fiscal yearsended September  30,  2004 and September  30,2005, and during the subsequent interim period preceding July10,  2006, neither our company nor anyone acting on our behalfconsulted Eisner LLP regarding either: (i) the application ofaccounting principles to a specific transaction, either completed orproposed, or the type of audit opinion that might be rendered on ourfinancial statements; or (ii) any matter that was the subject of adisagreement with KPMG Audit Plc or that was a‘‘reportable event’’ (as such term definedin Item 304(a)(1)(v) of Regulation S-K promulgated by the Securitiesand Exchange Commission).

Item 9A.    Controls andProcedures.

Evaluation of Disclosure Controls andProcedures.

Our company’s management, with theparticipation of our chief executive officer and our chief financialofficer, has evaluated the effectiveness of our disclosure controls andprocedures as of September  30,  2006.

Under therules of the Securities and Exchange Commission,‘‘disclosure controls and procedures’’ aredefined as controls and other procedures that are designed to ensurethat information required to be disclosed in the reports that we fileor submit under the Securities Exchange Act of 1934, including thisAnnual Report on Form 10-K, is recorded, processed, summarized andreported within the time periods specified in the rules of theSecurities and Exchange Commission. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensurethat information required to be disclosed by us, in reports that wefile or submit under the Securities Exchange Act of 1934, isaccumulated and communicated to our management, including our chiefexecutive officer and chief financial officer, as appropriate to allowtimely decisions regarding required disclosure.

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In the course of our disclosure controlsand procedures evaluation, we reviewed any data errors or controlproblems that we had identified and sought to confirm that appropriatecorrective actions were being undertaken. This type of evaluation isperformed on a quarterly basis so that the conclusions of management,including our chief executive officer and chief financial officer,concerning the effectiveness of our disclosure controls can be reportedin our periodic reports on Form 10-K and Form 10-Q. Many of thecomponents of our disclosure controls and procedures are also evaluatedon an ongoing basis by both our internal audit and financeorganizations. The overall goals of these various evaluation activitiesare to monitor our disclosure controls and procedures and to modifythem as necessary.

As discussed below, we identified a materialweakness in our internal control over financial reporting as ofSeptember 30, 2006. Accordingly, and based upon that evaluation, ourchief executive officer and chief financial officer concluded that ourdisclosure controls and procedures were not effective as of the end ofthe period covered by this report.

Report of Management onInternal Control over Financial Reporting.

Our management isresponsible for establishing and maintaining adequate internal controlover financial reporting for the company. Under the rules of theSecurities and Exchange Commission, ‘‘internal controlover financial reporting procedures’’ is defined as aprocess designed to provide reasonable assurance regarding thereliability of our financial reporting and the preparation of financialstatements for external purposes in accordance with accountingprinciples generally accepted in the United States of America.

Internal control over financial reporting includes maintainingrecords, that in reasonable detail, accurately and fairly reflect ourtransactions and our dispositions of assets; providing reasonableassurance that transactions are recorded as necessary for preparationof our financial statements in accordance with accounting principlesgenerally accepted in the United States of America; providingreasonable assurance that receipts and expenditures of company assetsare made only in accordance with management authorization; andproviding reasonable assurance regarding the prevention or the timelydetection of the unauthorized acquisition, use or disposition ofcompany assets that could have a material effect on our financialstatements. Because of its inherent limitations, internal control overfinancial reporting may not provide absolute assurance that amisstatement of our financial statements would be prevented ordetected.

Management conducted an evaluation of the effectivenessof our internal control over financial reporting using the criteria setforth by the Committee of Sponsoring Organizations of the TreadwayCommission in Internal Control — Integrated Framework.Based on this evaluation, management concluded that thecompany’s internal control over financial reporting wasineffective as of September  30,  2006 because of thematerial weakness in the control of oxygen cylinders in the AlliedRespiratory Limited business.

A material weakness, as definedunder standards established by the Public Company Accounting OversightBoard’s Auditing Standard No.2, is a control deficiency orcombination of control deficiencies that result in more than a remotelikelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected.

InFebruary  2006 the company was awarded two contracts to supplyoxygen, using a mix of concentrators and clinical grade oxygencylinders directly to patients homes, instead of the supply of oxygenin cylinders to pharmacies. In the legacy business we used some 80,000cylinders to provide oxygen to pharmacies. They in turn distributed theoxygen to patient’s homes. The cylinders were not bar coded andthe information systems to record the location of the cylinders wereinadequate. Now that we have reorganized our Allied Respiratory Limitedbusiness to the new form of supply, substituting the use of cylindersonly for concentrators and cylinders, we are writing off 42,000cylinders with a book value of $5.4  million. Most of thesecylinders are still in the field and it is uneconomic to collect themfor scrap value. However, it is apparent to management that the manualrecords were inadequate to enable us to recover these assets should itbe economic to do so. Accordingly, based on the specific criteriaestablished in Internal Control Integrated Framework, 

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issued by the Committee of SponsoringOrganizations of the Treadway Commission, management determined thatthese control deficiencies constitute a material weakness.

Remediation of Material Weakness

To rectifythis weakness we have started to bar code all the retained cylinders asthey pass through our filling plant and we have adapted our computersystems to record the delivery and recovery of assets from patients.During the coming months we will review the effectiveness of thesecontrols.

Our auditors, Eisner LLP, have issued a report on thisassessment of our internal control over financial reporting. Theirreport is included in this Item 9A.

Report of IndependentRegistered Public Accounting Firm

To the Board ofDirectors and Shareholders ofAllied Healthcare InternationalInc.

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control OverFinancial Reporting, that Allied Healthcare International Inc. andsubsidiaries (the ‘‘Company’’) did notmaintain effective internal control over financial reporting as ofSeptember 30, 2006, because of the effect of the materialweakness identified in management’s assessment based on criteriaestablished in Internal Control–Integrated Frameworkissued by the Committee of Sponsoring Organizations of the TreadwayCommission (‘‘COSO’’). The Company’smanagement is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is toexpress an opinion on management’s assessment and an opinion onthe effectiveness of the Company’s internal control overfinancial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding ofinternal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

Acompany’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements forexternal purposes in accordance with accounting principles generallyaccepted in the United States of America. A company’s internalcontrol over financial reporting includes those policies and proceduresthat (i) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositionsof the assets of the company; (ii) provide reasonable assurance thattransactions are recorded as necessary to permit preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States of America, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (iii)provide reasonable assurance regarding prevention or timely detectionof unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on thefinancial statements.

Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Amaterial weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that amaterial misstatement of the annual or interim financial statementswill not be prevented or detected. The following material weakness hasbeen identified and included in management’s assessment. AtSeptember 30, 2006, the Company did not maintain effective

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control over the safeguarding of its fixedassets as it relates to its subsidiary, Allied Respiratory, Ltd. Thesedeficiencies resulted in a write-off of 42,000 cylinders with a bookvalue of approximately $5.4  million as of September 30,2006. These control deficiencies resulted in more than a remotelikelihood that a material misstatement of annual or interim statementswould not be prevented or detected in the annual or interimconsolidated financial statements.

This material weakness wasconsidered in determining the nature, timing, and extent of audit testsapplied in our audit of the consolidated financial statements andfinancial statement schedules as of and for the year endedSeptember  30,  2006.

In our opinion,management’s assessment that the Company did not maintaineffective internal control over financial reporting as ofSeptember  30,  2006, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, because ofthe effect of the material weakness described above on the achievementof the objectives of the control criteria, the Company has notmaintained effective internal control over financial reporting as ofSeptember  30,  2006, based on criteria established inInternal Control–Integrated Framework issued by COSO.

Wehave also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidatedbalance sheets of Allied Healthcare International Inc. and subsidiariesas of September  30,  2006 and the related consolidatedstatements of operations, shareholders’ equity and cash flowsfor the year then ended and our report dated December  14,2006, expressed an unqualified opinion on those consolidated financialstatements.

/s/ EisnerLLP

New York, New YorkDecember14,  2006

Changes in Internal Control Over FinancialReporting.

There have not been any changes in our internalcontrol over financial reporting during the quarter endedSeptember  30,  2006 that have materially affected, or arereasonably likely to materially affect, our internal control overfinancial reporting. Subsequent to the fourth quarter, we began theremediation efforts to account for our oxygen cylinders that isdescribed above.

Item 9B.    Other Information.

Exceptas follows, there was no information that we were required to disclosein a Current Report on Form 8-K during the fourth quarter of fiscal2006 that was not so disclosed:

As of July  31,2006, the Company entered into an employment agreement with DavidMoffatt, our chief executive officer. For a description of ouremployment agreement with Mr.  Moffatt, see ‘‘Item11–Executive Compensation–Employment Agreements;Termination of Employment and Change-in-ControlArrangements.’’

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PARTIII

Item 10.    Directors and Executive Officers of theRegistrant.

Our Directors and Officers

The followingtable sets forth certain information concerning the directors andofficers of ourcompany:

|                   |  |  |     |  |    |                           |  |  |                                                  |
|-------------------|--|--|-----|--|----|---------------------------|--|--|--------------------------------------------------|
| Name              |  |  | Age |  |    | Positionswith our Company |
| Timothy M.Aitken  |  |  |     |  | 62 |                           |  |  | Chairmanof the Board and Chief Executive Officer |
| Sarah L.Eames     |  |  |     |  | 48 |                           |  |  | Executive Vice President andDirector             |
| David Moffatt     |  |  |     |  | 54 |                           |  |  | ChiefFinancial Officer                           |
| Leslie J.Levinson |  |  |     |  | 51 |                           |  |  | Secretary                                        |
| SophiaCorona      |  |  |     |  | 43 |                           |  |  | Director                                         |
| G. RichardGreen   |  |  |     |  | 67 |                           |  |  | Director                                         |
| MarkHanley        |  |  |     |  | 45 |                           |  |  | Director                                         |
| WaynePalladino    |  |  |     |  | 48 |                           |  |  | Director                                         |
| Jeffrey S.Peris   |  |  |     |  | 60 |                           |  |  | Director                                         |
| Scott A.Shay      |  |  |     |  | 49 |                           |  |  | Director                                         |
| AnnThornburg      |  |  |     |  | 57 |                           |  |  | Director                                         |
| MarkTompkins      |  |  |     |  | 66 |                           |  |  | Director                                         |
|                   |

Certainbiographical information regarding each director and officer is setforth below:

Timothy M.  Aitken has served aschairman of the board of our company since January  1997 and aschief executive officer of our company since November  2004. Healso served as chief executive officer of our company fromJanuary  1997 to January  2004. Prior to joining ourcompany, Mr.  Aitken served as an independent consultant to thehealthcare industry from 1995 to 1997. From June  1995 toNovember  1995, Mr.  Aitken served as the vice chairman andpresident of Apria Healthcare Group, Inc., a California-based homehealthcare company. He also served as chairman of the board of Omnicareplc from September  1993 until its acquisition by our company.From 1990 to 1995, Mr.  Aitken served as chairman of the board,president and chief executive officer of Abbey Healthcare Group Inc., apredecessor of Apria Healthcare Group, Inc.

Sarah L. Eameshas served as a director of our company since June  2002 and asexecutive vice president of our company since November  2004. Sheserved as chief executive officer of our company from January2004 to November  2004, as chief operating officer of our companyfrom June  2001 to November  2004, and as president of ourcompany from May  1998 to November  2004. She was executivevice president of business development and marketing of our companyfrom June  1997 to May  1998. Prior to joining our company,Ms.  Eames was employed by Johnson & Johnson Professional,Inc. as a business development consultant from 1996 to 1997. FromJune  1995 to November  1995, Ms.  Eames served asvice president of marketing for Apria Healthcare Group, Inc., aCalifornia-based home healthcare company. From 1980 to 1995, Ms.Eames held various marketing and business development positions atAbbey Healthcare Group Inc., a predecessor of Apria Healthcare Group,Inc. Ms.  Eames serves on the board of directors of Global MedTechnologies, Inc., an e-health, medical information technologycompany, that provides information management software products andservices to the healthcare industry.

David Moffatt hasserved as chief financial officer of our company since July2006. From December  2005 until May  2006, Mr.Moffatt was a consultant to staffing businesses. From 2000 untilNovember  2005, he was deputy European chief financial officerfor Monster Worldwide, Inc., a leading global online recruitmentservices provider. From May  1999 to April  2000,Mr.  Moffatt served as interim U.K. finance director for MonsterWorldwide, Inc. From January  1999 to May  1999, he was theinterim operations director of Patientline Ltd., a hospital bedsidetelephone, television and video company.

Leslie J.Levinson has served as secretary of our company sinceSeptember  1999 and had previously served in such capacity fromOctober  1990 to July  1997. Since January  2002, hehas been a 

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partner in the law firm of Brown RaysmanMillstein Felder & Steiner LLP, which firm serves as counsel to ourcompany. From 1991 to 2002, he was a partner in the law firm of BaerMarks & Upham LLP, which firm served as counsel to ourcompany.

Sophia Corona has been a director of our companysince November  2006. Since April  2006, Ms.  Coronahas been a financial advisor to privately-owned companies. FromOctober  2001 until March  2006, she was the chieffinancial officer of Bigfoot Interactive, Inc (now known as EpsilonInteractive, Inc.), a provider of e-mail communications and marketingservices, which was acquired by Alliance Data Systems Corporation, aNew York Stock Exchange-listed company that is a provider oftransaction services, credit services and marketing services, inSeptember  2005. From 2000 to 2001, Ms.  Corona was thevice president of business development for Visual Radio, LLC, atechnology incubation fund that she co-founded in 1996 and in which shewas employed as the chief financial officer from 1996 to 1998. From1998 to 2000, she was a senior vice president with Prism CommunicationsServices, Inc., a telecommunications provider.

G. RichardGreen has been a director of our company since August  1998.Mr.  Green has been the chairman since 1987 and a director since1964 of J.H. & F.W. Green Ltd., a conglomerate based in the UnitedKingdom. Since 1964, Mr.  Green has held various positions atJ.H. & F.W. Green Ltd. and several of itssubsidiaries.

Mark Hanley has been a director of ourcompany since November  2005. From 2000 to August  2005,Mr.  Hanley was president and chief executive of New ValleyHealth Group Inc., now O2 Science Acquisition Corporation, aprovider of respiratory services. From 1998 to 1999, he was a seniorvice president, sales and marketing, of Coram Healthcare Corporation,which provides specialized home infusion therapies and services in theUnited States and Canada. From 1995 to 1997, Mr.  Hanley was anexecutive director/director of business development of TransworldHealthcare (UK) Limited, a subsidiary of the Company now known asAllied Healthcare Holdings Limited. From 1987 to 1995, he held variouspositions with Apria Healthcare Group, Inc., a California-based homehealthcare company.

Wayne Palladino has been a directorof our company since September  2003. Mr.  Palladino hasworked at Pzena Investment Management LLC, an asset management firm,since June  2002, where he currently serves as principal and adirector of client and portfolio services. From August  2000 toJune  2002, he was a senior vice president and chief financialofficer of Lillian Vernon Corporation, a catalog retailer. Mr.Palladino was a vice president of our company from February  1991to September  1996, senior vice president of our company fromSeptember  1996 to August  2000 and chief financial officerof our company from February  1991 to August2000.

Jeffrey S. Peris has been a director of our companysince May  1998. Presently, Dr.  Peris serves as anexecutive/organization advisor to leading established global and newbusiness entities. Dr.  Peris served as the vice president ofhuman resources and chief learning officer of Wyeth (formerly AmericanHome Products Corporation), a pharmaceutical company, from 2001 to2006. Dr.  Peris was the vice president of business operations ofKnoll Pharmaceutical (Abbott Laboratories), where he was responsiblefor human resources and corporate communications, from 1998 to 2001.Dr.  Peris was a management consultant to various Fortune 100companies from 1997 to 1998. From 1972 to 1997, Dr.  Peris wasemployed by Merck Co., Inc., a pharmaceutical company, where he servedas the executive director of human resources from 1985 to 1997, theexecutive director of marketing from 1976 to 1985, and the director ofclinical biostatistics and research data systems from 1972 to1976.

Scott A. Shay has been a director of our companysince January  1996 and served as acting chairman of the board ofour company from September  1996 to January  1997.Mr.  Shay has been a managing director of Ranieri & Co.,Inc., a private investment advisor and management company, since itsformation in 1988. Mr.  Shay currently serves as the chairman ofthe board of Signature Bank and is currently a director of SignatureSecurities Group Inc., as well as an officer or director of affiliatesof Hyperion Partners II L.P. Prior to joining Ranieri & Co., Inc.,Mr.  Shay was a director of Salomon Brothers Inc., where he wasemployed from 1980 to 1988.

Ann Thornburg has been adirector of our company since November  2006. From October1982 until September  2006, Ms.  Thornburg was a partner atPricewaterhouseCoopers LLP, an auditing firm. 

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At PricewaterhouseCoopers LLP, she served ina variety of client service and management roles, including acting asaudit partner for major health care clients. From 2001 to 2005,Ms.  Thornburg was a member of the U.S. Board of Partners andPrincipals of PricewaterhouseCoopers LLP.

Mark Tompkinshas been a director of our company since September  2005. From1987 to the present, Mr.  Tompkins has been a self-employedinvestor, with a focus on private equity and capital development inpublicly traded entities, notably in the healthcare, biopharmaceutical,wholesale and distribution, tourism and leisure, and manufacturingindustries. From 1975 to 1987 he was active in residential andcommercial property investment in the Middle East, Germany, Spain,France and the United States. From 1972 to 1975, Mr.  Tompkinsworked for the Slater Walker Securities group and from 1965 to 1971 hewas a management consultant with Booz Allen & Hamilton. Mr.Tompkins is a director of Sodexho Alliance S.A., a company engaged inthe provision of food and management services.

All directors ofour company are elected by the shareholders for a one-year term andhold office until their successors are elected and qualified or untiltheir earlier death, resignation or removal. Officers are chosen by andserve at the discretion of the board of directors, subject to anyapplicable employment contracts. There are no family relationshipsamong our directors and officers.

All directors who are notemployees of our company are entitled to receive a fee of $10,000 perannum, plus reimbursement of expenses incurred as a result of acting asa director or as a member of any committee of our board of directors.In addition, Mr.  Palladino is entitled to receive an additional$15,000 per annum for serving as chairman of the Audit Committee;Mr.  Peris is entitled to receive an additional $10,000 per annumfor serving as chairman of our Compensation Committee and on the AuditCommittee; Mr.  Hanley is entitled to receive an additional$5,000 per annum for serving on the Compensation Committee; andMr.  Tompkins is entitled to receive an additional $5,000 perannum for serving on our Audit Committee.

Our board of directorshas determined that Sophia Corona, G. Richard Green, Mark Hanley, WaynePalladino, Jeffrey A. Peris, Ann Thornburg and Mark Tompkins are‘‘independent directors,’’ as such term isdefined in the rules of the Nasdaq Stock Market.

Meetings of theBoard of Directors

The business of our company is managed underthe direction of our board of directors. Members of the board ofdirectors are informed about our company’s affairs throughvarious reports and documents distributed to them, through operatingand financial reports routinely presented at meetings of the board ofdirectors and committee meetings by the chairman and other officers,and through other means. In addition, directors of our companydischarge their duties throughout the year not only by attending boardof directors’ meetings, but also through personal meetings andother communications, including telephone contact with the chairman ofthe board and others regarding matters of interest and concern to ourcompany.

During our fiscal year endedSeptember 30, 2006, our company’s board ofdirectors held 14 formal meetings and acted by unanimous writtenconsent in lieu of a meeting on three separate occasions. During ourfiscal year ended September  30,  2006, no directorattended fewer than 75% of the aggregate of the total number ofmeetings of the board of directors and any committees on which he orshe served.

Board Committees

The board of directors hasan Audit Committee and a Compensation Committee but it does not have anominating committee. The members of each committee are appointed bythe board of directors.

Audit Committee.    The AuditCommittee assists our board of directors in monitoring (1) theintegrity of our financial statements, (2) the independence andqualifications of our independent auditors, and (3) the performance ofour independent auditors and our internal audit functions. The currentwritten charter for the Audit Committee was adopted by our board ofdirectors on February  12, 2004 and is attached as an exhibit tothe proxy statement relating to our 2004 annual meeting ofshareholders.

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The Audit Committee consists of Messrs.Palladino, Peris and Tompkins, Ms.  Corona and Ms.Thornburg. Mr.  Palladino serves as chairman of the AuditCommittee. All of the members of the Audit Committee are‘‘independent directors,’’ as such term isdefined in the rules of the Nasdaq Stock Market. The board of directorshas determined that Wayne Palladino is an ‘‘auditcommittee financial expert,’’ as such term is defined inItem 401(h) of Regulation S-K promulgated by the Securities andExchange Commission.

Shortly after the filing of this AnnualReport on Form 10-K, Ms.  Thornburg is expected to commenceserving as chairwoman of the Audit Committee and Messrs. Peris andTompkins are expected to resign from the Audit Committee. Ms.Thornburg is an ‘‘audit committee financialexpert.’’. Ms.  Thornburg is expected to receive anadditional $30,000 per annum for acting as chairwoman of the AuditCommittee and Ms.  Corona is expected to receive an additional$5,000 per year for serving on the Audit Committee.

The AuditCommittee was in session during each of the 14 formal meetings of ourcompany’s board of directors during our fiscal year endedSeptember 30, 2006. The Audit Committee also held fiveformal meetings during that period, but did not act by unanimouswritten consent during that period.

CompensationCommittee.    The Compensation Committee reviews and approvesoverall policy with respect to compensation matters, including suchmatters as compensation plans for employees and employment agreementsand compensation for executive officers.

The CompensationCommittee consists of Messrs. Green, Hanley and Peris. Dr.  Perisserves as chairman of the Compensation Committee. All of the members ofthe Compensation Committee are ‘‘independentdirectors,’’ as such term is defined in the rules of theNasdaq Stock Market.

The Compensation Committee was in sessionduring each of the 14 formal meetings of our company’s board ofdirectors during our fiscal year endedSeptember 30, 2006. The Compensation Committee also heldone formal meeting during that period, but did not act by unanimouswritten consent during that period.

Section 16(a) BeneficialOwnership Reporting Compliance

Section 16(a) of the SecuritiesExchange Act of 1934 and the rules thereunder promulgated by theSecurities and Exchange Commission require the reporting oftransactions in our equity securities by our directors and certain ofour officers and by shareholders who beneficially own more than10% of our common stock (collectively, the‘‘Reporting Persons’’). Section 16(a) andthe rules thereunder require the Reporting Persons to report initialstatements of ownership of our equity securities on Form 3 and changesin ownership of our equity securities on Form 4 or Form 5. Based on areview of these reports filed by the Reporting Persons and writtenrepresentations from our directors and officers that no Forms 5 wererequired to be filed by them in respect of our fiscal year endedSeptember  30,  2006, we believe that no Reporting Personfailed to file a Section 16 report on a timely basis during our fiscalyear ended September  30,  2006, other than David Moffatt,who filed one Form  4 one day late. The Form 4 reported onetransaction in our equity securities.

Code of Conduct

InSeptember  2003, our board of directors adopted a Code of Conductthat applies to all of our directors, officers and employees, includingour chief executive officer and our chief financial officer. Asrequired by the regulations of the Securities and Exchange Commission,the Code of Conduct is designed to deter wrongdoing and to promote:

(1)    honest and ethical conduct, including the ethicalhandling of actual or apparent conflicts of interest between personaland professional relationships;

(2)    full, fair, accurate,timely, and understandable disclosure in reports and documents that wefile with, or submit to, the Securities and Exchange Commission and inother public communications made by us;

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        (3)    compliancewith applicable governmental laws, rules and regulations;

(4)    the prompt internal reporting of violations of the Codeof Conduct to the Audit Committee; and        (5)    accountability for adherence to the Code ofConduct.

A copy of our Code of Conduct is filed as an exhibit tothis Annual Report on Form 10-K.

|               |                         |
|---------------|-------------------------|
| Item11.  | Executive Compensation. |

The followingtable summarizes all compensation earned by or paid to our chiefexecutive officer and each of the other most highly compensatedexecutive officers of our company whose total annual salary and bonuscompensation exceeded $100,000 in fiscal 2006 (the‘‘Named Executive Officers’’) for servicesrendered in all capacities to our company in respect of our fiscalyears ended September 30, 2006, 2005 and 2004.

SummaryCompensationTable

|                                                   |        |  |            |       |        |                    |  |  |                          |   |         |                                 |  |  |                      |   |         |     |  |  |  |  |         |  |  |  |  |  |         |  |  |  |  |   |           |      |
|---------------------------------------------------|--------|--|------------|-------|--------|--------------------|--|--|--------------------------|---|---------|---------------------------------|--|--|----------------------|---|---------|-----|--|--|--|--|---------|--|--|--|--|--|---------|--|--|--|--|---|-----------|------|
|                                              |        |  |       |       |        |               |  |  |                     |   |         | Long-TermCompensationAwards     |  |  |                 |
| Nameand PrincipalPosition                         |        |  | FiscalYear |       |        | AnnualCompensation |  |  | RestrictedStockAwards($) |   |         | SecuritiesUnderlyingOptions (#) |  |  | AllOtherCompensation |
|                                                   | Salary |  |            | Bonus |
| TimothyM.Aitken(1)                                |        |  |            |       | 2006   |                    |  |  |                          | $ | 537,617 |                                 |  |  |                      | $ | — |     |  |  |  |  | — |  |  |  |  |  | 300,000 |  |  |  |  | $ | 9,000     | (9)  |
|     Chairmanof theBoard       |        |  |            |       | 2005   |                    |  |  |                          |   | 446,618 |                                 |  |  |                      |   | 450,000 | (5) |  |  |  |  | — |  |  |  |  |  | 90,000  |  |  |  |  |   | 9,000     | (9)  |
|     andChief ExecutiveOfficer |        |  |            |       | 2004   |                    |  |  |                          |   | 253,369 |                                 |  |  |                      |   | 450,000 | (6) |  |  |  |  | — |  |  |  |  |  | 350,000 |  |  |  |  |   | 91,645    | (10) |
| SarahL.Eames(2)                                   |        |  |            |       | 2006   |                    |  |  |                          | $ | 123,846 |                                 |  |  |                      | $ | — |     |  |  |  |  | — |  |  |  |  |  | — |  |  |  |  | $ | 7,800     | (9)  |
|     ExecutiveVicePresident    |        |  |            |       | 2005   |                    |  |  |                          |   | 234,391 |                                 |  |  |                      |   | — |     |  |  |  |  | — |  |  |  |  |  | — |  |  |  |  |   | 7,800     | (9)  |
|                                              |        |  |            |       | 2004   |                    |  |  |                          |   | 445,189 |                                 |  |  |                      | $ | 300,000 | (7) |  |  |  |  | 300,000 |  |  |  |  |  | — |  |  |  |  |   | 1,058,570 | (11) |
| DavidMoffatt                                      |        |  |            |       | 2006   |                    |  |  |                          | $ | 58,313  |                                 |  |  |                      | $ | — |     |  |  |  |  | — |  |  |  |  |  | 150,000 |  |  |  |  | $ | 11,031    | (12) |
|     ChiefFinancialOfficer(3)  |        |  |            |       |   |                    |  |  |                          |   |    |                                 |  |  |                      |   |    |     |  |  |  |  |    |  |  |  |  |  |    |  |  |  |  |   |      |      |
| CharlesF.Murphy(4)                                |        |  |            |       | 2006   |                    |  |  |                          | $ | 336,337 |                                 |  |  |                      | $ | — |     |  |  |  |  | — |  |  |  |  |  | — |  |  |  |  | $ | 18,370    | (9)  |
|     FormerChiefFinancial      |        |  |            |       | 2005   |                    |  |  |                          |   | 326,098 |                                 |  |  |                      |   | 138,765 | (5) |  |  |  |  | — |  |  |  |  |  | 57,000  |  |  |  |  |   | 18,872    | (9)  |
|     Officer                   |        |  |            |       | 2004   |                    |  |  |                          |   | 289,073 |                                 |  |  |                      |   | 53,781  | (8) |  |  |  |  | — |  |  |  |  |  | — |  |  |  |  |   | 18,286    | (9)  |
|                                                   |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                  |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Mr.Aitken has served as chairman of the board of our company sinceJanuary  1997 and as chief executive officer of our company sinceNovember  2004. He also served as chief executive officer of ourcompany from January  1997 until January2004. |

|     |                                                                                                                                                                                                                                                                                                     |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Ms.  Eames becamechief executive officer of our company in January  2004, chiefoperating officer of our company in June  2001 and president ofour company in May  1998. She stepped down from all suchpositions, and assumed the office of executive vice president of ourcompany, in November2004. |

|     |                                                                        |
|-----|------------------------------------------------------------------------|
| (3) | Mr.  Moffatt becamechief financial officer of our company in July2006. |

|     |                                                                                                                                                                                                                                                                                                                    |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Mr.  Murphy becameacting chief financial officer of our company in May  2003 and,in March  2004, assumed the title of chief financial officer ofour company. Mr.  Murphy resigned as chief financial officer ofour company in June  2006. He remained with our company on atransition basis through September2006. |

|     |                                                |
|-----|------------------------------------------------|
| (5) | Paid in fiscal 2006 as abonus for fiscal 2005. |

|     |                                                                                                                                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------|
| (6) | Consistsof (a) $400,000 cash paid in fiscal 2004 as a bonus for fiscal 2004 and(b) $50,000 cash paid in fiscal 2005 as a bonus for fiscal2004. |

|     |                                                |
|-----|------------------------------------------------|
| (7) | Paid in fiscal 2004 as abonus for fiscal 2004. |

|     |                                                |
|-----|------------------------------------------------|
| (8) | Paid infiscal 2005 as a bonus for fiscal 2004. |

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|     |                                     |
|-----|-------------------------------------|
| (9) | Reflectspayment for a carallowance. |

|      |                                                                                                                                                                                                                                                                                                               |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10) | Reflects (a) paymentof a car allowance of $8,250 and (b) the reimbursement of $83,395 intaxes incurred by Mr.  Aitken in fiscal 2004 in connection withhis repayment of a the principal amount of a company loan and accruedinterest thereon by the delivery of shares of our common stock owned byhim to us. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                       |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (11) | Of such amount, (a)$1,000,000 consists of special compensation paid to Ms.  Eamesfor past services, (b) payment of a car allowance of $7,149 and (c) thereimbursement of $51,421 in taxes incurred by Ms.  Eames infiscal 2004 in connection with her repayment of the principal amount ofa company loan and accrued interest thereon by the delivery of sharesof our common stock owned by her tous. |

|      |                                                                                                                                 |
|------|---------------------------------------------------------------------------------------------------------------------------------|
| (12) | Consists of (a) payment ofa car allowance of $2,701 and (b) payments toward Mr. Moffatt’sU.K.-based private pension fund. |

The following table setsforth certain information regarding options granted during fiscal 2006to our Named Executive Officers pursuant to our 2002 Stock Option Plan.During fiscal 2006 we did not grant stock appreciation rights to any ofour Named Executive Officers or any other employee. In accordance withthe rules of the Securities and Exchange Commission, the table setsforth the hypothetical gains or ‘‘optionspreads’’ that would exist for the options at the end oftheir respective terms. These gains are based on assumed rates ofannual compound stock price appreciation of 5% and 10%from the date the option was granted to the end of the option’sterm.

Option Grants in Fiscal2006

|                 |  |  |                                            |  |         |                                                           |  |  |                            |  |         |                |  |  |                                                                                             |   |         |     |  |  |         |  |         |  |   |         |  |  |         |  |   |         |  |  |         |  |
|-----------------|--|--|--------------------------------------------|--|---------|-----------------------------------------------------------|--|--|----------------------------|--|---------|----------------|--|--|---------------------------------------------------------------------------------------------|---|---------|-----|--|--|---------|--|---------|--|---|---------|--|--|---------|--|---|---------|--|--|---------|--|
| Name            |  |  | NumberofSecuritiesUnderlyingOptionsGranted |  |         | PercentageofTotal OptionsGranted toEmployees inFiscalYear |  |  | Exercise Price PerShare(1) |  |         | ExpirationDate |  |  | Potential Realizable ValueatAssumed Annual Rates ofStock Price AppreciationforOptionTerm(2) |
|            |  |  |                                       |  |         |                                                      |  |  |                       |  |         |           |  |  | 5%                                                                                          |   |         | 10% |
| TimothyM.Aitken |  |  |                                            |  | 300,000 |                                                           |  |  |                            |  | 64.5    | %              |  |  |                                                                                             | $ | 1.72    |     |  |  | 9/07/16 |  |         |  | $ | 324,510 |  |  |         |  | $ | 822,371 |  |
| SarahL.Eames    |  |  |                                            |  | — |                                                           |  |  |                            |  | — |                |  |  |                                                                                             |   | — |     |  |  |         |  | — |  |   |         |  |  | — |  |   |         |  |  | — |  |
| DavidMoffatt    |  |  |                                            |  | 150,000 |                                                           |  |  |                            |  | 32.3    | %              |  |  |                                                                                             | $ | 2.71    |     |  |  | 7/31/16 |  |         |  | $ | 255,646 |  |  |         |  | $ | 647,856 |  |
| CharlesF.Murphy |  |  |                                            |  | — |                                                           |  |  |                            |  | — |                |  |  |                                                                                             |   | — |     |  |  |         |  | — |  |   |         |  |  | — |  |   |         |  |  | — |  |
|                 |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------|
| (1) | Optionswere granted at an exercise price equal to the fair market value of ashare of our common stock on the date ofgrant. |

|     |                                                                                                                                                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The 5% and10% assumed annual compound rates of stock price appreciationare mandated by the Securities and Exchange Commission and do notrepresent our company’s estimate or projection of future commonstock prices. |

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The following table sets forth certaininformation with respect to our Named Executive Officers concerning theexercise of options by them during our fiscal year endedSeptember  30,  2006 and unexercised options held by themas of September  30,  2006. We have never granted stockappreciation rights to any of our Named Executive Officers or any otheremployee.

Aggregate Option Exercises in Fiscal 2006and 2006Fiscal Year-End OptionValues

|                  |  |  |                           |  |         |                  |  |  |                                                                                           |   |         |                                                                                      |  |  |             |  |  |           |
|------------------|--|--|---------------------------|--|---------|------------------|--|--|-------------------------------------------------------------------------------------------|---|---------|--------------------------------------------------------------------------------------|--|--|-------------|--|--|-----------|
| Name             |  |  | SharesAcquiredon Exercise |  |         | ValueRealized(1) |  |  | Number of Shares UnderlyingUnexercised Options at Fiscal YearEndExercisable/Unexercisable |   |         | Value ofUnexercisedIn-the-Money Optionsat Fiscal YearEnd(2)Exercisable/Unexercisable |
| Timothy M.Aitken |  |  |                           |  | 5,720   |                  |  |  |                                                                                           | $ | 16,016  |                                                                                      |  |  | 1,618,280/0 |  |  | $81,000/0 |
| SarahL.Eames     |  |  |                           |  | 90,000  |                  |  |  |                                                                                           | $ | 214,560 |                                                                                      |  |  | 544,000/0   |  |  | NA        |
| DavidMoffatt     |  |  |                           |  | — |                  |  |  |                                                                                           |   | — |                                                                                      |  |  | 0/150,000   |  |  | NA        |
| CharlesF.Murphy  |  |  |                           |  | — |                  |  |  |                                                                                           |   | — |                                                                                      |  |  | 0/0         |  |  | NA        |
|                  |

|  |
|--|
|  |  |
|  |

|     |                                                                  |
|-----|------------------------------------------------------------------|
| (1) | Beforegiving effect to any transaction costs or applicabletaxes. |

|     |                                                                                                                                                                                                                                |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Calculated on the basisof $1.99 per share, the closing sale price of our common stock, asreported on the Nasdaq Stock Market on September 29, 2006, thelast trading day of our 2006 fiscal year, minus the exerciseprice. |

Compensation of Directors

See‘‘Item 10 — Directors and Executive Officers ofthe Registrant — Our Directors and Officers’’ withrespect to compensation of non-employee directors.

EmploymentAgreements; Termination of Employment and Change-in-ControlArrangements

In September  2001, we entered into anemployment agreement with Mr.  Aitken. The employment agreementhas a three-year term (subject to automatic renewal for successiveadditional one-year periods unless either party provides the other withnotice of intent to terminate the agreement at least 90 days before thethen applicable termination date). The employment agreement providesthat our company will negotiate in good faith, commencing not less than90 days prior to each anniversary date of the employment agreement, theamount, if any, of future salary increases. Mr.  Aitken’ssalary is currently $0.6  million. Mr.  Aitken’semployment agreement provides that if his employment is terminatedduring the term of the agreement other than for cause, death ordisability, or if, within six months of a ‘‘change incontrol’’ (as defined in the employment agreement) of ourcompany, Mr.  Aitken or our company terminates his employment(other than for cause, death or disability), then (1) all stock optionsin our company held by Mr.  Aitken will immediately vest and(2)  Mr.  Aitken will be entitled to receive a cash paymentof 2.9 times his annual base salary during the twelve months precedingthe termination of employment or the change in control.

InSeptember  2001 we entered into an employment agreement withMs.  Eames, which was modified in November  2004 andSeptember  2005 and amended and restated in October  2006.Pursuant to her amended and restated employment agreement, Ms.Eames has agreed to continue to serve as executive vice president ofour company for a period of 18 months. The amended and restatedemployment agreement is subject to automatic renewal for successiveperiods of one year each unless terminated by either party on 90days’ notice. Pursuant to her amended and restated employmentagreement, Ms.  Eames’ base salary is $250,000 per annum.In addition, she is entitled to receive $5,000 for each trip of fivebusiness days or more that she makes to the United Kingdom on Companybusiness; however, the maximum amount payable to her in any calendaryear for such trips is $50,000. Ms.  Eames’ amended andrestated employment agreement provides that if her employment isterminated during the term of the agreement other than for cause, deathor disability, or if, within six months of a ‘‘change incontrol’’ (as defined in the amended and restatedemployment agreement) of our company, Ms.  Eames or our companyterminates her employment (other than for cause, death or 

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disability), then (1) all stock options inour company held by Ms.  Eames will immediately vest and(2)  Ms.  Eames will be entitled to receive a cash paymentof 1.9 times her annual base salary during the twelve months precedingthe termination of employment or the change in control.

In Deedsof Restrictive Covenants entered into in 1999 with one of our U.K.subsidiaries, Mr.  Aitken and Ms.  Eames have each agreednot to compete with us or our subsidiaries for twelve months followingtermination of employment without our prior written consent.

InJuly  2006 we entered into an employment agreement withMr.  Moffatt. Our employment agreement with Mr.  Moffattprovides that, during the first six months thereof, either party mayterminate the agreement upon one month’s written notice and,thereafter, either party may terminate the agreement upon sixmonth’s written notice. Our employment with Mr.  Moffattfurther provides that Mr.  Moffatt will not compete against usfor a period of six months following the termination of his employmentwith us. Pursuant to his employment agreement, Mr.  Moffattcurrently receives a salary of £0.2  million(approximately $0.4  million). In addition, pursuant to hisemployment agreement with us, Mr.  Moffatt receives a carallowance and we have agreed to make a payment equal to 15% ofhis annual salary towards his U.K.-based private pensionfund.

Compensation Committee Interlocks and InsiderParticipation

The Compensation Committee consists of G. RichardGreen, Mark Hanley and Jeffrey S. Peris. Dr.  Peris servesas chairman of the Compensation Committee. From October1,  2006 until November  30,  2006, our CompensationCommittee consisted of Messrs. Green and Peris. On December1,  2005, Mr.  Hanley joined the Compensation Committee.Except for Mr.  Hanley, who served from 1995 to 1997 as anexecutive director/director of business development of TransworldHealthcare (UK) Limited, a subsidiary of our company now known asAllied Healthcare Holdings Limited, none of Messrs. Green, Hanley orPeris has ever served as an officer or employee of our company or anyof our subsidiaries, nor has any such individual had a businessrelationship with our company or any of our subsidiaries during fiscal2006 that requires disclosure under the rules of the Securities andExchange Commission.

Stock Option Plans

1992 and 2002Stock Option Plans

In July  1992, our board ofdirectors and shareholders approved our 1992 Stock Option Plan. Our1992 Stock Option Plan, which is substantially similar to our 2002Stock Option Plan discussed below, provided for the grant of options tokey employees, officers, directors and non-employee independentcontractors of our company. Effective with the adoption by ourshareholders of our 2002 Stock Option Plan in June  2002, nofurther options may be granted under our 1992 Stock Option Plan.Outstanding options granted under our 1992 Stock Option Plan may beexercised in accordance with the terms of our 1992 Stock OptionPlan.

In March  2002, our board of directors adopted, andin June  2002 our shareholders approved, our 2002 Stock OptionPlan. Options granted under our 2002 Stock Option Plan may be eitherincentive stock options (‘‘IncentiveOptions’’), which are intended to meet the requirementsof section 422 of the Internal Revenue Code of 1986, as amended, oroptions that do not qualify as Incentive Options (which we refer to as‘‘Non-Qualified Options’’). Under our 2002Stock Option Plan, the Compensation Committee may grant (1) IncentiveOptions at an exercise price per share which is not less than the fairmarket value of a share of our common stock on the date on which suchIncentive Options are granted (and not less than 110% of thefair market value in the case of any optionee who beneficially ownsmore than 10% of the total combined voting power of our company)and (2)  Non-Qualified Options at an exercise price per sharewhich is determined by the Compensation Committee (and which may beless than the fair market value of a share of our common stock on thedate on which such Non-Qualified Options are granted). Our 2002 StockOption Plan further provides that the maximum period in which optionsmay be exercised will be determined by the Compensation Committee,except that Incentive Options may not be exercised after the expirationof ten years from 

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the date the Incentive Option was initiallygranted (and five years in the case of any optionee who beneficiallyowns more than 10% of the total combined voting power of ourcompany). Under our 2002 Stock Option Plan, if an optionee’semployment is terminated, the unexercised Incentive Options generallymust be exercised within three months after termination. However, ifthe termination is due to the optionee’s death or permanentdisability, the option must be exercised within one year of thetermination of employment. If we terminate the optionee’semployment for cause, or if the optionee voluntarily terminates hisemployment, his options generally will expire as of the terminationdate. Any option granted under our 2002 Option Stock Plan will benontransferable, except by will or by the laws of descent anddistribution, and generally may be exercised upon payment of the optionprice in cash or by delivery of shares of our common stock with a fairmarket value equal to the option price.

Shares delivered underour 2002 Stock Option Plan will be available from authorized butunissued shares of common stock or from shares of common stockreacquired by our company. Shares of common stock that are subject tooptions under our 2002 Stock Option Plan which have terminated orexpired unexercised will return to the pool of shares available forissuance under the 2002 Stock Option Plan.

As of September30,  2006, an aggregate of 2,122,614 shares of our common stockwere issuable upon the exercise of outstanding options that had beengranted under our 2002 Stock Option Plan and options to purchase anaggregate of 1,951,045 shares of our common stock were available forgrant under such Plan. As of September  30,  2006, anaggregate of 510,000 shares of our common stock were issuable upon theexercise of outstanding options that had been granted under our 1992Stock Option Plan. No further options may be granted under our 1992Stock Option Plan.

1997 Non-Employee DirectorPlan

In May  1997, our board of directors adopted our1997 Option Plan for Non-Employee Directors (the‘‘Director Plan’’), pursuant to which100,000 shares of our common stock were reserved for issuance upon theexercise of options granted to non-employee directors. The purpose ofthe Director Plan is to encourage ownership of common stock bynon-employee directors of our company whose continued services areconsidered essential to our company’s future progress and toprovide them with a further incentive to remain as directors of ourcompany. The Director Plan is administered by the board of directors.Directors of our company who are not employees of our company or anysubsidiary or affiliate of our company are eligible to participate inthe Director Plan. The Director Plan will terminate in May  2007;however, options outstanding on the expiration of the term shallcontinue to have full force and effect in accordance with theprovisions of the instruments evidencing such options. The board ofdirectors may suspend, terminate, revise or amend the Director Plan,subject to certain limitations.

Under the Director Plan, theboard of directors may from time to time at its discretion determinewhich of the eligible directors should receive options, the number ofshares subject to such options and the dates on which such options areto be granted. Each such option is immediately exercisable for a periodof ten years from the date of grant generally, but may not be exercisedmore than 90 days after the date an optionee ceases to serve as adirector of our company. Options granted under the Director Plan arenot transferable by the optionee other than by will, laws of descentand distribution, or as required by law.

Shares of common stockmay be purchased from our company upon the exercise of an option bypayment in cash or cash equivalent, through the delivery of shares ofcommon stock having a fair market value equal to the cash exerciseprice of the option or any combination of the above, subject to thediscretion of the board of directors.

As of September30,  2006, no options were outstanding under the DirectorPlan.

Indemnification

As permittedunder the Business Corporation Law of the State of New York, ourcertificate of incorporation provides that a director of our companywill not be personally liable to our company or our shareholders formonetary damages for breach of a fiduciary duty owed to our company orour 

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shareholders. By its terms and in accordancewith the law of the State of New York, however, this provision does noteliminate or otherwise limit the liability of a director of our companyfor any breach of duty based upon (1) an act or omission(a) resulting from acts committed in bad faith or involvingintentional misconduct or involving a knowing violation of law or(b) from which the director personally derived a financialbenefit to which he was not legally entitled, or (2) an improperdeclaration of dividends, purchase of our securities or other violationof section 719 of the Business Corporation Law of the State of NewYork.

Our certificate of incorporation and bylaws provide thatour company shall indemnify our directors and officers to the fullestextent permitted by New York law. In addition, we have entered intoindemnification agreements with each of our directors and executiveofficers and we maintain directors’ and officers’liability insurance.

|                |                                                                                               |
|----------------|-----------------------------------------------------------------------------------------------|
| Item 12.  | SecurityOwnership of Certain Beneficial Owners and Management and RelatedStockholder Matters. |

The following table sets forth the numberof shares of common stock, and the percentage of shares of commonstock, beneficially owned as of December  8,  2006 by(1) each director of our company, (2) each Named ExecutiveOfficer, (3) all persons known by us to be the beneficial owner of morethan 5% of our outstanding shares of common stock, and(4) all current directors and named executive officers of ourcompany as a group (9 persons). The information as to the number ofshares of our common stock beneficially owned by the individuals andentities listed below was derived from reports filed with theSecurities and Exchange Commission by such persons and company records.Except as set forth below, the address of each of the following holdersof shares of our common stock is c/o Allied Healthcare InternationalInc., 555 Madison Avenue, New York, New York10022.

|                                                                     |  |  |                                               |  |            |                                               |  |  |       |  |         |   |
|---------------------------------------------------------------------|--|--|-----------------------------------------------|--|------------|-----------------------------------------------|--|--|-------|--|---------|---|
| Name                                                                |  |  | NumberofShares ofCommonStockBeneficiallyOwned |  |            | Percentage of CommonStockBeneficiallyOwned(1) |
| TimothyM.Aitken                                                     |  |  |                                               |  | 2,398,853  | (2)                                           |  |  |       |  | 5.2     | % |
| SarahL.Eames                                                        |  |  |                                               |  | 1,058,718  | (3)                                           |  |  |       |  | 2.3     | % |
| DavidMoffatt                                                        |  |  |                                               |  | —    | (4)                                           |  |  |       |  | — |   |
| SophiaCorona                                                        |  |  |                                               |  | —    |                                               |  |  |       |  | — |   |
| G. RichardGreen                                                     |  |  |                                               |  | 91,854     | (5)                                           |  |  |       |  |         | * |
| MarkHanley                                                          |  |  |                                               |  | 5,000      | (6)                                           |  |  |       |  |         | * |
| WaynePalladino                                                      |  |  |                                               |  | 19,164     | (7)                                           |  |  |       |  |         | * |
| JeffreyS.Peris                                                      |  |  |                                               |  | 18,000     | (8)                                           |  |  |       |  |         | * |
| LewisS.Ranieri                                                      |  |  |                                               |  | 12,020,810 | (9)                                           |  |  |       |  | 26.7    | % |
| ScottA.Shay                                                         |  |  |                                               |  | 11,960,610 | (10)                                          |  |  |       |  | 26.6    | % |
| MarkTompkins                                                        |  |  |                                               |  | 5,000      | (6)                                           |  |  |       |  |         | * |
| AnnThornburg                                                        |  |  |                                               |  | —    |                                               |  |  |       |  | — |   |
| FMRCorp.                                                            |  |  |                                               |  | 3,618,819  | (11)                                          |  |  | 8.0%  |
| HyperionPartners IIL.P.                                             |  |  |                                               |  | 11,960,610 | (12)                                          |  |  | 26.6% |
| HyperionTW FundL.P.                                                 |  |  |                                               |  | 11,960,610 | (13)                                          |  |  | 26.6% |
| HyperionTWH Fund LLC                                                |  |  |                                               |  | 11,960,610 | (14)                                          |  |  | 26.6% |
| HyperionTWH Fund IILLC                                              |  |  |                                               |  | 11,960,610 | (15)                                          |  |  | 26.6% |
| Washington& Congress Capital Partners,L.P.                      |  |  |                                               |  | 7,697,578  | (16)                                          |  |  | 17.1% |
| Allcurrent executive officers and directors as a group (11persons). |  |  |                                               |  | 15,557,199 | (17)                                          |  |  | 33.0% |
|                                                                     |

|  |
|--|
|  |  |
|  |

|   |              |
|---|--------------|
| * | Lessthan 1%. |

|     |                                                                                                                                                                                                                                                                                                                                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | As ofDecember  8,  2006, there were 44,957,492 shares of ourcommon stock outstanding. The percentage given for each shareholderassumes that such shareholder has exercised the options held by suchshareholder that are exercisable within 60 days of December8,  2006, but that no other shareholders have exercised theoptions held by them. |

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|     |                                                                                                                                                                                                                                                                                      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Consists of682,007 shares of common stock held by Mr.  Aitken, 98,566 sharesof common stock held by Aitken (English) Company Limited, an affiliateof Mr.  Aitken, and 1,618,280 shares subject to options held byMr.  Aitken that are exercisable within 60 days ofDecember  8,2006. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Consists of 473,218 sharesof common stock held by Ms.  Eames, 4,000 shares of common stockheld jointly by Ms.  Eames and her husband and 581,500 sharessubject to options held by Ms.  Eames that are exercisable within60 days of December  8,  2006. Does not include anadditional 112,500 shares subject to options held by Ms.  Eamesthat are not exercisable within 60  days of December8,  2006. |

|     |                                                                                                                                    |
|-----|------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Does not include250,000 shares subject to options held by Mr.  Moffatt that arenot exercisable within 60 days of December  8,2006. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | Consists of 3,000 sharesof common stock held by Mr.  Green, 57,995 shares of common stockheld jointly by Mr.  Green and his wife, 19,259 shares of commonstock held by Orion Nominees Limited, an affiliate of Mr.  Green,9,000 shares subject to options held by Mr.  Green that areexercisable within 60 days of December  8,  2006 and 2,600shares owned of record by Mr.  Green’s wife, as to whichMr.  Green disclaims beneficial ownership. Mr.  Greenshares voting and dispositive power over the shares of our common stockheld by Orion Nominees Limited with his wife. Does not include anadditional 8,000 shares subject to options held by Mr.  Greenthat are not exercisable within 60 days of December  8,2006. |

|     |                                                                                                                                                                                                                                                                    |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (6) | Consists of 5,000 sharessubject to options held by such individual that are exercisable within60  days of December  8,  2006. Does not include10,000 shares subject to options held by such individual that are notexercisable within 60 days of December  8,2006. |

|     |                                                                                                                                                                                                                                                                                                              |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (7) | Consists of 6,164 sharesof common stock held by Mr.  Palladino and 13,000 shares subjectto options that are exercisable within 60 days of December8,  2006. Does not include an additional 8,000 shares subject tooptions held by Mr.  Palladino that are not exercisable within 60days of December  8,2006. |

|     |                                                                                                                                                                                                                                                                                                                           |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (8) | Consists of 2,000 sharesof common stock held by Mr.  Peris and 16,000 shares subject tooptions held by Mr.  Peris that are exercisable within 60 days ofDecember  8,  2006. Does not include an additional 8,000shares subject to options held by Mr.  Peris that are notexercisable within 60  days of December  8,2006. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (9) | Consists of 60,200 sharesof common stock owned by Mr.  Ranieri, 6,854,454 shares of commonstock owned by Hyperion Partners II L.P., 4,148,456 shares of commonstock owned by Hyperion TW Fund L.P., 482,700 shares of common stockowned by Hyperion TWH Fund LLC and 475,000 shares of common stock ownedby Hyperion TWH Fund II LLC. Each of such entities is an affiliate ofMr.  Ranieri. Mr.  Ranieri disclaims beneficial ownershipof the shares of common stock owned by such entities except to theextent of his pecuniary interest therein. Mr.  Ranieri sharesvoting and dispositive power over the shares of common stock held bysuch entities with Mr.  Shay. The address of Mr.  Ranieriis 50 Charles Lindbergh Blvd., Suite 500, Uniondale, New York11553. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10) | Consists of 6,854,454shares of common stock owned by Hyperion Partners II L.P., 4,148,456shares of common stock owned by Hyperion TW Fund L.P., 482,700 sharesof common stock owned by Hyperion TWH Fund LLC and 475,000 shares ofcommon stock owned by Hyperion TWH Fund II LLC. Each of such entitiesis an affiliate of Mr.  Shay. Mr.  Shay disclaimsbeneficial ownership of the shares of common stock owned by suchentities except to the extent of his pecuniary interest therein.Mr.  Shay shares voting and dispositive power over the shares ofcommon stock held by such entities with Mr.  Ranieri. |

|      |                                                                                                                                                                                                                                                                                                                                                        |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (11) | As reported on a Schedule 13G filedwith the Securities and Exchange Commission on February14,  2006 by FMR Corp. According to the Schedule 13G, Edward C.Johnson 3d and members of his family may be deemed to control FMR Corp.According to the Schedule 13G, FMR Corp. has beneficial ownership ofshares of our common stock as a result of its sole |

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | ownership of Fidelity Management &Research Company (‘‘Fidelity’’). Fidelity,an investment advisor registered under Section 203 of the InvestmentAdvisors Act of 1940, is the beneficial owner 3,618,819 shares of ourcommon stock as a result of acting as investment advisor to variousinvestment companies registered under Section 8 of the InvestmentCompany Act of 1940 that hold the shares. The address of FMR Corp. is82 Devonshire Street, Boston, Massachusetts02109. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (12) | Consists of (a)6,854,454 shares of common stock held by Hyperion Partners II L.P. and(b)  4,148,456 shares of common stock owned by Hyperion TW FundL.P., 482,700 shares of common stock owned by Hyperion TWH Fund LLC and475,000 shares of common stock owned by Hyperion TWH Fund II LLC, eachof which are affiliates of Hyperion Partners II L.P. and as to whichHyperion Partners II L.P. disclaims beneficial ownership except to theextent of its pecuniary interest therein. Scott A. Shay, a director ofour company, may be deemed to be the beneficial owner of all of suchshares of common stock. Mr.  Shay disclaims beneficial ownershipin such shares except to the extent of his pecuniary interest therein.The address of Hyperion Partners II L.P. is 50 Charles Lindbergh Blvd.,Suite 500, Uniondale, New York11553. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (13) | Consists of (a)4,148,456 shares of common stock held by Hyperion TW Fund L.P. and(b)  6,854,454 shares of common stock owned by Hyperion PartnersII L.P., 482,700 shares of common stock owned by Hyperion TWH Fund LLCand 475,000 shares of common stock owned by Hyperion TWH Fund II LLC,each of which are affiliates of Hyperion TW Fund L.P. and as to whichHyperion TW Fund L.P. disclaims beneficial ownership. Scott A. Shay, adirector of our company, may be deemed to be the beneficial owner ofall of such shares of common stock. Mr.  Shay disclaimsbeneficial ownership in such shares except to the extent of hispecuniary interest therein. The address of Hyperion TW Fund L.P. is 50Charles Lindbergh Blvd., Suite 500, Uniondale, New York11553. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (14) | Consists of (a) 482,700shares of common stock held by Hyperion TWH Fund LLC and (b)6,854,454 shares of common stock owned by Hyperion Partners II L.P.,4,148,456 shares of common stock owned by Hyperion TW Fund L.P. and475,000 shares of common stock owned by Hyperion TWH Fund II LLC, eachof which are affiliates of Hyperion TWH Fund LLC and as to whichHyperion TWH Fund LLC disclaims beneficial ownership. Scott A. Shay, adirector of our company, may be deemed to be the beneficial owner ofall of such shares of common stock. Mr.  Shay disclaimsbeneficial ownership in such shares except to the extent of hispecuniary interest therein. The address of Hyperion TWH Fund LLC is 50Charles Lindbergh Blvd., Suite 500, Uniondale, New York11553. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (15) | Consists of (a) 475,000shares of common stock held by Hyperion TWH Fund II LLC and (b)6,854,454 shares of common stock owned by Hyperion Partners II L.P.,4,148,456 shares of common stock owned by Hyperion TW Fund L.P. and482,700 shares of common stock owned by Hyperion TWH Fund LLC, each ofwhich are affiliates of Hyperion TWH Fund II LLC and as to whichHyperion TWH Fund II LLC disclaims beneficial ownership. Scott A. Shay,a director of our company, may be deemed to be the beneficial owner ofall of such shares of common stock. Mr.  Shay disclaimsbeneficial ownership in such shares except to the extent of hispecuniary interest therein. The address of Hyperion TWH Fund II LLC is50 Charles Lindbergh Blvd., Suite 500, Uniondale, New York11553. |

|      |                                                                                                                                                                                                                                                                                                                                     |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (16) | Excludes 93,492 sharesof common stock held by Triumph III Investors, L.P. Washington &Congress Capital Partners, L.P. may be deemed to be a member of a groupthat includes Triumph III Investors, L.P. The address of Washington& Congress Capital Partners, L.P. is 30  Rowes Wharf, Suite480, Boston, Massachusetts02110. |

|      |                                                                                                                                                                                                                                                                                  |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (17) | Includes an aggregate of2,247,780 shares subject to options held by our executive officers anddirectors that are exercisable within 60 days of December8,  2006 and 2,600 shares owned of record by Mr.Green’s wife, as to which Mr.  Green disclaims beneficialownership. |

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Equity Compensation PlanInformation

The following table sets forth certain informationas of September  30,  2006 regarding compensation plansunder which equity securities of our company are authorized forissuance:

Equity Compensation PlanInformation

|                                                       |  |  |                                                                                           |  |           |                                                                           |  |  |                                                                                                                                     |   |      |  |  |  |  |  |           |  |
|-------------------------------------------------------|--|--|-------------------------------------------------------------------------------------------|--|-----------|---------------------------------------------------------------------------|--|--|-------------------------------------------------------------------------------------------------------------------------------------|---|------|--|--|--|--|--|-----------|--|
| PlanCategory                                          |  |  | Number of Securities tobeIssued Upon Exerciseof Outstanding Options,Warrants andRights(a) |  |           | Weighted-AverageExercise PriceofOutstanding Options,Warrants andRights(b) |  |  | Number of SecuritiesRemaining AvailableforFuture Issuance UnderEquity CompensationPlans(ExcludingSecurities Reflected inColumn(a))I |
| Equity compensation plans approved byshareholders     |  |  |                                                                                           |  | 2,632,614 |                                                                           |  |  |                                                                                                                                     | $ | 4.99 |  |  |  |  |  | 1,951,045 |  |
| Equitycompensation plans not approved by shareholders |  |  |                                                                                           |  | 350,000   |                                                                           |  |  |                                                                                                                                     |   | 5.39 |  |  |  |  |  | —   |  |
| Total                                                 |  |  |                                                                                           |  | 2,982,614 |                                                                           |  |  |                                                                                                                                     | $ | 5.03 |  |  |  |  |  | 1,951,045 |  |
|                                                       |

Thesecurities covered by the equity compensation plan that has not beenapproved by our shareholders consist of warrants that were issued to athird party. The warrants were issued as partial compensation for thethird party’s agreement to provide consulting services relatedto corporate finance and investment banking matters. The warrants,which were issued in August  2003, expire in August  2007and are exercisable at prices ranging from $4.75 to $6.00 pershare.

|                |                                                |
|----------------|------------------------------------------------|
| Item 13.  | Certain Relationships andRelated Transactions. |

In November  2005, upon his joiningthe board, we granted Mark Hanley options to purchase 15,000 shares ofour common stock at a price of $6.00 per share. The options vest inthree equal annual installments beginning on the first anniversary ofthe date of grant and have a ten-year life.

In July  2006,we hired David Moffatt as our chief financial officer. For adescription of our employment agreement with Mr.  Moffatt, see‘‘Item 11 — Executive Compensation —Employment Agreements; Termination of Employment and Change-in-ControlArrangements.’’ In July  2006, in connection withhiring Mr.  Moffatt, we granted him options to purchase 150,000shares of our common stock at a price of $2.71 per share. The optionsvest in three equal annual installments beginning on the firstanniversary of the date of grant and have a ten-year life.

InSeptember  2006, we granted Mr.  Aitken options to purchase300,000 shares of our common stock at a price of $1.72 per share. Theoptions vested in full on the date of grant and have a ten-yearlife.

In October  2006 we entered into an amended andrestated employment agreement with Ms.  Eames. Pursuant to heramended and restated employment agreement, Ms.  Eames has agreedto continue to serve as executive vice president of our company for aperiod of 18 months. See ‘‘Item  11  —Executive Compensation — Employment Agreements; Termination ofEmployment and Change-in-Control Arrangements.’’ Inconnection with entering into the amended and restated employmentagreement with Ms.  Eames, on October  16,  2006 wegranted to Ms.  Eames options to purchase 150,000 shares of ourcommon stock at a price of $1.92 per share. The options vest on a prorata basis over of period of 12 months beginning on November16,  2006.

In October  2006, we granted Mr.Moffatt options to purchase 100,000 shares of our common stock at aprice of $1.92 per share. One-half of the options will vest if we meetcertain performance criteria in respect of our fiscal year endingSeptember  20,  2007 and one-half will vest if we meetcertain performance criteria in respect of our fiscal year endingSeptember  30,  2008.

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|                |                                        |
|----------------|----------------------------------------|
| Item 14.  | PrincipalAccountant Fees and Services. |

Audit and Other Fees DuringFiscal 2005 and Fiscal 2006

The following table sets forth thefees we were billed in respect of our fiscal year endedSeptember  30,  2005 and September  30,  2006for various audit and other services. Our auditors in respect of ourfiscal year ended September  30,  2005 was Deloitte &Touche LLP and our auditors in respect of our fiscal year endedSeptember  30,  2006 was EisnerLLP.

|                   |  |  |            |   |           |             |  |  |  |   |           |  |
|-------------------|--|--|------------|---|-----------|-------------|--|--|--|---|-----------|--|
|              |  |  | Fiscal2005 |   |           | Fiscal 2006 |
| Auditfees         |  |  |            | $ | 2,018,155 |             |  |  |  | $ | 1,942,746 |  |
| Audit-relatedfees |  |  |            |   | 97,683    |             |  |  |  |   | —   |  |
| Taxfees           |  |  |            |   | 342,472   |             |  |  |  |   | —   |  |
| All otherfees     |  |  |            |   | —   |             |  |  |  |   | —   |  |
|                   |

Auditservices included the audit of our annual financial statements and thereview of financial statements included in our quarterly reports onForm 10-Q, as well as the audit of internal controls overfinancial reporting required by Section 404 of the Sarbanes-Oxley Actof 2002. Audit services also included services that were provided inconnection with regulatory filings, including the issuance of comfortletters and consents related to SEC filings. During fiscal 2006, wewere billed for audit fees from Eisner LLP, KPMG Audit Plc and Deloitte& Touche LLP.

Audit-related services are assurance andrelated services that are related to the performance of the audit orreview of our financial statements. These services principallyconsisted of fees associated with compliance matters related toacquisitions.

Tax services consisted of the preparation and/orreview of, and consultations with respect to, federal, state, local andinternational tax returns.

Pre-Approval Policy

Thecharter of the Audit Committee was revised and restated by the board ofdirectors on February  12,  2004. At such time, the charterof the Audit Committee was revised to implement a pre-approval policyfor the provision of audit and non-audit services. Pursuant to theprovisions of its charter, the Audit Committee pre-approves allauditing services and permitted audit-related services (including thefees and terms thereof) to be performed for us by our independentauditor, subject to the de minimus exception (the ‘‘deminimus exception’’) for non-audit services that arepermitted by the Securities Exchange Act of 1934 and that are approvedby the Audit Committee prior to the completion of the audit. The AuditCommittee may form and delegate authority to subcommittees consistingof one or more members when appropriate, including the authority togrant pre-approvals of audit and permitted non-audit services, providedthat a decision of such a subcommittee to grant pre-approvals shall bepresented to the full Audit Committee at its next scheduledmeeting.

None of the audit-related services, tax services orother services described above under ‘‘Audit and OtherFees During Fiscal 2005 and Fiscal 2006’’ were approvedby the Audit Committee after the fact in reliance upon the de minimusexception.

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PARTIV

|                |                                            |
|----------------|--------------------------------------------|
| Item 15.  | Exhibits and Financial StatementSchedules. |

(a)    The following documents are filed as partof this Annual Report on Form10-K:

|        |  |  |                                                                                                                                                                                                    |  |  |        |
|--------|--|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--------|
| (1)    |  |  | ConsolidatedFinancialStatements:                                                                                                                                                                   |  |  | Page   |
|   |  |  | Reportof Independent Registered Public AccountingFirm                                                                                                                                              |  |  | F-1    |
|   |  |  | Reportof Independent Registered Public AccountingFirm                                                                                                                                              |  |  | F-2    |
|   |  |  | Consolidated BalanceSheets – September 30, 2006 and2005                                                                                                                                 |  |  | F-3    |
|   |  |  | Consolidated Statements ofOperations – For the Years Ended September 30, 2006, 2005and 2004                                                                                             |  |  | F-4    |
|   |  |  | ConsolidatedStatements of Changes in Shareholders’ Equity –  Forthe Years Ended September  30,  2006, 2005 and2004                                                                     |  |  | F-5    |
|   |  |  | Consolidated Statements ofCash Flows – For the Years Ended September  20,2006, 2005 and 2004                                                                                                 |  |  | F-6    |
|   |  |  | Notes toConsolidated FinancialStatements                                                                                                                                                           |  |  | F-8    |
| (2)    |  |  | ConsolidatedFinancial StatementSchedules:                                                                                                                                                          |  |  |   |
|   |  |  | Schedule I –Condensed FinancialInformation                                                                                                                                                   |  |  | S-1    |
|   |  |  | Schedule II –Valuation and QualifyingAccounts                                                                                                                                                |  |  | S-5    |
|   |  |  | Schedules other thanthose listed above are omitted because they are not required or are notapplicable or the information is shown in the audited consolidatedfinancial statements or relatednotes. |  |  |   |
|        |

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(3)    Exhibits:

|               |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Title                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1           |  |  | RestatedCertificate of Incorporation of United States Home Health Care Corp.(now known as Allied Healthcare International Inc.) filed with theDepartment of State of the State of New York on December12,  1990, as amended on August  7,  1992(incorporated herein by reference to Exhibit 3.1 of our QuarterlyReport on Form 10-Q for the quarter ended April  30,1997).                                       |
| 3.2           |  |  | Certificate of Amendment to theRestated Certificate of Incorporation of Transworld Home Healthcare,Inc. (now known as Allied Healthcare International Inc.) filed with theDepartment of State of the State of New York on June  28,1995 (incorporated herein by reference to Exhibit 3.2 of our QuarterlyReport on Form 10-Q for the quarter ended April  30,1997).                                              |
| 3.3           |  |  | Certificate of Amendment to theRestated Certificate of Incorporation of Transworld Home Healthcare,Inc. (now known as Allied Healthcare International Inc.) filed with theDepartment of State of the State of New York on October9,  1996 (incorporated herein by reference to Exhibit 3.3 of ourQuarterly Report on Form 10-Q for the quarter ended April30,  1997).                                            |
| 3.4           |  |  | Certificate ofAmendment to the Restated Certificate of Incorporation of TransworldHome Healthcare, Inc. (now known as Allied Healthcare InternationalInc.) filed with the Department of State of the State of New York onMay  6,  1997 (incorporated herein by reference to Exhibit3.4 of our Quarterly Report on Form 10-Q for the quarter endedApril  30,1997).                                                |
| 3.5           |  |  | Certificate of Amendment of theCertificate of Incorporation of Transworld Healthcare, Inc. (now knownas Allied Healthcare International Inc.) filed with the Department ofState of the State of New York on April  16,  1998(incorporated herein by reference to Exhibit 3.5 of our RegistrationStatement on Form S-4 (Reg. St. No. 333-87304) filed with theSecurities and Exchange Commission on May  1,2002). |
| 3.6           |  |  | Certificate of Amendment to theCertificate of Incorporation of Transworld Healthcare, Inc. (now knownas Allied Healthcare International Inc.) filed with the Department ofState of the State of New York on June  7,  2002(incorporated herein by reference to Exhibit 3.1 of our Current Reporton Form 8-K filed with the Securities and Exchange Commission onJune  10,2002).                                  |
| 3.7           |  |  | Certificate of Amendment to theCertificate of Incorporation of Allied Healthcare International Inc.which defines the rights of the Series A Convertible Preferred Stock,filed with the Department of State of the State of New York onJune  26,  2002 (incorporated herein by reference toExhibit 4.1 of our Current Report on Form 8-K filed with the Securitiesand Exchange Commission on August  9,2002).     |
| 3.8           |  |  | Certificate of Amendment to theprovisions of the Certificate of Incorporation of Allied HealthcareInternational Inc. that defines the rights of the Series A ConvertiblePreferred Stock, filed with the Department of State of the State of NewYork on February  12,  2003 (incorporated herein byreference to Exhibit 3.8 of our Quarterly Report on Form 10-Q for thequarter ended March  31,2003).            |
| 3.9           |  |  | Certificate of Amendment of theCertificate of Incorporation of Allied Healthcare International Inc.that eliminates all references to the Series A Convertible PreferredStock, filed with the New York Secretary of State on July20,  2004 (incorporated herein by reference to Exhibit 9 of ourForm 8-A/A filed with the Securities and Exchange Commission onJuly  21,  2004).                                  |
|               |

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|               |  |  |                                                                                                                                                                                                                                                                                                                                                                                       |
|---------------|--|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Title                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.10          |  |  | Certificate ofAmendment of the Certificate of Incorporation of Allied HealthcareInternational Inc. filed with the Department of State of the State ofNew York on September  10,  2004 (incorporated herein byreference to Exhibit 3.1 of our Current Report on Form 8-K filed withthe Securities and Exchange Commission on September  15,2004).                                      |
| 3.11          |  |  | Restated Bylaws of TransworldHome Healthcare, Inc. (now known as Allied Healthcare InternationalInc.) (incorporated herein by reference to Exhibit 3.4 of our AnnualReport on Form 10-K for the fiscal year ended October  31,1996).                                                                                                                                                  |
| 3.12          |  |  | Amendment to the Bylaws ofAllied Healthcare International Inc. effective June  7,2002 (incorporated herein by reference to Exhibit 3.2 of our CurrentReport on Form 8-K filed with the Securities and Exchange Commission onJune  10,  2002).                                                                                                                                         |
| 4.1           |  |  | SpecimenCertificate of Common Stock (incorporated herein by reference toExhibit 4.1 of our Current Report on Form 8-K filed with the Securitiesand Exchange Commission on June  10,2002).                                                                                                                                                                                             |
| 10.1          |  |  | Transworld Home HealthCare, Inc.1992 Stock Option Plan, as amended (incorporated herein by reference toExhibit 10.3 of our Quarterly Report on Form 10-Q for the quarter endedJune  30,  1998).                                                                                                                                                                                       |
| 10.2          |  |  | Form ofIndemnification Agreement for officers and directors (incorporatedherein by reference to Exhibit 10.31 of our Annual Report on Form 10-Kfor the fiscal year ended October  31,1994).                                                                                                                                                                                           |
| 10.3          |  |  | Transworld Home HealthCare, Inc.1997 Option Plan for Non-Employee Directors (incorporated herein byreference to Exhibit A of our Proxy Statement for our annual meeting ofshareholders held on May  28,1997).                                                                                                                                                                         |
| 10.4A         |  |  | Employment Agreement, datedSeptember  24,  2001, between Transworld Healthcare, Inc.(now known as Allied Healthcare International Inc.) and TimothyM.  Aitken (incorporated herein by reference to Exhibit 10.16 ofour Annual Report on Form 10-K for the fiscal year endedSeptember  30,2001).                                                                                       |
| 10.4B         |  |  | Employment Agreement, datedSeptember  24,  2001, between Transworld Healthcare, Inc.(now known as Allied Healthcare International Inc.) and Sarah Eames(incorporated herein by reference to Exhibit 10.17 of our Annual Reporton Form 10-K for the fiscal year ended September  30,2001).                                                                                             |
| 10.4C         |  |  | Amendment No. 1, datedNovember  17,  2004, to the Employment Agreement , datedSeptember  24,  2001, between Allied HealthcareInternational Inc. and Sarah L. Eames (incorporated herein by referenceto Exhibit 10.1 of our Current Report on Form 8-K filed with theSecurities and Exchange Commission on November  17,2004).                                                         |
| 10.4D         |  |  | Amendment No. 2, datedSeptember  28,  2005, to the Employment Agreement, datedSeptember  24,  2001, as amended by Amendment No. 1, datedNovember  17,  2004, between Allied HealthcareInternational Inc. and Sarah L.Eames                                                                                                                                                            |
| 10.4E*        |  |  | Amended and Restated EmploymentAgreement, dated October  16,  2006, between AlliedHealthcare International Inc. and SarahEames.                                                                                                                                                                                                                                                       |
| 10.5A         |  |  | Irrevocable Undertaking, datedApril  22,  2002, of Timothy M.  Aitken relating tothe redeemable shares of Transworld Healthcare (UK) Limited (now knownas Allied Healthcare Holdings Limited) (incorporated herein byreference to Exhibit 10.26 of our Registration Statement on Form S-4(Reg. St. No. 333-87304) filed with the Securities and ExchangeCommission on May  1,  2002). |
|               |

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|               |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------------|--|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Title                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5B         |  |  | IrrevocableUndertaking, dated April  22,  2002, of Sarah L. Eamesrelating to the redeemable shares of Transworld Healthcare (UK) Limited(now known as Allied Healthcare Holdings Limited) (incorporated hereinby reference to Exhibit 10.27 of our Registration Statement on Form S-4(Reg. St. No. 333-87304) filed with the Securities and ExchangeCommission on May  1,2002).                                                                                                                                      |
| 10.6          |  |  | Registration Rights Agreement,dated April  30,  2002, among Transworld Healthcare, Inc.(now known as Allied Healthcare International Inc.), Triumph PartnersIII, L.P. and Triumph III Investors, L.P. (incorporated herein byreference to Exhibit 10.29 of our Registration Statement on Form S-4(Reg. St. No. 333-87304) filed with the Securities and ExchangeCommission on May  1,2002).                                                                                                                               |
| 10.7          |  |  | 2002 Stock Option Plan(incorporated herein by reference to Annex D to the proxystatement/prospectus forming a part of Amendment No. 1 to ourRegistration Statement on Form S-4 (Reg. St. No. 333-87304) filed withthe Securities and Exchange Commission on May  21,2002).                                                                                                                                                                                                                                                |
| 10.8          |  |  | Employment Agreement, datedMarch  29,  2000, between Allied Medicare Limited andCharles Murphy (incorporated herein by reference to Exhibit 10.37 toour Registration Statement on Form S-1 (Reg. No. 333-115559) filed withthe Securities and Exchange Commission on May  17,2004).                                                                                                                                                                                                                                       |
| 10.9          |  |  | Form of Conversion Agreementbetween Allied Healthcare International Inc. and the holders of theshares of Series A Convertible Preferred Stock (incorporated herein byreference to Exhibit 10.38 to our Registration Statement on Form S-1(Reg. No. 333-115559) filed with the Securities and Exchange Commissionon May  17,2004).                                                                                                                                                                                         |
| 10.10         |  |  | Agreement, datedFebruary  17,  2004, among Allied Healthcare (UK) Limitedand Atos KPMG Consulting Limited (incorporated herein by reference toExhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter endedMarch  31,2004).                                                                                                                                                                                                                                                                                     |
| 10.11         |  |  | Underwriting Agreement, datedJuly  1,  2004, between Allied Healthcare InternationalInc. and the underwriters named therein (incorporated herein byreferenced to Exhibit 10.1 of our Quarterly Report on Form 10-Q for thequarter ended June  30,2004).                                                                                                                                                                                                                                                                   |
| 10.12A        |  |  | Facility Agreement, datedJuly  19,  2004, among Allied Healthcare Group Limited (nowknown as Allied Healthcare Group Holdings Limited), Allied HealthcareInternational Inc., Allied Healthcare Holdings Limited, thesubsidiaries of Allied Healthcare International Inc. named therein asguarantors, Barclays Capital and Lloyds TSB Bank plc, as arrangers, andthe other banks named therein (incorporated herein by referenced toExhibit 10.4 of our Quarterly Report on Form 10-Q for the quarter endedJune  30,2004). |
| 10.12B        |  |  | Amendment Letter, datedJuly  28,  2006, between Allied Healthcare HoldingsLimited, Allied Healthcare Group Holding Limited, Barclays Bank PLC andLloyds TSB Bank plc Limited (incorporated herein by reference toExhibit 10.19 of our Quarterly Report on Form 10-Q for the quarterended June  30,2006).                                                                                                                                                                                                                  |
| 10.12C        |  |  | Second Amendment Letter, datedSeptember  11,  2006 (effective September  13,2006), among Allied Healthcare Holdings Limited, Allied HealthcareGroup Holding Limited, Allied Healthcare International Inc., thesubsidiaries of Allied Healthcare International Inc. identifiedtherein, Barclays Bank PLC and Lloyds TSB Bank plc (incorporated hereinby reference to Exhibit 10.20 of our Current Report on Form 8-K filedwith the Securities and Exchange Commission on September18,  2006).                              |
|               |

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|               |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------|--|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Title                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.12D        |  |  | Third AmendmentLetter, dated October  17,  2006, among Allied HealthcareHoldings Limited, Allied Healthcare Group Holding Limited, AlliedHealthcare International Inc., the subsidiaries of Allied HealthcareInternational Inc. identified therein, Barclays Bank PLC and Lloyds TSBBank plc (incorporated herein by reference to Exhibit 10.21 of ourCurrent Report on Form 8-K filed with the Securities and ExchangeCommission on October  20,2006). |
| 10.12E        |  |  | Fourth Amendment Letter, datedNovember  10,  2006, among Allied Healthcare Group HoldingsLimited, Allied Healthcare International Inc., the subsidiaries ofAllied Healthcare International Inc. identified therein, Barclays BankPLC and Lloyds TSB Bank plc (incorporated herein by reference toExhibit 10.22 of our Current Report on Form 8-K filed with theSecurities and Exchange Commission on November  14,2006).                                |
| 10.13         |  |  | Floating Security Document,dated July  19,  2004, among Allied Healthcare GroupLimited (now known as Allied Healthcare Group Holdings Limited), AlliedHealthcare Holdings Limited, the subsidiaries of Allied HealthcareInternational Inc. named therein, and Barclays Bank plc, as securityagent (incorporated herein by referenced to Exhibit 10.5 of ourQuarterly Report on Form 10-Q for the quarter ended June30,  2004).                          |
| 10.14         |  |  | Subordination Deed,dated July  19,  2004, among Allied HealthcareInternational Inc., Barclays Bank plc and Allied Healthcare GroupLimited (now known as Allied Healthcare Group Holdings Limited)(incorporated herein by referenced to Exhibit 10.6 of our QuarterlyReport on Form 10-Q for the quarter ended June  30,2004).                                                                                                                           |
| 10.15*        |  |  | Employment Agreement, datedJuly  31,  2006, between Allied Healthcare Group Limitedand David Moffatt.                                                                                                                                                                                                                                                                                                                                                   |
| 10.16*        |  |  | FacilityAgreement, dated July  19,  2004, as amended and restatedon December  12,  2006, among Allied Healthcare GroupHoldings Limited, Allied Healthcare International Inc., thesubsidiaries of Allied Healthcare International Inc. named therein,Barclays Capital and Lloyds TSB Bank plc, as arrangers, and the otherbanks named therein.                                                                                                           |
| 10.17*        |  |  | Pledge andSecurity Agreement, dated December  12,  2006, betweenAllied Healthcare International Inc. and Barclays Bank PLC, as securityagent.                                                                                                                                                                                                                                                                                                           |
| 10.18*        |  |  | Intellectual Property SecurityAgreement, dated December  12,  2006, between AlliedHealthcare International Inc. and Barclays Bank PLC, as securityagent.                                                                                                                                                                                                                                                                                                |
| 11            |  |  | Statement re: computation ofearnings per share (computation can be determined clearly from thematerial contained in this Annual Report on Form10-K).                                                                                                                                                                                                                                                                                                    |
| 14            |  |  | Allied Healthcare InternationalInc. Code of Conduct (incorporated herein by reference to Exhibit 14 toour Form 10-K for the fiscal year ended September  30,2003).                                                                                                                                                                                                                                                                                      |
| 16.1          |  |  | Letter, dated January11,  2006, from Deloitte & Touche LLP to the Securities andExchange Commission (incorporated herein by reference to Exhibit 16.1of our Current Report on Form 8-K filed with the Securities andExchange Commission on January  17,2006).                                                                                                                                                                                       |
| 16.2          |  |  | Letter, dated July18,  2006, from KPMG Audit Plc to the Securities and ExchangeCommission (incorporated herein by reference to Exhibit 16.1 of ourCurrent Report on Form 8-K/A filed with the Securities and ExchangeCommission on July  18,2006).                                                                                                                                                                                                      |
| 21*           |  |  | Subsidiaries of Allied HealthcareInternational Inc.                                                                                                                                                                                                                                                                                                                                                                                                     |
| 23.1*         |  |  | Consent of EisnerLLP, independent registered public accounting firm of Allied HealthcareInternational Inc.                                                                                                                                                                                                                                                                                                                                              |
|               |

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|               |  |  |                                                                                                                                                                                                                                                                                                                             |
|---------------|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Title                                                                                                                                                                                                                                                                                                                       |
| 23.2*         |  |  | Consent of Deloitte& Touche LLP, independent registered public accounting firm ofAllied Healthcare InternationalInc.                                                                                                                                                                                                    |
| 31.1*         |  |  | Rule 13a-14(a)/15d-14(a)Certification of Chief ExecutiveOfficer.                                                                                                                                                                                                                                                            |
| 31.2*         |  |  | Rule 13a-14(a)/15d-14(a)Certification of Chief FinancialOfficer.                                                                                                                                                                                                                                                            |
| 32.1*         |  |  | Section 1350 Certification ofChief Executive Officer.                                                                                                                                                                                                                                                                       |
| 32.2*         |  |  | Section 1350Certification of Chief FinancialOfficer.                                                                                                                                                                                                                                                                        |
| 99.1          |  |  | AIM Schedule 1 —Pre-Admission Announcement filed by Allied Healthcare InternationalInc. with the Alternative Investment Market of the London StockExchange (incorporated herein by reference to Exhibit 99.2 of ourCurrent Report on Form 8-K filed with the Securities and ExchangeCommission on November  30,2005). |
|               |

|  |
|--|
|  |  |
|  |

|   |                |
|---|----------------|
| * | Filedherewith. |

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SIGNATURES

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

|        |  |  |                                     |  |  |                                                                                          |
|--------|--|--|-------------------------------------|--|--|------------------------------------------------------------------------------------------|
|   |  |  | ALLIEDHEALTHCARE INTERNATIONAL INC. |
|   |  |  | By:                                 |  |  | /s/ Timothy M.Aitken                                                                     |
|   |  |  |                                |  |  | Name:  TimothyM. Aitken Title:Chairman of the Board andChief Executive Officer |
|        |

Dated:December  14, 2006

POWER OF ATTORNEY

Each personwhose signature appears below constitutes and appoints TimothyM.  Aitken,  David  Moffatt and Marvet Abbassi, andeach of them, his or her true and lawful attorneys-in-fact and agents,with full power of substitution and resubstitution, for him or her andin his or her name, place and stead, in any and all capacities, to signany and all amendments to this Annual Report on Form 10-K, and to filethe same, with all exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting untosaid attorneys-in-fact and agents, and each of them, full power andauthority to do and perform each and every act and thing requisite andnecessary to be done, as fully to all intents and purposes as he or shemight or could do in person, hereby ratifying and confirming all thatsaid attorneys-in-fact and agents or any of them, or their or his orher substitute or substitutes, may lawfully do or cause to be done byvirtue hereof.

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities andon the datesindicated.

|                       |  |                                                                               |  |                   |
|-----------------------|--|-------------------------------------------------------------------------------|--|-------------------|
|                       |  |                                                                               |  |                   |
|                       |
| /s/Timothy M.  Aitken |  | Chairman of the Board andChief Executive Officer (principal executiveofficer) |  | December  14,2006 |
|                       |
| Timothy M.Aitken      |
|                       |
| /s/ Sarah L. Eames    |  | Executive Vice President andDirector                                          |  | December  14,2006 |
|                       |
| Sarah L.Eames         |
|                       |
| /s/ David Moffatt     |  | Chief Financial Officer(principal financial and accountingofficer)       |  | December  14,2006 |
|                       |
| DavidMoffatt          |
|                       |
| /s/ Sophia Corona     |  | Director                                                                      |  | December12,  2006 |
|                       |
| SophiaCorona          |
|                       |
| /s/ G. RichardGreen   |  | Director                                                                      |  | December  12,2006 |
|                       |
| G. RichardGreen       |
|                       |
| /s/ Mark Hanley       |  | Director                                                                      |  | December11,  2006 |
|                       |
| MarkHanley            |
|                       |
| /s/ WaynePalladino    |  | Director                                                                      |  | December14,  2006 |
|                       |
| WaynePalladino        |
|                       |
| /s/ Jeffrey S.Peris   |  | Director                                                                      |  | December  12,2006 |
|                       |
| Jeffrey S.Peris       |
|                       |

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|                   |  |          |  |                   |
|-------------------|--|----------|--|-------------------|
|                   |  |          |  |                   |
|                   |
| /s/ Scott A.Shay  |  | Director |  | December  14,2006 |
|                   |
| Scott A.Shay      |
|                   |
| /s/ Ann Thornburg |  | Director |  | December12,  2006 |
|                   |
| AnnThornburg      |
|                   |
| /s/ MarkTompkins  |  | Director |  | December13,  2006 |
|                   |
| MarkTompkins      |
|                   |

62

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ALLIEDHEALTHCARE INTERNATIONALINC.

|                                                                                                                             |  |  |        |
|-----------------------------------------------------------------------------------------------------------------------------|--|--|--------|
| Indexto Consolidated FinancialStatements                                                                                    |  |  | Page   |
| Reportof Independent Registered Public AccountingFirm                                                                       |  |  | F-1    |
| Reportof Independent Registered Public AccountingFirm                                                                       |  |  | F-2    |
| Consolidated Balance Sheets– September 30, 2006 and2005                                                               |  |  | F-3    |
| Consolidated Statements ofOperations – for the years ended September 30,2006, 2005 and2004                            |  |  | F-4    |
| ConsolidatedStatements of Changes in Shareholders’ Equity – for theyears ended September 30, 2006, 2005 and2004 |  |  | F-5    |
| Consolidated Statements of CashFlows – for the years ended September 30, 2006,2005 and 2004                           |  |  | F-6    |
| Notes to ConsolidatedFinancialStatements                                                                                    |  |  | F-8    |
| Indexto Consolidated Financial StatementSchedules                                                                           |  |  |   |
| Schedule I –Condensed FinancialInformation                                                                            |  |  | S-1    |
| Schedule II –Valuation and QualifyingAccounts                                                                         |  |  | S-5    |
|                                                                                                                             |

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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To theBoard of Directors and Shareholders ofAllied HealthcareInternational Inc.

We have audited the accompanyingconsolidated balance sheet of Allied Healthcare International Inc. andsubsidiaries (the ‘‘Company’’) as ofSeptember 30, 2006, and the related consolidated statements ofoperations, shareholders’ equity and cash flows for the year thenended. Our audit also included the financial statement schedules listedat Item 15(b). These financial statements and schedules are theresponsibility of the Company’s management. Our responsibility isto express an opinion on these financial statements based on ouraudit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for ouropinion.

In our opinion, the financial statements referredto above present fairly, in all material respects, the consolidatedfinancial position of Allied Healthcare International Inc. andsubsidiaries as of September 30, 2006, and the consolidatedresults of their operations and their consolidated cash flows for theyear then ended in conformity with accounting principles generallyaccepted in the United States of America.

We also haveaudited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of AlliedHealthcare International Inc.’s internal control over financialreporting as of September 30, 2006, based on criteriaestablished in Internal Control – Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission(‘‘COSO’’), and our report datedDecember 14, 2006 expressed an unqualified opinion onmanagement’s assessment of the effectiveness of theCompany’s internal control over financial reporting, and anadverse opinion on the effectiveness of the Company’s internalcontrol over financial reporting.

/s/EISNER LLP

New York, NewYork

December 14,2006

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REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

To the Board of Directors andShareholders ofAllied Healthcare International Inc.New York,New York

We have audited the accompanying consolidatedbalance sheet of Allied Healthcare International Inc. and subsidiaries(the ‘‘Company’’) as of September 30, 2005, andthe related consolidated statements of operations, changes inshareholders’ equity, and cash flows for each of the two years inthe period ended September 30, 2005. Our audits also included thefinancial statement schedules listed in the Index at Item 15. Thesefinancial statements and financial statement schedules are theresponsibility of the Company’s management. Our responsibility isto express an opinion on the financial statements and financialstatement schedules based on our audits.

We conducted ouraudits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all materialrespects, the financial position of Allied Healthcare InternationalInc. and subsidiaries as of September 30, 2005, and the results oftheir operations and their cash flows for each of the two years in theperiod ended September 30, 2005, in conformity with accountingprinciples generally accepted in the United States of America. Also, inour opinion, such financial statement schedules, when considered inrelation to the basic consolidated financial statements taken as awhole, present fairly, in all material respects, the information setforth therein.

/s/ DELOITTE & TOUCHELLP

New York, NewYork

November  28,2005

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ALLIEDHEALTHCARE INTERNATIONAL INC.CONSOLIDATED BALANCESHEETS(In thousands, except per sharedata)

|                                                                                                    |  |  |                   |   |          |                   |  |  |  |   |         |   |
|----------------------------------------------------------------------------------------------------|--|--|-------------------|---|----------|-------------------|--|--|--|---|---------|---|
|                                                                                               |  |  | September30, 2006 |   |          | September 30,2005 |
| ASSETS                                                                                             |  |  |                   |   |     |                   |  |  |  |   |    |   |
| Currentassets:                                                                                     |  |  |                   |   |     |                   |  |  |  |   |    |   |
| Cash and cashequivalents                                                                           |  |  |                   | $ | 3,583    |                   |  |  |  | $ | 5,873   |   |
| Accountsreceivable, less allowance for doubtful accounts of $1,713 and$1,734,respectively          |  |  |                   |   | 29,641   |                   |  |  |  |   | 33,443  |   |
| Unbilledaccountsreceivable                                                                         |  |  |                   |   | 11,823   |                   |  |  |  |   | 11,197  |   |
| Inventories                                                                                        |  |  |                   |   | 586      |                   |  |  |  |   | 359     |   |
| Deferredincometaxes                                                                                |  |  |                   |   | 691      |                   |  |  |  |   | — |   |
| Prepaidexpenses and otherassets                                                                    |  |  |                   |   | 1,547    |                   |  |  |  |   | 3,028   |   |
| Totalcurrentassets                                                                                 |  |  |                   |   | 47,871   |                   |  |  |  |   | 53,900  |   |
| Propertyand equipment,net                                                                          |  |  |                   |   | 27,076   |                   |  |  |  |   | 22,538  |   |
| Goodwill                                                                                           |  |  |                   |   | 112,710  |                   |  |  |  |   | 216,984 |   |
| Otherintangible assets,net                                                                         |  |  |                   |   | 6,655    |                   |  |  |  |   | 9,290   |   |
| Derivativeasset                                                                                    |  |  |                   |   | 252      |                   |  |  |  |   | — |   |
| Deferredincometaxes                                                                                |  |  |                   |   | 197      |                   |  |  |  |   | — |   |
| Deferredfinancing costs and otherassets                                                            |  |  |                   |   | 581      |                   |  |  |  |   | 727     |   |
| Totalassets                                                                                        |  |  |                   | $ | 195,342  |                   |  |  |  | $ | 303,439 |   |
| LIABILITIESAND SHAREHOLDERS’EQUITY                                                           |  |  |                   |   |     |                   |  |  |  |   |    |   |
| Currentliabilities:                                                                                |  |  |                   |   |     |                   |  |  |  |   |    |   |
| Currentportion of long-termdebt                                                                    |  |  |                   | $ | 11,236   |                   |  |  |  | $ | 10,577  |   |
| Accountspayable                                                                                    |  |  |                   |   | 4,739    |                   |  |  |  |   | 2,649   |   |
| Accruedexpenses, inclusive of payroll and relatedexpenses                                          |  |  |                   |   | 31,005   |                   |  |  |  |   | 26,463  |   |
| Liabilitiesof discontinuedoperations                                                               |  |  |                   |   | 690      |                   |  |  |  |   | 690     |   |
| Taxespayable                                                                                       |  |  |                   |   | 1,366    |                   |  |  |  |   | 2,152   |   |
| Totalcurrentliabilities                                                                            |  |  |                   |   | 49,036   |                   |  |  |  |   | 42,531  |   |
| Long-termdebt                                                                                      |  |  |                   |   | 59,923   |                   |  |  |  |   | 53,765  |   |
| Derivativeliability                                                                                |  |  |                   |   | —  |                   |  |  |  |   | 750     |   |
| Deferredincome taxes and other long-termliabilities                                                |  |  |                   |   | —  |                   |  |  |  |   | 4,534   |   |
| Totalliabilities                                                                                   |  |  |                   |   | 108,959  |                   |  |  |  |   | 101,580 |   |
| Commitmentsandcontingencies                                                                        |  |  |                   |   |     |                   |  |  |  |   |    |   |
| Shareholders’equity:                                                                         |  |  |                   |   |     |                   |  |  |  |   |    |   |
| Preferred stock,$.01 par value; authorized 10,000 shares, issued and outstanding–none        |  |  |                   |   | —  |                   |  |  |  |   | — |   |
| Commonstock, $.01 par value; authorized 80,000 shares, issued 45,542 and45,441 shares,respectively |  |  |                   |   | 455      |                   |  |  |  |   | 454     |   |
| Additionalpaid-incapital                                                                           |  |  |                   |   | 238,944  |                   |  |  |  |   | 237,796 |   |
| Accumulatedother comprehensiveincome                                                               |  |  |                   |   | 13,258   |                   |  |  |  |   | 6,112   |   |
| Accumulateddeficit                                                                                 |  |  |                   |   | (163,980 | )                 |  |  |  |   | (40,209 | ) |
|                                                                                               |  |  |                   |   | 88,677   |                   |  |  |  |   | 204,153 |   |
| Lesscost of treasury stock (585shares)                                                             |  |  |                   |   | (2,294   | )                 |  |  |  |   | (2,294  | ) |
| Totalshareholders’equity                                                                     |  |  |                   |   | 86,383   |                   |  |  |  |   | 201,859 |   |
| Totalliabilities and shareholders’equity                                                     |  |  |                   | $ | 195,342  |                   |  |  |  | $ | 303,439 |   |
|                                                                                                    |

Seenotes to consolidated financial statements.

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ALLIED HEALTHCARE INTERNATIONALINC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands,except per share data)

|                                                                                    |  |  |                             |   |          |                             |  |  |                             |   |         |   |  |  |  |   |         |   |
|------------------------------------------------------------------------------------|--|--|-----------------------------|---|----------|-----------------------------|--|--|-----------------------------|---|---------|---|--|--|--|---|---------|---|
|                                                                               |  |  | YearEndedSeptember 30, 2006 |   |          | Year EndedSeptember30, 2005 |  |  | Year EndedSeptember 30,2004 |
| Revenues:                                                                          |  |  |                             |   |     |                             |  |  |                             |   |    |   |  |  |  |   |    |   |
| Netpatientservices                                                                 |  |  |                             | $ | 280,205  |                             |  |  |                             | $ | 342,031 |   |  |  |  | $ | 317,393 |   |
| Netrespiratory, medical equipment andsupplies                                      |  |  |                             |   | 14,402   |                             |  |  |                             |   | 9,158   |   |  |  |  |   | 7,905   |   |
| Totalrevenues                                                                      |  |  |                             |   | 294,607  |                             |  |  |                             |   | 351,189 |   |  |  |  |   | 325,298 |   |
| Costofrevenues:                                                                    |  |  |                             |   |     |                             |  |  |                             |   |    |   |  |  |  |   |    |   |
| Patientservices                                                                    |  |  |                             |   | 194,475  |                             |  |  |                             |   | 243,304 |   |  |  |  |   | 227,816 |   |
| Respiratory,medical equipment andsupplies                                          |  |  |                             |   | 10,521   |                             |  |  |                             |   | 4,214   |   |  |  |  |   | 4,311   |   |
| Impairmentof respiratory, medical equipment andsupplies                            |  |  |                             |   | 5,932    |                             |  |  |                             |   | — |   |  |  |  |   | — |   |
| Totalcost ofrevenues                                                               |  |  |                             |   | 210,928  |                             |  |  |                             |   | 247,518 |   |  |  |  |   | 232,127 |   |
| Grossprofit                                                                        |  |  |                             |   | 83,679   |                             |  |  |                             |   | 103,671 |   |  |  |  |   | 93,171  |   |
| Selling,general and administrativeexpenses                                         |  |  |                             |   | 75,552   |                             |  |  |                             |   | 73,948  |   |  |  |  |   | 63,544  |   |
| Impairmentofgoodwill                                                               |  |  |                             |   | 121,901  |                             |  |  |                             |   | — |   |  |  |  |   | — |   |
| Impairmentof long-lived assets (fixed assets and otherintangibles)                 |  |  |                             |   | 10,295   |                             |  |  |                             |   | — |   |  |  |  |   | — |   |
| Operating(loss)income                                                              |  |  |                             |   | (124,069 | )                           |  |  |                             |   | 29,723  |   |  |  |  |   | 29,627  |   |
| Interestincome                                                                     |  |  |                             |   | 127      |                             |  |  |                             |   | 212     |   |  |  |  |   | 852     |   |
| Interestexpense                                                                    |  |  |                             |   | (4,272   | )                           |  |  |                             |   | (4,201  | ) |  |  |  |   | (14,579 | ) |
| Foreignexchange income(loss)                                                       |  |  |                             |   | 73       |                             |  |  |                             |   | (98     | ) |  |  |  |   | (184    | ) |
| Otherincome(expense)                                                               |  |  |                             |   | 39       |                             |  |  |                             |   | (175    | ) |  |  |  |   | — |   |
| (Loss)income before incometaxes                                                    |  |  |                             |   | (128,102 | )                           |  |  |                             |   | 25,461  |   |  |  |  |   | 15,716  |   |
| (Benefitfrom) provision for incometaxes                                            |  |  |                             |   | (4,331   | )                           |  |  |                             |   | 6,725   |   |  |  |  |   | 5,847   |   |
| Net(loss)income                                                                    |  |  |                             |   | (123,771 | )                           |  |  |                             |   | 18,736  |   |  |  |  |   | 9,869   |   |
| Redeemablepreferred dividends, conversion fees andaccretion                        |  |  |                             |   | —  |                             |  |  |                             |   | — |   |  |  |  |   | 7,020   |   |
| Net(loss) income available to commonshareholders                                   |  |  |                             | $ | (123,771 | )                           |  |  |                             | $ | 18,736  |   |  |  |  | $ | 2,849   |   |
| Basicnet (loss) income available to common shareholders per share of commonstock   |  |  |                             | $ | (2.75    | )                           |  |  |                             | $ | 0.42    |   |  |  |  | $ | 0.10    |   |
| Diluted net (loss) income available to common shareholders pershare of commonstock |  |  |                             | $ | (2.75    | )                           |  |  |                             | $ | 0.41    |   |  |  |  | $ | 0.10    |   |
| Weightedaverage number of common sharesoutstanding:                                |  |  |                             |   |     |                             |  |  |                             |   |    |   |  |  |  |   |    |   |
| Basic                                                                              |  |  |                             |   | 44,930   |                             |  |  |                             |   | 44,684  |   |  |  |  |   | 27,419  |   |
| Diluted                                                                            |  |  |                             |   | 44,930   |                             |  |  |                             |   | 45,169  |   |  |  |  |   | 28,104  |   |
|                                                                                    |

Seenotes to consolidated financial statements.

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ALLIED HEALTHCARE INTERNATIONALINC.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY(In thousands)

|                                                                                                      |  |  |             |  |        |                          |  |  |                                           |   |        |                           |  |  |                      |   |         |                |  |  |       |   |        |   |  |  |  |   |          |   |  |  |  |   |         |   |  |  |  |   |        |   |  |  |  |   |          |   |
|------------------------------------------------------------------------------------------------------|--|--|-------------|--|--------|--------------------------|--|--|-------------------------------------------|---|--------|---------------------------|--|--|----------------------|---|---------|----------------|--|--|-------|---|--------|---|--|--|--|---|----------|---|--|--|--|---|---------|---|--|--|--|---|--------|---|--|--|--|---|----------|---|
|                                                                                                 |  |  | CommonStock |  |        | AdditionalPaid-inCapital |  |  | AccumulatedOtherComprehensive(Loss)Income |   |        | Retained(Deficit)Earnings |  |  | Officers’Loans |   |         | TreasuryShares |  |  | Total |
|                                                                                                 |  |  | Shares      |  |        | Amount                   |
| Balance,September 30,2003                                                                            |  |  |             |  | 22,689 |                          |  |  |                                           |   | 227    |                           |  |  |                      |   | 142,897 |                |  |  |       |   | 3,140  |   |  |  |  |   | (68,814  | ) |  |  |  |   | (1,002  | ) |  |  |  |   | (1,285 | ) |  |  |  |   | 75,163   |   |
| Comprehensiveincome:                                                                                 |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   |     |   |
| Netincome                                                                                            |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   | 9,869    |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 9,869    |   |
| Foreigncurrency translationadjustment                                                                |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   | 7,638  |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 7,638    |   |
| Comprehensiveincome                                                                                  |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 17,507   |   |
| Issuanceof common stockfor:                                                                          |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   |     |   |
| Offering                                                                                             |  |  |             |  | 14,500 |                          |  |  |                                           |   | 145    |                           |  |  |                      |   | 70,905  |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 71,050   |   |
| Conversionof Series A preferredstock                                                                 |  |  |             |  | 7,774  |                          |  |  |                                           |   | 77     |                           |  |  |                      |   | 35,136  |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 35,213   |   |
| Exerciseof stockoptions                                                                              |  |  |             |  | 87     |                          |  |  |                                           |   | 1      |                           |  |  |                      |   | 400     |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 401      |   |
| Commonstock issuancecosts                                                                            |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   | (5,335  | )              |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | (5,335   | ) |
| Conversionfees paid to Series A preferred shareholders, net of conversionagreements claw backfeature |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   | (2,029  | )              |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | (2,029   | ) |
| Write-offof remaining Series A preferred stock issuancecosts                                         |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   | (1,696  | )              |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | (1,696   | ) |
| Accretionof Series A preferred stock issuancecosts                                                   |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   | (366    | )              |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | (366     | ) |
| Dividendson Series A preferredstock                                                                  |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   | (2,924  | )              |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | (2,924   | ) |
| Intereston notes toofficers                                                                          |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   | (7      | ) |  |  |  |   |   |   |  |  |  |   | (7       | ) |
| Repaymentof notes issued toofficers                                                                  |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   | 1,009   |   |  |  |  |   | (1,009 | ) |  |  |  |   | (— | ) |
| Balance,September 30,2004                                                                            |  |  |             |  | 45,050 |                          |  |  |                                           |   | 450    |                           |  |  |                      |   | 236,988 |                |  |  |       |   | 10,778 |   |  |  |  |   | (58,945  | ) |  |  |  |   | — |   |  |  |  |   | (2,294 | ) |  |  |  |   | 186,977  |   |
| Comprehensiveincome:                                                                                 |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   |     |   |
| Netincome                                                                                            |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   | 18,736   |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 18,736   |   |
| Foreigncurrency translationadjustment                                                                |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   | (4,258 | ) |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | (4,258   | ) |
| Unrealizedlosses from cash flow hedgingactivities                                                    |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   | (408   | ) |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | (408     | ) |
| Comprehensiveincome                                                                                  |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 14,070   |   |
| Issuanceof common stock for: Exercise of stockoptions                                                |  |  |             |  | 391    |                          |  |  |                                           |   | 4      |                           |  |  |                      |   | 808     |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 812      |   |
| Balance,September 30,2005                                                                            |  |  |             |  | 45,441 |                          |  |  |                                           | $ | 454    |                           |  |  |                      | $ | 237,796 |                |  |  |       | $ | 6,112  |   |  |  |  | $ | (40,209  | ) |  |  |  | $ | — |   |  |  |  | $ | (2,294 | ) |  |  |  | $ | 201,859  |   |
| Comprehensiveloss:                                                                                   |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   |     |   |
| Netloss                                                                                              |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   | (123,771 | ) |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | (123,771 | ) |
| Foreigncurrency translationadjustment                                                                |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   | 6,466  |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 6,466    |   |
| Unrealizedgains from cash flow hedgingactivities                                                     |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   | 680    |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 680      |   |
| Comprehensiveloss                                                                                    |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   |    |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | (116,625 | ) |
| Non-cashbased stockcompensation                                                                      |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   | 736     |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 736      |   |
| Issuanceof common stock for: Exercise of stockoptions                                                |  |  |             |  | 101    |                          |  |  |                                           |   | 1      |                           |  |  |                      |   | 410     |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 411      |   |
| Excesstax benefits on stock optionsexercised                                                         |  |  |             |  |   |                          |  |  |                                           |   |   |                           |  |  |                      |   | 2       |                |  |  |       |   |   |   |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   |   |   |  |  |  |   | 2        |   |
| Balance,September 30,2006                                                                            |  |  |             |  | 45,542 |                          |  |  |                                           | $ | 455    |                           |  |  |                      | $ | 238,944 |                |  |  |       | $ | 13,258 |   |  |  |  | $ | (163,980 | ) |  |  |  | $ | — |   |  |  |  | $ | (2,294 | ) |  |  |  | $ | 86,383   |   |
|                                                                                                      |

Seenotes to consolidated financial statements.

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ALLIED HEALTHCARE INTERNATIONALINC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Inthousands)

|                                                             |  |  |                            |   |          |                            |  |  |                             |   |         |   |  |  |  |   |         |   |
|-------------------------------------------------------------|--|--|----------------------------|---|----------|----------------------------|--|--|-----------------------------|---|---------|---|--|--|--|---|---------|---|
|                                                        |  |  | YearEndedSeptember 30,2006 |   |          | Year EndedSeptember30,2005 |  |  | Year EndedSeptember 30,2004 |
| Cash flows from operatingactivities:                        |  |  |                            |   |     |                            |  |  |                             |   |    |   |  |  |  |   |    |   |
| Net(loss) income                                            |  |  |                            | $ | (123,771 | )                          |  |  |                             | $ | 18,736  |   |  |  |  | $ | 9,869   |   |
| Adjustmentsto reconcile net (loss) income tonet             |  |  |                            |   |     |                            |  |  |                             |   |    |   |  |  |  |   |    |   |
| cashprovided by operatingactivities:                        |  |  |                            |   |     |                            |  |  |                             |   |    |   |  |  |  |   |    |   |
| Depreciationandamortization                                 |  |  |                            |   | 5,539    |                            |  |  |                             |   | 3,293   |   |  |  |  |   | 2,419   |   |
| Amortizationof intangibleassets                             |  |  |                            |   | 1,826    |                            |  |  |                             |   | 1,574   |   |  |  |  |   | 644     |   |
| Amortizationof debt issuance costs andwarrants              |  |  |                            |   | 180      |                            |  |  |                             |   | 446     |   |  |  |  |   | 1,645   |   |
| Impairmentofgoodwill                                        |  |  |                            |   | 121,901  |                            |  |  |                             |   | — |   |  |  |  |   | — |   |
| Impairmentof long-livedassets                               |  |  |                            |   | 16,227   |                            |  |  |                             |   | — |   |  |  |  |   | — |   |
| Provisionfor (reversal of) allowance for doubtfulaccounts   |  |  |                            |   | 431      |                            |  |  |                             |   | 758     |   |  |  |  |   | (1,653  | ) |
| (Gain)loss on sale of fixedassets                           |  |  |                            |   | (3       | )                          |  |  |                             |   | 7       |   |  |  |  |   | 3       |   |
| Interestinkind                                              |  |  |                            |   | —  |                            |  |  |                             |   | — |   |  |  |  |   | 540     |   |
| Stockbased compensation                                     |  |  |                            |   | 736      |                            |  |  |                             |   | 21      |   |  |  |  |   | — |   |
| Excesstax benefits on stock optionsexercised                |  |  |                            |   | (2       | )                          |  |  |                             |   | — |   |  |  |  |   | — |   |
| Interestaccrued on loans toofficers                         |  |  |                            |   | —  |                            |  |  |                             |   | — |   |  |  |  |   | (7      | ) |
| Write-offof deferred financing fees and debtdiscount        |  |  |                            |   | —  |                            |  |  |                             |   | — |   |  |  |  |   | 4,152   |   |
| Deferredincometaxes                                         |  |  |                            |   | (5,669   | )                          |  |  |                             |   | 152     |   |  |  |  |   | 1,030   |   |
| Changesin operating assets and liabilities,excluding        |  |  |                            |   |     |                            |  |  |                             |   |    |   |  |  |  |   |    |   |
| theeffect of businesses acquired andsold:                   |  |  |                            |   |     |                            |  |  |                             |   |    |   |  |  |  |   |    |   |
| Decrease(increase) in accountsreceivable                    |  |  |                            |   | 5,229    |                            |  |  |                             |   | (2,201  | ) |  |  |  |   | 9,479   |   |
| (Increase)decrease ininventories                            |  |  |                            |   | (196     | )                          |  |  |                             |   | 37      |   |  |  |  |   | 61      |   |
| Decrease(increase) in prepaid expenses and otherassets      |  |  |                            |   | 1,668    |                            |  |  |                             |   | (2,545  | ) |  |  |  |   | 2,861   |   |
| Increase(decrease) in accounts payable and otherliabilities |  |  |                            |   | 1,267    |                            |  |  |                             |   | 1,213   |   |  |  |  |   | (7,489  | ) |
| Netcash provided by operatingactivities                     |  |  |                            |   | 25,363   |                            |  |  |                             |   | 21,491  |   |  |  |  |   | 23,554  |   |
| Cashflows from investingactivities:                         |  |  |                            |   |     |                            |  |  |                             |   |    |   |  |  |  |   |    |   |
| Capitalexpenditures                                         |  |  |                            |   | (23,791  | )                          |  |  |                             |   | (9,709  | ) |  |  |  |   | (7,829  | ) |
| Proceedsfrom sale of property andequipment                  |  |  |                            |   | 21       |                            |  |  |                             |   | 8       |   |  |  |  |   | 29      |   |
| Paymentsfor acquisitions – net of cashacquired        |  |  |                            |   | (844     | )                          |  |  |                             |   | (14,504 | ) |  |  |  |   | (8,976  | ) |
| Proceedslimited to futureacquisitions                       |  |  |                            |   | —  |                            |  |  |                             |   | 1,850   |   |  |  |  |   | 41,974  |   |
| Paymentson acquisitionspayable                              |  |  |                            |   | (5,259   | )                          |  |  |                             |   | (4,793  | ) |  |  |  |   | (1,681  | ) |
| Netcash (used in) provided by investingactivities           |  |  |                            |   | (29,873  | )                          |  |  |                             |   | (27,148 | ) |  |  |  |   | 23,517  |   |
|                                                             |

(Continued)

Seenotes to consolidated financial statements.

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ALLIED HEALTHCARE INTERNATIONALINC.CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)(Inthousands)

|                                                              |  |  |                            |   |         |                            |  |  |                             |   |         |   |  |  |  |   |          |   |
|--------------------------------------------------------------|--|--|----------------------------|---|---------|----------------------------|--|--|-----------------------------|---|---------|---|--|--|--|---|----------|---|
|                                                         |  |  | YearEndedSeptember 30,2006 |   |         | Year EndedSeptember30,2005 |  |  | Year EndedSeptember 30,2004 |
| Cash flows from financingactivities:                         |  |  |                            |   |    |                            |  |  |                             |   |    |   |  |  |  |   |     |   |
| Paymentsfor financing fees and stock issuancecosts           |  |  |                            |   | — |                            |  |  |                             |   | (8      | ) |  |  |  |   | (6,223   | ) |
| Paymentson preferred dividends and conversionfees            |  |  |                            |   | — |                            |  |  |                             |   | — |   |  |  |  |   | (9,422   | ) |
| Proceedsfrom issuance ofstock                                |  |  |                            |   | — |                            |  |  |                             |   | — |   |  |  |  |   | 71,050   |   |
| Paymentson notespayable                                      |  |  |                            |   | — |                            |  |  |                             |   | (1,850  | ) |  |  |  |   | (38,740  | ) |
| Proceedsfrom long-termdebt                                   |  |  |                            |   | — |                            |  |  |                             |   | — |   |  |  |  |   | 53,781   |   |
| Borrowingsunder revolving loan,net                           |  |  |                            |   | 13,508  |                            |  |  |                             |   | 13,876  |   |  |  |  |   | 8,964    |   |
| Paymentson long-termdebt                                     |  |  |                            |   | — |                            |  |  |                             |   | — |   |  |  |  |   | (129,305 | ) |
| Principalpayments on long-termdebt                           |  |  |                            |   | (10,806 | )                          |  |  |                             |   | (11,101 | ) |  |  |  |   | (10,039  | ) |
| Proceedsfrom sale of interest rate cap and flooragreement    |  |  |                            |   | — |                            |  |  |                             |   | 98      |   |  |  |  |   | —  |   |
| Stockoptionsexercised                                        |  |  |                            |   | 411     |                            |  |  |                             |   | 791     |   |  |  |  |   | 401      |   |
| Excesstax benefits on stock optionsexercised                 |  |  |                            |   | 2       |                            |  |  |                             |   | — |   |  |  |  |   | —  |   |
| Netcash provided by (used in) financingactivities            |  |  |                            |   | 3,115   |                            |  |  |                             |   | 1,806   |   |  |  |  |   | (59,533  | ) |
| Effectof exchange rate oncash                                |  |  |                            |   | (895    | )                          |  |  |                             |   | 425     |   |  |  |  |   | 70       |   |
| Decreaseincash                                               |  |  |                            |   | (2,290  | )                          |  |  |                             |   | (3,426  | ) |  |  |  |   | (12,392  | ) |
| Cashand cash equivalents, beginning ofyear                   |  |  |                            |   | 5,873   |                            |  |  |                             |   | 9,299   |   |  |  |  |   | 21,691   |   |
| Cashand cash equivalents, end ofyear                         |  |  |                            | $ | 3,583   |                            |  |  |                             | $ | 5,873   |   |  |  |  | $ | 9,299    |   |
| Supplementalcash flowinformation:                            |  |  |                            |   |    |                            |  |  |                             |   |    |   |  |  |  |   |     |   |
| Cashpaid forinterest                                         |  |  |                            | $ | 4,063   |                            |  |  |                             | $ | 7,589   |   |  |  |  | $ | 10,444   |   |
| Cashpaid for income taxes,net                                |  |  |                            | $ | 3,206   |                            |  |  |                             | $ | 5,398   |   |  |  |  | $ | 8,528    |   |
| Supplementaldisclosure of investing and financingactivities: |  |  |                            |   |    |                            |  |  |                             |   |    |   |  |  |  |   |     |   |
| Detailsof business acquired in purchasetransactions:         |  |  |                            |   |    |                            |  |  |                             |   |    |   |  |  |  |   |     |   |
| Fairvalue of assetsacquired                                  |  |  |                            | $ | 949     |                            |  |  |                             | $ | 19,959  |   |  |  |  | $ | 9,975    |   |
| Liabilitiesassumed orincurred                                |  |  |                            |   | (105    | )                          |  |  |                             |   | (2,316  | ) |  |  |  |   | (628     | ) |
| Cashpaid for acquisitions (including relatedexpenses)        |  |  |                            |   | 844     |                            |  |  |                             |   | 17,643  |   |  |  |  |   | 9,347    |   |
| Cashacquired                                                 |  |  |                            |   | — |                            |  |  |                             |   | 3,139   |   |  |  |  |   | 371      |   |
| Netcash paid foracquisitions                                 |  |  |                            | $ | 844     |                            |  |  |                             | $ | 14,504  |   |  |  |  | $ | 8,976    |   |
|                                                              |

Seenotes to consolidated financialstatements

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements (In thousands, except per sharedata)

1.    Business and Operations:

Allied Healthcare International Inc. and its subsidiaries (the‘‘Company’’) is a leading provider offlexible, or temporary, healthcare staffing to the United Kingdom(‘‘U.K.’’) healthcare industry as measuredby revenues, market share and number of staff. At September30,  2006, the Company operated an integrated network ofapproximately 100 branches throughout most of the U.K. TheCompany’s healthcare staff consists principally of nurses,nurses aides and home health aides (known as carers in the U.K.), whichcomprises its staffing segment(‘‘Staffing’’). The Company focuses onplacing its staff on a per diem basis in hospitals, nursing homes, carehomes (which provide assisted living without medical services) andhomes. The Company maintains a pool of over 22,000 nurses, nurses aidesand home health aides. The Company also supplies medical-grade oxygenfor use in respiratory therapy to the U.K. pharmacy market and NorthernIreland and oxygen concentrators to customers in Northern Ireland.Following the award of the new oxygen contracts awarded to the Companyby the U.K. Department of Health, the Company now also provides unifiedoxygen services directly to customers in the South East of England asfurther described in Note 4. The Company’s supply ofmedical-grade oxygen for use in respiratory therapy, oxygenconcentrators and unified oxygen services comprise its oxygen segment(‘‘Oxygen’’).

2.    Summary ofSignificant Accounting Policies:

Basis of Accounting andPrinciples of Consolidation:

The accompanying consolidatedfinancial statements of the Company are prepared on the accrual basisof accounting in accordance with accounting principles generallyaccepted in the United States of America(‘‘U.S.’’). All intercompany accounts andtransactions are eliminated in consolidation.

Cash and CashEquivalents:

Cash and cash equivalents include highly liquidshort-term investments purchased with initial maturities of 90 days orless. Included in cash and cash equivalents are amounts placed inescrow deposits for the potential payments on contingent considerationthat is dependent upon future earnings of the Company’sacquisition of certain flexible staffing agencies. These escrowdeposits totaled $468 and $2,483 at September  30,  2006and 2005, respectively.

Stock-Based Compensation:

Priorto October  1,  2005, the Company accounted for itsstock-based compensation plans using the intrinsic value methodprescribed by APB Opinion No. 25, Accounting for Stock Issuedto Employees, and related interpretations (‘‘APB No.25’’) and provided the required pro forma disclosures ofStatement of Financial Accounting Standards No. 123, Accounting forStock-Based Compensation.

In December  2004, theFinancial Accounting Standards Board (the‘‘FASB’’) issued FAS No. 123R,Share-Based Payment (‘‘FAS No.123R’’), which requires companies to measure, at thegrant date, and recognize in the financial statements compensationexpense for all share-based payments at fair value over the requisiteservice period. Effective the beginning of fiscal 2006, the Companyadopted FAS No. 123R using the modified prospective application method.In accordance with the modified prospective application method of FASNo. 123R, financial results for the prior periods have not beenrestated. The Company recognizes compensation expense on astraight-line basis over the requisite service period for itsshare-based compensation plans.

Accounts Receivable:

The Company maintains a cash management program that focuses on thereimbursement function, as growth in accounts receivable has been themain operating use of cash historically. At 

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

September 30, 2006 and September 30, 2005,$29,641 (15.2%) and $33,443 (11.0%), respectively, of theCompany’s total assets consisted of accounts receivable. TheCompany’s goal is to maintain accounts receivable levels equal toor less than industry average, which would tend to mitigate the risk ofnegative cash flows from operations by reducing the required investmentin accounts receivable and thereby increasing cash flows fromoperations. The Company maintains credit controls to ensure cashcollection on a timely basis.

Each fiscal year the Companyundertakes a review of its methodology and procedure for reserving forits doubtful accounts. This process also takes into account theCompany’s actual experience of write offs in the period. Thepolicy is then applied at each quarter end to arrive at a closingreserve for doubtful accounts.

Inventories:

Inventories,which consist primarily of oxygen for use in respiratory therapy,ancillary medical supplies and certain medical equipment, are valued atthe lower of cost (determined using a first-in, first-out method) ormarket value.

Property and Equipment:

Property andequipment, including revenue-producing equipment, is carried at cost,net of accumulated depreciation and amortization. Revenue-producingequipment consists of oxygen cylinders, oxygen concentrators and oxygenvalves. Depreciation of revenue-producing equipment is provided on thestraight-line method over their estimated useful lives ranging fromseven to twenty years. Leasehold improvements are amortized over therelated lease terms or estimated useful lives, whichever is shorter.Computer software is amortized on a straight-line method over theestimated useful lives ranging from three to seven years.

Purchase Accounting:

For completed acquisitions,preliminary values and useful lives are allocated based upon fairvalues that have been determined for assets acquired and liabilitiesassumed and management’s best estimates for values that have notyet been finalized. The Company obtains a third-party valuation inorder to complete its purchase price allocations. Accordingly, finalasset and liability fair values as well as useful lives may differ frommanagement’s original estimates and could have an adverse impacton the Company’s consolidated financial position or results ofoperations.

Goodwill and Other IntangibleAssets:

Goodwill and other intangible assets are carried atcost, net of accumulated amortization.

In accordance with FASNo. 142,‘‘Goodwill and Other IntangibleAssets’’ (‘‘FAS No.142’’), all goodwill and intangible assets deemed to haveindefinite lives are no longer subject to amortization but are subjectto annual impairment tests. The Company completed its annual impairmenttest required under FAS No. 142 during the fourth quarter of fiscal2006 and determined there was an impairment to its recorded goodwillbalance by using a combination of market multiple, comparabletransaction and discounted cash flow methods. Based on a combination offactors, contributing to the impairment loss were the decrease inprofits in the Company’s Staffing segment due to the decline ofrevenues from the National Health Services (‘‘theNHS’’), decrease in profits in the Company’sOxygen segment due to the transitioning from the old pharmacy basedcontracts to the new supply of oxygen direct to patients contracts thathave lower margins (see Note 4), the Company’s current marketcapitalization at time of review as well as the current and projectedoperating results. As such, the Company recognized pre tax impairmentcharges of $110,004 and $11,897 related to the Staffing and Oxygensegments, respectively.

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

The following table presents the changesin the carrying amount of goodwill for the year ended September30,2006:

|                               |  |  |          |   |          |        |  |  |       |   |         |   |  |  |  |   |          |   |
|-------------------------------|--|--|----------|---|----------|--------|--|--|-------|---|---------|---|--|--|--|---|----------|---|
|                          |  |  | Staffing |   |          | Oxygen |  |  | Total |
| Balanceat October  1,2004     |  |  |          | $ | 194,058  |        |  |  |       | $ | 12,052  |   |  |  |  | $ | 206,110  |   |
| Goodwillacquired duringperiod |  |  |          |   | 15,623   |        |  |  |       |   | — |   |  |  |  |   | 15,623   |   |
| Foreignexchangeeffect         |  |  |          |   | (4,504   | )      |  |  |       |   | (245    | ) |  |  |  |   | (4,749   | ) |
| Balanceat September  30,2005  |  |  |          |   | 205,177  |        |  |  |       |   | 11,807  |   |  |  |  |   | 216,984  |   |
| Goodwillacquired duringperiod |  |  |          |   | 8,741    |        |  |  |       |   | — |   |  |  |  |   | 8,741    |   |
| Goodwillimpairment            |  |  |          |   | (110,004 | )      |  |  |       |   | (11,897 | ) |  |  |  |   | (121,901 | ) |
| Foreignexchangeeffect         |  |  |          |   | 8,624    |        |  |  |       |   | 262     |   |  |  |  |   | 8,886    |   |
| Balanceat September  30,2006  |  |  |          | $ | 112,538  |        |  |  |       | $ | 172     |   |  |  |  | $ | 112,710  |   |
|                               |

Goodwillacquired during the fiscal year ended September  30,  2006mainly relates to contingent earnouts, that were dependent upon futureearnings of previous acquisitions, which have been earned in thisfiscal year end. Included in the goodwill acquired during the yearsended September  30,  2006 and 2005 are the re-allocationsof net excess purchase price to assets acquired and liabilities assumedin connection with prior year acquisitions of $194 and $753,respectively. In addition, of the $112,710 goodwill amount,approximately $6,603 is deductible for U.K. income tax purposes.

Intangible assets subject to amortization are being amortized on thestraight-line method and consist of thefollowing:

|                              |  |  |              |  |  |                     |   |        |                         |  |  |                   |   |       |  |  |  |  |   |         |  |
|------------------------------|--|--|--------------|--|--|---------------------|---|--------|-------------------------|--|--|-------------------|---|-------|--|--|--|--|---|---------|--|
|                         |  |  |         |  |  | September30,2006    |
|                         |  |  | RangeOfLives |  |  | GrossCarryingAmount |   |        | AccumulatedAmortization |  |  | NetCarryingAmount |
| Customerrelationships        |  |  | 5–12   |  |  |                     | $ | 10,000 |                         |  |  |                   | $ | 3,371 |  |  |  |  | $ | 6,629   |  |
| Tradenames                   |  |  | 3            |  |  |                     |   | 193    |                         |  |  |                   |   | 193   |  |  |  |  |   | — |  |
| Non-competeagreements        |  |  | 2 –3   |  |  |                     |   | 225    |                         |  |  |                   |   | 199   |  |  |  |  |   | 26      |  |
| Favorableleasehold interests |  |  | 2 –5   |  |  |                     |   | 9      |                         |  |  |                   |   | 9     |  |  |  |  |   | — |  |
| Total                        |  |  |         |  |  |                     | $ | 10,427 |                         |  |  |                   | $ | 3,772 |  |  |  |  | $ | 6,655   |  |
|                              |

|                              |  |  |              |  |  |                     |   |        |                         |  |  |                   |   |       |  |  |  |  |   |       |  |
|------------------------------|--|--|--------------|--|--|---------------------|---|--------|-------------------------|--|--|-------------------|---|-------|--|--|--|--|---|-------|--|
|                         |  |  |         |  |  | September30,2005    |
|                         |  |  | RangeOfLives |  |  | GrossCarryingAmount |   |        | AccumulatedAmortization |  |  | NetCarryingAmount |
| Customerrelationships        |  |  | 5–12   |  |  |                     | $ | 11,355 |                         |  |  |                   | $ | 2,087 |  |  |  |  | $ | 9,268 |  |
| Tradenames                   |  |  | 3            |  |  |                     |   | 181    |                         |  |  |                   |   | 171   |  |  |  |  |   | 10    |  |
| Non-competeagreements        |  |  | 2 –3   |  |  |                     |   | 94     |                         |  |  |                   |   | 88    |  |  |  |  |   | 6     |  |
| Favorableleasehold interests |  |  | 2 –5   |  |  |                     |   | 21     |                         |  |  |                   |   | 15    |  |  |  |  |   | 6     |  |
| Total                        |  |  |         |  |  |                     | $ | 11,651 |                         |  |  |                   | $ | 2,361 |  |  |  |  | $ | 9,290 |  |
|                              |

TheCompany reviewed the carrying amount of its other intangibles anddeemed certain assets to be impaired as of September  30,2006 as a result of the decline in revenues from the NHS in itsStaffing segment. Thus, in accordance with the provisions of FAS No.144, ‘‘Accounting for the Impairment or Disposal ofLong-Lived Assets’’ (‘‘FAS No.144’’), the Company has recognized pre tax impairmentcharges of $995 and $3 related to it customer relationships andfavorable leasehold interests, respectively, in the fourth quarter offiscal 2006 which are reflected in the gross carrying amounts above.The total impairment charge of $998 is included in the‘‘Impairment of Long-Lived Assets’’ captionin the Company’s Consolidated Statements ofOperations.

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

Amortization expense for other intangibleassets subject to amortization was $1,826, $1,574 and $644 for theyears ended September  30,  2006, 2005 and 2004,respectively. At September  30,  2006, estimated futureamortization expense of other intangible assets subject to amortizationis as follows: approximately $1,657, $1,551, $1,511, $1,319 and $438for the fiscal years ending September  30,  2007, 2008,2009, 2010 and 2011, respectively.

Deferred FinancingCosts:

Costs incurred in obtaining long-term financing areamortized over the terms of the long-term financing agreements usingthe straight-line method. At September  30,  2006 and 2005,other assets included $514 and $660 of deferred financing costs, net ofaccumulated amortization of $421 and $220, respectively. During thefourth quarter of fiscal 2004, the Company wrote-off $2,937 of deferredrefinancing costs related to the refinancing of its former seniorcredit facility. Amortization of deferred financing costs is includedin interest expense in the accompanying Consolidated Statements ofOperations.

Income Taxes:

The Company accounts forincome taxes using the liability method in accordance with FAS No. 109,‘‘Accounting for IncomeTaxes.’’    Under this method, deferred incometax assets and liabilities reflect tax carryforwards and the neteffects of temporary differences between the carrying amounts of assetsand liabilities for financial reporting and income tax purposes, asdetermined under currently enacted tax rates. Deferred tax assets arerecorded if future realization is more likely than not.

Deferredtaxes are recorded primarily for bad debts, federal and state netoperating loss carryforwards, depreciation and amortization ofintangibles, which are reported in different periods for federal incometax purposes than for financial reporting purposes. Valuationallowances are established, when necessary, to reduce deferred taxassets to the amounts expected to be realized.

RevenueRecognition:

Patient services and respiratory therapy revenuesare recognized when services are performed and substantiated by properdocumentation. For patient services, which account for approximately95% of the Company’s business, revenue is recognized uponcompletion of timesheets that also require the signature of therecipient of services. Unbilled accounts receivable represents amountsdue for services performed, but not billed as of the balance sheetdate. Revenues from the rental of home medical equipment are recognizedover the rental period (typically on a month-to-month basis). Revenuesfrom the sale of oxygen and supplies for use in respiratory therapy arerecognized when products are delivered, a contractual arrangementexists, the sales price is either fixed or determinable and collectionis reasonably assured.

The Company receives a majority of itsrevenue from the NHS and other U.K. governmental payors. Certainrevenues are subject to review by third-party payors, and adjustments,if any, are recorded when determined. For the years endedSeptember  30,  2006, 2005 and 2004, 68.0%,66.2% and 65.0%, respectively, of the Company’snet revenues were attributable to the NHS and other U.K. governmentalpayor programs.

Earnings Per Share:

Basic earnings pershare (‘‘EPS’’) is computed using theweighted average number of common shares outstanding. Diluted EPSadjusts basic EPS for the effects of stock options and warrants onlywhen such effect is dilutive. At September  30,  2006, 2005and 2004, the Company had outstanding stock options and warrants topurchase 2,983, 677 and 1,493 shares, respectively, of common stock

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

ranging in price from $1.72 to $7.25, $6.20to $7.25 and $5.41 to $7.25 per share, respectively, that were notincluded in the computation of diluted EPS either because the exerciseprice was greater than the average market price of the common shares orsuch effect would have been anti-dilutive.

The weighted averagenumber of shares used in the basic and diluted earnings per sharecomputations for the years ended September  30,  2006, 2005and 2004 are asfollows:

|                                                                                                       |  |  |      |  |         |      |  |  |      |  |        |  |  |  |  |  |        |  |
|-------------------------------------------------------------------------------------------------------|--|--|------|--|---------|------|--|--|------|--|--------|--|--|--|--|--|--------|--|
|                                                                                                  |  |  | 2006 |  |         | 2005 |  |  | 2004 |
| Weightedaverage number of common shares outstanding as used in computation ofbasic EPS of commonstock |  |  |      |  | 44,930  |      |  |  |      |  | 44,684 |  |  |  |  |  | 27,419 |  |
| Effectof dilutive securities – stock options andwarrants                                        |  |  |      |  | — |      |  |  |      |  | 485    |  |  |  |  |  | 685    |  |
| Sharesused in computation of diluted EPS of commonstock                                               |  |  |      |  | 44,930  |      |  |  |      |  | 45,169 |  |  |  |  |  | 28,104 |  |
|                                                                                                       |

Comprehensive(Loss) Income:

Components of comprehensive (loss) income includenet (loss) income and all other non-owner changes in equity, such asthe change in the cumulative translation adjustment and unrealizedgains (losses) from cash flow hedging activities, which are the onlyitems of other comprehensive (loss) income impacting the Company.

Impairment of Long-Lived Assets:

Long-lived assetsare reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable. If the sum ofthe undiscounted future cash flows is less than the carrying amount ofthe asset, a loss is recognized for the difference between the fairvalue (discounted future cash flows) and carrying value of the asset.Impairment loss on assets to be sold, if any, is based on the estimatedproceeds to be received, less estimated costs to sell. The Company hasrecognized impairment charges in fiscal 2006. See Goodwill and OtherIntangible Assets above for impairment charges related to goodwill andNote 5 for charges related to fixed assets.

ForeignCurrency Translation:

Assets and liabilities of foreignsubsidiaries whose functional currency is other than the U.S. dollarare translated to U.S. dollars using the exchange rates in effect atthe balance sheet date. Results of operations are translated usingweighted average exchange rates during the period. Adjustmentsresulting from the translation process are included as a separatecomponent of accumulated other comprehensive (loss) income included inshareholders’ equity.

SegmentInformation:

FAS No. 131, ‘‘Disclosures aboutSegments of an Enterprise and Related Information,’’establishes annual and interim reporting standards for anenterprise’s operating segments and related disclosures aboutits products, services, geographic areas and major customers. Anoperating segment is defined as a component of an enterprise thatengages in business activities from which it may earn revenues andincur expenses, whose operating results are regularly reviewed by thechief operating decision maker and for which discrete financialinformation is available.

The Company’s U.K. operationsderive its revenues from flexible healthcare services, consistingprincipally of nurses, nurses aides and home health aides, and supplyof medical-grade oxygen for use in respiratory therapy products to theU.K. pharmacy market and Northern Ireland, unified oxygen serviceddirectly to customers in the South East of England as well as provideoxygen concentrators to customers in NorthernIreland.

Fair Value of FinancialInstruments:

Cash, accounts receivable, unbilled accountsreceivable, accounts payable, accrued expenses and taxes payableapproximate fair value due to the short-term maturity of thoseinstruments. The 

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

derivative asset (liability) is recorded atits estimated fair value. The estimated fair value of theCompany’s outstanding borrowings approximates their carryingvalue at September  30,  2006 and 2005.

Concentrations of Credit Risk:

Financial instruments whichpotentially subject the Company to concentrations of credit risk arecash equivalents and accounts receivable. The Company places its cashequivalents with high credit quality financial institutions. TheCompany believes no significant concentration of credit risk existswith respect to these cash equivalents.

The Company grants creditwithout collateral to its patients, who are primarily insured underthird-party agreements. The Company maintains an allowance for doubtfulaccounts based on the expected collectibility of accounts receivable.At September  30,  2006 and 2005, 69.1% and66.2% of accounts receivable was due from the NHS and other U.K.governmental payors, respectively, with the balance due from variousother third-party payors and self-pay patients (none of which comprisegreater than 10% of the balance).

Use ofManagement’s Estimates:

The preparation of financialstatements in conformity with generally accepted accounting principles(‘‘GAAP’’) requires management to makeestimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements, and the reported amounts ofrevenues and expenses during the reporting period. Actual results coulddiffer from those estimates. Estimates are used for, but not limitedto, the accounting for allowance for doubtful accounts, contingencies,valuation of inventories, accrued expenses, depreciation andamortization.

Reclassifications:

Certain prior yearbalances have been reclassified to conform to the current yearpresentation.

Recent Accounting Pronouncements:

InFebruary  2006, the FASB issued FAS No. 155, Accounting forCertain Hybrid Financial Instruments — An Amendment of FASBStatement No. 133 and 140 (‘‘FAS No.155’’). FAS No.155 simplifies the accounting for certainhybrid financial instruments that contain an embedded derivative thatotherwise would have required bifurcation. Specifically, FAS No. 155allows financial instruments that have embedded derivatives to beaccounted for as a whole if the holder elects to account for the wholeinstrument on a fair value basis. FAS No. 155 also eliminates theinterim guidance in FAS No. 133 which provides that beneficial interestin securitized financial assets are not subject to the provisions ofFAS No. 133. FAS No. 155 is effective for all financial instrumentsacquired or issued after the beginning of an entity’s firstfiscal year that begins after September  15,  2006. TheCompany does not believe the adoption of FAS No. 155 will have amaterial impact on its consolidated financial position and results ofoperations.

In March  2006, the FASB issued FAS No. 156,Accounting for Servicing of Financial Assets — An Amendmentof FASB Statement No. 140 (‘‘FAS No.156’’). FAS No. 156 requires that all separatelyrecognized servicing assets and servicing liabilities be initiallymeasured at fair value, if practicable. FAS No. 156 permits, but doesnot require, the subsequent measurement of servicing assets andservicing liabilities at fair value. FAS No. 156 is effective as of thebeginning of an entity’s first fiscal year that begins afterSeptember  15,  2006. The Company does not believe theadoption of FAS No. 156 will have a material impact on its consolidatedfinancial position and results of operations.

In July2006, the FASB issued Interpretation(‘‘FIN’’) No. 48, Accounting forUncertainty in Income Taxes — an interpretation of FASBStatement No. 109. FIN 48 prescribes a recognition

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. FIN 48 also provides guidanceon derecognition, classification, interest and penalties, accounting ininterim periods, disclosure and transition. This Interpretation iseffective for fiscal years beginning after December  15,2006. The Company is currently evaluating the impact of FIN 48 on itsconsolidated financial position and results of operations.

InSeptember  2006, the Securities and Exchange Commission (the‘‘SEC’’) issued Staff Accounting BulletinNo. 108 (‘‘SAB No. 108’’). Theinterpretation in SAB No. 108 were issued to address diversity inpractice in quantifying financial statement misstatements and thepotential under current practice for the build up of improper amountson the balance sheet. This interpretation establishes thestaff’s approach that requires quantification of financialstatement misstatements based on the effects of the misstatements oneach of the Company’s financial statements and the relatedfinancial statement disclosures. SAB No. 108 permits existing publiccompanies to initially apply its provisions either by (i) restatingprior financial statements or (ii) recording the cumulative effect asadjustments to the carrying values of assets and liabilities with anoffsetting adjustment recorded to the opening balance of retainedearnings. SAB No. 108 is effective for fiscal years ending afterNovember  15,  2006. The Company is currently evaluatingthe impact of SAB No. 108 on its consolidated financial position andresults of operations.

In September  2006. the FASB issuedFAS No. 157, Fair Value Measurements (‘‘FAS No.157’’). FAS No. 157 defines fair value as the price thatwould be received to sell an asset or paid to transfer a liability inan orderly transaction between market participants at the measurementdate. It also established a framework for measuring fair value in GAAPand expands disclosures about fair value measurement. FAS No. 157applies under other accounting pronouncements that require or permitfair value measurements. FAS No. 157 is effective for fiscal yearsending after November  15,  2007 and interim periods withinthose fiscal years. The Company is currently evaluating the impact ofFAS No. 157 on its consolidated financial position and results ofoperations.

In September  2006, the FASB issued FAS No.158, Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans — an amendment of FASB Statements No.87, 88, 106 and 132(R) (‘‘FAS No.158’’). FAS No. 158 requires an employer to recognize theoverfunded or underfunded status of a defined benefit postretirementplan (other than a multiemployer plan) as an asset or liability in itsstatement of financial position and to recognize changes in that fundedstatus in the year in which the changes occur through comprehensiveincome. FAS No.158 also requires an employer to measure the fundedstatus of a plan as of the date of its year-end statements of financialposition, with limited exceptions. FAS No. 158 is effective for fiscalyears ending after December  15,  2006 for the initialrecognition of the funded status of a defined benefit postretirementplan and the required disclosures. The Company does not believe theadoption of FAS No. 158 will have a material impact on its consolidatedfinancial position and results of operations.

3.    BusinessCombinations:

In fiscal 2006, the Company acquired the entireissued share capital of a home care training agency for approximately$778 in cash and additional contingent cash consideration of up to $936dependent upon (i) future earnings in fiscal 2006, (ii) providing a setminimum of training programs and (iii) the sellers continuingemployment with the Company until at least December  31,2006. Of the $936 contingent cash consideration, the Company hasrecognized accrued compensation costs of $524, net of income tax, asthe acquisition contract required the sellers to remain in employmentwith the Company until at least December  31,  2006 (theearnout period).

In fiscal 2005, the Company acquired a total of9 Social Service agencies for approximately $17,059 in cash and $69 inacquisition payable, which was paid in fiscal 2006. As of 

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

September  30,  2005, thesetransactions included provisions to pay additional amounts, payable incash, of up to $9,735 in contingent consideration dependent upon futureearnings of the acquired entities. In fiscal 2006 a total of $6,326 wasearned, of which $2,247 remains payable as of September30,  2006. The remaining balance of contingent consideration wasunearned and will not be required.

In fiscal 2004, the Companyacquired a total of 8 flexible staffing agencies for approximately$8,610 in cash. At September  30,  2004, these transactionsincluded provisions to pay additional amounts, payable in cash, of upto $10,501 in contingent consideration dependent upon future earningsof the acquired entities. In fiscal 2005 and 2006 a total of $6,970 wasearned, of which $1,963 remains payable as of September30,  2006. The remaining balance of contingent consideration wasunearned and will not be required.

In fiscal 2006, Companycompleted its purchase price allocation for its fiscal 2005acquisitions. Accordingly, final tangible assets, separatelyidentifiable intangible assets and liabilities were assigned values ofapproximately $5,853, $5,560 and $2,271, respectively, with theremaining portion of $9,176 attributable to goodwill. As compared tothe original valuations at acquisition, the final valuation resulted ina reclass of $194 from separately identifiable intangible assets togoodwill.

In fiscal 2005, the Company completed its purchaseprice allocation for its fiscal 2004 acquisitions. Accordingly,tangible assets, separately identifiable intangible assets andliabilities were assigned values of approximately $1,311, $3,493 and$709, respectively, with the remaining portion of $4,913 attributableto goodwill. As compared to the original valuations at acquisition, thefinal valuation resulted in a reclass of $753 from goodwill toseparately identifiable intangible assets.

In fiscal 2004, theCompany completed its purchase price allocation for its remainingfiscal 2003 acquisitions. Accordingly, tangible assets, separatelyidentifiable intangible assets and liabilities were assigned values ofapproximately $377, $1,209 and $368, respectively, with the remainingportion of $5,109 attributable to goodwill. As compared to the originalvaluations at acquisition, the final valuation resulted in a reclass of$215 from goodwill to separately identifiable intangible assets.

The pro forma results of operations and related per shareinformation for these acquisitions have not been presented as theamounts are considered immaterial.

4.    Reorganization:

In 2005, the U.K. Department of Health sought to unify the supply ofoxygen to NHS patients in England and Wales. The previous system usedpharmacies to supply cylindered gases, while oxygen concentrators aresupplied via regional contracts with homecare providers. Under therevised system, which came into effect on February  1,2006, homecare providers supply cylindered gas and liquid oxygen aswell as oxygen concentrators directly to patients. Following a tenderprocess, the Company was awarded two of the contracts submitted whichcommenced in February  2006. As the existing cylinder businesswas organized on a National distribution structure, the award of theareas in the South East of England required the setting up ofadditional facilities in the South East of England which was effectedin the second quarter of fiscal 2006. These changes resulted in theCompany incurring additional charges and capital expenditures in fiscal2006 as it commenced supplying under the new contracts. TheCompany’s supply of cylindered gases in Northern Ireland andScotland is unaffected, as is its contract to supply oxygenconcentrator services in Northern Ireland.

Due to transitionproblems transferring the oxygen cylinder business from communitypharmacies the Company has incurred higher than anticipatedimplementation expenses to build the infrastructure and distributionnetwork to absorb the increased volume of oxygen patients from thecommunity based pharmacies. The Company is still facing a higher thananticipated cost structure as it transitions over all customers fromthe pharmacies to the home delivery service. These additional costs areexpected to continue for the foreseeable future before costefficiencies can be achieved.

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

In the fourth quarter of fiscal 2005, inresponse to the changing structure of the method of supply to the NHS,the Company reorganized its operations. Thus, instead of operatingthrough a number of different subsidiaries to supply healthcare staff,the Company’s healthcare staffing business was reorganized intotwo main operations. One part of the Company’s flexiblehealthcare staffing business is operated by its Allied StaffingProfessionals Limited subsidiary, which provides staff to the NHS underthe NHS Framework Agreements and also provides staff to its formeroperations in the northern England. The remainder of theCompany’s healthcare staffing business is operated by its AlliedHealthcare Group Limited subsidiary, and includes the rest of its NHSbusiness and all its homecare work. As a result of this reorganization,and in accordance with FAS No. 146, ‘‘Accounting forCosts Associated with Exit or Disposal Activities,’’the Company recognized pre-tax charges of $631 to satisfy existinglease obligations on the closure of several of its U.K. offices and$442 for severance and employee related costs in its fourth quarter offiscal 2005. At September  30,  2006, $315 to satisfyexisting lease obligations on the closure of several of its U.K.offices has not been paid. At September  30,  2005, $601 tosatisfy existing lease obligations on the closure of several of itsU.K. offices and $50 for severance and employee related costs had notbeen paid.

In the fourth quarter of fiscal 2005, the Company alsorebranded the U.K. group operations and launched a new corporate logo.The Company recognized a charge of $1,017 in its fourth quarter offiscal 2005 related to the new corporate logo.

5.    Propertyand Equipment:

Major classes of property and equipment, net,consist of the following at September30:

|                                                      |  |  |      |   |        |      |  |  |  |   |        |  |
|------------------------------------------------------|--|--|------|---|--------|------|--|--|--|---|--------|--|
|                                                 |  |  | 2006 |   |        | 2005 |
| Revenueproducingequipment                            |  |  |      | $ | 18,121 |      |  |  |  | $ | 15,401 |  |
| Furniture,fixtures and equipment (includingsoftware) |  |  |      |   | 28,212 |      |  |  |  |   | 24,393 |  |
| Land,buildings and leaseholdimprovements             |  |  |      |   | 1,044  |      |  |  |  |   | 895    |  |
|                                                 |  |  |      |   | 47,377 |      |  |  |  |   | 40,689 |  |
| Less,accumulated depreciation andamortization        |  |  |      |   | 20,301 |      |  |  |  |   | 18,151 |  |
|                                                 |  |  |      | $ | 27,076 |      |  |  |  | $ | 22,538 |  |
|                                                      |

Inthe fourth quarter of fiscal 2006 the Company recognized a pre-taxcharge of $9,040 of software costs related to its Staffing segmentcomputerized accounting and payroll system based on the Oracle platformthat was implemented in fiscal 2005. The system is currently operatingin only four of its branches. The Company has discovered that thesystem is too slow for the nature of its business and therefore is notachieving full functionality. As such, the Company has decided toabandon certain of the software features of the Oracle platform and notcontinue with the planned expansion to its other branches as itbelieves the cost to have a workable model would exceed alternatesolutions. The Company is currently reassessing its operating systemand researching alternate lower cost solutions to implement. Thewrite-off is classified within ‘‘Impairment of long-livedassets’’ on the Consolidated Statements ofOperations.

Also, in the fourth of fiscal 2006, the Companyrecognized pre-tax charges related to its Oxygen segment of $5,381,$551 and $257 for the write-off of revenue producing equipment (oxygencylinders), oxygen filling station and software costs, respectively.Due to the award of the new oxygen contracts, the Company has madesignificant capital expenditures, amounting to $14,738, in order tofulfill its obligation under the new contracts. The Company hassubstituted a number of cylinders with oxygen concentrators As such,the Company believes that these oxygen cylinders have become obsoleteand have no further use to the Company. The Company also invested in anoxygen filling station whereby its cylinders would be re-filled. But,due to the location of the plant and strict noise 

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

pollution governmental rules, the Companydoes not believe it will be able to utilize such plant. The Companyalso wrote-off various software costs related to transitioning to itsnew oxygen contracts that it believes has no future benefit. The totalwrite-offs of $5,932 related to the oxygen cylinders and filling plantare classified under ‘‘Cost of revenues —Impairment of respiratory, medical equipment andsupplies’’ on the Consolidated Statements of Operations.The write-off of software costs is classified within‘‘Impairment of long-lived assets’’ on theConsolidated Statements of Operations.

Depreciation andamortization of property and equipment for the years endedSeptember  30,  2006, 2005 and 2004 were $5,539, $3,293 and$2,419, respectively. The net book value of revenue producing equipmentwas $13,182 and $8,417 at September  30,  2006 andSeptember  30,  2005, respectively.

6.    Accrued Expenses:

Accrued expenses consist of thefollowing at September30:

|                                                         |  |  |      |   |        |      |  |  |  |   |        |  |
|---------------------------------------------------------|--|--|------|---|--------|------|--|--|--|---|--------|--|
|                                                    |  |  | 2006 |   |        | 2005 |
| Payrolland relatedexpenses                              |  |  |      | $ | 18,057 |      |  |  |  | $ | 18,015 |  |
| Acquisitionspayable (on earned contingentconsideration) |  |  |      |   | 4,210  | (A)  |  |  |  |   | 1,632  |  |
| Professionalfees                                        |  |  |      |   | 2,294  |      |  |  |  |   | 1,586  |  |
| Interestpayable                                         |  |  |      |   | 696    |      |  |  |  |   | 626    |  |
| Other                                                   |  |  |      |   | 5,748  |      |  |  |  |   | 4,604  |  |
|                                                    |  |  |      | $ | 31,005 |      |  |  |  | $ | 26,463 |  |
|                                                         |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                       |
|-----|-----------------------------------------------------------------------------------------------------------------------|
| (A) | Includedin the $4,210 is $1,077 that is currently under negotiation with theowners of the previously acquired entity. |

Related to theCompany’s fiscal 2003 discontinued operations on the sale of twoof its subsidiaries, are recorded liabilities in the amount of $690related to certain tax contingencies at September  30,2006 and 2005.

7.    Debt:

In the fourth quarter offiscal 2004, the Company’s U.K. subsidiary, Allied HealthcareGroup Holdings Limited (‘‘AlliedHoldings’’) obtained a new senior credit facility.Subject to the terms of the senior credit facility, ancillaryfacilities, in the form of an additional facility or financialaccommodation (including an interest rate swap, cap, or otherarrangement for the hedging or fixing of interest), are available up toa maximum of £15  million based on the Company’ssenior lenders discretion.

The senior credit facility (togetherwith approximately $65,715 of the net proceeds of the Company’sfiscal 2004 completed public offering) refinanced the Company’sformer senior credit facility and mezzanine indebtedness, both of whichhad been entered into on December  17,  1999. The seniorcredit facility is collateralized by a first priority lien on theassets of Allied Holdings and certain of its subsidiaries. Togetherwith Allied Holdings and certain of its subsidiaries, the Company isguaranteeing the debt and other obligations of certain wholly-ownedU.K. subsidiaries under the senior credit facility.

The seniorcredit facility consists of thefollowing:

|              |                                                                  |
|--------------|------------------------------------------------------------------|
| •  | £30,000 ($56,178)term loan A, maturing July  19,  2009;and |

|              |                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------|
| •  | £20,000 ($37,452) revolvingloan B maturing July  19,  2009 which may be drawn uponuntil June  19,  2009. |

F-17

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Table of Contents

ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

Repayment of the term loan A commenced inJanuary  2005 and continues semi-annually until final maturity.Repayment of revolving loan B shall be on the last day of its interestperiod. Both the A and B loans bear interest at rates equal to LIBOR(if sterling) or EURIBOR (if euros) plus any bank mandatory costs (ifapplicable) plus 0.70% to 0.90% per annum (depending onconsolidated debt to consolidated profit ratios). As ofSeptember  30,  2006, the Company had outstandingborrowings of $33,707 and $37,452 relating to term loan A and revolvingloan B, respectively, under the senior credit facility, that boreinterest at rates ranging from 5.66% to 5.68%. As ofSeptember  30,  2005, the Company had outstandingborrowings of $42,307 and $22,035 relating to term loan A and revolvingloan B, respectively, under the senior credit facility, that boreinterest at rates ranging from 5.37% to 5.36%.

Inthe fourth quarter of fiscal 2006, the senior credit facility wasamended to provide an overdraft facility (‘‘OverdraftFacility’’) in the amount of £3,000 ($5,618) forgeneral corporate purposes. The Company had utilized such OverdraftFacility in the fourth quarter of fiscal 2006 and had no amountsoutstanding as of September  30,  2006. The OverdraftFacility is currently repayable upon the earlier of demand from thebank or January  11,  2007. Interest on the OverdraftFacility will be charged at the same rate as loans under the revolvingloan B.

The senior credit facility agreement is based on theU.K.’s Loan Markets Association Multicurrency Term and RevolvingFacilities agreement which is a standard form designed to becommercially acceptable to the corporate lending market.

Subjectto certain exceptions, the senior credit facility prohibits orrestricts the following, among otherthings:

|              |                                                                                                                  |
|--------------|------------------------------------------------------------------------------------------------------------------|
| •  | incurring liens and grantingsecurity interests in the assets of certain of the Company’sU.K. subsidiaries; |

|              |                                   |
|--------------|-----------------------------------|
| •  | incurring additionalindebtedness; |

|              |                                              |
|--------------|----------------------------------------------|
| •  | making certainfundamental corporate changes; |

|              |                                                                                         |
|--------------|-----------------------------------------------------------------------------------------|
| •  | payingdividends (including the payment of dividends to the Company by itssubsidiaries); |

|              |                                                            |
|--------------|------------------------------------------------------------|
| •  | making specifiedinvestments, acquisitions or disposals;and |

|              |                                                    |
|--------------|----------------------------------------------------|
| •  | entering into certain transactionswith affiliates. |

The senior credit facility contains affirmativeand negative financial covenants customarily found in agreements ofthis kind, including the maintenance of certain financial ratios, suchas debt to earnings (including amounts provided for depreciation andamortization), earnings (before interest and taxes) to interestexpense, minimum net worth, maximum ancillary facilities indebtednessand the prohibition of off balance sheet funding. The Company is alsoobligated to ensure that the guarantors of the senior credit facilitymust not at any time represent less than 90% of the consolidatedgross assets, turnover or earnings before interest and taxes of theU.K. subsidiaries. As of September  30, 2006, the Company was notin compliance with the covenant ratio of EBIT to Interest Expense andwas in compliance with the remainder of the covenants. As ofSeptember  30,  2005, the Company was in compliance withall such covenants. On December  8,  2006 the Companyobtained a temporary waiver from the bank on such covenant. The waiverwill be in effect through October  15,  2007. Further, theCompany was working with its senior lenders on resetting, among otherthings, the EBIT to Interest Expense covenant. Subsequent toSeptember  30,  2006, the Company amended and restated itssenior credit facility to reset its financial covenants. See Note16.

Notes Due in Connection with Acquisitions.    TheCompany repaid, through Allied Holdings, notes payable of $1,850 and$38,740 issued in connection with the acquisition of certain U.K.flexible staffing agencies, in fiscals 2005 and 2004 respectively.

F-18

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Table of Contents

ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

Guarantees.    The seniorcredit facility is collateralized by a first priority lien on theassets of the Allied Holdings and certain of its subsidiaries. Togetherwith Allied Holdings and certain of its subsidiaries, the Company isguaranteeing the debt and other obligations of certain wholly-ownedU.K. subsidiaries under the senior credit facility. At September30,  2006 and 2005, the amounts guaranteed, which approximate theamounts outstanding, totalled $71,159 and $64,342, respectively.Subsequent to September  30,  2006 and in conjunction withthe amendment to the senior credit facility, the Company has grantedthe senior lenders a security interest in substantially all of itsassets to secure the payment of its guarantee.

FinancialInstruments.    In March  2003, the Company entered intoa Rate Cap and Floor Collar Agreement that capped its interest rate atLIBOR of 5.50% and its interest floor at LIBOR of 4.47%,subject to special provisions, on approximately $93,630 of theCompany’s floating rate debt under a contract which would haveexpired in March 2008. In February  2005, the Company sold thisderivative instrument for approximately $100.

In February2005, the Company entered into two interest rate swap agreements, whichexpire in July  2009, the objective of which is to protect theCompany against the potential rising of interest rates on its floatingrate debt. The two interest rate swap agreements cover approximately$56,178 of the Company’s floating rate debt until January2008 and then decreases by $5,618 each six month period, in order toreflect the amortizing effect of the Company’s floating ratedebt, until the end of the interest rate swap agreements. The interestrate under the swap agreements is fixed at 4.935% and is payablesemi-annually. In the third quarter of fiscal 2005, the Companydesignated the two interest rate swap agreements as cash flow hedges.In accordance with FAS No. 133, Accounting for Certain DerivativeInstruments and Certain Hedging Activities, as amended by FAS No.138 and related implementation guidance (‘‘FAS No.133’’), the Company calculated the fair value of theinterest rate swap agreements to be an asset of $252 atSeptember  30,  2006 and a liability of $750 atSeptember  30,  2005. Prior to the cash flow hedgedesignation, changes in the value from period to period of the interestrate swap agreements was recorded as other expense or income, asappropriate. At September  30,  2006 and 2005, theeffective portion of the income (loss) on the interest rate swapagreements designated as cash flow hedges was $272, net of $117 ofincome tax and ($408), net of $175 income tax, respectively, and isincluded in other comprehensive income. In fiscals 2006 and 2005, theCompany recognized other income of $27, net of $12 of income tax andother expense of $123, net of $53 of income tax, respectively, relatedto the cash flow hedge ineffectiveness. The Company will continue toassess the effectiveness of these cash flow hedges on a quarterlybasis.

Annual maturities of long-term debt for each of the nextfive yearsare:

|                         |  |  |        |   |        |  |
|-------------------------|--|--|--------|---|--------|--|
| Yearending September30, |  |  |   |
| 2007                    |  |  |        | $ | 11,236 |  |
| 2008                    |  |  |        |   | 11,236 |  |
| 2009                    |  |  |        |   | 48,687 |  |
|                    |  |  |        | $ | 71,159 |  |
|                         |

8.    SeriesA Preferred Stock:

In fiscal 2002, the Company exchanged equityinvestments and subordinated debt investments in its U.K. subsidiariesfor shares of its common stock. The Company issued 7,774 shares of itsSeries A preferred stock with an aggregate liquidation preference of£22,287 ($35,213 at the fixed exchange rate of $1.58 set forthin an amendment to our certificate of incorporation defining the rightsof the Series A preferred stock). The shares of Series A preferredstock were issued to certain equity investors in Allied Holdings inexchange for 22,287 ordinary shares of Allied Holdings.

F-19

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Table of Contents

ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

During March through May of 2004, theCompany entered into conversion agreements (the‘‘Conversion Agreements’’) with all of theholders of our Series A preferred stock. Pursuant to the ConversionAgreements, such holders converted their shares into a like number ofshares of common stock upon the consummation of the Company’sJuly  7,  2004 issuance of 14,500 shares of its commonstock pursuant to the registration statement on Form S-1 that wasdeclared effective by the Securities and Exchange Commission onJuly  1,  2004 (the‘‘Offering’’). The Company paid to theholders of the Series A preferred stock an aggregate of $7,388 inaccrued and unpaid dividends and $2,034 conversion fee from theproceeds of the offering.

9.    Shareholders’Equity:

In January  2001, the Company initiated a stockrepurchase program, whereby the Company may purchase up toapproximately $1,000 of its outstanding common stock in open market orprivately negotiated transactions. In May  2003, the Companyinitiated another stock repurchase program, whereby the Company maypurchase up to an additional $3,000 of its outstanding common stock inopen market transactions or in privately negotiated transactions. As ofSeptember  30,  2006, the Company had acquired 408 sharesfor an aggregate purchase price of $1,285 pursuant to its stockrepurchase programs, which are reflected as treasury stock in theconsolidated balance sheet at September  30,  2006. Inaddition, as of September  30,  2006, the Company hadacquired, in fiscal 2004, 177 shares of its common stock for anaggregate value of $1,009 related to delivery to it of shares of itscommon stock by certain executives for payment on promissory notesissued by them to the Company.

10.    IncomeTaxes:

The provision for income taxes from continuing operationsfor the years ended September  30, 2006, 2005 and 2004 issummarized asfollows:

|                                         |  |  |      |   |        |      |  |  |      |   |        |  |  |  |  |   |        |   |
|-----------------------------------------|--|--|------|---|--------|------|--|--|------|---|--------|--|--|--|--|---|--------|---|
|                                    |  |  | 2006 |   |        | 2005 |  |  | 2004 |
| Current:                                |  |  |      |   |   |      |  |  |      |   |   |  |  |  |  |   |   |   |
| Federal                                 |  |  |      | $ | (2     | )    |  |  |      | $ | 2      |  |  |  |  |   | (68    | ) |
| Foreign                                 |  |  |      |   | 1,346  |      |  |  |      |   | 6,388  |  |  |  |  |   | 4,885  |   |
| Deferred:                               |  |  |      |   |   |      |  |  |      |   |   |  |  |  |  |   |   |   |
| Foreign                                 |  |  |      |   | (5,675 | )    |  |  |      |   | 335    |  |  |  |  |   | 1,030  |   |
| (Benefitfrom) provision for incometaxes |  |  |      | $ | (4,331 | )    |  |  |      | $ | 6,725  |  |  |  |  | $ | 5,847  |   |
|                                         |

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Table of Contents

ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

Deferred income taxes reflect the net taxeffects of temporary differences between the carrying amounts of assetsand liabilities recorded for financial reporting purposes and theamounts used for income tax purposes. Significant components of theCompany’s deferred tax assets and liabilities as ofSeptember  30,  2006 and 2005 are asfollows:

|                                       |  |  |      |   |         |      |  |  |  |   |         |   |
|---------------------------------------|--|--|------|---|---------|------|--|--|--|---|---------|---|
|                                  |  |  | 2006 |   |         | 2005 |
| Deferredtax assets:                   |  |  |      |   |    |      |  |  |  |   |    |   |
| Accruedexpenses                       |  |  |      | $ | 348     |      |  |  |  | $ | 671     |   |
| Federalnet operating losscarryforward |  |  |      |   | 25,939  |      |  |  |  |   | 26,047  |   |
| Statenet operating losscarryforward   |  |  |      |   | 9,026   |      |  |  |  |   | 9,064   |   |
| Provisionfor doubtfulaccounts         |  |  |      |   | 691     |      |  |  |  |   | — |   |
| Depreciation                          |  |  |      |   | 1,108   |      |  |  |  |   | 8       |   |
| Intangibleassets                      |  |  |      |   | 67      |      |  |  |  |   | 85      |   |
| StockOptions                          |  |  |      |   | 242     |      |  |  |  |   | — |   |
| Other,net                             |  |  |      |   | 6       |      |  |  |  |   | 237     |   |
| Grossdeferred taxassets               |  |  |      |   | 37,427  |      |  |  |  |   | 36,112  |   |
| Valuationallowance                    |  |  |      |   | (35,563 | )    |  |  |  |   | (35,887 | ) |
| Netdeferred taxassets                 |  |  |      |   | 1,864   |      |  |  |  |   | 225     |   |
| Deferredtaxliabilities:               |  |  |      |   |    |      |  |  |  |   |    |   |
| Depreciation                          |  |  |      |   | — |      |  |  |  |   | (1,947  | ) |
| Intangibleassets                      |  |  |      |   | (900    | )    |  |  |  |   | (2,787  | ) |
| Other,net                             |  |  |      |   | (76     | )    |  |  |  |   | — |   |
| Deferredtaxliabilities                |  |  |      |   | (976    | )    |  |  |  |   | (4,734  | ) |
| Netdeferred tax asset(liability)      |  |  |      | $ | 888     |      |  |  |  | $ | (4,509  | ) |
|                                       |

TheCompany has recorded a full valuation allowance against its U.S.deferred tax assets as management believes it is not more likely thannot that these deferred tax assets will be utilized prior to theirexpiration. Subsequent recognition of these deferred tax assets wouldresult in an income tax benefit in the year of such recognition.

As of September  30,  2006, the Company has a federalnet operating loss carryforward of approximately $76,290 which ifunused, will expire in the years 2018 through 2023. Current or futureownership changes may limit the future realization of these netoperating losses in accordance with Internal Revenue Code Section382.

Reconciliations of the differences between income taxescomputed at federal statutory tax rates and consolidated provisions forincome taxes on income before income taxes and discontinued operationsfor the years ended September  30,  2006, 2005 and 2004 areasfollows:

|                                    |  |  |      |   |         |      |  |  |      |   |         |   |  |  |  |   |         |   |
|------------------------------------|--|--|------|---|---------|------|--|--|------|---|---------|---|--|--|--|---|---------|---|
|                               |  |  | 2006 |   |         | 2005 |  |  | 2004 |
| Incometaxes at34%                  |  |  |      | $ | (43,555 | )    |  |  |      | $ | 8,657   |   |  |  |  | $ | 5,343   |   |
| Nondeductiblecompensation          |  |  |      |   | 1       |      |  |  |      |   | — |   |  |  |  |   | 304     |   |
| Nondeductiblegoodwillimpairment    |  |  |      |   | 34,732  |      |  |  |      |   | — |   |  |  |  |   | — |   |
| Valuationallowance                 |  |  |      |   | (324    | )    |  |  |      |   | 55      |   |  |  |  |   | 1,071   |   |
| Stockoptions                       |  |  |      |   | (3      | )    |  |  |      |   | (424    | ) |  |  |  |   | — |   |
| Foreigntax,net                     |  |  |      |   | 5,146   |      |  |  |      |   | (1,486  | ) |  |  |  |   | (876    | ) |
| Other,net                          |  |  |      |   | (328    | )    |  |  |      |   | (77     | ) |  |  |  |   | 5       |   |
| (Benefit)provision for incometaxes |  |  |      | $ | (4,331  | )    |  |  |      | $ | 6,725   |   |  |  |  | $ | 5,847   |   |
|                                    |

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

Provision has not been made for U.S. oradditional foreign taxes for undistributed earnings of the U.K. foreignsubsidiaries. Any of those earnings have been and will continue to bereinvested. Determination of the amount of unrecognized deferred taxliability with respect to such earnings is not practical. We believethat the amount of additional taxes that might be payable on theearning of foreign subsidiaries, if remitted, would be partially offsetby the U.S. foreign tax credits.

(Loss) income before incometaxes generated from the U.K. operations for the years endedSeptember  30,  2006, 2005 and 2004 was ($128,661), $24,144and $19,970, respectively.

11.    Stock Options andWarrants:

Stock Options:

Under the shareholder approved1992 Stock Option Plan and 2002 Stock Option Plan, the Company maygrant incentive and non-qualified options to purchase its common stockto key employees, officers, directors and non-employee independentcontractors. Effective with the adoption of the Company’s 2002Stock Option Plan (‘‘Option Plan’’), nofurther options may be granted under the 1992 Stock Option Plan. Stockoptions are issued at an exercise price per share which is not lessthan the fair market value of the stock on the grant date and generallyvest over a three year period and expire ten years from the grant date.Options granted under the plans generally may be exercised upon paymentof the option price in cash or by delivery of shares of our commonstock with a fair market value equal to the option price. Certainoption awards provide for accelerated vesting if there is a change incontrol. Shares delivered under the 2002 Stock Option Plan will beavailable from authorized but unissued shares of common stock or fromshares of common stock reacquired by the Company. Shares available forfuture grant under the 2002 Stock Option Plan were 1,951 shares atSeptember  30,  2006.

Following is a summary oftransactions under the Option Plan during the year endedSeptember  30,  2006, 2005 and2004:

|                              |  |  |                      |  |       |                                 |  |  |                      |  |      |                                 |  |  |                      |  |       |                                 |  |  |  |  |      |  |  |  |  |  |       |   |  |  |  |  |      |  |
|------------------------------|--|--|----------------------|--|-------|---------------------------------|--|--|----------------------|--|------|---------------------------------|--|--|----------------------|--|-------|---------------------------------|--|--|--|--|------|--|--|--|--|--|-------|---|--|--|--|--|------|--|
|                         |  |  | 2006                 |  |       | 2005                            |  |  | 2004                 |
|                         |  |  | NumberOfStockOptions |  |       | WeightedAverageExercisePrice($) |  |  | NumberofStockOptions |  |      | WeightedAverageExercisePrice($) |  |  | NumberofStockOptions |  |       | WeightedAverageExercisePrice($) |
| Outstanding beginning ofyear |  |  |                      |  | 2,610 |                                 |  |  |                      |  | 5.49 |                                 |  |  |                      |  | 2,646 |                                 |  |  |  |  | 4.87 |  |  |  |  |  | 2,254 |   |  |  |  |  | 4.58 |  |
| Granted                      |  |  |                      |  | 465   |                                 |  |  |                      |  | 2.18 |                                 |  |  |                      |  | 652   |                                 |  |  |  |  | 5.93 |  |  |  |  |  | 713   |   |  |  |  |  | 5.70 |  |
| Exercised                    |  |  |                      |  | (101  | )                               |  |  |                      |  | 4.04 |                                 |  |  |                      |  | (410  | )                               |  |  |  |  | 2.18 |  |  |  |  |  | (87   | ) |  |  |  |  | 4.63 |  |
| Forfeited                    |  |  |                      |  | (341  | )                               |  |  |                      |  | 5.28 |                                 |  |  |                      |  | (278  | )                               |  |  |  |  | 5.54 |  |  |  |  |  | (234  | ) |  |  |  |  | 4.68 |  |
| Outstandingend ofyear        |  |  |                      |  | 2,633 |                                 |  |  |                      |  | 4.99 |                                 |  |  |                      |  | 2,610 |                                 |  |  |  |  | 5.49 |  |  |  |  |  | 2,646 |   |  |  |  |  | 4.87 |  |
|                              |

Asummary of the options outstanding and exercisable as ofSeptember  30,  2006 is asfollows:

|                            |  |  |                   |  |       |                                                       |  |  |                                                  |  |      |                             |  |  |  |  |     |  |  |  |  |  |         |  |
|----------------------------|--|--|-------------------|--|-------|-------------------------------------------------------|--|--|--------------------------------------------------|--|------|-----------------------------|--|--|--|--|-----|--|--|--|--|--|---------|--|
| Rangeof Exercise Price ($) |  |  | NumberOutstanding |  |       | Weighted-AverageExercise PriceofOptionsOutstanding($) |  |  | Weighted-AverageRemainingContractualLife inYears |  |      | Aggregate IntrinsicValue($) |
| 1.72 –2.71           |  |  |                   |  | 450   |                                                       |  |  |                                                  |  | 2.05 |                             |  |  |  |  | 9.9 |  |  |  |  |  | 81      |  |
| 3.83–5.70            |  |  |                   |  | 1,572 |                                                       |  |  |                                                  |  | 5.02 |                             |  |  |  |  | 7.2 |  |  |  |  |  | — |  |
| 6.00–7.25            |  |  |                   |  | 611   |                                                       |  |  |                                                  |  | 7.05 |                             |  |  |  |  | 1.8 |  |  |  |  |  | — |  |
|                       |  |  |                   |  | 2,633 |                                                       |  |  |                                                  |  | 4.99 |                             |  |  |  |  | 6.4 |  |  |  |  |  | 81      |  |
|                            |

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

|                           |  |  |                   |  |       |                                                       |  |  |                                                  |  |      |                             |  |  |  |  |     |  |  |  |  |  |         |  |
|---------------------------|--|--|-------------------|--|-------|-------------------------------------------------------|--|--|--------------------------------------------------|--|------|-----------------------------|--|--|--|--|-----|--|--|--|--|--|---------|--|
| RangeofExercise Price ($) |  |  | NumberExercisable |  |       | Weighted-AverageExercise PriceofOptionsExercisable($) |  |  | Weighted-AverageRemainingContractualLife inYears |  |      | Aggregate IntrinsicValue($) |
| 1.72 –2.71          |  |  |                   |  | 300   |                                                       |  |  |                                                  |  | 1.72 |                             |  |  |  |  | 9.9 |  |  |  |  |  | 81      |  |
| 3.83–5.70           |  |  |                   |  | 1,516 |                                                       |  |  |                                                  |  | 5.00 |                             |  |  |  |  | 7.2 |  |  |  |  |  | — |  |
| 6.00–7.25           |  |  |                   |  | 532   |                                                       |  |  |                                                  |  | 7.19 |                             |  |  |  |  | 0.8 |  |  |  |  |  | — |  |
|                      |  |  |                   |  | 2,348 |                                                       |  |  |                                                  |  | 5.08 |                             |  |  |  |  | 6.1 |  |  |  |  |  | 81      |  |
|                           |

Theweighted average grant-date fair value of stock options granted duringthe years ended September  30,  2006, 2005 and 2004 was$1.34, $4.44 and $4.22, respectively. The total intrinsic value ofoptions exercised during the years ended September  30,2006, 2005 and 2004 was $240, $1,718 and $360. For options exercisedduring the years ended September  30,  2006, 2005 and 2004,$411, $791 and 401, respectively, was received in cash to cover theexercise price of the options exercised. In addition, for the yearended September  30,  2005, 19 option shares were also usedto cover the exercise price of the options exercised.

The fairvalue of each option granted is estimated on the date of grant usingthe Black-Scholes option-pricing model with the following weightedaverageassumptions:

|                       |  |  |      |  |      |      |  |  |      |  |      |   |  |  |  |  |      |   |
|-----------------------|--|--|------|--|------|------|--|--|------|--|------|---|--|--|--|--|------|---|
|                  |  |  | 2006 |  |      | 2005 |  |  | 2004 |
| Expectedlife (years)  |  |  |      |  | 6    |      |  |  |      |  | 9    |   |  |  |  |  | 9    |   |
| Risk-freeinterestrate |  |  |      |  | 4.7  | %    |  |  |      |  | 4.1  | % |  |  |  |  | 2.6  | % |
| Volatility            |  |  |      |  | 66.0 | %    |  |  |      |  | 63.9 | % |  |  |  |  | 66.0 | % |
| Expecteddividendyield |  |  |      |  | 0    | %    |  |  |      |  | 0    | % |  |  |  |  | 0    | % |
|                       |

Followingis a summary of the status of the Company’s nonvested stockoptions as of September  30,  2006 and changes during theyear ended September  30,2006:

|                                |  |  |              |  |      |                                         |  |  |  |  |      |  |
|--------------------------------|--|--|--------------|--|------|-----------------------------------------|--|--|--|--|------|--|
| NonvestedShareOptions          |  |  | ShareOptions |  |      | Weighted-AverageGrant-DateFairValue ($) |
| Nonvested at October  1,2005   |  |  |              |  | 399  |                                         |  |  |  |  | 4.15 |  |
| Granted                        |  |  |              |  | 465  |                                         |  |  |  |  | 1.34 |  |
| Vested                         |  |  |              |  | (519 | )                                       |  |  |  |  | 2.22 |  |
| Forfeited                      |  |  |              |  | (60  | )                                       |  |  |  |  | 4.63 |  |
| Nonvestedat September  30,2006 |  |  |              |  | 285  |                                         |  |  |  |  | 2.98 |  |
|                                |

Thetotal fair value of share options vested during the years endedSeptember  30,  2006, 2005 and 2004 was $1,153, $2,286 and$4,159, respectively.

As a result of adopting FAS No. 123R, forthe year ended September  30,  2006 share-basedcompensation cost recognized in selling, general and administrativeexpenses increased loss before income taxes, by $736 and net loss by$663, compared with that if the Company had continued to account forstock-based compensation under APB No. 25. For the year endedSeptember  30,  2006, the adoption of FAS No. 123R had a$0.01 impact on EPS. The Company recognizes compensation expense on astraight-line basis over the requisite service period. As ofSeptember  30,  2006 there was $635 of total unrecognizedcompensation cost related to nonvested share-based compensation awards,net of estimated forfeitures, which the Company expects to recognizeover a weighted average period of approximately 2.1 years. Thecompensation cost as generated by the Black-Scholes option-pricingmodel may not be indicative of the future benefit, if any, that may bereceived by the option holder.

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Table of Contents

ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

The following presents pro forma netincome and related per share amounts as if the fair value based methodhad been used to account for the Company’s stock options for theyears ended September  30,  2005 and2004:

|                                                                                                                               |  |  |      |   |        |      |  |  |  |   |         |   |
|-------------------------------------------------------------------------------------------------------------------------------|--|--|------|---|--------|------|--|--|--|---|---------|---|
|                                                                                                                          |  |  | 2005 |   |        | 2004 |
| Netincome available to common shareholders, asreported                                                                        |  |  |      | $ | 18,736 |      |  |  |  | $ | 2,849   |   |
| Add:Stock-based compensation included in reported net income, net ofrelated tax effect                                        |  |  |      |   | 21     |      |  |  |  |   | — |   |
| Less:Total stock-based compensation expense determined under fair valuebased method for all awards, net of related taxeffects |  |  |      |   | (2,143 | )    |  |  |  |   | (3,876  | ) |
| Proforma net income (loss) attributable to commonshareholders                                                                 |  |  |      | $ | 16,614 |      |  |  |  | $ | (1,027  | ) |
| Netincome (loss) pershare:                                                                                                    |  |  |      |   |   |      |  |  |  |   |    |   |
| Basic – asreported                                                                                                      |  |  |      | $ | 0.42   |      |  |  |  | $ | 0.10    |   |
| Basic– pro forma                                                                                                        |  |  |      | $ | 0.37   |      |  |  |  | $ | (0.04   | ) |
| Net income(loss) per share:                                                                                                   |  |  |      |   |   |      |  |  |  |   |    |   |
| Diluted– asreported                                                                                                     |  |  |      | $ | 0.41   |      |  |  |  | $ | 0.10    |   |
| Diluted– pro forma                                                                                                      |  |  |      | $ | 0.37   |      |  |  |  | $ | (0.04   | ) |
|                                                                                                                               |

On May28,  1997, the Company adopted a stock option plan fornon-employee directors (the ‘‘DirectorsPlan’’) which gives non-employee directors options topurchase up to 100 shares of common stock. As of September30,  2006, no options have been granted under the Directors Plan.Options under the Directors Plan may be granted by the Board ofDirectors which determines the exercise price, vesting provisions andterm of such grants.

Warrants:

In the fourth quarter offiscal 2003, in connection with the execution of an agreement with anunaffiliated third party pursuant to which such third party agreed toprovide us with consulting services related to corporate finance andinvestment banking matters, the Company issued to such third partywarrants to purchase up to an aggregate of 350 shares of its commonstock. Of the 350 warrants issued, 100 of the warrants are exercisableat $4.75 per share, 175 of the warrants are exercisable at $5.50 pershare and 75 of the warrants are exercisable at a price of $6.00 pershare. The warrants expire on August  13,  2007. Atissuance, the fair value of the warrants of $603 was recorded as adeferred cost and was being amortized over the two year life of theagreement. For the years ended September  30,  2005 and2004, the Company recorded $260 and $302, respectively, in amortizationrelated to such warrants.

12.    Commitments andContingencies:

Guarantees:

The senior credit facility iscollateralized by a first priority lien on the assets of the AlliedHoldings and certain of its subsidiaries. Together with Allied Holdingsand certain of its subsidiaries, the Company is guaranteeing the debtand other obligations of certain wholly-owned U.K. subsidiaries underthe senior credit facility. At September  30,  2006 and2005, the amounts guaranteed, which approximate the amountsoutstanding, totalled $71,159 and $64,342, respectively.

Employment Agreements:

The Company has three employmentagreements that provided for minimum aggregate annual compensation of$1,038 in fiscal 2006.

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

In September  2001, the Companyentered into an employment agreement with Mr.  Aitken, itsChairman and Chief Executive Officer. The employment agreement has athree-year term (subject to automatic renewal for successive additionalone-year periods unless either party provides the other with notice ofintent to terminate the agreement at least 90 days before the thenapplicable termination date). The employment agreement provides thatthe Company will negotiate in good faith, commencing not less than 90days prior to the anniversary date of the employment agreement, theamount, if any, of future salary increases. The salary of Mr.Aitken is currently $562. Mr.  Aitken’s employmentagreement provides that if his employment is terminated during the termof the agreement other than for cause, death or disability, or if,within six months of a ‘‘change incontrol’’ (as defined in the agreement) of the Company,Mr.  Aitken or the Company terminates his employment, then (1)all stock options in the Company held by Mr.  Aitken shallimmediately vest and (2) Mr.  Aitken will be entitled to receivea cash payment of 2.9 times his average annual base salary during thetwelve months preceding the change of control or the termination ofemployment.

In September  2001, the Company entered into anemployment agreement with Ms.  Eames, which was modified inNovember  2004 and September  2005 and amended and restatedin October  2006. Pursuant to her amended and restated employmentagreement, Ms.  Eames has agreed to continue to serve asExecutive Vice President of the Company for a period of 18 months. Theamended and restated employment agreement is subject to automaticrenewal for successive periods of one year each unless terminated byeither party on 90 days’ notice. Pursuant to her amended andrestated employment agreement, Ms.  Eames’ base salary is$250 per annum. In addition, she is entitled to receive $5 for eachtrip of five business days or more that she makes to the U.K. onCompany business; however, the maximum amount payable to her in anycalendar year for such trips is $50. Ms.  Eames’ amendedand restated employment agreement provides that if her employment isterminated during the term of the agreement other than for cause, deathor disability, or if, within six months of a ‘‘change incontrol’’ (as defined in the amended and restatedemployment agreement) of the Company, Ms Eames or the Companyterminates her employment (other than for cause, death or disability),then (1) all stock options in the Company held by Ms.  Eames willimmediately vest and (2)  Ms.  Eames will be entitled toreceive a cash payment of 1.9 times her annual base salary during thetwelve month preceding the termination of employment or the change incontrol.

In Deeds of Restrictive Covenants entered into in 1999with one of our U.K. subsidiaries, Mr.  Aitken and Ms.Eames have each agreed not to compete with the Company or itssubsidiaries for twelve months following termination of employmentwithout the Company’s prior written consent.

InJuly  2006 the Company entered into an employment agreement withMr.  Moffatt, its Chief Financial Officer. The employmentagreement with Mr.  Moffatt provides that, during the first sixmonths thereof, either party may terminate the agreement upon onemonth’s written notice and, thereafter, either party mayterminate the agreement upon six month’s written notice. Theemployment agreement with Mr.  Moffatt further provides thatMr.  Moffatt will not compete against us for a period of sixmonths following the termination of his employment with us. Pursuant tohis employment agreement, Mr.  Moffatt currently receives asalary of $356. In addition, pursuant to his employment agreement withus, Mr.  Moffatt receives a car allowance and we have agreed tomake a payment equal to 15% of his annual salary towards hisU.K.-based private pension fund.

Operating Leases:

TheCompany has entered into various operating lease agreements for officespace and equipment. Certain of these leases provide for renewaloptions.

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

The Company’s future minimumrental commitments as of September  30,  2006 are asfollows:

|            |  |  |  |   |       |  |
|------------|--|--|--|---|-------|--|
| 2007       |  |  |  | $ | 2,610 |  |
| 2008       |  |  |  |   | 1,753 |  |
| 2009       |  |  |  |   | 1,428 |  |
| 2010       |  |  |  |   | 1,173 |  |
| 2011       |  |  |  |   | 809   |  |
| Thereafter |  |  |  |   | 774   |  |
|       |  |  |  | $ | 8,547 |  |
|            |

Rentexpense under non-capitalized lease or rental agreements for the yearsended September  30, 2006, 2005 and 2004 amounted to $5,246,$3,912 and $3,493, respectively.

Contingencies:

Some ofthe Company’s inactive subsidiaries were Medicare Part Bsuppliers who submitted claims to the designated carrier who is theU.S. government’s claims processing administrator. From time totime, the carrier may request an audit of Medicare Part B claims on aprepayment or postpayment basis. If the outcome of any audit results ina denial or a finding of an overpayment, then the affected subsidiaryhas appeal rights. Under postpayment audit procedures, the suppliergenerally pays the alleged overpayment and can pursue appeal rights fora refund of any paid overpayment incorrectly assessed against thesupplier.

The Company believes that it has been in compliance,in all material respects, with the applicable provisions of the federalstatutes, regulations and laws and applicable state laws together withall applicable laws and regulations of other countries in which theCompany operates. Due to the broad and sometimes vague nature of theselaws and regulations, there can be no assurance that an enforcementaction will not be brought against the Company, or that the Companywill not be found to be in violation of one or more of theseprovisions. At present, the Company cannot anticipate what impact, ifany, administrative or judicial interpretation of the applicablefederal and state laws and those of other countries may have on theCompany’s consolidated financial position, cash flows or resultsof operations.

The Company is involved in various other legalproceedings and claims incidental to its normal business activities.The Company is vigorously defending its position in all suchproceedings. Management believes these matters should not have amaterial adverse impact on the consolidated financial position, cashflows or results of operations of the Company.

The two contractsrelated to the Company’s Oxygen business contain minimum servicecriteria that the Company must adhere too. Failure to meet the servicecriteria under such contracts may result in severe financial penaltiesto the Company. At September 30, 2006, the Company believes it was incompliance with the such service criteria.

13.    Operationsby Business Segments and Geographic Areas:

The Company’soperations are in the U.K. The U.K. operations derive its revenues fromflexible healthcare services, consisting principally of nurses, nursesaides and home health aides, and supply of medical-grade oxygen for usein respiratory therapy products to the U.K. pharmacy market and inNorthern Ireland, and also provides oxygen concentrators to customersin Northern Ireland. Following the award of the new oxygen contracts,the Company now also provides unified oxygen services directly tocustomers in the South East of England as further described in Note4.

The Company evaluates performance and allocates resourcesbased on profit and loss from operations before corporate expenses,interest and income taxes. The accounting policies of the businesssegment are the same as those described in the summary of significantaccounting policies.

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

The following tables present certainfinancial information by reportable business segment for the yearsended September  30,  2006, 2005 and2004.

|                                        |  |  |                              |   |          |        |  |  |       |   |         |   |  |  |  |   |          |   |
|----------------------------------------|--|--|------------------------------|---|----------|--------|--|--|-------|---|---------|---|--|--|--|---|----------|---|
|                                   |  |  | YearEnded September  30,2006 |
|                                   |  |  | Staffing                     |   |          | Oxygen |  |  | Total |
| Totalrevenues to unaffiliatedcustomers |  |  |                              | $ | 280,205  |        |  |  |       | $ | 14,402  |   |  |  |  | $ | 294,607  |   |
| Impairmentofgoodwill                   |  |  |                              | $ | 110,004  |        |  |  |       | $ | 11,897  |   |  |  |  | $ | 121,901  |   |
| Impairmentof long-livedassets          |  |  |                              | $ | 10,038   |        |  |  |       | $ | 6,189   |   |  |  |  | $ | 16,227   |   |
| Segmentoperatingloss                   |  |  |                              | $ | (101,965 | )      |  |  |       | $ | (18,874 | ) |  |  |  | $ | (120,839 | ) |
| Unallocatedcorporateexpenses           |  |  |                              |   |     |        |  |  |       |   |    |   |  |  |  |   | (3,230   | ) |
| Interestand other expense,net          |  |  |                              |   |     |        |  |  |       |   |    |   |  |  |  |   | (4,106   | ) |
| Foreignexchangeincome                  |  |  |                              |   |     |        |  |  |       |   |    |   |  |  |  |   | 73       |   |
| Lossbefore income taxes                |  |  |                              |   |     |        |  |  |       |   |    |   |  |  |  | $ | (128,102 | ) |
| Depreciationandamortization            |  |  |                              | $ | 3,724    |        |  |  |       | $ | 1,810   |   |  |  |  | $ | 5,534    |   |
| Corporatedepreciation andamortization  |  |  |                              |   |     |        |  |  |       |   |    |   |  |  |  |   | 5        |   |
| Totaldepreciation andamortization      |  |  |                              |   |     |        |  |  |       |   |    |   |  |  |  | $ | 5,539    |   |
| Identifiableassets, September  30,2006 |  |  |                              | $ | 172,909  |        |  |  |       | $ | 19,884  |   |  |  |  | $ | 192,793  |   |
| Corporateassets                        |  |  |                              |   |     |        |  |  |       |   |    |   |  |  |  |   | 2,549    |   |
| Totalassets, September  30,2006        |  |  |                              |   |     |        |  |  |       |   |    |   |  |  |  | $ | 195,342  |   |
| TotalCapitalexpenditures               |  |  |                              | $ | 9,053    |        |  |  |       | $ | 14,738  |   |  |  |  | $ | 23,791   |   |
|                                        |

|                                        |  |  |                              |   |         |        |  |  |       |   |        |  |  |  |  |   |         |   |
|----------------------------------------|--|--|------------------------------|---|---------|--------|--|--|-------|---|--------|--|--|--|--|---|---------|---|
|                                   |  |  | YearEnded September  30,2005 |
|                                   |  |  | Staffing                     |   |         | Oxygen |  |  | Total |
| Totalrevenues to unaffiliatedcustomers |  |  |                              | $ | 342,031 |        |  |  |       | $ | 9,158  |  |  |  |  | $ | 351,189 |   |
| Segmentoperatingprofit                 |  |  |                              | $ | 28,714  |        |  |  |       | $ | 3,662  |  |  |  |  | $ | 32,376  |   |
| Unallocatedcorporateexpenses           |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  |   | (2,653  | ) |
| Interestand other expense, net         |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  |   | (4,164  | ) |
| Foreign exchangeloss                   |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  |   | (98     | ) |
| Incomebefore income taxes              |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  | $ | 25,461  |   |
| Depreciationandamortization            |  |  |                              | $ | 4,081   |        |  |  |       | $ | 779    |  |  |  |  | $ | 4,860   |   |
| Corporatedepreciation andamortization  |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  |   | 7       |   |
| Totaldepreciation andamortization      |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  | $ | 4,867   |   |
| Identifiableassets, September  30,2005 |  |  |                              | $ | 288,363 |        |  |  |       | $ | 12,306 |  |  |  |  | $ | 300,669 |   |
| Corporateassets                        |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  |   | 2,770   |   |
| Totalassets, September  30,2005        |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  | $ | 303,439 |   |
| TotalCapitalexpenditures               |  |  |                              | $ | 8,016   |        |  |  |       | $ | 1,693  |  |  |  |  | $ | 9,709   |   |
|                                        |

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

|                                        |  |  |                              |   |         |        |  |  |       |   |        |  |  |  |  |   |         |   |
|----------------------------------------|--|--|------------------------------|---|---------|--------|--|--|-------|---|--------|--|--|--|--|---|---------|---|
|                                   |  |  | YearEnded September  30,2004 |
|                                   |  |  | Staffing                     |   |         | Oxygen |  |  | Total |
| Totalrevenues to unaffiliatedcustomers |  |  |                              | $ | 317,393 |        |  |  |       | $ | 7,905  |  |  |  |  | $ | 325,298 |   |
| Segmentoperatingprofit                 |  |  |                              | $ | 31,935  |        |  |  |       | $ | 2,618  |  |  |  |  | $ | 34,553  |   |
| Unallocatedcorporateexpenses           |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  |   | (4,926  | ) |
| Interestexpense, net                   |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  |   | (13,727 | ) |
| Foreign exchangeloss                   |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  |   | (184    | ) |
| Incomebefore income taxes              |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  | $ | 15,716  |   |
| Depreciationandamortization            |  |  |                              | $ | 2,174   |        |  |  |       | $ | 882    |  |  |  |  | $ | 3,056   |   |
| Corporatedepreciation andamortization  |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  |   | 7       |   |
| Totaldepreciation andamortization      |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  | $ | 3,063   |   |
| Identifiableassets, September  30,2004 |  |  |                              | $ | 267,080 |        |  |  |       | $ | 10,595 |  |  |  |  | $ | 277,675 |   |
| Corporateassets                        |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  |   | 4,719   |   |
| Totalassets, September  30,2004        |  |  |                              |   |    |        |  |  |       |   |   |  |  |  |  | $ | 282,394 |   |
| TotalCapitalexpenditures               |  |  |                              | $ | 6,296   |        |  |  |       | $ | 1,533  |  |  |  |  | $ | 7,829   |   |
|                                        |

14.    ProfitSharing Plan:

The Company has a profit sharing plan pursuant toSection 401(k) of the Internal Revenue Code, concerning all U.S.employees who meet certain requirements. These requirements include,among other things, at least one year of service and attainment of theage of 21.

The plan operates as a salary reduction plan wherebyparticipants contribute anywhere from 1% to 15% of theircompensation, not to exceed the maximum available under theCode.

The Company may make additional matching cash contributionsat its discretion. The Company’s contributions to the plan wereapproximately $3 for the year ended September  30,2004.

In addition to the U.S. plan described above, certain ofthe Company’s U.K. subsidiaries also sponsor personal pensionplans. The plans operate as salary reduction plans, which also allowsfor lump sum contributions, whereby participants contribute anywherefrom 1% to 40% of their compensation, not to exceed themaximum available under the U.K. tax laws. The Company may make anadditional contribution (which varies according to employee contractsand contribution elections) which is in the form of cash. TheCompany’s contributions to the U.K. plans were $57, $84 and $89for the years ended September  30,  2006, 2005 and 2004,respectively.

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

15.    Selected Quarterly FinancialData (Unaudited):

The following table presents the comparativeunaudited quarterly results for the years ended September30,  2006 and2005:

|                                                              |  |  |              |   |        |          |  |  |          |   |        |               |  |  |  |   |        |  |  |  |  |   |          |      |
|--------------------------------------------------------------|--|--|--------------|---|--------|----------|--|--|----------|---|--------|---------------|--|--|--|---|--------|--|--|--|--|---|----------|------|
| 2006Quarter Ended                                            |  |  | December 31, |   |        | March31, |  |  | June 30, |   |        | September 30, |
| Totalrevenues                                                |  |  |              | $ | 75,855 |          |  |  |          | $ | 71,098 |               |  |  |  | $ | 73,170 |  |  |  |  | $ | 74,484   |      |
| Grossprofit                                                  |  |  |              | $ | 23,725 |          |  |  |          | $ | 21,537 |               |  |  |  | $ | 22,176 |  |  |  |  | $ | 16,241   | (a)  |
| Netincome (loss) available to commonshareholders             |  |  |              | $ | 3,406  |          |  |  |          | $ | 2,569  |               |  |  |  | $ | 1,350  |  |  |  |  | $ | (131,096 | )(b) |
| Basicand diluted net income (loss) per share of common stock |  |  |              | $ | 0.08   |          |  |  |          | $ | 0.06   |               |  |  |  | $ | 0.03   |  |  |  |  | $ | (2.92    | )    |
|                                                              |

|  |
|--|
|  |  |
|  |

|     |                                                                              |
|-----|------------------------------------------------------------------------------|
| (a) | Includescharge of $5,932 mainly related to the write-off of oxygencylinders. |

|     |                                                                                                                              |
|-----|------------------------------------------------------------------------------------------------------------------------------|
| (b) | Includes total charges of$131,421, net of tax, related to impairment charges on goodwill, otherintangibles and fixed assets. |

|                                                       |  |  |              |   |        |          |  |  |          |   |        |               |  |  |  |   |        |  |  |  |  |   |        |     |
|-------------------------------------------------------|--|--|--------------|---|--------|----------|--|--|----------|---|--------|---------------|--|--|--|---|--------|--|--|--|--|---|--------|-----|
| 2005Quarter Ended                                     |  |  | December 31, |   |        | March31, |  |  | June 30, |   |        | September 30, |
| Totalrevenues                                         |  |  |              | $ | 86,563 |          |  |  |          | $ | 90,815 |               |  |  |  | $ | 89,483 |  |  |  |  | $ | 84,328 |     |
| Grossprofit                                           |  |  |              | $ | 25,214 |          |  |  |          | $ | 26,196 |               |  |  |  | $ | 26,215 |  |  |  |  | $ | 26,046 |     |
| Netincome available to commonshareholders             |  |  |              | $ | 4,827  |          |  |  |          | $ | 5,055  |               |  |  |  | $ | 4,654  |  |  |  |  | $ | 4,200  | (c) |
| Basicand diluted net income per share of common stock |  |  |              | $ | 0.11   |          |  |  |          | $ | 0.11   |               |  |  |  | $ | 0.10   |  |  |  |  | $ | 0.09   |     |
|                                                       |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                    |
|-----|--------------------------------------------------------------------------------------------------------------------|
| (c) | Includescharges of $1,463, net of tax, related to reorganization costs,rebranding and launch of new corporatelogo. |

16.    Subsequent Events:

On December12,  2006 the Company’s senior credit facility was amendedand restated (the ‘‘Amended Senior CreditFacility’’). The Company’s U.K. subsidiary, AlliedHoldings, entered into the Amended Senior Credit Facility, whichprovides for a £46,000 ($89,806) multicurrency senior creditfacility to replace the senior credit facility. The Amended SeniorCredit Facility is collateralized by a first priority lien on theassets of Allied Holdings and certain of its subsidiaries, and paymentis guaranteed by the Company and certain of the subsidiaries of AlliedHoldings. The Company has also granted the banks a security interest insubstantially all of its assets to secure the payment of itsguarantee.

The Amended Senior Credit Facility consists of thefollowing:

|  |              |                                                                   |
|--|--------------|-------------------------------------------------------------------|
|  | •  | an £18,000 ($35,141)term loan A that matures in July  2009; |

|  |              |                                                                                                                                                                      |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | until commencement of the invoice discountfacility, a £20,000 ($39,046) revolving loan B1 that may bedrawn upon until June  2009 and that matures in July2009; |

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ALLIEDHEALTHCARE INTERNATIONAL INC.Notes to Consolidated FinancialStatements  (Continued) (In thousands, except per sharedata)

|  |              |                                                                                                                                                                                                                                                                                                                |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | followingcommencement of the invoice discount facility, a £12,500($24,404) revolving loan B1 that may be drawn upon until June2009 and that matures in July  2009 and a £7,500 ($14,642)invoice discounting facility B2 that may be drawn upon untilJune  2009 and that matures in July  2009; and |

|  |              |                                                                                                                 |
|--|--------------|-----------------------------------------------------------------------------------------------------------------|
|  | •  | an £8,000 (15,618) revolving loan Cthat may be drawn upon until June  2009 and that matures inJuly  2009. |

Repayment of term loan A is made semi-annually.Repayment of revolving loan B1 is on the last day of its interestperiod. Repayment of invoice discounting loan B2 shall be on thematurity date (July 2009). Repayment of revolving loan C shall be onthe maturity date (July 2009) or, if earlier, the date that the otherfacilities are repaid. The loans bear interest at rates equal to LIBOR(if sterling) or EURIBOR (if euros) plus any bank mandatory costs (ifapplicable) plus 0.70% to 3.50% per annum (depending onconsolidated debt to consolidated profit ratios).

The AmendedSenior Credit Facility places limits on the Company’s ability toincur capital expenditures, requires the Company to separate the roleof the Chairman and the Chief Executive Officer no later thanAugust  1,  2007, and requires the Company to engage aconsultant to review its operations and make recommendations withrespect thereto.

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ALLIEDHEALTHCARE INTERNATIONAL INC. (PARENT COMPANY ONLY) SCHEDULEI — CONDENSED FINANCIAL INFORMATION BALANCE SHEETS(In thousands, except per sharedata)

|                                                                                                    |  |  |                  |   |          |                  |  |  |  |   |         |   |
|----------------------------------------------------------------------------------------------------|--|--|------------------|---|----------|------------------|--|--|--|---|---------|---|
|                                                                                               |  |  | September30,2006 |   |          | September30,2005 |
| ASSETS                                                                                             |  |  |                  |   |     |                  |  |  |  |   |    |   |
| Currentassets:                                                                                     |  |  |                  |   |     |                  |  |  |  |   |    |   |
| Cashand cashequivalents                                                                            |  |  |                  | $ | 18       |                  |  |  |  | $ | 344     |   |
| Prepaidexpenses and otherassets                                                                    |  |  |                  |   | 161      |                  |  |  |  |   | 50      |   |
| Totalcurrent assets                                                                                |  |  |                  |   | 179      |                  |  |  |  |   | 394     |   |
| Property andequipment, net                                                                         |  |  |                  |   | 4        |                  |  |  |  |   | 9       |   |
| Investment in andadvances tosubsidiaries                                                           |  |  |                  |   | 85,234   |                  |  |  |  |   | 201,149 |   |
| Goodwill                                                                                           |  |  |                  |   | 2,300    |                  |  |  |  |   | 2,300   |   |
| Otherassets                                                                                        |  |  |                  |   | 66       |                  |  |  |  |   | 66      |   |
| Totalassets                                                                                        |  |  |                  | $ | 87,783   |                  |  |  |  | $ | 203,918 |   |
| LIABILITIESAND SHAREHOLDERS’EQUITY                                                           |  |  |                  |   |     |                  |  |  |  |   |    |   |
| Currentliabilities:                                                                                |  |  |                  |   |     |                  |  |  |  |   |    |   |
| Accountspayable                                                                                    |  |  |                  | $ | 103      |                  |  |  |  | $ | 166     |   |
| Accruedexpenses                                                                                    |  |  |                  |   | 607      |                  |  |  |  |   | 1,178   |   |
| Liabilities ofdiscontinuedoperations                                                               |  |  |                  |   | 690      |                  |  |  |  |   | 690     |   |
| Taxespayable                                                                                       |  |  |                  |   | —  |                  |  |  |  |   | 2       |   |
| Totalcurrentliabilities                                                                            |  |  |                  |   | 1,400    |                  |  |  |  |   | 2,036   |   |
| Long-termliabilities                                                                               |  |  |                  |   | —  |                  |  |  |  |   | 23      |   |
| Totalliabilities                                                                                   |  |  |                  |   | 1,400    |                  |  |  |  |   | 2,059   |   |
| Commitmentsandcontingencies                                                                        |  |  |                  |   |     |                  |  |  |  |   |    |   |
| Shareholders’equity:                                                                         |  |  |                  |   |     |                  |  |  |  |   |    |   |
| Preferred stock, $.01 parvalue; authorized 10,000 shares, issued and outstanding –none       |  |  |                  |   | —  |                  |  |  |  |   | — |   |
| Common stock,$.01 par value; authorized 80,000 shares, issued 45,542 and 45,441shares,respectively |  |  |                  |   | 455      |                  |  |  |  |   | 454     |   |
| Additionalpaid-incapital                                                                           |  |  |                  |   | 238,944  |                  |  |  |  |   | 237,796 |   |
| Accumulatedother comprehensiveincome                                                               |  |  |                  |   | 13,258   |                  |  |  |  |   | 6,112   |   |
| Accumulateddeficit                                                                                 |  |  |                  |   | (163,980 | )                |  |  |  |   | (40,209 | ) |
|                                                                                               |  |  |                  |   | 88,677   |                  |  |  |  |   | 204,153 |   |
| Lesscost of treasury stock (585shares)                                                             |  |  |                  |   | (2,294   | )                |  |  |  |   | (2,294  | ) |
| Totalshareholders’equity                                                                     |  |  |                  |   | 86,383   |                  |  |  |  |   | 201,859 |   |
| Totalliabilities and shareholders’equity                                                     |  |  |                  | $ | 87,783   |                  |  |  |  | $ | 203,918 |   |
|                                                                                                    |

Seenote to condensed financial information.

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ALLIED HEALTHCARE INTERNATIONAL INC.(PARENT COMPANY ONLY) SCHEDULE I — CONDENSED FINANCIALINFORMATION STATEMENTS OF OPERATIONS(Inthousands)

|                                            |  |  |                             |   |          |                             |  |  |                             |   |         |  |  |  |  |   |         |   |
|--------------------------------------------|--|--|-----------------------------|---|----------|-----------------------------|--|--|-----------------------------|---|---------|--|--|--|--|---|---------|---|
|                                       |  |  | YearEndedSeptember 30, 2006 |   |          | Year EndedSeptember30, 2005 |  |  | Year EndedSeptember 30,2004 |
| Revenue                                    |  |  |                             | $ | —  |                             |  |  |                             | $ | — |  |  |  |  | $ | — |   |
| Expenses:                                  |  |  |                             |   |     |                             |  |  |                             |   |    |  |  |  |  |   |    |   |
| Selling,general and administrativeexpenses |  |  |                             |   | 3,230    |                             |  |  |                             |   | 3,090   |  |  |  |  |   | 4,884   |   |
| Totalexpenses                              |  |  |                             |   | 3,230    |                             |  |  |                             |   | 3,090   |  |  |  |  |   | 4,884   |   |
| Equityin (loss) income ofsubsidiaries      |  |  |                             |   | (124,333 | )                           |  |  |                             |   | 17,859  |  |  |  |  |   | 14,013  |   |
| Interestincome                             |  |  |                             |   | 3,795    |                             |  |  |                             |   | 3,810   |  |  |  |  |   | 856     |   |
| Other(expense)income                       |  |  |                             |   | (5       | )                           |  |  |                             |   | 159     |  |  |  |  |   | (184    | ) |
| Incomebefore incometaxes                   |  |  |                             |   | (123,773 | )                           |  |  |                             |   | 18,738  |  |  |  |  |   | 9,801   |   |
| (Benefitfrom) provision for incometaxes    |  |  |                             |   | (2       | )                           |  |  |                             |   | 2       |  |  |  |  |   | (68     | ) |
| Net(loss)income                            |  |  |                             | $ | (123,771 | )                           |  |  |                             | $ | 18,736  |  |  |  |  | $ | 9,869   |   |
|                                            |

Seenote to condensed financial information.

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Table of Contents

SCHEDULE I

ALLIEDHEALTHCARE INTERNATIONAL INC. (PARENT COMPANY ONLY) SCHEDULEI — CONDENSED FINANCIAL INFORMATION STATEMENTS OF CASHFLOWS(Inthousands)

|                                                                                                  |  |  |                            |   |          |                            |  |  |                            |   |         |   |  |  |  |   |         |   |
|--------------------------------------------------------------------------------------------------|--|--|----------------------------|---|----------|----------------------------|--|--|----------------------------|---|---------|---|--|--|--|---|---------|---|
|                                                                                             |  |  | YearEndedSeptember 30,2006 |   |          | Year EndedSeptember30,2005 |  |  | Year EndedSeptember30,2004 |
| Cash flows from operatingactivities:                                                             |  |  |                            |   |     |                            |  |  |                            |   |    |   |  |  |  |   |    |   |
| Net(loss)income                                                                                  |  |  |                            | $ | (123,771 | )                          |  |  |                            | $ | 18,736  |   |  |  |  | $ | 9,869   |   |
| Adjustmentsto reconcile net income to net cash used in operatingactivities:                      |  |  |                            |   |     |                            |  |  |                            |   |    |   |  |  |  |   |    |   |
| Equity interest in netloss (income) ofsubsidiaries                                               |  |  |                            |   | 124,333  |                            |  |  |                            |   | (17,859 | ) |  |  |  |   | (14,013 | ) |
| Depreciationandamortization                                                                      |  |  |                            |   | 5        |                            |  |  |                            |   | 6       |   |  |  |  |   | 7       |   |
| Amortizationof debt issuance costs andwarrants                                                   |  |  |                            |   | —  |                            |  |  |                            |   | 261     |   |  |  |  |   | 302     |   |
| Stockbased compensation –employees                                                         |  |  |                            |   | 736      |                            |  |  |                            |   | 21      |   |  |  |  |   | — |   |
| Interestaccrued on loans toofficers                                                              |  |  |                            |   | —  |                            |  |  |                            |   | — |   |  |  |  |   | (7      | ) |
| Changesin operating assets and liabilities, excluding the effect of businessesacquired and sold: |  |  |                            |   |     |                            |  |  |                            |   |    |   |  |  |  |   |    |   |
| Increase in receivables fromsubsidiaries                                                         |  |  |                            |   | (1,269   | )                          |  |  |                            |   | (2,649  | ) |  |  |  |   | (56,771 | ) |
| (Increase)decrease in prepaid expenses and otherassets                                           |  |  |                            |   | (111     | )                          |  |  |                            |   | 119     |   |  |  |  |   | 431     |   |
| Decreasein accounts payable and otherliabilities                                                 |  |  |                            |   | (660     | )                          |  |  |                            |   | (1,011  | ) |  |  |  |   | (451    | ) |
| Netcash used in operatingactivities                                                              |  |  |                            |   | (737     | )                          |  |  |                            |   | (2,376  | ) |  |  |  |   | (60,633 | ) |
| Cashflows from financingactivities:                                                              |  |  |                            |   |     |                            |  |  |                            |   |    |   |  |  |  |   |    |   |
| Paymentsfor stock issuancecosts                                                                  |  |  |                            |   | —  |                            |  |  |                            |   | — |   |  |  |  |   | (5,335  | ) |
| Paymentsfor preferreddividends                                                                   |  |  |                            |   | —  |                            |  |  |                            |   | — |   |  |  |  |   | (9,422  | ) |
| Proceedsfrom issuance ofstock                                                                    |  |  |                            |   | —  |                            |  |  |                            |   | — |   |  |  |  |   | 71,050  |   |
| Stockoptionsexercised                                                                            |  |  |                            |   | 411      |                            |  |  |                            |   | 791     |   |  |  |  |   | 401     |   |
| Netcash provided by financingactivities                                                          |  |  |                            |   | 411      |                            |  |  |                            |   | 791     |   |  |  |  |   | 56,694  |   |
| Effectof exchange rate oncash                                                                    |  |  |                            |   | —  |                            |  |  |                            |   | 23      |   |  |  |  |   | 32      |   |
| Decreaseincash                                                                                   |  |  |                            |   | (326     | )                          |  |  |                            |   | (1,562  | ) |  |  |  |   | (3,907  | ) |
| Cashand cash equivalents, beginning ofperiod                                                     |  |  |                            |   | 344      |                            |  |  |                            |   | 1,906   |   |  |  |  |   | 5,813   |   |
| Cashand cash equivalents, end ofperiod                                                           |  |  |                            | $ | 18       |                            |  |  |                            |   | 344     |   |  |  |  | $ | 1,906   |   |
|                                                                                                  |

Seenote to condensed financial information.

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ALLIED HEALTHCARE INTERNATIONALINC.(PARENT COMPANY ONLY)SCHEDULE I — CONDENSEDFINANCIAL INFORMATIONNOTE TO CONDENSED FINANCIALINFORMATION

Basis of Presentation:

Certaininformation and footnote disclosures normally included in financialstatements prepared in conformity with generally accepted accountingprinciples have been condensed or omitted. Accordingly, these financialstatements should be read in conjunction with the consolidatedfinancial statements of Allied Healthcare International Inc. (the‘‘Company’’) in its 2006 Annual Report onForm 10-K.

The investments in the Company’ssubsidiaries are carried on the equity basis, which represents amountinvested less dividends received plus or minus the Company’sequity in the subsidiaries’ income or loss to date. Significantintercompany balances and activities have not been eliminated in theunconsolidated financial information.

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ALLIED HEALTHCARE INTERNATIONALINC.(In thousands)

SCHEDULE II —VALUATION AND QUALIFYINGACCOUNTS

|                                 |  |  |                               |   |        |                    |  |  |                |   |        |            |  |  |                        |  |  |         |  |  |  |   |        |  |
|---------------------------------|--|--|-------------------------------|---|--------|--------------------|--|--|----------------|---|--------|------------|--|--|------------------------|--|--|---------|--|--|--|---|--------|--|
| ColumnA                         |  |  | Column B                      |   |        | ColumnC            |  |  | ColumnD        |   |        | ColumnE    |
|                            |  |  |                          |   |        | AdditionsChargedto |  |  |           |   |        |       |
| Description                     |  |  | Balanceat Beginning of Period |   |        | Cost andExpenses   |  |  | Other Accounts |   |        | Deductions |  |  | Balanceat End ofPeriod |
| Allowance forDoubtful Accounts: |  |  |                               |   |   |                    |  |  |                |   |   |            |  |  |                   |  |  |    |  |  |  |   |   |  |
| Year endedSeptember  30,2006    |  |  |                               | $ | 1,734  |                    |  |  |                | $ | 431    |            |  |  | $  124(B)    |  |  | $576(A) |  |  |  | $ | 1,713  |  |
| Yearended September  30,2005    |  |  |                               | $ | 1,269  |                    |  |  |                | $ | 758    |            |  |  | $(61)(B)               |  |  | $232(A) |  |  |  | $ | 1,734  |  |
| Yearended September  30,2004    |  |  |                               | $ | 3,346  |                    |  |  |                | $ | (1,653 | )          |  |  | $  259(B)    |  |  | $683(A) |  |  |  | $ | 1,269  |  |
|                                 |

|  |
|--|
|  |  |
|  |

|     |                                                           |
|-----|-----------------------------------------------------------|
| (A) | Doubtfulaccounts written off, net of recoveries and sold. |

|     |                                                                                     |
|-----|-------------------------------------------------------------------------------------|
| (B) | Adjustments arising from translation offoreign financial statements to U.S.dollars. |

S-5

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